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RMKR > SEC Filings for RMKR > Form 10-Q/A on 16-Aug-2013All Recent SEC Filings

Show all filings for RAINMAKER SYSTEMS INC

Form 10-Q/A for RAINMAKER SYSTEMS INC


16-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or


other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under Part I Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the SEC on April 1, 2013, that may cause our, or our industry's, actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activities, performance or achievements expressed in or implied by such forward-looking statements.
Important factors which could cause actual results to differ materially from those in the forward-looking statements include:
our client concentration given that we are currently dependent on a few significant client relationships,

our ability to acquire new clients and increase demand,

our ability to raise additional equity or debt financing,

the possibility of the discontinuation of some client relationships,

general market conditions,

              the macro-economic environment and its impact on our business as
               our clients are reducing their overall marketing spending and our
               clients' customers are reducing their purchase of services
               contracts,

the high degree of uncertainty and our limited visibility due to economic conditions,
our ability to execute our business strategy and manage growth,
our ability to integrate domestic and/or foreign acquisitions without disruption to our business,

              the effectiveness of our sales team and approach, our ability to
               target, analyze and forecast the revenue to be derived from a
               client and the costs associated with providing services to that
               client,

our ability to control costs,
the date during the course of a calendar year that a new client is acquired,
the length of the integration cycle for new clients and the timing of revenues and costs associated therewith,
potential competition in the marketplace,
our ability to retain and attract employees and board members,
market acceptance of our solutions and pricing options,
our ability to maintain and develop our existing technology platform and to deploy new technology,
the financial condition of our clients' businesses,
the protection of our intellectual property,
and other factors as detailed in in Part I Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the SEC on April 1, 2013. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We assume no obligation to update such forward-looking statements publicly for any reason even if new information becomes available in the future, except as may be required by law.

Overview
Rainmaker is a leading business selling partner providing global B2B e-Commerce solutions enhanced by Global Commerce Services. Our suite of cloud applications increase visibility and control of revenue streams and are utilized by customers, channel partners, end customers and our service sales teams. Our dedicated Global Commerce Services Agents have specific expertise in our customers' businesses, are deployed under our customers' brands and follow a sales process tailored specifically for the client. Our solutions address the critical elements of B2B online buying, the renewals process, including data management, quoting, selling and learning management services. We believe our solutions, which tightly integrate software, managed services and data, reflects the growing trend of delivering enterprise services via the cloud.


GrowCommerce B2B Storefront: Designed to allow our clients to sell more of their products and maintenance contracts directly to their customers or via their channel partners through the GrowCommerce platform. Benefits include:
i. Direct and channel friendly sales through clearly defined rules designed to ensure that client business rules drive the outcome of each client contact point in order to overcome confusion and deliver an integrated communication of the status of each customer to both the client and its channel partners;

ii. State of the art cloud platform that includes an open API architecture for seamless integrations, the ability to handle complex B2B rules, a quoting system, purchase order and wire transfer support, and the capacity to handle discounting and multi-tier pricing;

iii. Touch inbound and outbound global telesales utilizing multiple communication methods including online chat, email, social media and phone support to assist potential buyers;

iv. Management and optimization of trial periods to transition missed opportunities into potential sales;

v. Opportunities to cross-sell and up-sell new products and services to increase total revenue on existing sales.

GrowCommerce for Renewals: Designed to maximize renewal rates, subscriptions and other contracts to allow our clients to significantly increase the lifetime value of their customers. Benefits of this solution include:
i. The ability to deliver time sensitive pre-expiration countdown emails and phone campaigns potentially resulting in higher renewal rates.

ii. Gaining market intelligence, such as why a customer was initially lost, which enables our clients to address the customer's objections within client business rules to potentially increase revenue through reactivations and win-backs.

iii. The ability to manage, enable and credit the channel in the post sales process through clearly defined rules designed to ensure that client business rules drive the outcome of each client contact point.

iv. Maximizing each customer contact by providing opportunities for cross-selling and up-selling new products and services.

v. Delivering lost revenue recognition through the same transaction platform used for other Rainmaker products, creating one integrated tool for customer status and other much needed reporting for both the client and its channel partners.

View Central Learning Management System: Our LMS solution is designed to provide our clients with the potential to generate more revenue selling training programs to their customers. Benefits include:
i. The ability to educate without our client losing sight of its core competency:

1. Targeted delivery methods to each specific market segment

2. The potential to increase training revenues with visibility into business impact

3. Tools and reporting for on-going process improvements

ii. Product modules include:

1. Instructor led training

2. Vclassroom

3. Elearning

4. Replay

We offer high touch inbound and outbound Global Commerce Service Agents utilizing multiple communication methods including online chat, email, social media and phone support to assist potential buyers. Our Global Commerce Service Agents are trained to capitalize on opportunities to cross-sell and up-sell new products and services to potentially increase total revenue on existing sales. Each product in the Rainmaker e-Commerce solution suite can be purchased individually to meet specific client needs or as an integrated product suite designed to deliver maximum revenue during the B2B customer buying process. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. Although actual results have historically been reasonably consistent with management's expectations, future results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
Management has discussed the development of our critical accounting policies with the audit committee of the board of directors and they have reviewed the disclosures of such policies and management's estimates in this Management's Discussion and Analysis of Financial Condition and Results of Operations.


With the establishment of our Canadian foreign subsidiary and the subsequent purchase of Canadian based assets in 2007, we adopted a policy for recording foreign currency transactions and translation in accordance with FASB ASC 830, Foreign Currency Matters. For our Canadian subsidiary, the functional currency has been determined to be the local currency, and therefore, assets and liabilities are translated at period-end exchange rates, and statement of operations items are translated at an average exchange rate prevailing during the period. Such translation adjustments are recorded in accumulated comprehensive loss, a component of stockholders' equity, and in the consolidated statements of operations and comprehensive loss. Also in 2007, we acquired Qinteraction Limited and its Philippine-based subsidiary. As a result of this acquisition, we also adopted the policy mentioned above for recording foreign currency transactions and translations for this subsidiary as the functional currency was determined to be the local currency for the Philippine-based subsidiary. In December 2012, we sold our Manila-based operations to Shore Solutions, Inc. In January of 2009, we established our Rainmaker Europe subsidiary in the United Kingdom. We adopted the policy mentioned above for recording foreign currency transactions and translations for this subsidiary as the functional currency has been determined to be the local currency (Great Britain Pound) for the UK-based subsidiary. For continuing operations, gains and losses from foreign currency denominated transactions are included in interest and other expense, net, in the consolidated statements of operations. Management believes there have been no significant changes during the six months ended June 30, 2013 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the SEC on April 1, 2013.

Results of Operations
The following table sets forth for the periods given selected financial data as
a percentage of our net revenue. The table and discussion below should be read
in connection with the financial statements and the notes thereto which appear
elsewhere in this report as well as with our financial statements and notes
thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2012.
                                       Three Months Ended June 30,        Six Months Ended June 30,
                                          2013              2012             2013             2012
Net revenue                              100.0  %          100.0  %         100.0  %          100.0  %
Cost of services                          64.9              56.3             65.0              56.5
Gross margin                              35.1  %           43.7  %          35.0  %           43.5  %
Operating expenses:
Sales and marketing                       18.0               7.3             16.2               7.9
Technology and development                31.1              22.2             27.6              23.5
General and administrative                37.4              20.1             50.6              20.7
Depreciation and amortization              9.3               5.8              9.0               6.1
Total operating expenses                  95.8  %           55.4  %         103.4  %           58.2  %
Operating loss                           (60.7 )           (11.7 )          (68.4 )           (14.7 )
Loss (gain) due to change in fair
value of warrant liability                 0.2              (0.2 )           (2.3 )            (0.2 )
Interest and other expense, net            1.1               0.6              1.6               0.5
Loss before income tax expense           (62.0 )%          (12.1 )%         (67.7 )%          (15.0 )%
Income tax expense (benefit)               0.5               0.9              0.6               0.9
Net loss from continuing operations      (62.5 )%          (13.0 )%         (68.3 )%          (15.9 )%
Loss from discontinued operations,
net of tax                                (1.5 )           (24.8 )            0.9             (14.9 )
Net loss                                 (64.0 )%          (37.8 )%         (67.4 )%          (30.8 )%

Foreign currency translation
adjustments                               (1.8 )            (1.6 )           (1.8 )            (0.8 )
Comprehensive loss                       (65.8 )%          (39.4 )%         (69.2 )%          (31.6 )%

Comparison of Three Months Ended June 30, 2013 and 2012 Net Revenue. Net revenue decreased $2.2 million, or 31%, to $4.7 million in the three months ended June 30, 2013, as compared $6.9 million for the three months ended June 30, 2012 primarily due to the elimination of non-strategic client programs and the loss of clients through acquisition or contract termination totaling $2.8 million and a reduction of GrowCommerce platform volume of $230,000 offset by the growth of GrowCommerce channel and telesales volume of $900,000.
Cost of Services and Gross Margin. Cost of services decreased $814,000, or 21%, to $3.1 million in the three months ended June 30, 2013, as compared to $3.9 million in the 2012 comparative period primarily due to lower revenue as described above. Our gross margin percentages were 35% and 44%, respectively, in the three months ended June 30, 2013 and 2012. The erosion


in gross margin is due to declines in our higher margin GrowCommerce business and lower sales volume to absorb the investment in growing the telesales infrastructure in anticipation of implementing contracted services. Sales and Marketing Expenses. Sales and marketing expenses increased $347,000, or 69%, to $852,000 in the three months ended June 30, 2013, as compared to $505,000 in the 2012 comparative period. The change was primarily attributable to non-recurring increase in severance expense of $62,000 and an increase in sales and marketing staff compensation expense of $186,000.
Technology and Development Expenses. Technology and development expenses decreased $58,000, or 4%, to $1.5 million during the three months ended June 30, 2013, as compared to $1.5 million in the 2012 comparative period. The decrease was primarily attributable to a $110,000 increase in the amount of costs capitalized as internally developed software rather than expensed in the period, decreases in software costs of $58,000 and outsourced services expense of $59,000 offset by increases in consulting and temporary services of $150,000. General and Administrative Expenses. General and administrative expenses increased $387,000, or 28%, to $1.8 million during the three months ended June 30, 2013, as compared to $1.4 million in the 2012 comparative period. The increase was primarily due to a non-recurring charge $150,000 related to the closure of the Austin, Texas facility, increases in legal fees of $145,000 and an increase of $126,000 in board of directors' compensation offset by lower stock compensation expense of $70,000.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $37,000, or 9%, to $439,000 for the three months ended June 30, 2013, as compared to $402,000 in the 2012 comparative period. Depreciation and amortization expense increased due to an increase in amortization of capitalized software development costs.

Interest and Other Expense, Net. The components of interest and other expense, net are as follows (in thousands):

                              Three Months Ended June 30,
                                2013                 2012         Change
Interest expense, net     $         54           $         30    $   24
Currency translation loss           (1 )                   13       (14 )
Total                     $         53           $         43    $   10

Income Tax Expense. Income tax expense decreased $40,000, or 62%, to $25,000 for the three months ended June 30, 2013, as compared to $65,000 for the three months ended June 30, 2012. Our income tax expense for the three months ended June 30, 2013 was based on our estimate of taxable income for the full year ending December 31, 2013, and primarily consists of estimates of foreign taxes and domestic gross margin taxes for certain states.
Income (Loss) from Discontinued Operations, Net of Tax. Loss from discontinued operations for the three months ended June 30, 2013 was $69,000 as compared to a loss from discontinued operations for the three months ended June 30, 2012 of $1.7 million. The loss from discontinued operations in the three months ended June 30, 2013 is attributable to an adjustment to the sales price pursuant to the Stock Purchase Agreement for the sale of the Company's Manila operations in December 2012.
Comparison of Six Months Ended June 30, 2013 and 2012 Net Revenue. Net revenue decreased $3.9 million, or 29%, to $9.4 million in the six months ended June 30, 2013, as compared to $13.3 million for the six months ended June 30, 2012, primarily due to the elimination of non-strategic client programs and loss of clients through acquisition or contract termination of $5.1 million, reduction of GrowCommerce platform volume of $406,000 offset by growth in GrowCommerce channel and telesales volume of $1.6 million.
Cost of Services and Gross Margin. Cost of services decreased $1.4 million, or 19%, to $6.1 million in the six months ended June 30, 2013, as compared to $7.5 million in the 2012 comparative period due to lower revenue as described above. Our gross margin percentages were 35.0% and 43.5% , respectively, in the six month periods ended June 30, 2013 and 2012. The erosion in gross margin was due to costs associated with the one time charge of transitioning call center agents from our Austin, Texas facility to our UK facility and declines in our higher margin GrowCommerce business.
Sales and Marketing Expenses. Sales and marketing expenses increased $472,000, or 45%, to $1,517,000 during the six months ended June 30, 2013, as compared to $1,045,000 in the 2012 comparative period. The change is primarily attributable to


an increase in stock compensation expense of $99,000, increases in recruiting fees of $72,000 for new sales and marketing personnel and higher personnel cost of $242,000.
Technology and Development Expenses. Technology and development expenses decreased $525,000, or 17%, to $2,594,000 during the six months ended June 30, 2013, as compared to $3,119,000 in the 2012 comparative period. The decrease was primarily attributable to decreases in equipment costs and outsourced services expense of $269,000, a $137,000 increase in the amount of costs capitalized as internally developed software rather than expensed in the period, the deferral of $87,000 relating to accounting requirements for multiple element arrangements and decreases in outside services of $67,000.
General and Administrative Expenses. General and administrative expenses increased $2.0 million, or 73%, to $4.8 million during the six months ended June 30, 2013, as compared to the 2012 comparative period. The increase was primarily due to non-recurring expenses of $345,000 related to the relocation of the finance function from the Austin, Texas facility to our Campbell, California facility, a charge of $150,000 related to closure of the Austin facility and a $280,000 impairment charge against vendor deposits, increases in stock compensation expense of $602,000, the majority of which relates to non-recurring restricted stock awards granted to board members which were fully vested upon grant, increases in legal fees of $430,000, an increase of $203,000 in board of directors' compensation and an increase in variable compensation of $198,000 and offset by lower administrative personnel cost of $148,000.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $39,000, or 5%, to $845,000 during the six months ended June 30, 2013, as compared to the 2012 comparative period. Depreciation and amortization expense increased due to an increase in amortization of capitalized software development costs.
Interest and Other Expense, Net. The components of interest and other expense, net are as follows (in thousands):

                                  Six Months Ended June 30,
                                        2013                   2012     Change
Interest expense, net     $           109                     $  61    $   48
Currency translation loss               1                        10        (9 )
Other                                  36                         -        36
Total                     $           146                     $  71    $   75

Income Tax Expense. Income tax expense decreased $63,000, or 53%, to $55,000 during the six months ended June 30, 2013, as compared to the 2012 comparative period. The decrease is attributable to a lower estimate of domestic gross margin taxes for certain states.
Income (Loss) from Discontinued Operations, Net of Tax. Income from discontinued operations for the six months ended June 30, 2013 was $87,000 as compared to a loss from discontinued operations for the six months ended June 30, 2012 of $2.0 million. The income from discontinued operation for the six months ended June 30, 2013 is a result of the winddown of a contract that was assigned to Shore Solutions as part of the sale of our Manila operations in December 2012 offset by an adjustment to the sales price pursuant to the Stock Purchase Agreement.
.

Liquidity and Sources of Capital
Cash used in operating activities for the six months ended June 30, 2013 was $3.2 million, as compared to cash used in operating activities of $455,000 in the six months ended June 30, 2012. Cash used in operating activities in the six months ended June 30, 2013 was primarily the result of the net loss from continuing operations of $6.3 million, offset by non-cash expenses for depreciation of property of $845,000, stock-based compensation expenses of $1,128,000, a provision for impairment related to vendor deposits of $280,000 and changes in operating assets and liabilities that provided cash of $908,000 as a result of managing working capital.
Cash used in operating activities for the six months ended June 30, 2012 was $455,000, primarily as a result of the net loss from continuing operations of $4.1 million, offset by non-cash expenses for depreciation of property of $806,000 and stock-based compensation expenses of $390,000, changes in operating assets and liabilities that provided cash of $911,000, primarily reduction of accounts receivable and managing working capital, and cash provided by discontinued operations of $410,000.


Cash used in investing activities was $859,000 in the six months ended June 30, 2013, as compared to cash used in investing activities of $1.3 million in the six months ended June 30, 2012. Cash used in investing activities in the six months ended June 30, 2013 was primarily a result of capital expenditures of $873,000. Cash used in investing activities in the six months ended June 30, 2012 was primarily the result of capital expenditures of $553,000 and cash used in discontinued operations of $751,000.
Cash provided by financing activities was approximately $4.6 million in the six months ended June 30, 2013, as compared to cash used in financing activities of $798,000 in the six months ended June 30, 2012. Cash provided by financing activities in the six months ended June 30, 2013 was primarily a result of net proceeds of $5.5 million from the sale of common stock, repayment of borrowings of $987,000 under our Term Loan and Revolving Line and purchases of $111,000 of treasury stock from employees for shares withheld for income taxes payable on restricted stock awards vested during the six months ended June 30, 2013 offset by proceeds from borrowings of $200,000 under our Revolving Line. Cash used in financing activities in the six months ended June 30, 2012 was primarily the result of the $3.9 million in repayment of borrowings and purchases of $191,000 of treasury stock from employees for shares withheld for income tax payable on restricted stock awards vested during the six months ended June 30, 2012. At June 30, 2013, the Company had a net working capital deficit of $5.8 million. Our principal source of liquidity as of June 30, 2013 consisted of $5.0 million of cash and cash equivalents and $3.5 million of net accounts receivable. Our debt balance as of June 30, 2013 was $4 million, of which $2.5 million is payable within the next twelve months. Our accounts payable balance as of June 30, 2013 was $7.8 million of which $6.3 million is related to a merchant account of a customer. See below under "Credit Arrangements" for further discussion of our credit facility with Comerica Bank.
On April 5, 2013, the Company completed the sale of approximately 13 million shares of our common stock in a registered direct offering. The gross cash proceeds from the sale of common stock was approximately $5.8 million, with net proceeds totaling approximately $5.5 million. The Company is now executing a plan that it believes will establish profitable operations through increased sales and decreased expenses. There can be no assurance that we will be successful in increasing sales, reducing expenses or achieving profitable operations. We are evaluating our options to sell other non-strategic assets as we focus on the Company's core business. In the event that the Company fails to achieve profitable operations, fails to reduce expenses, restructure its debt and/or is unable to raise additional capital, we will not have adequate cash or financial resources to operate for the next twelve months, which would raise substantial doubt about our ability to continue as a going concern and pay our liabilities as they become due.
Credit Arrangements
On June 14, 2012, the Company entered into a Loan and Security Agreement with Comerica Bank (the "Credit Facility"). The maximum amount of credit available to the Company under the Credit Facility is $5 million, comprised of a $3 million term loan facility ("Term Loan") and a $2 million revolving line of credit ("Revolving Line"), which includes a $500,000 sub-facility for letters of credit . . .

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