RMKR 03.31.2013 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
FORM 10-Q
__________________________
(MARK ONE)
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T | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED: March 31, 2013
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
COMMISSION FILE NUMBER: 000-28009
__________________________
RAINMAKER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
__________________________
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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.
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 x 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.
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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 May 9, 2013, the registrant had 42,545,345 shares of Common Stock, $0.001 par value, outstanding.
RAINMAKER SYSTEMS, INC.
FORM 10-Q
AS OF MARCH 31, 2013
TABLE OF CONTENTS
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PART I. | FINANCIAL INFORMATION | |
Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II. | OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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PART I.—FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS |
RAINMAKER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
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| | | | | | | |
| March 31, 2013 | | December 31, 2012 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 5,076 |
| | $ | 4,494 |
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Restricted cash | 217 |
| | 52 |
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Accounts receivable, net | 3,181 |
| | 3,720 |
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Prepaid expenses and other current assets | 1,472 |
| | 1,292 |
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Total current assets | 9,946 |
| | 9,558 |
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Property and equipment, net | 2,396 |
| | 2,455 |
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Goodwill | 5,244 |
| | 5,337 |
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Other non-current assets | 416 |
| | 416 |
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Total assets | $ | 18,002 |
| | $ | 17,766 |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | |
Current liabilities: | | | |
Accounts payable | $ | 9,168 |
| | $ | 7,159 |
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Accrued compensation and benefits | 1,057 |
| | 425 |
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Other accrued liabilities | 3,868 |
| | 3,142 |
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Deferred revenue | 1,774 |
| | 2,311 |
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Current portion of notes payable | 2,907 |
| | 2,727 |
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Total current liabilities | 18,774 |
| | 15,764 |
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Deferred tax liability | 578 |
| | 567 |
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Long-term deferred revenue | 261 |
| | 44 |
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Common stock warrant liability | 123 |
| | 348 |
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Notes payable, less current portion | 1,500 |
| | 1,800 |
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Total liabilities | 21,236 |
| | 18,523 |
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Commitments and contingencies (Note 6) |
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Stockholders’ deficit: | | | |
Preferred stock, $0.001 par value; 5,000 shares authorized, none issued and outstanding | — |
| | — |
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Common stock, $0.001 par value; 50,000 shares authorized, 31,084 shares issued and 28,949 shares outstanding at March 31, 2013 and 30,454 shares issued and 28,428 shares outstanding at December 31, 2012 | 27 |
| | 27 |
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Additional paid-in capital | 131,384 |
| | 130,402 |
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Accumulated deficit | (131,492 | ) | | (128,198 | ) |
Accumulated other comprehensive loss | (347 | ) | | (261 | ) |
Treasury stock, at cost, 2,135 shares at March 31, 2013 and 2,026 shares at December 31, 2012 | (2,806 | ) | | (2,727 | ) |
Total stockholders’ deficit | (3,234 | ) | | (757 | ) |
Total liabilities and stockholders’ deficit | $ | 18,002 |
| | $ | 17,766 |
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See accompanying notes.
RAINMAKER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(Unaudited)
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| Three Months Ended |
| March 31, |
| 2013 | | 2012 |
Net revenue | $ | 4,656 |
| | $ | 6,401 |
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Cost of services | 3,035 |
| | 3,625 |
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Gross profit | 1,621 |
| | 2,776 |
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Operating expenses: |
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Sales and marketing | 665 |
| | 540 |
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Technology and development | 1,122 |
| | 1,589 |
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General and administrative | 2,980 |
| | 1,368 |
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Depreciation and amortization | 406 |
| | 404 |
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Total operating expenses | 5,173 |
| | 3,901 |
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Operating loss | (3,552 | ) | | (1,125 | ) |
Loss (gain) due to change in fair value of warrant liability | (225 | ) | | (7 | ) |
Interest and other expense, net | 93 |
| | 27 |
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Loss before income tax expense | (3,420 | ) | | (1,145 | ) |
Income tax expense | 30 |
| | 53 |
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Net loss from continuing operations | (3,450 | ) | | (1,198 | ) |
Net income (loss) from discontinued operations, net of tax | 156 |
| | (276 | ) |
Net loss | $ | (3,294 | ) | | $ | (1,474 | ) |
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Foreign currency translation adjustments | (86 | ) | | 1 |
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Comprehensive loss | $ | (3,380 | ) | | $ | (1,473 | ) |
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Basic and diluted net income (loss) per share: | | | |
Net loss from continuing operations | $ | (0.12 | ) | | $ | (0.04 | ) |
Net income (loss) from discontinued operations | $ | 0.01 |
| | $ | (0.01 | ) |
Net Loss | $ | (0.11 | ) | | $ | (0.05 | ) |
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Weighted average common shares - Basic and diluted | 28,994 |
| | 26,808 |
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See accompanying notes.
RAINMAKER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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| Three Months Ended |
| March 31, |
| 2013 | | 2012 |
Operating activities: | | | |
Net loss | $ | (3,294 | ) | | $ | (1,474 | ) |
Adjustment for income (loss) from discontinued operations, net of tax | (156 | ) | | 276 |
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Adjustment to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization of property and equipment | 406 |
| | 376 |
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Amortization of intangible assets | — |
| | 28 |
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Loss (gain) due to change in fair value of warrant liability | (225 | ) | | (7 | ) |
Stock-based compensation expense | 979 |
| | 187 |
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Credit for allowance for doubtful accounts | — |
| | (31 | ) |
Provision for allowances for other assets | 280 |
| | — |
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Changes in operating assets and liabilities: | | | |
Accounts receivable | 567 |
| | 764 |
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Prepaid expenses and other assets | (462 | ) | | 45 |
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Accounts payable | 2,046 |
| | 1,082 |
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Accrued compensation and benefits | 623 |
| | 133 |
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Other accrued liabilities | 721 |
| | (377 | ) |
Income tax payable | 15 |
| | 40 |
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Deferred tax liability | 11 |
| | 17 |
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Deferred revenue | (320 | ) | | (588 | ) |
Net cash provided by continuing operations | 1,191 |
| | 471 |
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Net cash provided by discontinued operations | 121 |
| | 112 |
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Net cash provided by operating activities | 1,312 |
| | 583 |
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Investing activities: | | | |
Purchases of property and equipment | (352 | ) | | (257 | ) |
Restricted cash, net | (165 | ) | | (4 | ) |
Net cash used in continuing operations | (517 | ) | | (261 | ) |
Net cash used in discontinued operations | — |
| | (97 | ) |
Net cash used in investing activities | (517 | ) | | (358 | ) |
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Financing activities: | | | |
Proceeds from borrowings | 200 |
| | — |
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Repayment of borrowings | (320 | ) | | (593 | ) |
Net proceeds on overdraft facility | — |
| | 2 |
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Tax payments in connection with treasury stock surrendered | (79 | ) | | (159 | ) |
Net cash used in continuing operations | (199 | ) | | (750 | ) |
Net cash used in discontinued operations | — |
| | (24 | ) |
Net cash used in financing activities | (199 | ) | | (774 | ) |
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Effect of exchange rate changes on cash | (14 | ) | | (94 | ) |
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Net increase (decrease) in cash and cash equivalents | 582 |
| | (643 | ) |
Cash and cash equivalents at beginning of period | 4,494 |
| | 8,490 |
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Cash and cash equivalents at end of period | $ | 5,076 |
| | $ | 7,847 |
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Supplemental disclosures of cash flow information: | | | |
Cash paid for interest | $ | 57 |
| | $ | 58 |
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Cash paid for income taxes | 3 |
| | 4 |
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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 the Silicon Valley in Campbell, California, and have additional operations near London, England. On January 25, 2013, we announced that our operations in Austin, Texas will be consolidated into our operations at our headquarters in Silicon Valley and into our operations center near 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 rules and regulations of the Securities and Exchange Commission ("SEC"). 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 months ended March 31, 2013 are not necessarily indicative of results to be expected for the year ending December 31, 2013, 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, 2012, as filed with the SEC on April 1, 2013. Balance sheet information as of December 31, 2012 has been derived from the audited financial statements for the year then ended.
Certain prior year amounts have been reclassified to conform to the current year presentation. In the year ended December 31, 2012, the Company completed the sale of Rainmaker Systems, Ltd. and its wholly owned subsidiary, Rainmaker Asia, Inc. (together “Manila” or “RSL”). RSL met the requirements for presentation as discontinued operations. Manila's operating activities are segregated from the Company's continuing operations within the consolidated statement of operations and comprehensive loss, and are classified solely under the caption income (loss) from discontinued operations, net of tax. As such, certain amounts reported in the accompanying financial statements as of and for the three month period ended March 31, 2012 have been retrospectively revised to conform to the 2013 presentation. There were no other reclassifications that had a material effect on previously reported results of operations, total assets or accumulated deficit.
Going Concern
As reflected in the accompanying consolidated financial statements, we had a net loss from continuing operations of $3.5 million for the three months ended March 31, 2013. During the three months ended March 31, 2013, we generated $1.2 million in cash from operating activities.
At March 31, 2013, the Company had a net working capital deficit of $8.8 million. Our principal source of liquidity as of March 31, 2013 consisted of $5.1 million of cash and cash equivalents and $3.2 million of net accounts receivable. Our debt balance as of March 31, 2013 was $4.4 million, of which $2.9 million is payable within the next twelve months. Our accounts payable balance as of March 31, 2013 was $9.2 million of which $7.1 million is related to a merchant account of a customer. See Note 5 for further discussion of our debt agreements.
As more fully described in Note 9, on April 5, 2013, we completed the sale of approximately 13 million shares of our common stock in a registered direct offering. The gross cash proceeds from the sale of common stock was approximately $5.8 million. The Company is now executing a plan that it believes will establish profitable operations through increased sales and decreased
expenses. There can be no assurance that we will be successful in increasing sales, reducing expenses or achieving profitable operations. We are evaluating our options to sell other non-strategic assets as we focus on the Company's core business. In the event that the Company fails to achieve profitable operations, fails to reduce expenses and/or is unable to raise additional capital, we will not have adequate cash or financial resources to operate for the next twelve months as a going concern and pay our liabilities as they become due.
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, commitments and contingencies, fair value estimates for the expense of employee stock options and warrants and the assessment of recoverability and impairment of goodwill and long-lived assets.
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 March 31, 2013 and December 31, 2012 (in thousands):
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| March 31, 2013 | | December 31, 2012 |
Cash and cash equivalents: | | | |
Cash | $ | 3,436 |
| | $ | 2,854 |
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Money market funds | 1,640 |
| | 1,640 |
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Total cash and cash equivalents | $ | 5,076 |
| | $ | 4,494 |
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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. At March 31, 2013 and December 31, 2012, our allowance for potentially uncollectible accounts was $15,000 and $15,000, 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 development of internal-use computer software and associated interest costs are capitalized. We capitalized approximately $278,000 and $245,000 of such costs during the three months ended March 31, 2013 and 2012, 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, Goodwill - Subsequent Measurement, 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 March 31, 2013 and December 31, 2012, we had accumulated impairment losses of $11.5 million.
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 for purposes of making operating decisions and assessing financial performance. The chief operating decision maker does not use product line financial performance as a basis for business operating decisions. 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. For 2012, after the sale of Rainmaker Asia and the consolidation of operations, we concluded that we have one operating and reportable segment and one reporting unit.
As of December 31, 2012, we performed our annual goodwill impairment evaluation required under FASB ASC 350-20-35, and concluded that goodwill was not impaired as the estimated fair value exceeded the carrying value. At March 31, 2013 and December 31, 2012, we had approximately $5.2 million and $5.3 million, respectively, in goodwill recorded on our consolidated balance sheets.
Long-Lived Assets
Long-lived assets including our purchased intangible assets are amortized over their previously defined estimated useful lives. In accordance with FASB ASC 360-10-35, long-lived assets, such as property, equipment, 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 are 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 are 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 that lack stand-alone value 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.
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 March 31, 2013 and December 31, 2012, we had gross deferred tax assets of $31.8 million and $31.8 million, respectively. At March 31, 2013 and December 31, 2012, 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 and disclosure.
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 March 31, 2013.
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 8 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 March 31, 2013, two clients accounted for 10% or more of our net revenue, with Microsoft Corporation ("Microsoft") representing approximately 39% of our net revenue and Symantec Corporation ("Symantec") representing approximately 25% of our net revenue. In the three months ended March 31, 2012, three clients accounted for 10% or more of our net revenue, with Microsoft representing approximately 24% of our net revenue, Symantec representing approximately 17% of our net revenue and Hewlett-Packard representing approximately 11% of our net revenue.
No individual client’s 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 expire in October 2013 and 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 their 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.
We utilize our call centers in the United States and United Kingdom and a network of managed telesales representatives in Canada to fulfill certain contracts. We also utilized our former operations based in Manila prior to their sale in December 2012. See Note 3 for more details regarding our former Manila operations. In June 2012, we began providing telesales services throughout Latin America utilizing a strategic partner located in the Dominican Republic.
Foreign Currency Translation
The functional currency of our foreign subsidiaries was determined to be their respective local currencies (Canadian Dollar, Great Britain Pound and Philipine Peso). 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
As more fully disclosed in Note 9, on April 5, 2013, we completed the sale of approximately 13 million shares of our common stock in a registered direct offering. The gross cash proceeds from the sale of common stock was approximately $5.8 million. Members of our board of directors and our Chief Executive Officer purchased an aggregate of 500,025 shares at a price of $0.45 per share in the offering.
Recent Accounting Standards
In March 2013, the FASB issued new accounting guidance, ASU No. 2013-05 – Foreign Currency Matters. This update requires that an entity should release cumulative currency translation adjustments to net income when the entity ceases to have controlling financial interest in a foreign entity or a group of financial assets in a foreign entity. This new guidance is effective for the first reporting period beginning after December 15, 2013. We adopted this standard in the fourth quarter of 2012 in accounting for the sale of Rainmaker Asia Ltd.
2. NET LOSS PER SHARE
Basic net income (loss) per share is computed using the weighted-average number of shares of common stock outstanding during the year. Diluted net income (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 |
| March 31, |
| 2013 | | 2012 |
Net loss from continuing operations | $ | (3,450 | ) | | $ | (1,198 | ) |
Net income (loss) from discontinued operations | 156 |
| | (276 | ) |
Net loss | $ | (3,294 | ) | | $ | (1,474 | ) |
| | | |
Weighted-average shares of common stock outstanding – basic and diluted | 28,994 |
| | 26,808 |
|
| | | |
Basic and diluted net income (loss) per share: | | | |
Continuing operations | $ | (0.12 | ) | | $ | (0.04 | ) |
Discontinued operations | $ | 0.01 |
| | $ | (0.01 | ) |
Net loss | $ | (0.11 | ) | | $ | (0.05 | ) |
For the three months ended March 31, 2013 and 2012, we excluded approximately 4.6 million and 3.8 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, our Manila-based operations, no longer fit with the long term strategic plans of the Company. The Company committed to a plan to sell our Manila-based operations, which were sold to Shore Solutions, Inc. ("Shore") in December 2012. RSL's operating results for the three months ended March 31, 2012 are reported as discontinued operations in the consolidated financial statements.
On December 17, 2012, the Company completed its Stock Purchase Agreement (the "SPA") with Shore, pursuant to which the Company sold its Manila-based operations of Rainmaker Systems Ltd., and its wholly owned subsidiary, Rainmaker Asia, Inc., to Shore.
Pursuant to the SPA, Shore acquired 100% of the issued and outstanding stock of RSL. Under the SPA, the Company received an initial cash payment at closing of $845,000. In addition t o the closing payment, the Company may receive additional contingent consideration based on multiple earn-out provisions included within the SPA, which provides the Company the ability to receive
additional consideration of $300,000 at target plus a nominal percentage of certain revenues of RSL during the period from January 1, 2013 through December 31, 2015. The Company did not record any additional consideration for the three months ended March 31, 2013. RSL's operating results for the three months ended March 31, 2013 and 2012 are reported as discontinued operations in the consolidated financial statements.
The accompanying unaudited consolidated statements of operations and cash flows have been reclassified for three months ended March 31, 2013 and 2012 to remove the operating results of RSL from continuing operations and presenting the results of RSL as income (loss) from discontinued operations, net of tax. Cost of services for the three months ended March 31, 2013 is net of a true up adjustment of $78,000. Income (loss) 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 March 31, |
| 2013 | | 2012 |
Revenue | $ | 158 |
| | $ | 2,559 |
|
Cost of services | 2 |
| | 2,334 |
|
Gross profit | 156 |
| | 225 |
|
Operating expenses | — |
| | 509 |
|
Non-operating (income) expenses | — |
| | (8 | ) |
Income (loss) from discontinued operations | $ | 156 |
| | $ | (276 | ) |
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
|
| | | | | | | | | |
| Estimated Useful Life | | March 31, 2013 | | December 31, 2012 |
Computer equipment | 3 years | | $ | 4,005 |
| | $ | 3,974 |
|
Capitalized software and development | 2-5 years | | 13,996 |
| | 13,686 |
|
Furniture and fixtures | 5 years | | 437 |
| | 437 |
|
Leasehold improvements | Lease term | | 264 |
| | 232 |
|
| | | 18,702 |
| | 18,329 |
|
Accumulated depreciation and amortization | | | (16,417 | ) | | (16,015 | ) |
Construction in process (1) | | | 111 |
| | 141 |
|
Property and equipment, net | | | $ | 2,396 |
| | $ | 2,455 |
|
_____________
| |
(1) | Construction in process at March 31, 2013 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 $5,000 to $15,000, subject to future revisions. |
5. LONG-TERM DEBT OBLIGATIONS
Long-term debt consists of the following (in thousands):
|
| | | | | | | |
| March 31, 2013 | | December 31, 2012 |
Comerica term loan | $ | 2,700 |
| | $ | 3,000 |
|
Comerica revolving line | 1,693 |
| | 1,493 |
|
Notes payable – insurance | 14 |
| | 34 |
|
Total notes payable | 4,407 |
| | 4,527 |
|
Less: current portion | (2,907 | ) | | (2,727 | ) |
Total notes payable, less current portion | $ | 1,500 |
| | $ | 1,800 |
|
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. Term Loan advances outstanding on December 31, 2012 are payable in thirty equal monthly installments of principal, plus accrued interest, beginning on January 1, 2013 and ending on June 14, 2015. As of March 31, 2013 there was $2.7 million outstanding under the Term Loan and $1.7 million outstanding under the Revolving Line.
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 March 31, 2013.
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, which Comerica Bank agreed to reduce to 1.00 to 1.00 until April 15, 2013. 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, failure to deliver audited financial statements with an unqualified opinion, and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Credit Facility. As of March 31, 2013, we were in compliance with all loan covenants.
Notes Payable – Insurance
On August 13, 2012, we entered into an agreement with AON Private Risk Management to finance our 2012 to 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 March 31, 2013, the remaining liability under this financing agreement was $14,000.
6. COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of March 31, 2013, our operating commitments include operating leases for our facilities and certain property and equipment that expire at various dates through 2015. 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 to 16,430 square feet. On October 31, 2012, the Company executed a third amendment to the operating lease for our corporate headquarters, effective December 1, 2012, with a three-year term. On January 31, 2013, the Company executed a fourth amendment to the operating lease for our corporate headquarters, effective February 1, 2013, providing an additional 3,936 square feet of additional space. The fourth amendment did not modify the three-year term of the third amendment to the operating lease. Annual base rent under the amended lease is approximately $365,000 in the first year of the lease, or $321,000 after deducting free base rent the first three months of the amended lease, and increases by 3% 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 was reduced to $40,000 for a security deposit.
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. On January 25, 2013, the Company announced the closure of the Company's Austin facility as operations are to be consolidated in our headquarters in Campbell,
California, and our United Kingdom location as part of a strategic reallocation of resources designed to increased levels of service to customers and operating cost savings. The Company is actively seeking to sub-lease the Austin facility.
In October 2012, we executed an office lease agreement for office space in Godalming outside of London, where we have call center operations. The facility's 5,000 square feet of call center space will be utilized to better accommodate our current operations in Europe and provide additional space for expansion. The lease has a thirty-month term and terminates in March 2015. Annual base rent for this facility is 28,000 Great Britain Pounds. Based on the exchange rate at March 31, 2013, annual rent is approximately $43,000 in U.S. dollars.
Rent expense under operating lease agreements for continuing operations during the three months ended March 31, 2013 and 2012 was $153,000 and $203,000, respectively.
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. The standby letter of credit was reduced to $40,000 in accordance with the fourth amendment to the operating lease for our corporate headquarters in Campbell, California.
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 March 31, 2013 and December 31, 2012.
Litigation
On February 8, 2013, the Company's former Chief Executive Officer, Michael Silton, filed a demand for arbitration and complaint with the American Arbitration Association, alleging breach of contract and other causes of action relating to the termination of Mr. Silton's employment with the Company in October 2012. Mr. Silton is seeking full payment of severance benefits in the amount of approximately $1.0 million, plus compensation for unused vacation, related penalties and punitive damages. On March 21, 2013, the Company filed a responsive pleading in the arbitration proceedings. The Company disputes and denies the allegations and intends to defend the claim. Accordingly, the Company is not in a position to assess the probability of any loss or the estimated range of potential loss, if any.
From time to time in the ordinary course of business, we are subject to other claims, asserted or unasserted, or named as a party to other lawsuits or investigations. We are not aware of any such asserted or unasserted legal proceedings or claims that we believe would have a material adverse effect on our financial condition or results of operations.
7. 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 March 31, 2013 and 2012 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 |
2013 | | | | | | | | | |
Common stock warrant liability | $ | 348 |
| | $ | — |
| | $ | (225 | ) | | $ | — |
| | $ | 123 |
|
2012 | | | | | | | | | |
Contingent consideration — Optima (1) | 225 |
| | (225 | ) | | — |
| | — |
| | — |
|
Common stock warrant liability | 517 |
| | — |
| | (7 | ) | | — |
| | 510 |
|
____________
| |
(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 |
March 31, 2013 | | | | | |
Assets: | | | | | |
Money market funds (1) | $ | 1,640 |
| | $ | — |
| | $ | — |
|
Liabilities: | | | | | |
Common stock warrant liability (2) | $ | — |
| | $ | — |
| | $ | 123 |
|
December 31, 2012 | | | | | |
Assets: | | | | | |
Money market funds (1) | $ | 1,640 |
| | $ | — |
| | $ | — |
|
Liabilities: | | | | | |
Common stock warrant liability (2) | $ | — |
| | $ | — |
| | $ | 348 |
|
____________ | |
(1) | Money market funds are valued using active quoted market rates. |
| |
(2) | The fair value of our common stock warrant liability (see Note 8 - 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. |
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 March 31, 2013 and December 31, 2012, which were determined in a manner consistent with that described for stock option awards as set forth in Note 8:
|
| | | | | |
| March 31, | | December 31, |
| 2013 | | 2012 |
Expected life in years | 3.25 |
| | 3.50 |
|
Volatility | 65.99 | % | | 65.99 | % |
Risk-free interest rate | 0.36 | % | | 0.34 | % |
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.
8. 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 of 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 7 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).
On December 21, 2012, the board of directors approved and adopted the 2012 Inducement Equity Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the issuance of nonqualified stock options and shares of common stock, either with or without a purchase price, to newly hired employees as a material inducement to such individuals entering into our employment. Stockholder approval of the 2012 Plan is not required under SEC or NASDAQ Capital Market rules.
During the three months ended March 31, 2013, 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. Accordingly, 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 111,963 shares during the three months ended March 31, 2013 with a cost of approximately $79,000 from employees to cover federal and state taxes due. During the three months ended March 31, 2013 we granted restricted stock awards for 500,000 shares to two members of our board of directors with immediate vesting.
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 in which the respective award grantee’s salary expense is reported. The table below reflects stock-based compensation expense for the three months ended March 31, 2013 and 2012 (in thousands):
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2013 | | 2012 |
Stock-based compensation expense included in: | | | |
Cost of services | $ | 17 |
| | $ | 33 |
|
Sales and marketing | 118 |
| | 11 |
|
Technology and development | 43 |
| | 11 |
|
General and administrative | 801 |
| | 132 |
|
| $ | 979 |
| | $ | 187 |
|
At March 31, 2013, approximately $1.6 million 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 $404,000 will be expensed in the remainder of 2013 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 three months ended March 31, 2013 and 2012, 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:
|
| | | | | |
| Three Months Ended |
| March 31, |
| 2013 | | 2012 |
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 and 2012 Plan for the three months ended March 31, 2013 is as follows (in thousands):
|
| | | | | | | | | |
| | | Options Outstanding |
| Available for Grant | | Number of Shares | | Weighted Average Exercise Price |
Balance at December 31, 2012 | 810 |
| | 1,169 |
| | $ | 1.25 |
|
Authorized | 1,375 |
| | — |
| | — |
|
Options granted | (212 | ) | | 212 |
| | 0.64 |
|
Restricted stock awards granted | (1,268 | ) | | — |
| | — |
|
Options exercised | — |
| | (5 | ) | | 0.81 |
|
Options canceled | 131 |
| | (131 | ) | | 2.00 |
|
Restricted stock awards forfeited | 129 |
| | — |
| | — |
|
Balance at March 31, 2013 | 965 |
| | 1,245 |
| | $ | 1.07 |
|
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 the previous December 31 or 1,000,000 shares. Shares outstanding at December 31, 2012 were 28,428,000 and the additional shares authorized amounted to 1,000,000 under the 2003 Plan and 375,000 shares authorized under the 2012 Plan as shown in the table above.
The following table summarizes the activity with regard to restricted stock awards during the three months ended March 31, 2013. Restricted stock awards are issued from the 2003 Plan and 2012 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, 2012 | 2,254,688 |
| | $ | 0.80 |
|
Granted | 1,267,857 |
| | 0.77 |
|
Vested | (1,267,718 | ) | | 0.69 |
|
Forfeited | (128,750 | ) | | 0.91 |
|
Balance of nonvested shares at March 31, 2013 | 2,126,077 |
| | $ | 0.66 |
|
The total fair value of the nonvested restricted stock awards at grant date was $1.2 million as of March 31, 2013.
9. SUBSEQUENT EVENTS
On April 5, 2013, we completed the sale of approximately 13 million shares of our common stock in a registered direct offering. The gross cash proceeds from the sale of common stock was approximately $5.8 million, with net proceeds totaling approximately $5.5 million. We intend to use the net cash proceeds from the offering for general corporate purposes, including working capital and capital expenditures. The offering was made pursuant to an effective registration statement on Form S-3 and related prospectus (File No. 333-171946) declared effective by the SEC on March 7, 2011, a prospectus supplement dated March 28, 2013, and related other filings with the SEC.
| |
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under Part I Item 1A – “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the SEC on April 1, 2013, that may cause our, or our industry’s, actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activities, performance or achievements expressed in or implied by such forward-looking statements.
Important factors which could cause actual results to differ materially from those in the forward-looking statements include:
• general market conditions,
| |
• | the macro-economic environment and its impact on our business as our clients are reducing their overall marketing spending and our clients' customers are reducing their purchase of services contracts, |
• the high degree of uncertainty and our limited visibility due to economic conditions,
• our ability to execute our business strategy and manage growth,
• our ability to integrate domestic and/or foreign acquisitions without disruption to our business,
| |
• | the effectiveness of our sales team and approach, our ability to target, analyze and forecast the revenue to be derived from a client and the costs associated with providing services to that client, |
• our ability to control costs,
• the date during the course of a calendar year that a new client is acquired,
• the length of the integration cycle for new clients and the timing of revenues and costs associated therewith,
• our client concentration given that we are currently dependent on a few significant client relationships,
• potential competition in the marketplace,
• our ability to retain and attract employees and board members,
• market acceptance of our solutions and pricing options,
• our ability to maintain and develop our existing technology platform and to deploy new technology,
• our ability to acquire new clients and increase demand,
• the possibility of the discontinuation of some client relationships,
• the financial condition of our clients' businesses,
• the protection of our intellectual property,
• our ability to raise additional equity or debt financing,
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• | the potential delisting of our common stock from the NASDAQ Capital Market should we fail to maintain compliance with the criteria for continued listing, |
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• | and other factors as detailed in in Part I Item 1A - “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the SEC on April 1, 2013. |
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We assume no obligation to update such forward-looking statements publicly for any reason even if new information becomes available in the future, except as may be required by law.
Overview
Rainmaker is a leading business selling partner providing global B2B e-Commerce solutions enhanced by Global Commerce Services. Our suite of cloud applications increase visibility and control of revenue streams and are utilized by customers, channel partners, end customers and our service sales teams. Our dedicated Global Commerce Services Agents have specific expertise in our customers' businesses, are deployed under our customers' brands and follow a sales process tailored specifically for the client. Our solutions address the critical elements of B2B online buying, the renewals process, including data management, quoting, selling and learning management services. We believe our solutions, which tightly integrate software, managed services and data, reflects the growing trend of delivering enterprise services via the cloud.
GrowCommerce B2B Storefront: Designed to allow our clients to sell more of their products and maintenance contracts directly to their customers or via their channel partners through the GrowCommerce platform. Benefits include:
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i. | Direct and channel friendly sales through clearly defined rules designed to ensure that client business rules drive the outcome of each client contact point in order to overcome confusion and deliver an integrated communication of the status of each customer to both the client and its channel partners; |
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ii. | State of the art cloud platform that includes an open API architecture for seamless integrations, the ability to handle complex B2B rules, a quoting system, purchase order and wire transfer support, and the capacity to handle discounting and multi-tier pricing; |
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iii. | Touch inbound and outbound global telesales utilizing multiple communication methods including online chat, email, social media and phone support to assist potential buyers; |
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iv. | Management and optimization of trial periods to transition missed opportunities into potential sales; |
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v. | Opportunities to cross-sell and up-sell new products and services to increase total revenue on existing sales. |
GrowCommerce for Renewals: Designed to maximize renewal rates, subscriptions and other contracts to allow our clients to significantly increase the lifetime value of their customers. Benefits of this solution include:
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i. | The ability to deliver time sensitive pre-expiration countdown emails and phone campaigns potentially resulting in higher renewal rates. |
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ii. | Gaining market intelligence, such as why a customer was initially lost, which enables our clients to address the customer's objections within client business rules to potentially increase revenue through reactivations and win-backs. |
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iii. | The ability to manage, enable and credit the channel in the post sales process through clearly defined rules designed to ensure that client business rules drive the outcome of each client contact point. |
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iv. | Maximizing each customer contact by providing opportunities for cross-selling and up-selling new products and services. |
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v. | Delivering lost revenue recognition through the same transaction platform used for other Rainmaker products, creating one integrated tool for customer status and other much needed reporting for both the client and its channel partners. |
View Central Learning Management System: Our LMS solution is designed to provide our clients with the potential to generate more revenue selling training programs to their customers. Benefits include:
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i. | The ability to educate without our client losing sight of its core competency: |
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1. | Targeted delivery methods to each specific market segment. |
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2. | The potential to increase training revenues with visibility into business impact. |
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3. | Tools and reporting for on-going process improvements. |
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ii. | Product modules include: |
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1. | Instructor led training |
We offer high touch inbound and outbound Global Commerce Service Agents utilizing multiple communication methods including online chat, email, social media and phone support to assist potential buyers. Our Global Commerce Service Agents are trained to capitalize on opportunities to cross-sell and up-sell new products and services to potentially increase total revenue on existing sales.
Each product in the Rainmaker e-commerce solution suite can be purchased individually to meet specific client needs or as an integrated product suite designed to deliver maximum revenue during the B2B customer buying process.
Critical Accounting Policies/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 December 2012, we sold our Manila-based operations to Shore Solutions, Inc. In January of 2009, we established our Rainmaker Europe subsidiary in the United Kingdom. We adopted the policy mentioned above for recording foreign currency transactions and translations for this subsidiary as the functional currency has been determined to be the local currency (Great Britain Pound) for the UK-based subsidiary. For continuing operations, gains and losses from foreign currency denominated transactions are included in interest and other expense, net, in the consolidated statements of operations.
Except for the presentation of our Manila-based operations as discontinued operations, as discussed in Note 3, management believes there have been no significant changes during the three months ended March 31, 2013 to the items that we disclosed as
our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the SEC on April 1, 2013.
Results of Operations
The following table sets forth for the periods given selected financial data as a percentage of our net revenue. The table and discussion below should be read in connection with the financial statements and the notes thereto which appear elsewhere in this report as well as with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.
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| | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
Net revenue | 100.0 | % | | 100.0 | % |
Cost of services | 65.2 |
| | 56.6 |
|
Gross margin | 34.8 | % | | 43.4 | % |
Operating expenses: |
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|
Sales and marketing | 14.3 |
| | 8.4 |
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Technology and development | 24.1 |
| | 24.8 |
|
General and administrative | 64.0 |
| | 21.4 |
|
Depreciation and amortization | 8.7 |
| | 6.3 |
|
Total operating expenses | 111.1 | % | | 60.9 | % |
Operating loss | (76.3 | ) | | (17.5 | ) |
Loss (gain) due to change in fair value of warrant liability | (4.8 | ) | | (0.1 | ) |
Interest and other expense, net | 2.0 |
| | 0.4 |
|
Loss before income tax expense | (73.5 | )% | | (17.8 | )% |
Income tax expense (benefit) | 0.6 |
| | 0.8 |
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Net loss from continuing operations | (74.1 | )% | | (18.6 | )% |
Loss from discontinued operations, net of tax | 3.4 |
| | (4.3 | ) |
Net loss | (70.7 | ) | | (22.9 | ) |
| | | |
Foreign currency translation adjustments | (1.8 | ) | | — |
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Comprehensive loss | (72.5 | )% | | (22.9 | )% |
Comparison of Three Months Ended March 31, 2013 and 2012
Net Revenue. Net revenue decreased $1.7 million, or 27%, to $4.7 million in the three months ended March 31, 2013, as compared to the three months ended March 31, 2012 due to the elimination of non-strategic client programs and loss of clients through acquisition of $942,000, reduction of GrowCommerce platform volume of $234,000 and reduction of GrowCommerce channel and telesales volume of $460,000.
Cost of Services and Gross Margin. Cost of services decreased $590,000, or 16%, to $3.0 million in the three months ended March 31, 2013, as compared to the 2012 comparative period primarily due to lower revenue as described above. Our gross margin percentage was 35% and 43%, respectively, in the three months ended March 31, 2013 and 2012. The erosion in gross margin was due to costs associated with the transition of call center agents from our Austin, Texas facility to our UK facility, higher telecommunication costs and declines in our higher margin GrowCommerce business.
Sales and Marketing Expenses. Sales and marketing expenses increased $125,000, or 23%, to $665,000 in the three months ended March 31, 2013, as compared to the 2012 comparative period. The change was primarily attributable to an increase in stock compensation expense of $93,000, increases in recruiting fees of $72,000 for new sales personnel and a decrease in travel costs of $44,000.
Technology and Development Expenses. Technology and development expenses decreased $467,000, or 29%, to $1,122,000 during the three months ended March 31, 2013, as compared to the 2012 comparative period. The decrease was primarily attributable to decreases in equipment costs and outsourced services expense of $261,000, decreases in consulting and outside services of $123,000, and decreases in personnel costs of $63,000.
General and Administrative Expenses. General and administrative expenses increased $1.6 million, or 118%, to $3.0 million during the three months ended March 31, 2013, as compared to the 2012 comparative period. The increase was primarily due to increases in stock compensation expense of $587,000, the majority of which relates to restricted stock awards which were fully
vested upon grant and is expected to be non-recurring, increases in legal fees of $287,000, an increase of $78,000 in board of directors' compensation, increases in variable compensation expense of $144,000 and non-recurring expenses of $345,000 related to the relocation of the finance function from the Austin, Texas facility to our Campbell, California facility and a $280,000 impairment charge against vendor deposits.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $2,000, or 0%, to $406,000 for the three months ended March 31, 2013, as compared to the 2012 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):
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| | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2013 | | 2012 | |
Interest expense, net | $ | 61 |
| | $ | 44 |
| | $ | (17 | ) |
Currency translation loss | 2 |
| | 4 |
| | 2 |
|
Other | $ | 30 |
| | $ | 5 |
| | $ | 25 |
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Total | $ | 93 |
| | $ | 53 |
| | $ | 10 |
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Income Tax Expense. Income tax expense decreased $23,000, or 43%, to $30,000 for the three months ended March 31, 2013, as compared to the three months ended March 31, 2012. Our income tax expense for the three months ended March 31, 2013 was based on our estimate of taxable income for the full year ending December 31, 2013, and primarily consists of estimates of foreign taxes and domestic gross margin taxes for certain states.
Income (Loss) from Discontinued Operations, Net of Tax. Income from discontinued operations for the three months ended March 31, 2013 was $156,000 as compared to a loss from discontinued operations for the three months ended March 31, 2012 of $276,000. The Company sold its Manila operations in December 2012. The income from discontinued operation for the three months ended March 31, 2013 is a result of the winddown of a contract that was assigned to Shore as part of the sale of our Manila operations.
Liquidity and Sources of Capital
Cash provided by operating activities for the three months ended March 31, 2013 was $1.3 million, as compared to cash provided by operating activities of $583,000 in the three months ended March 31, 2012. Cash provided by operating activities in the three months ended March 31, 2013 was primarily the result of the net loss from continuing operations of $3.3 million, offset by non-cash expenses for depreciation and amortization of property and intangibles of $406,000, stock-based compensation expenses of $979,000, a provision for impairment related to vendor deposits of $280,000 and changes in operating assets and liabilities that provided cash of $3.2 million as a result of managing working capital.
Cash provided by operating activities for the three months ended March 31, 2012 was $583,000, primarily as a result of the net loss from continuing operations of $1.5 million, offset by non-cash expenses for depreciation and amortization of property and intangibles of $1,848,000 and stock-based compensation expenses of $187,000, changes in operating assets and liabilities that provided cash of $1.1 million by reducing accounts receivable and managing working capital and cash provided by discontinued operations of $112,000.
Cash used in investing activities was $517,000 in the three months ended March 31, 2013, as compared to cash used in investing activities of $358,000 in the three months ended March 31, 2012. The change was primarily the result of increases in restricted cash of $161,000 related to misdirected cash receipts to be refunded and increases in capital expenditures of $95,000 offset by a reduction in cash used in discontinued operations of $97,000.
Cash used in financing activities was approximately $199,000 in the three months ended March 31, 2013, as compared to cash used in financing activities of $774,000 in the three months ended March 31, 2012. Cash used in financing activities in the three months ended March 31, 2013 was primarily a result of the repayment of borrowings of $300,000 under our Term Loan and purchases of $79,000 of treasury stock from employees for shares withheld for income taxes payable on restricted stock awards vested during the three months ended March 31, 2013 offset by proceeds from borrowings of $200,000 under our Revolving Line. Cash used in financing activities in the three months ended March 31, 2012 was primarily the result of the $593,000 in repayment of borrowings and purchases of $159,000 of treasury stock from employees for shares withheld for income tax payable on restricted stock awards vested during the three months ended March 31, 2012.
At March 31, 2013, the Company had a net working capital deficit of $8.8 million. Our principal source of liquidity as of March 31, 2013 consisted of $5.1 million of cash and cash equivalents and $3.2 million of net accounts receivable. Our debt balance as of March 31, 2013 was $4 million, of which $2.9 million is payable within the next twelve months. Our accounts payable balance as of March 31, 2013 was $9.2 million of which $7.1 million is related to a merchant account of a customer. See below under "Credit Arrangements" for further discussion of our credit facility with Comerica Bank.
On April 5, 2013, the Company completed the sale of approximately 13 million shares of our common stock in a registered direct offering. The gross cash proceeds from the sale of common stock was approximately $5.8 million, with net proceeds totaling approximately $5.5 million. The Company intends to use the net cash proceeds from the offering for general corporate purposes, including working capital and capital expenditures. The Company is now executing a plan that it believes will establish profitable operations through increased sales and decreased expenses. There can be no assurance that we will be successful in increasing sales, reducing expenses or achieving profitable operations. We are evaluating our options to sell other non-strategic assets as we focus on the Company's core business. In the event that the Company fails to achieve profitable operations, fails to reduce expenses and/or is unable to raise additional capital, we will not have adequate cash or financial resources to operate for the next twelve months as a going concern and pay our liabilities as they become due.
Credit Arrangements
On June 14, 2012, the Company entered into a Loan and Security Agreement with Comerica Bank (the "Credit Facility"), 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. Term Loan advances outstanding on December 31, 2012 are payable in thirty equal monthly installments of principal, plus accrued interest, beginning on January 1, 2013 and ending on June 14, 2015. As of March 31, 2013, there was $2.7 million outstanding under the Term Loan and $1.7 million outstanding under the Revolving Line.
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 March 31, 2013.
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, which Comerica Bank agreed to reduce to 1.00 to 1.00 until April 15, 2013. 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, failure to deliver audited financial statements with an unqualified opinion, and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Credit Facility. As of March 31, 2013, we were in compliance with all loan covenants.
Off-Balance Sheet Arrangements
As of March 31, 2013 and 2012, we had no off-balance sheet arrangements or obligations as defined under SEC rules and regulations.
Potential Impact of Inflation
To date, inflation has not had a material impact on our business.
Recent Accounting Standards
In March 2013, the FASB issued new accounting guidance, ASU No. 2013-05 – Foreign Currency Matters. This update requires that an entity should release cumulative currency translation adjustments to net income when the entity ceases to have controlling financial interest in a foreign entity or a group of financial assets in a foreign entity. This new guidance is effective
for the first reporting period beginning after December 15, 2013. We adopted this standard in the fourth quarter of 2012 in accounting for the sale of Rainmaker Asia Ltd.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable for smaller reporting companies.
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ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
As of March 31, 2013, 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 were effective as of March 31, 2013.
Change in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II.—OTHER INFORMATION
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ITEM 1. | LEGAL PROCEEDINGS |
On February 8, 2013, the Company's former Chief Executive Officer, Michael Silton, filed a demand for arbitration and complaint with the American Arbitration Association, alleging breach of contract and other causes of action relating to the termination of Mr. Silton's employment with the Company in October 2012. Mr. Silton is seeking full payment of severance benefits in the amount of approximately $1.0 million, plus compensation for unused vacation, related penalties and punitive damages. On March 21, 2013, the Company filed a responsive pleading in the arbitration proceedings. The Company disputes and denies the allegations and intends to defend the claim. Accordingly, the Company is not in a position to assess the probability of any loss or the estimated range of potential loss, if any.
From time to time in the ordinary course of business, we are subject to other claims, asserted or unasserted, or named as a party to other lawsuits or investigations. We are not aware of any such asserted or unasserted legal proceedings or claims that we believe would have a material adverse effect on our financial condition 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, 2012, as filed with the SEC on April 1, 2013, for additional discussion of the litigation and regulatory risks facing our Company.
Not applicable for smaller reporting companies.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Issuer Purchases of Equity Securities
The table below presents share repurchase activity for the three months ended March 31, 2013. The shares were repurchased by us in connection with satisfaction of tax withholding obligations on vested restricted stock.
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| | | | | | | | | |
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 |
January 2013 | | — | | — | | N/A | | N/A |
February 2013 | | 93,998 |
| | $0.70 | | N/A | | N/A |
March 2013 | | 17,965 |
| | $0.71 | | N/A | | N/A |
Total | | 111,963 |
| | $0.70 | | N/A | | N/A |
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ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
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ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
None.
ITEM 6. EXHIBITS
The following exhibits are incorporated by reference or filed with this report as indicated below:
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| | |
10.1 |
| Executive Employment Agreement, dated January 17, 2013, between Rainmaker Systems, Inc. and Mallorie Burak (Incorporated by reference to Exhibit 10.71 to the Annual Report on Form 10-K for the year ended December 31, 2012, filed on April 1, 2013). |
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10.2 |
| Transition Agreement and Amendment of Executive Employment Agreement, dated January 23, 2013, between Rainmaker Systems, Inc. and Timothy Burns (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K, filed on January 25, 2013). |
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31.1 |
| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
| Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS |
| XBRL Instance Document |
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101.SCH |
| XBRL Taxonomy Extension Schema Document |
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101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
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101.DEF* | XBRL Taxonomy Extension Presentation Linkbase Document |
*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.
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| | | |
| | | RAINMAKER SYSTEMS, INC. |
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Dated: | May 14, 2013 | | /s/ Mallorie Burak |
| | | Mallorie Burak |
| | | Chief Financial Officer |