RMKR 9.30.2012 10Q

10-Q 1 rmkr930201210q.htm 10-Q RMKR 9.30.2012 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________

FORM 10-Q

__________________________

(MARK ONE)



T	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: September 30, 2012

COMMISSION FILE NUMBER: 000-28009

__________________________

RAINMAKER SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

__________________________



Delaware		33-0442860
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

900 East Hamilton Ave., Suite 400

Campbell, California 95008

(Address of principal executive offices) (Zip Code)

(408) 626-3800

(Registrant’s telephone number, including area code)

__________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

(1) Yes x No ¨

(2) Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



	Yes S		No £

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	£	Accelerated filer	£
Non-accelerated filer	£ (Do not check if a smaller reporting company)	Smaller reporting company	S

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

As of November 9, 2012, the registrant had 27,186,992 shares of Common Stock, $0.001 par value, outstanding.

RAINMAKER SYSTEMS, INC.

FORM 10-Q

AS OF SEPTEMBER 30, 2012

TABLE OF CONTENTS




		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)	3
	Consolidated Balance Sheets at September 30, 2012 and December 31, 2011	3
	Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2012 and 2011	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30

	Signatures	31

PART I.—FINANCIAL INFORMATION


ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS

RAINMAKER SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)



	September 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	4,425		$	8,490
Restricted cash	28			18
Accounts receivable, net	4,520			4,587
Prepaid expenses and other current assets	1,543			876
Assets held for sale	4,023			4,164
Total current assets	14,539			18,135
Property and equipment, net	2,631			2,861
Intangible assets, net	2			85
Goodwill	5,337			5,268
Other non-current assets	410			422
Total assets	$	22,919		$	26,771
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,888		$	5,702
Accrued compensation and benefits	550			740
Other accrued liabilities	3,158			3,097
Deferred revenue	2,154			2,629
Current portion of notes payable	955			4,306
Liabilities related to assets held for sale	2,327			2,163
Total current liabilities	16,032			18,637
Deferred tax liability	525			473
Long-term deferred revenue	78			103
Common stock warrant liability	832			517
Notes payable, less current portion	3,593			—
Total liabilities	21,060			19,730
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding	—			—
Common stock, $0.001 par value; 50,000,000 shares authorized, 29,294,663 shares issued and 27,271,238 shares outstanding at September 30, 2012 and 28,686,486 shares issued and 26,812,935 shares outstanding at December 31, 2011	27			26
Additional paid-in capital	130,129			129,373
Accumulated deficit	(123,662		)	(117,926		)
Accumulated other comprehensive loss	(1,912		)	(1,827		)
Treasury stock, at cost, 2,023,425 shares at September 30, 2012 and 1,873,551 shares at December 31, 2011	(2,723		)	(2,605		)
Total stockholders’ equity	1,859			7,041
Total liabilities and stockholders’ equity	$	22,919		$	26,771

See accompanying notes.

RAINMAKER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net revenue	$	6,900		$	7,089		$	20,196		$	19,282
Cost of services	3,808			4,189			11,315			11,341
Gross margin	3,092			2,900			8,881			7,941
Operating expenses:
Sales and marketing	524			1,015			1,569			2,935
Technology and development	1,199			1,832			4,318			5,652
General and administrative	1,486			1,898			4,238			5,725
Depreciation and amortization	420			524			1,226			1,968
Loss on fair value re-measurement	—			114			—			44
Total operating expenses	3,629			5,383			11,351			16,324
Operating loss	(537		)	(2,483		)	(2,470		)	(8,383		)
Loss (gain) due to change in fair value of warrant liability	337			(70		)	315			(95		)
Interest and other expense, net	63			43			134			99
Loss before income tax expense	(937		)	(2,456		)	(2,919		)	(8,387		)
Income tax expense (benefit)	7			(15		)	125			73
Net loss from continuing operations	(944		)	(2,441		)	(3,044		)	(8,460		)
Loss from discontinued operations, net of tax	(706		)	(245		)	(2,692		)	(626		)
Net loss	$	(1,650	)	$	(2,686	)	$	(5,736	)	$	(9,086	)

Foreign currency translation adjustments	31			(38		)	(78		)	(315		)
Comprehensive loss	$	(1,619	)	$	(2,724	)	$	(5,814	)	$	(9,401	)

Basic and diluted net loss per share - continuing operations	$	(0.03	)	$	(0.10	)	$	(0.11	)	$	(0.38	)
Basic and diluted net loss per share - discontinued operations	$	(0.03	)	$	(0.01	)	$	(0.10	)	$	(0.03	)
Basic and diluted net loss per share	$	(0.06	)	$	(0.11	)	$	(0.21	)	$	(0.41	)

Weighted average common shares - Basic and diluted	27,066			24,900			27,013			22,385

See accompanying notes.

RAINMAKER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended
	September 30,
	2012			2011
Operating activities:
Net loss	$	(5,736	)	$	(9,086	)
Adjustment for loss from discontinued operations, net of tax	2,692			626
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment	1,141			1,774
Amortization of intangible assets	85			194
Gain on fair value re-measurement	—			44
Loss (gain) due to change in fair value of warrant liability	315			(95		)
Stock-based compensation expense	607			1,564
Credit for allowance for doubtful accounts	(35		)	(21		)
Changes in operating assets and liabilities:
Accounts receivable	227			(1,167		)
Prepaid expenses and other assets	(762		)	(205		)
Accounts payable	1,705			1,465
Accrued compensation and benefits	(19		)	89
Other accrued liabilities	(360		)	816
Income tax payable	30			(39		)
Deferred tax liability	51			73
Deferred revenue	(501		)	(591		)
Net cash used in continuing operations	(560		)	(4,559		)
Net cash provided by (used in) discontinued operations	(1,021		)	530
Net cash used in operating activities	(1,581		)	(4,029		)
Investing activities:
Purchases of property and equipment	(907		)	(1,279		)
Restricted cash, net	(10		)	75
Net cash used in continuing operations	(917		)	(1,204		)
Net cash used in discontinued operations	(837		)	(70		)
Net cash used in investing activities	(1,754		)	(1,274		)
Financing activities:
Proceeds from issuance of common stock	—			3,290
Proceeds from issuance of common stock from option exercises	—			15
Proceeds from borrowings	4,555			1,224
Repayment of borrowings	(3,933		)	(660		)
Repayment of acquisition earnout	(113		)	—
Net proceeds (repayment) on overdraft facility	(381		)	26
Tax payments in connection with treasury stock surrendered	(233		)	(217		)
Net cash provided by (used in) continuing operations	(105		)	3,678
Net cash provided by (used in) discontinued operations	(708		)	148
Net cash provided by (used in) financing activities	(813		)	3,826
Effect of exchange rate changes on cash	83			(120		)
Net decrease in cash and cash equivalents	(4,065		)	(1,597		)

Cash and cash equivalents at beginning of period	8,490			11,757
Cash and cash equivalents at end of period	$	4,425		$	10,160

Supplemental disclosures of cash flow information:
Cash paid for interest	$	106		$	128
Cash paid for income taxes	42			91

Supplemental disclosures of non-cash investing and financing activities:
Common stock issued in acquisitions	112			—

See accompanying notes.

RAINMAKER SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

— UNAUDITED —

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

The accompanying consolidated financial statements include the accounts of Rainmaker Systems, Inc. and its wholly-owned subsidiaries (“Rainmaker,” “we,” “our” or “the Company”). Rainmaker is an e-Commerce software company that helps multi-national companies address the B2B market by maximizing sales revenue for their products and services. Rainmaker provides these solutions on a global basis supporting multiple payment methods, currencies and language capabilities. The Rainmaker e-Commerce platform can be enhanced with Rainmaker global telesales agents to maximize revenue and customer satisfaction through the entire customer life cycle. We are headquartered in Silicon Valley in Campbell, California, and have additional operations in or near Austin, Texas and London, England. Our global clients consist primarily of large enterprises operating in the computer hardware, software and information services industries.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Rainmaker Systems, Inc. and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

Basis of Presentation

The consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. The interim financial statements are unaudited but reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the results of these periods.

The results of our operations for the three and nine months ended September 30, 2012 are not necessarily indicative of results to be expected for the year ending December 31, 2012, or any other period. These consolidated financial statements should be read in conjunction with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission (“SEC”) on March 30, 2012 and amended on April 30, 2012. Balance sheet information as of December 31, 2011 has been derived from the audited financial statements for the year then ended.

In the quarter ended June 30, 2012, the Company concluded that due to the planned sale of Rainmaker Systems, Ltd. and its wholly owned subsidiary, Rainmaker Asia, Inc. (together "Manila" or "RSL"), our Manila operations met the requirements for presentation as assets held for sale and discontinued operations, and all assets of RSL have been separately presented under current assets and all liabilities of RSL are included under current liabilities. As such, certain amounts reported in the accompanying financial statements for 2011 have been reclassified to conform to the 2012 presentation. There were no other reclassifications that had a material effect on previously reported results of operations and total assets or accumulated deficit.

Going Concern

As reflected in the accompanying consolidated financial statements, we had a net loss from continuing operations of $944,000 and $3 million for the three and nine months ended September 30, 2012, respectively. During the nine months ended September 30, 2012, we used $560,000 in operating activities from continuing operations and $1 million in operating activities from discontinued operations.

At September 30, 2012, the Company had a net working capital deficit of $1.5 million. Our principal source of liquidity as of September 30, 2012 consisted of $4.4 million of cash and cash equivalents and $4.5 million of net accounts receivable. Our debt balance as of September 30, 2012 was $4.5 million, of which $1 million is payable within the next twelve months. See Note 6 for further discussion of our debt agreements.

improve our business focus. In the event that the Company fails to achieve profitable operations, fails to close on the intended sale of assets and/or is unable to raise additional capital, we will not have adequate cash or financial resources to operate for the next twelve months.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The ability of the Company to continue as a going concern is dependent on our ability to develop profitable operations through implementation of our current business initiatives. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Our estimates are based on historical experience, input from sources outside of the Company, and other relevant facts and circumstances. Actual results could differ materially from those estimates. Accounting policies that include particularly significant estimates are revenue recognition and presentation policies, valuation of accounts receivable, measurement of our deferred tax asset and the corresponding valuation allowance, allocation of purchase price in business combinations, fair value estimates for the expense of employee stock options and warrants and the assessment of recoverability and impairment of goodwill, intangible assets, fixed assets and commitments and contingencies.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents generally consist of money market funds. The fair market value of cash equivalents represents the quoted market prices at the balance sheet dates and approximates their carrying value.

The following is a summary of our cash and cash equivalents at September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012		December 31, 2011
Cash and cash equivalents:
Cash	$	549	$	3,541
Money market funds	3,876		4,949
Total cash and cash equivalents	$	4,425	$	8,490

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers or clients’ customers to make required payments of amounts due to us. The allowance is comprised of specifically identified account balances for which collection is currently deemed doubtful. In addition to specifically identified accounts, estimates of amounts that may not be collectible from those accounts whose collection is not yet deemed doubtful but which may become doubtful in the future are made based on historical bad debt write-off experience. If the financial condition of our clients or our clients' customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. See Note 3 for a discussion regarding the allowance for doubtful accounts for our discontinued operations. At September 30, 2012 and December 31, 2011, our allowance for potentially uncollectible accounts was $17,000 and $80,000, respectively.

Property and Equipment

Property and equipment are stated at cost. Depreciation of property and equipment is recorded using the straight-line method over the assets’ estimated useful lives. Computer equipment and capitalized software are depreciated over two to five years and furniture and fixtures are depreciated over five years. Amortization of leasehold improvements is recorded using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets. Amortization of fixed assets under capital leases is included in depreciation expense.

Costs of internal-use software are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40, Internal Use Software, and FASB ASC 350-50, Website Development Costs. The guidance requires that we expense computer software and website development costs as they are incurred during the preliminary project stage. Once the capitalization criteria of ASC 350-40 and ASC 350-50 have been met, external direct costs of materials and services consumed in developing or obtaining internal-use software, including website development costs, payroll and payroll-

related costs for employees who are directly associated with and who devote time to the internal-use computer software and associated interest costs are capitalized. We capitalized approximately $320,000 and $846,000 of such costs during the three and nine months ended September 30, 2012 and $335,000 and $1.1 million of such costs during the three and nine months ended September 30, 2011, respectively. Capitalized costs are amortized using the straight-line method over the shorter of the term of the related client agreement, if such development relates to a specific outsource client, or the software’s estimated useful life, ranging from two to five years. Capitalized internal-use software and website development costs are included in property and equipment on the accompanying balance sheets.

Goodwill and Other Intangible Assets

We completed several acquisitions during the period of February 2005 through January 2010. Goodwill represents the excess of the acquisition purchase price over the estimated fair value of net tangible and intangible assets acquired. Goodwill is not amortized, but instead is tested for impairment at least annually or more frequently if events and circumstances indicate that the asset might be impaired.

In our analysis of goodwill and other intangible assets, we apply the guidance of FASB ASC 350-20-35 in determining whether any impairment conditions exist. In our analysis of other finite lived amortizable intangible assets, we apply the guidance of FASB ASC 360-10-35, Property, Plant and Equipment – Subsequent Measurement, in determining whether any impairment conditions exist. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Intangible assets are attributable to the various technologies and customer relationships of the businesses we have acquired. At September 30, 2012 and December 31, 2011, we had accumulated impairment losses of $11.5 million.

In the fourth quarter of 2011, we performed our annual goodwill impairment evaluation required under FASB ASC 350-20-35, Intangibles – Goodwill and Other-Subsequent Measurement, and concluded that goodwill was not impaired. At September 30, 2012 and December 31, 2011, we had approximately $3.8 million in goodwill recorded on our Contract Sales reporting unit and approximately $1.5 million recorded on our Rainmaker Europe reporting unit.

We report segment results in accordance with FASB ASC 280, Segment Reporting. The method for determining what information is reported is based on the way that management organizes the operating segments for making operational decisions and assessments of financial performance. Our chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by detailed information listing revenues by customer and product line, for purposes of making operating decisions and assessing financial performance. Currently, the chief operating decision maker does not use product line financial performance as a basis for business operating decisions. Accordingly, we concluded that we have one operating and reportable segment. In accordance with FASB ASC 350-20-35, we are required to test goodwill for impairment at the reporting unit level, which is an operating segment or one level below an operating segment.

Long-Lived Assets

Long-lived assets including our purchased intangible assets are amortized over their estimated useful lives. In accordance with FASB ASC 360-10-35, Property, Plant and Equipment-Subsequent Measurement, long-lived assets, such as property, equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented on the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a business unit intended to be sold that meets certain criteria for being held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. We have evaluated our long-lived assets and noted no indications of impairment.

Revenue Recognition and Presentation

Substantially all of our revenue is generated from (i) the online sale of our clients products to their small and medium-sized business ("SMB") customers, (ii) the sale of service contracts and maintenance renewals, (iii) lead development and other telesales services, and (iv) software subscriptions for hosted internet sales of web-based training. Revenue is recorded using the proportional performance model, where revenue is recognized as performance occurs over the term of the contract and any initial set up fees are recognized over the estimated customer life. We recognize revenue from the online sale of our clients' products and the sale of our clients’ service contracts and maintenance renewals on the “net basis”, which represents the amount billed to the end customer less the amount paid to our client. Revenue from the sale is recognized when a purchase order from a client’s customer is received, the service or service contract or maintenance agreement is delivered, the fee is fixed or determinable, the collection of the receivable is reasonably assured, and no significant post-delivery obligations remain unfulfilled. Revenue from lead

development and other telesales services we perform is recognized as the services are accepted and is generally earned ratably over the service contract period. We earn revenue from our software application subscriptions of hosted online sales of web-based training ratably over each contract period. Since these software subscriptions are usually paid in advance, we have recorded a deferred revenue liability on our balance sheet that represents the prepaid portions of subscriptions that will be earned over the next one to five years.

Our agreements typically do not contain multiple deliverables. In the few instances where our agreements have contained multiple deliverables, they do not have value to our customers on a standalone basis, and therefore the deliverables are considered together as one unit of accounting. However, we may enter into sales contracts with multiple deliverable element conditions with stand-alone value in the future, which may affect the timing of our revenue recognition and may have an impact on our future financial statements.

Our revenue recognition policy involves significant judgments and estimates about collectability. We assess the probability of collection based on a number of factors, including past transaction history and/or the creditworthiness of our clients’ customers, which is based on current published credit ratings, current events and circumstances regarding the business of our clients’ customers and other factors that we believe are relevant. If we determine that collection is not reasonably assured, we defer revenue recognition until such time as collection becomes reasonably assured, which is generally upon receipt of cash payment.

In addition, we provide an allowance in accrued liabilities for the cancellation of service contracts that occurs within a specified time after the sale, which is typically less than 30 days. This amount is calculated based on historical results and constitutes a reduction of the net revenue we record for the commission we earn on the sale.

Cost of Services

Cost of services consists of costs associated with promoting and selling our clients’ products and services including compensation costs of telesales personnel, telesales commissions and bonuses, costs of designing, producing and delivering marketing services, and salaries and other personnel expenses related to fee-based activities. Cost of services also includes the costs of allocated facility and telephone usage for our telesales representatives as well as other direct costs associated with the delivery of our services, including credit card fees related to the online sale of our clients' products. Most of the costs are personnel related and fluctuate in relation to our net revenue. Bonuses and sales commissions will typically change in proportion to revenue or profitability.

Advertising

We expense advertising costs as incurred. These costs were not material and are included in sales and marketing expense.

Income Taxes

We account for income taxes using the liability method. The liability method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. Therefore, we provide a valuation allowance to the extent that we do not believe it is more likely than not that we will generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets. At September 30, 2012 and December 31, 2011, we had gross deferred tax assets of $31.3 million and $30.6 million, respectively. At September 30, 2012 and December 31, 2011, the deferred tax assets were subject to a 100% valuation allowance and therefore are not recorded on our balance sheet as assets. Realization of our deferred tax assets is limited and we may not be able to fully utilize these deferred tax assets to reduce our tax rates.

FASB ASC 740, Income Taxes, prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under this guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FASB ASC 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Our policy for recording interest and penalties related to uncertain tax positions is to record such items as a component of income before taxes. Penalties, interest paid and interest received are recorded in interest and other expense, net, in the statement of operations. There were immaterial amounts accrued for interest and penalties related to uncertain tax positions as of September 30, 2012.

Stock-Based Compensation

FASB ASC 718, Compensation-Stock Compensation, establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share-based payment transactions. This guidance requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. See Note 9 for further discussion of this standard and its effects on the financial statements presented herein.

Concentrations of Credit Risk and Credit Evaluations

Our financial instruments that expose us to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable.

We place our cash and cash equivalents in a variety of financial institutions and limit the amount of credit exposure through diversification and by investing the funds in money market accounts which are insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, the balance of cash deposits is in excess of the FDIC insurance limits.

We sell our clients’ products and services primarily to business end users and, in most transactions, assume full credit risk on the sale. Credit is extended based on an evaluation of the financial condition of our client’s customer, and collateral is generally not required. Credit losses have traditionally been immaterial, and such losses have been within management’s expectations.

We have generated a significant portion of our revenue from sales to customers of a limited number of clients. In the three months ended September 30, 2012, three clients accounted for 10% or more of our net revenue, with Microsoft representing approximately 37% of our net revenue, Symantec representing approximately 18% of our net revenue and Hewlett-Packard representing approximately 11% of our net revenue. In the three months ended September 30, 2011, three clients accounted for 10% or more of our net revenue, with Microsoft representing approximately 25% of our net revenue, Symantec representing approximately 20% of our net revenue and Hewlett-Packard representing approximately 14% of our net revenue.

In the nine months ended September 30, 2012, three clients accounted for 10% or more of our net revenue, with Microsoft representing approximately 35% of our net revenue, Symantec representing approximately 20% of our net revenue and Hewlett-Packard representing approximately 11% of our net revenue. In the nine months ended September 30, 2011, three clients accounted for 10% or more of our net revenue, with Symantec representing approximately 21% of our net revenue, Microsoft representing approximately 20% of our net revenue and Hewlett-Packard representing approximately 14% of our net revenue.

No individual client’s end-user customer accounted for 10% or more of our revenues in any period presented.

We have outsourced services agreements with our significant clients that expire at various dates ranging through June 2015. Our agreements with Symantec expire in March 2014 and can generally be terminated prior to expiration with ninety days notice. Our agreements with Microsoft expire at various dates from June 2013 through June 2015, and can be terminated with thirty days notice. Our agreements with Hewlett-Packard expired in October 2012. We have received a purchase order from Hewlett-Packard to extend our services through October 2013 and we continue to provide services while the extension agreement is finalized. Our agreements with Hewlett-Packard can generally be terminated prior to expiration with ninety days notice.

Fair Value of Financial Instruments

The amounts reported as cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term maturities.

The fair value of short-term and long-term debt obligations is estimated based on current interest rates available to us for debt instruments with similar terms, degrees of risk and remaining maturities. The carrying values of these obligations, as of each period presented, approximate their respective fair values.

Segment Reporting

In accordance with FASB ASC 280, Segment Reporting, we concluded that we have one operating and reportable segment. We have call center operations within the United States and the United Kingdom where we perform services on behalf of our clients. While we exited our Canadian call center facility in September 2010, we continue to maintain a network of managed telesales representatives in the region.

The following is a breakdown of net revenue by product line for the three and nine months ended September 30, 2012 and 2011 (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Contract sales	$	3,892	$	3,701	$	8,743	$	7,965
Lead development	2,207		2,521		9,056		8,678
Training sales	801		867		2,397		2,639
Total	$	6,900	$	7,089	$	20,196	$	19,282

Foreign revenues are attributed to the country of the business entity that executed the contract. We utilize our call centers in the United States and the United Kingdom and a network of managed telesales representatives in Canada to fulfill these contracts. We also utilize our operations based in Manila which as of September 30, 2012 are classified as assets held for sale. See Note 3 for more details regarding our discontinued operations. In June 2012, we began providing telesales services throughout Latin America utilizing a strategic partner located in the Dominican Republic. The following is a geographic breakdown of our net revenue for the three and nine months ended September 30, 2012 and 2011 (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
United States	$	6,824	$	6,345	$	19,785	$	17,480
Europe	76		744		411		1,802
Total	$	6,900	$	7,089	$	20,196	$	19,282

Property and equipment information is based on the physical location of the assets, and goodwill and intangible information is based on the country of the business entity to which these are allocated. The following is a geographic breakdown of net long-lived assets as of September 30, 2012 and December 31, 2011 (in thousands):



	Property & Equipment, Net		Goodwill		Intangible Assets, Net
September 30, 2012
United States	$	2,499	$	3,777	$	2
Europe	132		1,560		—
Total	$	2,631	$	5,337	$	2
December 31, 2011
United States	$	2,659	$	3,777	$	84
Europe	202		1,491		1
Total	$	2,861	$	5,268	$	85

Foreign Currency Translation

The functional currency of our foreign subsidiaries was determined to be their respective local currencies (Canadian Dollar and Great Britain Pound). Foreign currency assets and liabilities are translated at the current exchange rates at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates in effect during the period. The related unrealized gains and losses from foreign currency translation are recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity in the consolidated balance sheet and the consolidated statement of operations and comprehensive loss. For continuing operations, net gains and losses resulting from foreign exchange transactions are included in interest and other expense, net, in the consolidated statements of operations.

Related Party Transactions

In June 2011, we issued and sold 3.7 million shares of our common stock, together with warrants to purchase up to an aggregate 1.5 million additional shares, in a public offering. Members of our board of directors purchased 135,660 shares at a price of $1.29 per share. They also received warrants to purchase up to an additional 54,264 shares with an initial exercise price of $1.40 per share. See Note 9 for more information regarding our equity offering.

Recent Accounting Standards

In September 2011, the FASB issued new accounting guidance, ASU No. 2011-08 – Testing Goodwill for Impairment. This update permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC 350. This new guidance is effective for the first reporting period beginning after December 15, 2011. We will implement ASU No. 2011-08 as part of our 2012 impairment testing.

In June 2011, the FASB issued new accounting guidance, ASU No. 2011-05 – Presentation of Comprehensive Income. This update requires that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is effective for the first reporting period beginning after December 15, 2011. We adopted this standard in the first quarter of 2012 and elected to present a single continuous statement of operations and comprehensive loss.

In May 2011, the FASB issued ASU No. 2011-04 – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This pronouncement is effective for reporting periods beginning on or after December 15, 2011. The Company adopted this standard in the first quarter of 2012, as reflected in Note 8, Fair Value Measurements.

2. NET LOSS PER SHARE

Basic net loss per share is computed using the weighted-average number of shares of common stock outstanding during the year. Diluted net loss per share also gives effect, as applicable, to the potential dilutive effect of outstanding stock options and warrants, using the treasury stock method, unvested restricted share awards, and convertible securities, using the if converted method, as of the beginning of the period presented or the original issuance date, if later.

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net loss from continuing operations	$	(944	)	$	(2,441	)	$	(3,044	)	$	(8,460	)
Loss from discontinued operations	(706		)	(245		)	(2,692		)	(626		)
Net loss	(1,650		)	(2,686		)	(5,736		)	(9,086		)

Weighted-average shares of common stock outstanding – basic and diluted	27,066			24,900			27,013			22,385

Basic and diluted net loss per share - continuing operations	$	(0.03	)	$	(0.10	)	$	(0.11	)	$	(0.38	)
Basic and diluted net loss per share - discontinued operations	$	(0.03	)	$	(0.01	)	$	(0.10	)	$	(0.03	)
Basic and diluted net loss per share	$	(0.06	)	$	(0.11	)	$	(0.21	)	$	(0.41	)

For the three and nine months ended September 30, 2012, we excluded approximately 3.5 million and 3.6 million options, warrants and unvested restricted share awards, respectively, from the calculation of diluted net loss per share as these securities were anti-dilutive. In the three and nine months ended September 30, 2011, we excluded approximately 4.3 million and 4.5 million options, warrants and unvested restricted share awards, respectively, from the calculation of diluted net loss per share as these securities were anti-dilutive.

3. DISCONTINUED OPERATIONS

In the quarter ended June 30, 2012, the Company concluded that RSL no longer fit with the long term strategic plans of the Company as we (a) shift away from lower margin Business Process Outsourcing ("BPO") and towards outsourced telesales services that started with outsourcing our Latin America business to a partner in the Dominican Republic, and (b) transform into a complete end-to-end B2B solution provider leveraging e-Commerce technology. The Company has engaged a broker to sell, and has committed to a plan to sell, our Manila-based operations. RSL's operating results for the three and nine months ended September 30, 2012 and 2011 are reported as discontinued operations in the consolidated financial statements.

Assets are classified as held for sale when the Company commits to a plan to sell the assets and there is reasonable certainty that the sale will take place within one year. Upon classification as held for sale, long-lived assets are no longer depreciated or depleted and a measurement for impairment is performed to expense any excess of carrying value over fair value less costs to sell. Subsequent changes to estimated fair value less the cost to sell will impact the measurement of assets held for sale for assets for which fair value is determined to be less than the carrying value of the assets. We evaluated our assets held for sale and noted no impairment was necessary as of September 30, 2012. The assets and associated liabilities of RSL have been reclassified within the consolidated balance sheets as "Assets held for sale" or "Liabilities related to assets held for sale."

The accompanying unaudited consolidated statements of operations and cash flows have been reclassified for all periods presented to remove the operating results of RSL from continuing operations and presenting the results of RSL as loss from discontinued operations, net of tax. Losses from discontinued operations, net of income taxes for all periods presented reflect the operating results of our Manila-based operations and are as follows, in thousands:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenue	$	2,766		$	2,837		$	7,873		$	9,102
Cost of services	3,100			2,443			8,811			7,713
Gross margin (loss)	(334		)	394			(938		)	1,389
Operating expenses	320			585			1,680			1,880
Non-operating expenses	52			54			74			135
Loss from discontinued operations	$	(706	)	$	(245	)	$	(2,692	)	$	(626	)

Cost of services for the nine months ended September 30, 2012 includes $499,000 related to establishing a reserve for the bankruptcy of a client.

The following assets and liabilities have been segregated and classified as held for sale in the accompanying consolidated balance sheets at September 30, 2012 and December 31, 2011.



	September 30, 2012		December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	166	$	260
Accounts receivable, net	1,319		1,672
Prepaid expenses and other current assets	71		73
Total current assets of discontinued operations held for sale	1,556		2,005
Property and equipment, net	2,234		1,799
Other non-current assets	233		360
Assets of discontinued operations held for sale	$	4,023	$	4,164
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,293	$	823
Accrued compensation and benefits	873		500
Other accrued liabilities	104		82
Deferred revenue	17		11
Current portion of capital lease obligations	40		106
Current portion of notes payable	—		630
Current liabilities of discontinued operations held for sale	2,327		2,152
Capital lease obligations, less current portion	—		11
Total liabilities of discontinued operations held for sale	$	2,327	$	2,163

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):



	Estimated Useful Life	September 30, 2012			December 31, 2011
Computer equipment	3 years	$	4,666		$	4,602
Capitalized software and development	2-5 years	13,919			12,273
Furniture and fixtures	5 years	437			431
Leasehold improvements	Lease term	258			256
		19,280			17,562
Accumulated depreciation and amortization		(16,681		)	(15,577		)
Construction in process (1)		32			876
Property and equipment, net		$	2,631		$	2,861

_____________


(1)	Construction in process at September 30, 2012 consists primarily of costs incurred to further develop and enhance our e-commerce platform. Estimated cost to complete these projects is in the range of $25,000 to $50,000, subject to future revisions.

5. INTANGIBLE ASSETS

Intangibles assets consist of the following (in thousands):



	Estimated Useful Life	September 30, 2012			December 31, 2011
Developed technology	3 years	$	330		$	330
Customer relations	2 years	—			232
		330			562
Accumulated amortization		(328		)	(477		)
Intangibles assets, net		$	2		$	85

As of September 30, 2012, future amortization expense of intangible assets will amount to $2,000 in 2012.

6. LONG-TERM DEBT OBLIGATIONS

Long-term debt consists of the following (in thousands):



	September 30, 2012			December 31, 2011
Comerica term loan	$	3,000		$	—
Comerica revolving line	1,493			—
Bridge Bank credit facility	—			3,748
Overdraft facility	—			381
Notes payable – Optima	—			149
Notes payable – insurance	55			28
Total notes payable	4,548			4,306
Less: current portion	(955		)	(4,306		)
Total notes payable, less current portion	$	3,593		$	—

Comerica Bank Credit Facility

On June 14, 2012, the Company entered into a Loan and Security Agreement with Comerica Bank (the "Credit Facility"), replacing Bridge Bank, N.A. as the Company's primary lender. 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 and certain credit card services. The Company may request advances under the Term Loan until December 14, 2012. Any Term Loan advances that are outstanding on December 14, 2012 will be payable in thirty equal monthly installments of principal, plus accrued interest, beginning on January 1, 2013 and ending on June 14, 2015.

less the aggregate face amount of letters of credit issued and the aggregate limits of any credit cards issued and any merchant credit card processing reserves. Amounts borrowed under the Revolving Line are due on December 14, 2013. The interest rate per annum for advances under the Credit Facility is the Prime Referenced Rate, as defined in the Credit Facility, plus the applicable margin. The applicable margin is one and one half percent (1.50%) per annum for the Revolving Line and two and one quarter percent (2.25%) per annum for the Term Loan. The interest rate on our Term Loan and Revolving Line were 5.50% and 4.75%, respectively, as of September 30, 2012.

The Credit Facility is secured by substantially all of Rainmaker’s consolidated assets. Rainmaker must comply with certain financial covenants, including maintaining unrestricted cash with Comerica Bank equal to the greater of $1 million or the aggregate outstanding amount of Term Loan advances, and not less than $1 million upon achieving positive cash flow, and maintaining a minimum liquidity ratio with respect to all indebtedness owing to Comerica Bank of at least 1.25 to 1.00. The Credit Facility contains customary covenants that will, subject to limited exceptions, require Comerica's approval to, among other things, (i) create liens; (ii) make capital expenditures; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The Credit Facility also provides for customary events of default, including nonpayment, breach of covenants, material adverse events, payment defaults of other indebtedness, and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Credit Facility. As of September 30, 2012, we were in compliance with all loan covenants.

Bridge Bank Credit Facility

In April 2004, we entered into a business loan agreement and a commercial security agreement with Bridge Bank (the “ Bridge Credit Facility”). The Bridge Credit Facility, as last amended in November 2011, had a maturity date of December 10, 2012. The maximum amount of credit that could be borrowed under the Bridge Credit Facility was $6 million, subject to a borrowing base, and included a $1.0 million sub-facility for standby letters of credit. The interest rate per annum for advances under the Bridge Credit Facility was equal to the greater of (i) 3.5%, or (ii) one quarter of one percent (0.25%) above the prime lending rate. In June 2012, we terminated the Bridge Credit Facility and repaid all borrowings thereunder.

In July 2005, we issued an irrevocable standby letter of credit in the amount of $100,000 to our landlord for a security deposit for our corporate headquarters located in Campbell, California. The letter of credit issued by Bridge Bank was replaced in July 2012 by a letter of credit in like amount issued by Comerica Bank under the Credit Facility described above.

In December 2010, we issued an irrevocable standby letter of credit in the amount of £250,000 Great Britain Pounds to Barclays Bank PLC to secure our overdraft facility described below. The letter of credit was issued by Bridge Bank and we terminated this letter of credit in June 2012.

Overdraft Facility

On November 25, 2010, our subsidiary, Rainmaker EMEA Limited, established an overdraft facility with Barclays Bank PLC in the amount of £247,500 Great Britain Pounds. This overdraft facility was secured by a £250,000 standby letter of credit issued by Bridge Bank as noted above. In June 2012, we repaid and terminated the overdraft facility.

Notes Payable – Optima acquisition

On January 29, 2010, we entered into and closed a stock purchase agreement for Optima Consulting Partners Limited (“Optima”). In accordance with this agreement, we entered into a note payable for $350,000 payable in two installments, with $200,000 plus accrued interest due eighteen months from the closing date and $150,000 plus accrued interest due twenty-four months after the closing date. We paid the first installment of the note in July 2011 and fully settled the liability by paying the second installment in January 2012. The interest rate on the note payable was 0.4% per year and we recorded the present value of the note payable discounted over two years at a rate of 6.2%. The resulting discount on note payable was amortized over the two-year term of the note.

Notes Payable – insurance

On August 13, 2012, we entered into an agreement with AON Private Risk Management to finance our 2012 - 2013 insurance premiums with AFCO Acceptance Corporation in the amount of $62,000. The interest rate on the note payable is 6.068% and the note is payable in nine equal monthly installment payments beginning in September 2012. As of September 30, 2012, the remaining liability under this financing agreement was $55,000.

7. COMMITMENTS AND CONTINGENCIES

Lease Commitments

As of September 30, 2012, our off-balance sheet arrangements include operating leases for our facilities and certain property and equipment that expire at various dates through 2014. All of these leases are described in more detail below. These arrangements allow us to obtain the use of the equipment and facilities without purchasing them. If we were to acquire these assets, we would be required to obtain financing and record a liability related to the financing of these assets. Leasing these assets under operating leases allows us to use these assets for our business while minimizing the obligations and upfront cash flow related to purchasing the assets.

In October 2009, we executed a second amendment to the operating lease for our corporate headquarters in Campbell, California to reduce our lease cost. Under this amendment, we reduced the amount of space that we lease by 6,719 square feet to 16,430 square feet starting October 1, 2009, and reduced our lease cost per square foot by approximately 18%. We obtained a first right of refusal to the reduced space (6,719 square feet). Under this second amendment, the lease will expire on January 31, 2013. Annual gross rent under the amended lease was approximately $227,000 in the first year of the lease which ended September 30, 2010, and increases by approximately 5% each year thereafter for the remaining term. In addition, we will continue to pay our proportionate share of operating costs and taxes based on our occupancy, and a letter of credit issued to the landlord in the amount of $100,000 for a security deposit will remain in place.

In September 2011, we extended an existing lease in Austin, Texas on approximately 21,388 square feet of space for a term of 24 months through December 31, 2013. Annual rent under the lease approximates $212,000, or $18,000 monthly. Additionally, we pay our proportionate share of maintenance on the common areas in the business park.

With our acquisition of Optima in January 2010, we assumed an office lease in the United Kingdom in Godalming outside of London, where we have call center operations. This cancellable lease, which was expanded to accommodate growth in October 2010, commenced in November 2009, has a three-year term and terminates in October 2012. Annual base rent for this facility is £134,000 Great Britain Pounds. Based on the exchange rate at September 30, 2012, annual rent is approximately $216,000 in U.S. dollars. In September 2011, we leased additional space in Godalming due to the continued expansion of our European operations. This lease had a one-year term and terminated in September 2012.

Rent expense under operating lease agreements for continuing operations during the nine months ended September 30, 2012 and 2011 was $622,000 and $686,000, respectively. Rent expense for the nine months ended September 30, 2012 and 2011 includes $0 and $99,000, respectively, related to the closure of our Montreal facility.

Our Manila-based operations, whose operating results for the three and nine months ended September 30, 2012 and 2011 are reported as discontinued operations, have lease commitments as of September 30, 2012. On May 1, 2010, we executed a lease for approximately 15,852 square feet of call center space in the Alphaland Southgate Tower in Makati City. The lease has a three-year term and terminates on April 30, 2013. Based on the exchange rate as of September 30, 2012, and the free and discounted base rent included in the lease agreement, our annual base rent for this space will be approximately $242,000 in the final year of the lease. In April 2012, we entered into an agreement to lease approximately 43,000 square feet of call center space in the Greenfield District of Manila. The lease has a two-year term and terminates on March 31, 2014. Based on the exchange rate as of September 30, 2012, and the free and discounted base rent, our annual base rent for this space will be approximately $462,000 per year.

Guarantees

On July 18, 2012, we issued an irrevocable standby letter of credit in the amount of $100,000 to our landlord for a security deposit for our corporate headquarters located in Campbell, California. The letter of credit was issued by Comerica Bank under the Credit Facility, described above, and replaced the standby letter of credit issued by Bridge Bank in July 2005.

Our customer contracts typically require us to contingently indemnify against certain qualified third party claims. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not had to make any payments for these obligations, and no liabilities have been recorded for these obligations on our balance sheets as of September 30, 2012 and December 31, 2011.

Litigation

proceedings before various courts; however, we believe that any ultimate liability surrounding these claims, if any, will not have a material impact on our financial position or results of operations. Also see Part I Item 1A— “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the SEC on March 30, 2012 and amended on April 30, 2012, for additional discussion of the litigation and regulatory risks facing our Company.

8. FAIR VALUE MEASUREMENTS

Fair value is the exchange price that would be the amount received for an asset or paid to transfer a liability in an orderly transaction between market participants. In arriving at a fair value measurement, we use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of inputs used to establish fair value are the following:


Level 1	— Quoted prices in active markets for identical assets or liabilities;


Level 2	— Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and


Level 3	— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A summary of the activity of the fair value of the Level 3 liabilities for the three months ended September 30, 2012 and 2011 is as follows (in thousands):



	Beginning Value of Level 3 Liabilities		Transfers In (Out)		Loss(Gain) on Fair Value Re- measurement			Foreign Currency Adjustment			Ending Fair Value of Level 3 Liabilities
2012
Common stock warrant liability	$	495	$	—	$	337		$	—		$	832
2011
Contingent consideration — Optima (1)	113		—		114			(2		)	225
Common stock warrant liability	790		—		(70		)	—			720

A summary of the activity of the fair value of the Level 3 liabilities for the nine months ended September 30, 2012 and 2011 is as follows (in thousands):



	Beginning Value of Level 3 Liabilities		Transfers In (Out)			Loss(Gain) on Fair Value Re- measurement			Foreign Currency Adjustment			Ending Fair Value of Level 3 Liabilities
2012
Contingent consideration — Optima (1)	$	225	$	(225	)	$	—		$	—		$	—
Common stock warrant liability	517		—			315			—			832
2011
Contingent consideration — Optima (1)	182		—			44			(1		)	225
Common stock warrant liability	—		815			(95		)	—			720

____________

(1)

The contingent consideration paid under the Optima stock purchase agreement was $225,000 based on the achievement of certain performance metrics for the calendar year ended December 31, 2011. The contingent consideration payment was transferred from our fair value measurements once the final calculation was determinable. The liability was settled in April 2012 in accordance with the guidelines of the Optima stock purchase agreement.

The following table represents the fair value hierarchy for our financial assets and liabilities held by us measured at fair value on a recurring basis (in thousands):



	Level 1		Level 2		Level 3
September 30, 2012
Assets:
Money market funds (1)	$	3,876	$	—	$	—
Liabilities:
Common stock warrant liability (2)	$	—	$	—	$	832
December 31, 2011
Assets:
Money market funds (1)	$	5,652	$	—	$	—
Liabilities:
Common stock warrant liability (2)	$	—	$	—	$	517
Contingent consideration—Optima (3)	$	—	$	—	$	225

____________


(1)	Money market funds are valued using active quoted market rates.

(2)

The fair value of our common stock warrant liability (see Note 9 - Stockholders' Equity) is determined using the Black–Scholes valuation method utilizing the quoted price of our common stock in an active market. Volatility is estimated based on the historical market activity of our stock. The expected life is based on the remaining contractual term of the warrants and the risk free interest rate is based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants' remaining contractual term. See detailed inputs below.


(3)	Contingent consideration - Optima was valued as of December 31, 2011 based on the achievement of the performance metrics listed in the stock purchase agreement. The $225,000 contingent consideration was paid in accordance with the Optima stock purchase agreement in April 2012.

The Company uses the Black-Scholes model to value our common stock warrant liability. The following are the assumptions used to measure the accrued warrant liability at September 30, 2012 and December 31, 2011, which were determined in a manner consistent with that described for stock option awards as set forth in Note 9:



	September 30,		December 31,
	2012		2011
Expected life in years	3.75		4.50
Volatility	65.99	%	65.99	%
Risk-free interest rate	0.34	%	0.83	%
Dividend rate	—	%	—	%

The amounts reported as cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term maturities.

The fair value of short-term and long-term capital lease and debt obligations is estimated based on current interest rates available to us for debt instruments with similar terms, degrees of risk and remaining maturities. The carrying values of these obligations, as of each period presented, approximate their respective fair values.

9. STOCKHOLDERS' EQUITY

Equity Offering

In June 2011, we issued and sold 3.7 million shares of our common stock, together with warrants to purchase up to an aggregate 1.5 million additional shares, in a public offering. The offering was made pursuant to a prospectus filed with our shelf registration statement on Form S-3 (File No. 333-171946), which was filed with the SEC on January 28, 2011, amended on February 18, 2011 and declared effective by the SEC on March 7, 2011, the prospectus supplement dated June 22, 2011, and the free writing prospectus dated June 23, 2011. We received gross cash proceeds of approximately $3.9 million from the equity offering. The $3.3 million of net cash proceeds from the offering were used for general corporate purposes, including working capital and capital expenditures.

The 1.5 million warrants issued through the public offering have an initial 5-year term and an exercise price of $1.40 per share and became exercisable six months after their issuance date. If at any time the shares of common stock issuable thereunder

are not registered for resale pursuant to an effective registration statement, the warrants may be exercised by way of a cashless exercise. The warrants also contain provisions that protect the holders thereof against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as stock dividends, stock splits and other similar events. In addition, the placement agent received a warrant to purchase a number of shares of common stock equal to three percent (3.0%) of the number of shares purchased by investors in the offering, which approximates 110,000 shares. The placement agent warrant has an initial 5-year term and an exercise price of $1.05 per share and became exercisable six months after its issuance date. The placement agent warrant may also be exercised by way of a cashless exercise. The placement agent warrant also contains provisions that protect its holder against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as stock dividends, stock splits and other similar events.

We have classified all of the above mentioned warrants as liabilities under the caption "Common stock warrant liability" and recorded the liability at its estimated fair value with the corresponding gains or losses as a separate line item after operating loss from operations, under the caption "Loss (gain) due to change in fair value of warrant liability." See Note 8 for disclosure regarding the fair value of financial instruments.

Stock Compensation

In 2003, the board of directors adopted and the stockholders approved the 2003 Stock Incentive Plan (“2003 Plan”). The 2003 Plan provides for the issuance of incentive stock options or nonqualified stock options to employees, consultants and non-employee members of the board of directors, and issuance of shares of common stock for purchase or as a bonus for services rendered (restricted stock awards).

During the three and nine months ended September 30, 2012, we had restricted stock awards that vested. We are required to withhold income taxes at statutory rates based on the closing market value of the vested shares on the date of vesting. We offer employees the ability to have vested shares withheld by us in an amount equal to the amount of taxes to be withheld. Based on this, we purchased 44,429 and 149,874 shares during the three and nine months ended September 30, 2012, with a cost of approximately $42,000 and $119,000, from employees to cover federal and state taxes due.

We account for stock-based compensation awards issued to employees and directors using the guidance from FASB ASC 718, Compensation-Stock Compensation. ASC 718 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share-based payment transactions. This guidance requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations and comprehensive loss.

The fair value of stock options is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions, including expected time to exercise, future stock price volatility, risk-free interest rates, and dividend rates which greatly affect the calculated values. Stock-based compensation expense is recorded net of an estimated forfeiture rate and trued-up upon vesting. These factors could change in the future, which would affect the stock-based compensation expense in future periods. The estimated fair value of stock-based compensation awards is amortized using the straight-line method over the vesting period of the awards.

We expense stock-based compensation to the same expense categories that the respective award grantee’s salary expense is reported. The table below reflects stock-based compensation expense for the three and nine months ended September 30, 2012 and 2011 (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Stock-based compensation expense included in:
Cost of services	$	24	$	15	$	77	$	64
Sales and marketing	12		57		34		143
Technology and development	32		51		75		148
General and administrative	149		399		421		1,209
	$	217	$	522	$	607	$	1,564

At September 30, 2012, approximately $682,000 of stock-based compensation relating to unvested awards had not been amortized and will be expensed in future periods through 2016. Under current grants that are unvested and outstanding, approximately $128,000 will be expensed in the remainder of 2012 as stock-based compensation, subject to true-up adjustments for forfeitures and vestings during the year.

We calculate the value of our stock option awards when they are granted. Accordingly, we update our valuation assumptions for the risk-free interest rate on the date of grant. Annually, we prepare an analysis of the historical activity within our option plans as well as the demographic characteristics of the grantees of options within our stock option plan to determine the estimated life of the grants, stock volatility and an estimated forfeiture rate. During the nine months ended September 30, 2012 and 2011, the weighted average valuation assumptions for stock option awards and forfeiture rates used for the expense calculations for stock option and restricted stock awards were as follows:



	Nine Months Ended
	September 30,
	2012		2011
Expected life in years	3.76		3.76
Volatility	65.99	%	65.99	%
Risk-free interest rate	0.44	%	1.00	%
Dividend rate	—	%	—	%
Forfeiture Rates:
Options	27.61	%	27.61	%
Restricted stock	15.04	%	15.04	%

Expected life of our option grants is estimated based on our analysis of our actual historical option exercises and cancellations. Expected stock price volatility is based on the historical volatility from traded shares of our stock over the expected term. The risk-free interest rate is based on the rate of a zero-coupon U.S. Treasury instrument with a remaining term approximately equal to the expected term. We have not historically paid dividends and we do not expect to pay dividends in the near term and therefore we have set the dividend rate at zero.

A summary of activity under our 2003 Plan for the nine months ended September 30, 2012 is as follows:



			Options Outstanding
	Available for Grant		Number of Shares		Weighted Average Exercise Price
Balance at December 31, 2011	403,189		1,021,288		$	1.59
Authorized	1,000,000		—		—
Options granted	(85,000	)	85,000		0.84
Restricted stock awards granted	(885,000	)	—		—
Options canceled	370,932		(370,932	)	1.23
Restricted stock awards forfeited	382,125		—		—
Balance at September 30, 2012	1,186,246		735,356		$	1.63

In accordance with the 2003 Plan, the number of shares authorized for grant under the 2003 Plan automatically increases on the first trading date of January by an amount equal to the lesser of 4% of our outstanding common stock at December 31 or 1,000,000 shares. Shares outstanding at December 31, 2011 were 26,812,935 and the additional shares authorized amounted to 1,000,000 as shown in the table above.

The following table summarizes the activity with regard to restricted stock awards during the nine months ended September 30, 2012. Restricted stock awards are issued from the 2003 Plan and any issuances reduce the shares available for grant as indicated in the previous table. Restricted stock awards are valued at the closing market price of our stock on the date of the grant.



	Number of Shares		Weighted Average Grant Price
Balance of nonvested shares at December 31, 2011	1,345,875		$	1.03
Granted	885,000		0.84
Vested	(557,812	)	0.79
Forfeited	(382,125	)	0.92
Balance of nonvested shares at September 30, 2012	1,290,938		$	0.88

The total fair value of the nonvested restricted stock awards at grant date was $1.1 million as of September 30, 2012.

10. SUBSEQUENT EVENTS

On October 15, 2012, we entered into an agreement to lease approximately 5,000 square feet of call center space in the United Kingdom in Godalming. The lease has a 30 month term and terminates in March 2015. This facility will be utilized to better accommodate our current operations in Europe and provide additional space for expansion. Based on the exchange rate as of September 30, 2012, and the free and discounted base rent, our annual base rent will be approximately $45,000.

On October 24, 2012, Michael Silton's employment as the Chief Executive Officer was terminated. Our Board of Directors has named Timothy Burns, the Company's Chief Financial Officer, as interim President and CEO while the search for a new CEO is concluded. The Board also appointed Mitchell Levy to succeed Mr. Silton as Chairman of the Board. Mr. Levy has served as a director of the Company since 2004 and is currently Chairman of the Company's Governance and Nominating Committee and Chairman of the Company's Compensation Committee, as well as a member of the Company's Audit Committee.

On October 31, 2012, the Company executed a third amendment of the operating lease for our corporate headquarters in Campbell, California, effective December 1, 2012 with a 3-year term. Annual base rent under the amended lease is approximately $277,000 in the first year of the lease, or $208,000 after deducting free base rent in the first three months of the amended lease, and increases by approximately 3% each year thereafter for the remaining term. We will continue to pay our proportionate share of operating costs and taxes based on our occupancy, and a letter of credit issued to the landlord for a security deposit of $30,000 will replace the prior letter of credit of $100,000.


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, 2011, as filed with the SEC on March 30, 2012 and amended on April 30, 2012, 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.

Among the important factors which could cause actual results to differ materially from those in the forward-looking statements include general market conditions, the current very difficult 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, our ability to integrate acquisitions without disruption to our business, our ability to sell our Manila operations in a timely manner, our ability to transition to a new chief executive officer 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, 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, our client concentration given that we are currently dependent on a few significant client relationships, potential competition in the marketplace, the ability to retain and attract employees, market acceptance of our service programs and pricing options, our ability to maintain and develop our existing technology platform and to deploy new technology, our ability to sign new clients and control expenses, the possibility of the discontinuation of some client relationships, the potential for additional litigation and adverse outcomes to litigation we are currently involved in, the financial condition of our clients’ businesses, our ability to raise additional equity or debt financing and other factors as detailed in Part I Item 1A – “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the SEC on March 30, 2012 and amended on April 30, 2012.

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

We are an e-Commerce software company that helps multi-national companies address the B2B market by maximizing sales revenue for their products and services. Rainmaker provides these solutions on a global basis supporting multiple

payment methods, currencies and language capabilities. The Rainmaker e-Commerce platform can be enhanced with Rainmaker global telesales agents to maximize revenue and customer satisfaction through the entire customer life cycle. We offer three primary solutions designed to increase revenue for our clients from their small and medium-sized business customers:


•	Transact: Our Transact solution is designed to allow our clients to sell more of their products and maintenance contracts directly to their customers or via their channel partners.


•	Renew: Our Renew solution is designed to maximize renewal rates, subscriptions and other contracts to allow our clients to significantly increase the lifetime value of their customers.


•	Educate: Our Educate solution is designed to allow our clients to generate more revenue selling training programs to their customers.

We also provide lead development and other telesales services to generate, qualify and develop corporate leads, turning these prospects into sales opportunities and qualified appointments for our clients' field sales forces and for their channel partners.

We operate as an extension of our clients' sales and marketing teams. All of our interactions with our clients' customers utilize and incorporate our clients' brands and trademarks to complement and enhance our clients' sales and marketing efforts. Thus, our clients entrust us with some of their most valuable assets -- their brand and reputation. We are not simply a vendor but a partner, able to turn basic customer contact points into revenue generating opportunities while simplifying otherwise complex sales and marketing needs. We deliver high value service to our clients' customers in a cost effective manner while delivering channel friendly ways to increase online sales.

Critical Accounting Policies/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 has been determined to be the local currency for the Philippine-based subsidiary. 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.

Except for the presentation of our Manila-based operations as discontinued operations, discussed in Note 3, management believes there have been no significant changes during the nine months ended September 30, 2012 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, 2011, as filed with the SEC on March 30, 2012 and amended on April 30, 2012.

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, as amended, for the year ended December 31, 2011.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Net revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services	55.2		59.1		56.0		58.8
Gross margin	44.8	%	40.9	%	44.0	%	41.2	%
Operating expenses:
Sales and marketing	7.6		14.3		7.8		15.2
Technology and development	17.4		25.8		21.4		29.4
General and administrative	21.5		26.8		21.0		29.7
Depreciation and amortization	6.1		7.4		6.1		10.2
Loss on fair value re-measurement	—		1.6		—		0.2
Total operating expenses	52.6	%	75.9	%	56.3	%	84.7	%
Operating loss	(7.8	)	(35.0	)	(12.3	)	(43.5	)
Loss (gain) due to change in fair value of warrant liability	4.9		(1.0	)	1.6		(0.5	)
Interest and other expense, net	0.9		0.6		0.7		0.5
Loss before income tax expense	(13.6	)%	(34.6	)%	(14.6	)%	(43.5	)%
Income tax expense (benefit)	0.1		(0.2	)	0.6		0.4
Net loss from continuing operations	(13.7	)%	(34.4	)%	(15.2	)%	(43.9	)%
Loss from discontinued operations, net of tax	(10.2	)	(3.5	)	(13.3	)	(3.2	)
Net loss	(23.9	)	(37.9	)	(28.5	)	(47.1	)

Foreign currency translation adjustments	0.4		(0.5	)	(0.4	)	(1.6	)
Comprehensive loss	(23.5	)%	(38.4	)%	(28.9	)%	(48.7	)%

Comparison of Three Months Ended September 30, 2012 and 2011

Net Revenue. Net revenue decreased $189,000, or 3%, to $6.9 million in the three months ended September 30, 2012, as compared to the three months ended September 30, 2011.

The following table shows the change in net revenue by product line between the periods (in thousands):



	Three Months Ended September 30,				$ Change			% Change
	2012		2011		$ Change			% Change
Contract sales	$	3,892	$	3,701	$	191		5	%
Lead development	2,207		2,521		(314		)	(12	)%
Training sales	801		867		(66		)	(8	)%
Total	$	6,900	$	7,089	$	(189	)	(3	)%

Net revenue from our contract sales increased in the three months ended September 30, 2012, as compared to the 2011 comparative period due to growth in our eCommerce business. Lead development net revenue decreased in the three months ended September 30, 2012, as compared to the 2011 comparative period due to the elimination of non-strategic client programs, offset by multiple new programs with Microsoft, a significant client in both 2011 and 2012. Training sales net revenue also decreased in the three months ended September 30, 2012, as compared to the 2011 comparative period due to net client attrition.

Cost of Services and Gross Margin. Cost of services decreased $381,000, or 9%, to $3.8 million in the three months ended September 30, 2012, as compared to the 2011 comparative period primarily due to the impact of cost reduction initiatives and lower revenue. Our gross margin percentage was 45% and 41%, respectively, in the three months ended September 30, 2012 and 2011. The improvement in gross margin was due to cost savings initiatives and growth in our higher margin eCommerce business.

Sales and Marketing Expenses. Sales and marketing expenses decreased $491,000, or 48%, to $524,000 in the three months ended September 30, 2012, as compared to the 2011 comparative period. The change was primarily attributable to a decrease in personnel costs of $299,000, reduced commissions costs of $120,000 and a decrease in travel costs of $61,000.

Technology and Development Expenses. Technology and development expenses decreased $633,000, or 35%, to $1.2 million during the three months ended September 30, 2012, as compared to the 2011 comparative period. The decrease was primarily attributable to decreases in equipment costs and outsourced services expense of $340,000, decreases in personnel costs of approximately $170,000 and reduced telecommunication costs of $100,000 as a result of our cost reduction initiatives.

General and Administrative Expenses. General and administrative expenses decreased $412,000, or 22%, to $1.5 million during the three months ended September 30, 2012, as compared to the 2011 comparative period. The decrease was primarily due

to reduced stock compensation expense of $200,000, a reduction of $80,000 in board of directors' compensation, decreases in personnel costs of approximately $67,000 and a reduction in travel costs of $45,000. Certain of these reductions were due to cost savings initiatives.

Depreciation and Amortization Expenses. Depreciation and amortization expenses decreased $104,000, or 20%, to $420,000 for the three months ended September 30, 2012, as compared to the 2011 comparative period. Depreciation and amortization expense decreased due to software and equipment assets becoming fully depreciated and acquisition related intangible assets becoming fully amortized.

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



	Three Months Ended September 30,					Change
	2012		2011			Change
Interest expense, net	56		47			(9		)
Currency translation loss (gain)	7		(4		)	(11		)
Total	$	63	$	43		$	(20	)

Income Tax Expense. Income tax expense increased $22,000, or 147%, to $7,000 for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. Our income tax expense for the three months ended September 30, 2012 was based on our estimate of taxable income for the full year ending December 31, 2012, and primarily consists of estimates of foreign taxes and domestic gross margin taxes for certain states.

Loss from Discontinued Operations, Net of Tax. Loss from discontinued operations was $706,000 for the three months ended September 30, 2012, as compared to $245,000 in the three months ended September 30, 2011. The change was primarily due to costs to launch a significant new program and over-capacity, due to net customer attrition.

Comparison of Nine Months Ended September 30, 2012 and 2011

Net Revenue. Net revenue increased $914,000, or 5%, to $20.2 million in the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011.

The following table shows the change in net revenue by product line between the periods (in thousands):



	Nine Months Ended September 30,				$ Change			% Change
	2012		2011		$ Change			% Change
Contract sales	$	8,743	$	7,965	$	778		10	%
Lead development	9,056		8,678		378			4	%
Training sales	2,397		2,639		(242		)	(9	)%
Total	$	20,196	$	19,282	$	914		5	%

Net revenue from our contract sales increased in the nine months ended September 30, 2012, as compared to the 2011 comparative period due to growth in our eCommerce business. Net revenue from our lead development product line increased in the nine months ended September 30, 2012, as compared to the 2011 comparative period due to multiple new programs with Microsoft, a significant client in both 2011 and 2012. Net revenue from our training sales product line decreased in the nine months ended September 30, 2012, as compared to the 2011 comparative period due to net client attrition.

Cost of Services and Gross Margin. Cost of services decreased $26,000 to $11.3 million in the nine months ended September 30, 2012, as compared to the 2011 comparative period. Our gross margin percentage was 44% and 41% in the nine months ended September 30, 2012 and 2011, respectively. The improvement in gross margin was due to cost savings initiatives and growth in our higher margin eCommerce business.

Sales and Marketing Expenses. Sales and marketing expenses decreased $1.4 million, or 47%, to $1.6 million in the nine months ended September 30, 2012, as compared to the 2011 comparative period. The change was primarily due to a decrease in personnel costs of $858,000, a reduction in sales commissions of $201,000, a reduction in travel costs of $130,000 and a reduction in stock compensation costs of $109,000 largely as a result of cost savings initiatives.

Technology and Development Expenses. Technology and development expenses decreased $1.3 million, or 24%, to $4.3 million during the nine months ended September 30, 2012, as compared to the 2011 comparative period. The decrease was primarily attributable to decreases in equipment costs and outsourced services expense of $480,000, a decrease in personnel costs of approximately $471,000, a reduction in telecommunication costs of $280,000 and a reduction in stock compensation costs of $70,000 largely as a result of cost savings initiatives.

General and Administrative Expenses. General and administrative expenses decreased $1.5 million, or 26%, to $4.2 million during the nine months ended September 30, 2012, as compared to the 2011 comparative period. The decrease was primarily due to reduced stock compensation expense of $764,000, a decrease in personnel costs of $359,000 and a decrease in board of directors' compensation of $230,000. Certain of these reductions were due to cost savings initiatives.

Depreciation and Amortization Expenses. Depreciation and amortization expenses decreased $742,000, or 38%, to $1.2 million for the nine months ended September 30, 2012, as compared to the 2011 comparative period. Depreciation and amortization expense decreased due to software and equipment assets becoming fully depreciated and acquisition related intangible assets becoming fully amortized.

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



	Nine Months Ended September 30,					Change
	2012		2011			Change
Interest expense	117		115			(2		)
Currency translation loss (gain)	17		(16		)	(33		)
Total	$	134	$	99		$	(35	)

Net interest expense remained consistent in the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011.

The currency translation gain is primarily due to the fluctuation of currency exchange rates on our former borrowing facilities and note payable, denominated in United States Dollars, owed by our foreign subsidiaries. This includes our former overdraft facility payable to Barclays Bank by our United Kingdom subsidiary. Fluctuations of currency exchange rates may have a negative effect in future periods on our financial results.

Income Tax Expense. Income tax expense increased $52,000, or 71%, to $125,000 for the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011. Our income tax expense for the nine months ended September 30, 2012 was based on our estimate of taxable income for the full year ending December 31, 2012, and primarily consists of estimates of foreign taxes and domestic gross margin taxes for certain states.

Loss from Discontinued Operations, Net of Tax. Loss from discontinued operations was $2.7 million for the nine months ended September 30, 2012, as compared to $626,000 in the nine months ended September 30, 2011. The changs was due primarily to establishing a reserve for the bankruptcy of a client in the amount of $499,000, costs related to the exit of our BPI lease and the move into a larger facility to accommodate future expansion of $445,000, the initial costs incurred to launch a significant new program of and over-capacity due to net customer attrition.

Liquidity and Sources of Capital

Cash used in operating activities for the nine months ended September 30, 2012 was $1.6 million, as compared to cash used in operating activities of $4.0 million in the nine months ended September 30, 2011. Cash used in operating activities in the nine months ended September 30, 2012 was primarily the result of net loss from continuing operations of $3 million, offset by non-cash expenses for depreciation and amortization of property and intangibles of $1.2 million and stock-based compensation expenses of $607,000, cash used by discontinued operations of $1.0 million and changes in operating assets and liabilities that provided cash of $371,000.

Cash used in operating activities for the nine months ended September 30, 2011 was $4.0 million, primarily the result of net loss from continuing operations of $8.5 million, offset by non-cash expenses for depreciation and amortization of property and intangibles of $2 million and stock-based compensation expenses of $1.6 million, changes in operating assets and liabilities that provided cash of $441,000 and cash provided by discontinued operations of $530,000.

Cash used in investing activities was $1.8 million in the nine months ended September 30, 2012, as compared to cash used in investing activities of $1.3 million in the nine months ended September 30, 2011. The change was primarily the result of increases in capital expenditures used by our discontinued operations of approximately $767,000 during the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011, offset by a reduction in capital expenditures used by continuing operations of $372,000 during the same period.

Cash used in financing activities was approximately $813,000 in the nine months ended September 30, 2012, as compared to cash provided by financing activities of $3.8 million in the nine months ended September 30, 2011. Cash used in financing activities was primarily a result of cash used by discontinued operations of $708,000 and purchases of $233,000 of treasury stock

from employees for shares withheld for income taxes payable on restricted stock awards vested during the nine months ended September 30, 2012. Cash provided by financing activities in the nine months ended September 30, 2011 was primarily result of the $3.3 million in proceeds from our June 2011 offering of common stock and net proceeds from borrowings of $664,000.

At September 30, 2012, the Company had a net working capital deficit of $1.5 million. Our principal source of liquidity as of September 30, 2012 consisted of $4.4 million of cash and cash equivalents and $4.5 million of net accounts receivable. Our debt balance as of September 30, 2012 was $4.5 million, of which $1 million is payable within the next twelve months. See below under "Credit Arrangements" for further discussion of our credit facility with Comerica Bank.

As reflected in the accompanying consolidated financial statements, we had a net loss from continuing operations of $944,000 and $3 million for the three and nine months ended September 30, 2012, respectively. During the nine months ended September 30, 2012, we used cash of $560,000 in operating activities from continuing operations and $1.0 million in operating activities from discontinued operations.

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. In addition, the Company is in negotiations with interested parties to agree on the pricing and other terms to complete the sale our of operations in Manila. We are also evaluating our options to sell other non-strategic assets as we focus on the Company's core business. The sale of our Manila operations and other assets is intended to both improve our cash position as well as to improve our business focus. In the event that the Company fails to achieve profitable operations, fails to close on the intended sale of assets and/or is unable to raise additional capital, we will not have adequate cash or financial resources to operate for the next twelve months.

Credit Arrangements

Rainmaker also may request additional advances under the Revolving Line in an aggregate outstanding amount not to exceed the lesser of (i) the Revolving Line or (ii) the borrowing base, which is 80% of the Company's eligible accounts receivable balances, less the aggregate face amount of letters of credit issued and the aggregate limits of any credit cards issued and any merchant credit card processing reserves. Amounts borrowed under the Revolving Line are due on December 14, 2013. The interest rate per annum for advances under the Credit Facility is the Prime Referenced Rate, as defined in the Credit Facility, plus the applicable margin. The applicable margin is one and one half percent (1.50%) per annum for the Revolving Line and two and one quarter percent (2.25%) per annum for the Term Loan. The interest rate on our Term Loan and Revolving Line were 5.50% and 4.75%, respectively, as of September 30, 2012.

Off-Balance Sheet Arrangements

Leases Commitments

leases allows us to use these assets for our business while minimizing the obligations and upfront cash flow related to purchasing the assets.

In October 2009, we executed a second amendment to the operating lease for our corporate headquarters in Campbell, California to reduce our lease cost. Under this amendment, we reduced the amount of space that we lease by 6,719 square feet to 16,430 square feet starting October 1, 2009, and reduced our lease cost per square foot by approximately 18%. We obtained a first right of refusal to the reduced space (6,719 square feet). Under this second amendment, the lease will expire on January 31, 2013. Annual gross rent under the amended lease was approximately $227,000 in the first year of the lease which ended September 30, 2010, and increases by approximately 5% each year thereafter for the remaining term. In addition, we will continue to pay our proportionate share of operating costs and taxes based on our occupancy and a letter of credit issued to the landlord in the amount of $100,000 for a security deposit will remain in place.

In September 2011, we extended an existing lease in Austin, Texas on approximately 21,388 square feet of space for a term of 24 months through December 31, 2013. Annual rent in the facility approximates $212,000, or $18,000 monthly. Additionally, we pay our proportionate share of maintenance on the common areas in the business park.

Our Manila-based operations, whose operating results for the three and nine months ended September 30, 2012 and 2011 are reported as discontinued operations, have lease commitments as of September 30, 2012. On May 1, 2010, we executed a lease for approximately 15,852 square feet of call center space in the Alphaland Southgate Tower in Makati City. The lease has a three-year term and terminates on April 30, 2013. Based on the exchange rate as of September 30, 2012, and the free and discounted base rent included in the lease agreement, our annual base rent for this space will be approximately $242,000 in the final year of the lease. In April 2012, we entered into an agreement to lease approximately 43,000 square feet of call center space in the Greenfield District of Manila. The lease has a two-year term and terminates in March 2014. This facility is being utilized to better accommodate our current operations in Manila and provides additional space for expansion for those operations. Based on the exchange rate as of September 30, 2012, and the free and discounted base rent, our annual base rent for this space will be approximately $462,000.

Guarantees

Potential Impact of Inflation

To date, inflation has not had a material impact on our business.

Recent Accounting Standards

In September 2011, the FASB issued new accounting guidance, ASU No. 2011-08 – Testing Goodwill for Impairment. This update permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC 350. This new guidance is effective for the first reporting period beginning after December 15, 2011. We elected not to early adopt and will implement ASU No. 2011-08 as part of our 2012 impairment testing.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.


ITEM 4.	CONTROLS AND PROCEDURES


(a)	Disclosure Controls and Procedures

As of September 30, 2012, our management, including our principal executive officer and principal financial officer, has conducted an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act of 1934, as amended. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.


(b)	Change in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the third quarter of our 2012 fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.—OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

From time to time in the ordinary course of business, we are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations. We are not aware of any asserted or unasserted legal proceedings or claims that we believe would have a material adverse effect on our financial condition or results of operations. We are currently involved in administrative proceedings; however, we believe that any ultimate liability surrounding these claims, if any, will not have a material impact on our financial position or results of operations. See Part I Item 1A— “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the SEC on March 30, 2012 and amended on April 30, 2012, for additional discussion of the litigation and regulatory risks facing our Company.


ITEM 1A.	RISK FACTORS

Not applicable for smaller reporting companies.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below presents share repurchase activity for the three months ended September 30, 2012. The shares were repurchased by us in connection with satisfaction of tax withholding obligations on vested restricted stock units.



Period	Total Number of Shares (or Units Purchased)	Average Price Paid per Share (or Unit)	Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs
April 2012	2,618	$0.79	N/A	N/A
May 2012	38,367	$0.96	N/A	N/A
June 2012	3,444	$1.04	N/A	N/A
Total	44,429	$0.96	N/A	N/A


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.	OTHER INFORMATION

On November 12, 2012, the Company received a notification letter (the “Notice”) from the Listing Qualifications Staff (the "Staff") of the Nasdaq Stock Market ("Nasdaq") indicating that the Company is not in compliance with Nasdaq Marketplace Rule 5550(b)(1) (the "Continued Listing Requirement"), because the Company does not meet the minimum stockholders' equity requirement of $2.5 million, nor the alternatives of market value of listed securities or net income from continuing operations. The Notice has no effect on the listing of the Company's common stock at this time and the Company's common stock will continue to trade on the Nasdaq Capital Market under the symbol "RMKR”.

In accordance with Nasdaq Marketplace Rules, the Company has been provided 45 calendar days, or until December 27, 2012, to submit a plan to regain compliance. If the plan is accepted, the Staff can grant an extension of up to 180 calendar days from November 12, 2012 to achieve compliance with the Continued Listing Requirement.

If, as a result of the application of such listing requirements, our common stock is delisted from the Nasdaq Capital Market, our stock would become harder to buy and sell. Consequently, if we were removed from the Nasdaq Capital Market, the ability or willingness of broker-dealers to sell or make a market in our common stock might decline. As a result, the ability to resell shares of our common stock could be adversely affected.

ITEM 6. EXHIBITS


(a)	Exhibits

The following exhibits are filed with this report as indicated below:



10.1		Change Order (#CR00022) to Statement of Work to the Vendor Services Agreement, dated as of September 20, 2010 between Rainmaker Systems, Inc. and Microsoft Corporation.

31.1		Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K.

31.2		Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K.

32.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, furnished under Exhibit 32 of Item 601 of Regulation S-K.

32.2		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, furnished under Exhibit 32 of Item 601 of Regulation S-K.

101*		The following materials from Rainmaker Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, (ii) Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2012 and 2011, (iii) Consolidated Statement of Cash Flows for the nine months ended September 30, 2012 and 2011, and (iv) Notes to Consolidated Financial Statements.

*		Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		RAINMAKER SYSTEMS, INC.

Dated:	November 14, 2012	/s/ Timothy Burns
		Timothy Burns
		Chief Financial Officer Interim President and Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)