10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________ 

FORM 10-Q

__________________________ 

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED: September 30, 2014

OR

¨ 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)

 __________________________ 

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.

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

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

As of November 14, 2014, the registrant had 42,252,329 shares of Common Stock, $0.001 par value, outstanding.

RAINMAKER SYSTEMS, INC.

FORM 10-Q

AS OF SEPTEMBER 30, 2014

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013	3
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	33
	Signatures	34

2

PART I.—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAINMAKER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	September 30, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	170		$	3,633
Restricted cash	61			3
Accounts receivable, net of allowance of $10 and $11, respectively	1,262			3,554
Prepaid expenses and other current assets	1,287			1,618
Total current assets	2,780			8,808
Property and equipment, net	891			691
Other non-current assets	919			840
Total assets	$	4,590		$	10,339
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	15,581		$	13,042
Accrued compensation and benefits	769			1,001
Other accrued liabilities	2,263			3,665
Deferred revenue	2,027			1,965
Convertible and supplemental notes payable, net of discount of $4,457 and $0	231			—
Derivative liability conversion option	952			—
Notes payable	200			3,641
Total current liabilities	22,023			23,314
Deferred tax liability	—			26
Deferred revenue, less current portion	2,135			1,629
Common stock warrant liability	1,446			93
Other long-term liabilities	90			172
Total liabilities	25,694			25,234
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.001 par value; 5,000 shares authorized, none issued and outstanding	—			—
Common stock, $0.001 par value; 50,000 shares authorized, 43,582 shares issued and 42,259 shares outstanding at September 30, 2014 and 43,795 shares issued and 41,495 shares outstanding at December 31, 2013	42			41
Additional paid-in capital	136,685			137,445
Accumulated deficit	(155,837		)	(149,169		)
Accumulated other comprehensive loss	(363		)	(336		)
Treasury stock, at cost; 1,323 shares at September 30, 2014 and 2,300 shares at December 31, 2013	(1,631		)	(2,876		)
Total stockholders’ deficit	(21,104		)	(14,895		)
Total liabilities and stockholders’ deficit	$	4,590		$	10,339

See accompanying notes.

3

RAINMAKER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Net revenue	$	1,882		$	4,160		$	9,139		$	13,546
Cost of services	1,834			3,008			8,068			9,324
Gross profit	48			1,152			1,071			4,222
Operating expenses:
Sales and marketing	445			905			2,260			2,422
Technology and development	778			1,231			2,517			3,613
General and administrative	699			2,102			2,577			6,853
Restructuring expense	365			—			365			—
Depreciation and amortization	117			396			286			1,241
Total operating expenses	2,404			4,634			8,005			14,129
Operating loss	(2,356		)	(3,482		)	(6,934		)	(9,907		)
(Gain) loss due to change in fair value of warrant liability and derivative liability	(1,267		)	66			(1,284		)	(148		)
Loss on issuance of convertible notes payable	483			—			483			—
Interest and other expense, net	321			59			589			205
Loss before income tax expense	(1,893		)	(3,607		)	(6,722		)	(9,964		)
Income tax expense	(86		)	(20		)	(53		)	35
Net loss from continuing operations	(1,807		)	(3,587		)	(6,669		)	(9,999		)
Net income (loss) from discontinued operations, net of tax	—			(34		)	—			53
Net loss	$	(1,807	)	$	(3,621	)	$	(6,669	)	$	(9,946	)
Foreign currency translation adjustments	10			85			(26		)	(87		)
Comprehensive loss	$	(1,797	)	$	(3,536	)	$	(6,695	)	$	(10,033	)
Basic and diluted net income (loss) per share:
Net loss from continuing operations	$	(0.04	)	$	(0.09	)	$	(0.16	)	$	(0.28	)
Net income (loss) from discontinued operations	$	—		$	—		$	—		$	—
Net loss	$	(0.04	)	$	(0.09	)	$	(0.16	)	$	(0.28	)
Weighted average common shares - basic and diluted	41,891			40,684			41,980			35,566

See accompanying notes.

4

RAINMAKER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2014			2013
Operating activities:
Net loss	$	(6,669	)	$	(9,946	)
Adjustment for income from discontinued operations, net of tax	—			(53		)
Adjustment to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property and equipment, incl. asset impairment	345			1,241
Amortization of debt discount	291			—
Gain due to change in fair value of warrant liability and derivative liability conversion feature	(1,284		)	(148		)
Stock-based compensation expense	291			1,352
Provision for allowance for doubtful accounts	(1		)	—
Loss on issuance of convertible debt	483			—
Provision for allowance of credit card receivables	—			420
Provision for allowances for other assets	—			280
Changes in operating assets and liabilities:
Accounts receivable	2,318			(848		)
Prepaid expenses and other assets	225			(207		)
Accounts payable	2,557			3,475
Accrued compensation and benefits	(246		)	576
Other accrued liabilities	(1,226		)	230
Deferred tax liability	(26		)	40
Deferred revenue	568			650
Net cash used in continuing operations	(2,374		)	(2,938		)
Net cash provided by discontinued operations	—			53
Net cash used in operating activities	(2,374		)	(2,885		)
Investing activities:
Purchases of property and equipment	(543		)	(1,614		)
Change in restricted cash, net	—			35
Net cash used in continuing operations	(543		)	(1,579		)
Net cash used in discontinued operations	—			—
Net cash used in investing activities	(543		)	(1,579		)
Financing activities:
Proceeds from issuance of common stock	—			5,534
Proceeds from borrowings	3,340			200
Repayment of borrowings	(3,787		)	(1,397		)
Restricted cash related to borrowings	(58		)	—
Tax payments in connection with treasury stock surrendered	(5		)	(132		)
Net cash provided by (used in) continuing operations	(510		)	4,205
Net cash provided by discontinued operations	—			—
Net cash provided by (used in) financing activities	(510		)	4,205
Effect of exchange rate changes on cash	(36		)	(69		)
Net increase (decrease) in cash and cash equivalents	(3,463		)	(328		)
Cash and cash equivalents at beginning of period	3,633			4,494
Cash and cash equivalents at end of period	$	170		$	4,166
Supplemental disclosures of cash flow information:
Cash paid for interest	$	164		$	161
Cash paid for income taxes	$	16		49
Supplemental disclosures of non-cash investing and financing activities:
Retirement of fully depreciated property and equipment	$	—		$	590
Common stock issued in settlement of claim	$	200		$	—
Warrants issued to convertible note holders	$	2,050		$	—
Conversion feature of convertible notes payable	$	1,539		$	—
Supplemental notes payable	$	1,545		$	—
Accrued interest on convertible notes payable	$	53		$	—

See accompanying notes.

5

RAINMAKER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

— UNAUDITED —

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Rainmaker Systems, Inc. and its subsidiaries ("Rainmaker", "we", "our", or "the Company") is focused on the development and marketing of a platform for the management of outside training for profit. In addition, we generate sales from lead generation services, and SMB sales and contract renewals.

Our ViewCentral SaaS platform provides an end-to-end solution for the management and delivery of training and certification programs, or training-as-a-business, for corporations. The ViewCentral Learning Management System ("LMS") platform is a SaaS, cloud based, on-demand, training management system, available 24x7 with no software installation. This self-service platform is highly configurable, so our customers utilize only the modules they need, branded as they choose. Designed specifically to automate time-consuming manual administration and to maximize training participation, the ViewCentral suite contains tools for before, during and after course delivery.

We are headquartered in Campbell, California, in the heart of the Silicon Valley. Our global clients consist primarily of large enterprises operating in a range of industries. Our strategy for long-term success of the business is to maintain and improve our position as a leading LMS provider. This will involve ongoing investment in our LMS platform to meet market demands, as well as building the sales and marketing infrastructure to support growth.

Principles of Consolidation

The accompanying condensed 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 and nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014, 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, 2013 ("2013 Form 10-K"), as filed with the SEC on April 1, 2014. Balance sheet information as of December 31, 2013 has been derived from the audited financial statements for the year then ended.

Reclassifications

Certain reclassifications have been made to the prior year's condensed consolidated statements of comprehensive loss to conform to the current year presentation.

6

Liquidity and Going Concern

As reflected in the accompanying consolidated financial statements, we had a net loss from continuing operations of $6.7 million for the nine months ended September 30, 2014. During the nine months ended September 30, 2014, we used $2.4 million in cash in operating activities.

At September 30, 2014, the Company had a net working capital deficit of $19.2 million. Our principal source of liquidity as of September 30, 2014 consisted of $170,100 of cash and cash equivalents and $1.3 million of net accounts receivable. Notes payable under the Convertible and Supplemental Notes were $3.1 million and $1.5 million, respectively, as of September 30, 2014. Another $200,000 was payable under the Revolving Line of Credit Notes. We have received notices of default and acceleration from investors holding our Revolving Line of Credit Notes, Convertible Notes and Supplemental Notes. See Note 5 for further discussion of our debt agreements and notices of default thereunder.

Our accounts payable balance increased from $13.0 million as of December 31, 2013 to $15.6 million as of September 30, 2014. $12.9 million of the September 30, 2014 accounts payable balance is related to a merchant account of a customer.

In order to meet our operating requirements, we will need to raise additional capital from outside third parties or from the sale of assets and restructure our obligations. As part of this process, in October 2014 we sold a customer contract and subcontracts to N3 North America, LLC. Additionally, we are pursuing a plan to achieve profitable operations through a combination of increased sales and decreased expenses. There can be no assurance that we will be successful in obtaining third party capital, selling assets or restructuring our obligations. We do not have adequate cash or financial resources to operate for the next twelve months without raising significant additional capital, which raises substantial doubt about our ability to continue as a going concern.

In addition to the liquidity issues noted above, some key vendors of the Company have either formally or informally,  via phone, email, mail, or a combination of one or more of these methods, given the Company a notice of material breach for non-payment, and have informed us of their rights under the various service agreements to which we entered.  Their rights include the suspension or cancellation of service and a demand for immediate payment, among other remedies.  The Company is in communications with these vendors and in some cases has worked out extended payment terms.  There is no guarantee that the Company will be able to reach agreements with all vendors or that it will in all future circumstances be able to fulfill the terms of all extended payment terms, which could have a significant negative impact on our operations and financial position.  Our revenue generation is dependent on the ability of the Company to continue to (1) avoid the cancellation of key vendor services (2) raise money through the sale of assets or the addition of new debt or equity to pay down and pay off key vendors and (3) meet the terms of existing and future payment plans.  The failure to accomplish these goals could seriously impact our operations and financial position.

On November 6, 2014, the Company received a notice of default from investors holding the Revolving Notes.  The notice of default stated that an event of default had occurred as a result of the Company’s failure to repay principal when due on October 2, 2014, and declared all principal and accrued interest outstanding under the Revolving Notes to be immediately due and payable. At November 6, 2014 accrued interest on the Revolving Notes was $2,176.

On November 6, 2014, the Company also received a notice of default from investors (the “Majority Investors”) holding $1.8 million of the outstanding principal amount of the Company’s Convertible Notes and $900,000 of the outstanding principal amount of the Company’s Supplemental Notes.  The notice of default stated that an event of default had occurred under the Convertible Notes and Supplemental Notes as a result of the Company’s failure to repay the above-referenced Revolving Notes when due, and declared all principal and accrued interest outstanding under the Convertible Notes and Supplemental Notes held by the Majority Investors to be immediately due and payable.

On November 17, 2014, the Company received a notification of disposition of collateral from the collateral agent for the holders of the Convertible Notes and Supplemental Notes notifying the Company that a foreclosure sale of all or substantially all of the Company’s assets would take place on December 4, 2014. If the Majority Investors and collateral agent elect to proceed with the foreclosure sale of the Company’s assets, upon completion of such sale the Company would no longer be able to continue as a going concern and would immediately cease operations. The Majority Investors have represented to the Company that in the event of a foreclosure sale in which the Majority Investors acquire the Company’s assets, their intent would be to continue operating the ViewCentral business in a separate legal entity that continues existing contractual agreements with the Company’s ViewCentral customers.

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.

7

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, commitments and contingencies, fair value estimates for the expense of employee stock options, embedded derivative features and warrants and the assessment of recoverability and impairment long-lived assets.

Significant Accounting Policies - Convertible Instruments

The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 Derivatives and Hedging Activities. Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable GAAP.

Recent Accounting Standards

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.

In August 2014, the FASB issued a new accounting standard which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim reporting period. If substantial doubt exists, additional disclosure is required. This new standard will be effective for the Company for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the condensed consolidated financial statements.

2.    NET LOSS PER SHARE

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

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

8

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Net loss from continuing operations	$	(1,807	)	$	(3,587	)	$	(6,669	)	$	(9,999	)
Net income (loss) from discontinued operations	—			(34		)	—			53
Net loss	$	(1,807	)	$	(3,621	)	(6,669		)	(9,946		)
Weighted-average shares of common stock outstanding – basic and diluted	41,891			40,684			41,980			35,566
Basic and diluted net income (loss) per share:
Continuing operations	$	(0.04	)	$	(0.09	)	$	(0.16	)	$	(0.28	)
Discontinued operations	—			—			—			—
Net loss	$	(0.04	)	$	(0.09	)	$	(0.16	)	$	(0.28	)

The following table presents the unvested restricted stock awards and "in the money" stock options and stock warrants that were excluded from the calculation of diluted net loss per share for the three and nine months ended September 30, 2014 and 2013 as these securities were anti-dilutive (in thousands).

	Nine Months Ended
	September 30,
	2014	2013
Unvested restricted stock awards	377	1,963
Stock options	1	131
Stock warrants	1,937	—
Total anti-dilutive securities	2,315	2,094

Stock options and warrants that were not "in the money" at September 30, 2014 and 2013 were 4,100,000 and 2,879,000, respectively.

9

3.    CUSTOMER CONCENTRATION

We have generated a significant portion of our revenue from sales to limited number of clients. The following table presents the concentration of revenue from significant customers for the three and nine months ended September 30, 2014 and 2013.

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2014	2013	2014	2013
Microsoft Corporation	38%	42%	52%	41%
Symantec Corporation	—%	26%	—%	25%
Verizon Communications	14%	—%	11%	—%
Hewlett-Packard Company	12%	12%	—%	10%

The following table presents the concentration of accounts receivable as of September 30, 2014 and December 31, 2013.

	September 30, 2014	December 31, 2013
Microsoft Corporation	17%	25%
Symantec Corporation	36%	40%
Hewlett-Packard Company	11%	11%
Splunk Inc.	15%	—%

We have outsourced services agreements with our significant clients that expire at various dates ranging through March 2018. Our agreements with Symantec expired on March 31, 2014. Certain agreements with Microsoft expired on June 30, 2014 and were not renewed. On October 15, 2014, the Company and N3 North America, LLC signed and closed an Asset Purchase Agreement pursuant to which the Company sold to N3 our remaining Microsoft contract. This contract represented 20% of net revenue for the nine months ended September 30, 2014.

4.    BALANCE SHEET COMPONENTS

Prepaids and Other Current Assets

Prepaids and other current assets consist of the following (in thousands):

	September 30, 2014		December 31, 2013
Prepaids and other current assets:
Prepaid expenses	$	344	$	623
Deferred financing costs	295		—
Deferred professional service costs	275		252
VAT tax receivable	281		440
Other current assets	92		303
Prepaids and other current assets	$	1,287	$	1,618

Property and Equipment

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

10

	Estimated Useful Life	September 30, 2014			December 31, 2013
Property and equipment:
Computer equipment	3 years	$	3,945		$	3,993
Capitalized software and development	2-5 years	13,899			13,208
Furniture and fixtures	5 years	308			309
Leasehold improvements	Lease term	110			123
		18,262			17,633
Accumulated depreciation and amortization		(17,375		)	(17,099		)
Construction in process		4			157
Property and equipment, net		$	891		$	691

Other Non-current Assets

Other non-current assets consist of the following (in thousands):

	September 30, 2014		December 31, 2013
Other non-current assets:
Credit card reserve deposits and other	$	95	$	395
Deferred professional service costs	824		445
Other non-current assets	$	919	$	840

Accounts Payable

Approximately $12.9 million in accounts payable as of September 30, 2014 represents collections by the Company on behalf of software sales to third party customers associated with a customer's value added reseller arrangement.  This balance is owed to the customer and the Company is currently negotiating a settlement arrangement on the balance due. As of September 30, 2014, included in accounts receivable is $447,000 associated with this customer.

Other Accrued Liabilities

Other accrued liabilities consist of the following (in thousands):

	September 30, 2014		December 31, 2013
Other accrued liabilities:
Payable to customers *	$	1,344	$	1,460
Accrued professional fees	89		663
VAT taxes payable	270		248
Settlement liability	—		200
Reseller rebates	—		190
Sales reserve	—		117
Other liabilities	560		787
Other accrued liabilities	$	2,263	$	3,665

* - Amounts represent collections on customer receivables associated with "product sales" in excess of amounts owed to state jurisdictions. The Company is in the process of evaluating remediation plans for the balances due.

Deferred Revenue and Deferred Professional Services Costs:

In April 2013, the Company entered into an arrangement to provide subscription services and perform material modifications to its LMS platform for a significant customer. The Company received acceptance of the material modifications on July 18, 2014 and began to amortize the deferred costs and recognize revenue over the remaining subscription period of 50 months.

11

As of September 30, 2014, the Company has recorded deferred revenue of $4.1 million of which $2.0 million is included in current deferred revenue and $2.1 million is included in noncurrent deferred revenue. The Company has also deferred related professional service costs incurred associated with the customization of the LMS platform of $1.1 million. Deferred professional service costs of $275,000 and $824,000 is included in prepaid and other current assets and other noncurrent assets, respectively, at September 30, 2014.

5.    NOTES PAYABLE

Notes payable consist of the following (in thousands):

	September 30, 2014			December 31, 2013
Convertible notes, including accrued interest of $53	$	3,143		$	—
Supplemental notes	1,545			—
Discount	(4,457		)	—
Total convertible and supplemental notes	231			—
Comerica term loan	$	—		$	1,800
Comerica revolving line	—			1,230
Agility line of credit, net of discount of $0 and $96, respectively	—			404
Revolving Line of Credit	200			—
Notes payable – insurance	—			207
Total notes payable	200			3,641

2014 Convertible Notes Financing

On July 15, 2014, the Company entered into a Purchase Agreement with certain investors pursuant to which the Company agreed to issue units each consisting of (i) a secured convertible promissory note in the face amount of $1.00 (the “Convertible Notes”), (ii) a supplemental secured promissory note in the face amount of $0.50 (the “Supplemental Notes”) and (iii) warrants to purchase up to four shares of the Company’s common stock (the “Warrants”) (collectively, the “Financing Transaction”).

On July 15, 2014, the Company completed an initial closing of the Financing Transaction for the sale of 2,550,000 units, representing gross proceeds to the Company of $2,550,000 and net proceeds of approximately $2,275,000 after deducting fees and expenses payable by the Company. On August 12, 2014, the Company completed a secondary closing of the Financing Transaction for the sale of 450,000 units, representing gross proceeds to the Company of $450,000 and net proceeds of approximately $415,000. On September 9, 2014, the Company completed a third closing of the Financing Transaction for the sale of 90,000 units, representing gross proceeds of $90,000 and net proceeds of $83,700. The Company used a portion of the net proceeds from the Financing Transaction to repay its outstanding indebtedness owing to Comerica Bank and Agility Capital II, LLC and used the balance of the net proceeds for general corporate purposes, including working capital.

The Convertible Notes of $3.1 million will mature on July 15, 2019 and accrue interest at a fixed rate of 8.0% per annum payable quarterly. Interest accrued from the date of issuance through June 30, 2015 will be added to the principal amount of the Convertible Notes quarterly. During the continuance of an event of default, the Convertible Notes may accrue interest at a default rate of 15% per annum. Subject to stockholder approval of an increase in the number of authorized shares of the Company’s common stock in an amount sufficient to permit full conversion of the Convertible Notes, the Convertible Notes will be convertible into shares of the Company’s common stock at a conversion rate of $0.25 per share. The Convertible Notes also contain provisions that protect the holders thereof against dilution by adjustment of the conversion rate in certain events such as stock dividends, stock splits and other similar events and certain issuances of common stock by the Company at a price per share less than the conversion rate then in effect.

The Supplemental Notes of $1.5 million will mature on July 15, 2019 and accrue interest at a fixed rate of 8.0% per annum payable at maturity. During the continuance of an event of default, the Supplemental Notes may accrue interest at a default rate of 15% per annum. However, the Supplemental Notes can be canceled after two years if certain insolvency related events have been remediated.

The Convertible Notes and Supplemental Notes are secured by a first lien on substantially all of the Company’s consolidated assets. The Convertible Notes and Supplemental Notes contain covenants that will, subject to limited exceptions,

12

require the approval of the holders of a majority of the outstanding principal amount thereof to, among other things, (i) incur other indebtedness; (ii) create liens; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The Convertible Notes and Supplemental Notes also provide for customary events of default, including nonpayment, breach of covenants, material adverse events, payment defaults of other indebtedness and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Convertible Notes and Supplemental Notes. If the Company is not able to comply with such covenants or if any event of default otherwise occurs, the outstanding note balances could become due and payable immediately. On November 6, 2014, we received a notice of default and acceleration from certain holders of our Convertible Notes and Supplemental Notes. See below under the heading “Events of Default - Convertible Notes, Supplemental Notes and Revolving Notes” for a further discussion of the notices of default and acceleration received under our debt agreements.

In connection with the Financing Transaction, the Company issued 12,360,000 Warrants which have an initial 10-year term with an exercise price of $0.08 per share. The Warrants are subject to stockholder approval of an increase in the number of authorized shares of the Company’s common stock in an amount sufficient to permit full exercise of the Warrants into shares of the Company's common stock. The Warrants may also 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 and issuances of common stock at a price per share less than the exercise price then in effect. As such, the Company is required to record the warrants which do not have fixed settlement provisions as liabilities and mark to market at the end of each reporting period.

September 2014 Revolving Line of Credit Note

On September 2, 2014, the Company obtained $200,000 under Revolving Line of Credit Notes (the "Revolving Notes") from two investors in the Financing Transaction. The Revolving Notes are secured by a second lien on substantially all of the Company's consolidated assets. Outstanding principal accrues interest at a fixed rate of 5% per annum, payable quarterly starting December 31, 2014. During the continuance of an event of default, outstanding principal may accrue interest at a default rate of 7% per annum. Each advance must be paid within 30 days of the date of such advance. The Company borrowed the full $200,000 on the Revolving Notes on September 2, 2014 and this amount remained outstanding as of September 30, 2014. On November 6, 2014, we received a notice of default and acceleration from the holders of our Revolving Notes. See below under the heading “Events of Default - Convertible Notes, Supplemental Notes and Revolving Notes” for a further discussion of the notices of default and acceleration received under our debt agreements.

Events of Default - Convertible Notes, Supplemental Notes, and Revolving Notes

On November 6, 2014, the Company received a notice of default from investors holding the Revolving Notes.  The notice of default stated that an event of default had occurred as a result of the Company’s failure to repay principal when due on October 2, 2014, and declared all principal and accrued interest outstanding under the Revolving Notes to be immediately due and payable. At November 6, 2014 accrued interest on the Revolving Notes was $2,176.

On November 6, 2014, the Company also received a notice of default from investors (the “Majority Investors”) holding $1.8 million of the outstanding principal amount of the Company’s Convertible Notes and $900,000 of the outstanding principal amount of the Company’s Supplemental Notes.  The notice of default stated that an event of default had occurred under the Convertible Notes and Supplemental Notes as a result of the Company’s failure to repay the above-referenced Revolving Notes when due, and declared all principal and accrued interest outstanding under the Convertible Notes and Supplemental Notes held by the Majority Investors to be immediately due and payable.

On November 17, 2014, the Company received a notification of disposition of collateral from the collateral agent for the holders of the Convertible Notes and Supplemental Notes notifying the Company that a foreclosure sale of all or substantially all of the Company’s assets would take place on December 4, 2014. If the Majority Investors and collateral agent elect to proceed with the foreclosure sale of the Company’s assets, upon completion of such sale the Company would no longer be able to continue as a going concern and would immediately cease operations. The Majority Investors have represented to the Company that in the event of a foreclosure sale in which the Majority Investors acquire the Company’s assets, their intent would be to continue operating the ViewCentral business in a separate legal entity that continues existing contractual agreements with the Company’s ViewCentral customers.

Comerica Bank Credit Facility

On June 14, 2012, the Company entered into a Loan and Security Agreement with Comerica Bank (the "Comerica Credit Facility"). The maximum amount of credit available to the Company under the Comerica Credit Facility at inception was $5 million, comprised of a $3 million term loan facility ("Term Loan") and a $2 million revolving line of credit ("Revolving Line"), which included a $500,000 sub-facility for letters of credit and certain credit card services. The outstanding amount under the

13

Term Loan was repaid by the Company in June 2014. Amounts borrowed under the Revolving Line became due on December 14, 2013, which was subsequently extended to May 1, 2014. The outstanding amount under the Revolving Line of $998,000 was repaid by the Company on July 15, 2014 and the Comerica Credit Facility was terminated. However, Comerica continues to maintain a cash-secured letter of credit in the face amount of $61,000 issued to our landlord for our leased headquarters in Campbell, California.

Agility Capital Credit Facility

On October 30, 2013, the Company closed a Loan Agreement (the "Agility Loan Agreement") with Agility Capital II, LLC (“Agility”), providing for a revolving line of credit of up to $500,000, which amount could be increased to $650,000 under certain conditions (the “Maximum Revolving Line”). The Agility Loan Agreement became due on December 14, 2013, commensurate with the Comerica Credit Facility, which was subsequently extended to May 1, 2014, commensurate with the extension of the scheduled maturity date of the Comerica Revolving Line. The outstanding amount under the Agility Loan Agreement of $432,000 was repaid by the Company on July 15, 2014, and the Agility Loan Agreement was terminated.

Notes Payable – Insurance

On December 11, 2013, the Company entered into an agreement with AON Private Risk Management to finance our 2013 to 2014 insurance premiums with First Insurance Funding Corp. in the amount of $237,000. The interest rate on the note payable was 4.99% and the note was payable in eight equal monthly installment payments beginning in December 2013. The outstanding balance of the note payable was repaid in June 2014.

6.    RESTRUCTURING

Effective July 15, 2014, Donald Massaro resigned as President and Chief Executive Officer of the Company. Effective July 15, 2014, Bradford Peppard agreed to resign as Executive Vice President and Chief Financial Officer of the Company; this resignation became effective September 12, 2014.

In connection with Mr. Massaro’s separation from the Company, the Company and Mr. Massaro entered into a Settlement Agreement and General Release. Pursuant to the agreement, Mr. Massaro is entitled to a severance payment in accordance with his employment contract of $221,250, which is equal to nine (9) months base salary, payable in accordance with the Company’s normal payroll schedule. As of September 30, 2014, $175,866 of this amount remained outstanding.

In connection with Mr. Peppard's separation from the Company, the Company intends to pay Mr. Peppard a severance payment in accordance with his employment contract in the amount of $125,000, which is equal to six (6) months base salary. Payment would be made in six (6) monthly payments beginning in January 2015.

In September, 2014, the Company decided to close its Godalming (UK) office. The Company occupied premises at this location under a lease agreement that ends March 1, 2015. As part of its decision to close this office, the Company recorded a charge of $19,138 representing amounts owed on the lease from October 1, 2014 to the end of the lease.

7.    COMMITMENTS AND CONTINGENCIES

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 sought 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. On May 15, 2013, the American Arbitration Association appointed an arbitrator. Thereafter, Mr. Silton withdrew his arbitration claim and on May 22, 2013, filed a complaint against the Company in the Santa Clara Superior Court. The allegations and causes of action were the same as the complaint filed with the American Arbitration Association. On July 5, 2013, the Company filed an answer to Mr. Silton's complaint and a cross-complaint against Mr. Silton. On or about August 1, 2013, Mr. Silton filed an answer to the cross-complaint. Between July and December 2013, the parties served and responded to written discovery requests and produced documents. In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a confidential settlement agreement. Pursuant to the settlement agreement, and in exchange for a release of claims, Mr. Silton received a payment from the Company's insurer and 1,000,000 shares of the Company's common stock, which were issued during the three months ended March 31, 2014. A portion of the payment and the shares of common stock was paid to Mr. Silton's legal

14

counsel. After effectuating the terms of the settlement, the case was formally dismissed on March 17, 2014. In connection with the settlement agreement, the Company recorded a charge of $200,000 in the year ended December 31, 2013.

On July 9, 2013, YKnot Holdings LLC (“YKnot”) filed a complaint seeking damages against the Company in the Santa Clara Superior Court alleging breach of contract and related causes of action arising from the eCommerce Processor Agreement (the “Agreement”) entered into by YKnot and the Company in January 2012.  The central allegation in the complaint alleged that the Company failed to timely pay over certain reserves held by the Company against chargebacks and returns relating to YKnot's products in accordance with the Agreement.  On August 12, 2013, the Company filed an answer to the complaint and filed a cross-complaint against YKnot.  In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a settlement agreement pursuant to which the Company and YKnot agreed to a mutual "walk away" settlement and release with no money or other consideration paid to either party.

On September 29, 2014, the Company received a complaint filed against the Company by Symantec Corporation (“Symantec”) in the Superior Court of California, Santa Clara County, alleging breach of contract arising from the Master Services Agreement entered into by the Company and Symantec in June 2006, the statement of work entered into by the parties in June 2008 and the Online Store Agreement for SMB and Midmarket Businesses entered into by the parties in June 2010. In the complaint Symantec seeks payment of unpaid amounts thereunder in the approximate amount of $12.4 million, plus interest and attorneys’ fees and costs.

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.

8.    FAIR VALUE MEASUREMENTS

A summary of the activity of the fair value of the Level 3 liabilities (common stock warrant liability and derivative liability conversion option) for the nine months ended September 30, 2014 and 2013 is as follows (in thousands):

	Nine Months Ended
	September 30,
	2014			2013
Balance at December 31, 2013 and 2012, respectively	$	93		$	348
Issuances	—			—
Gain on fair value remeasurement	(17		)	(225		)
Balance at March 31, 2014 and 2013, respectively	76			123
Issuances	—			—
Loss on fair value remeasurement	—			11
Balance at June 30, 2014 and 2013, respectively	76			134
Issuances	3,589			—
(Gain) loss on fair value remeasurement	(1,267		)	66
Balance at September 30, 2014 and 2013, respectively	$	2,398		$	200

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

15

	Level 1		Level 2		Level 3
September 30, 2014
Liabilities:
Common stock warrant liability (2)	$	—	$	—	$	1,446
Derivative liability conversion option	$	—	$	—	$	952
December 31, 2013
Assets:
Money market funds (1)	$	1,641	$	—	$	—
Liabilities:
Common stock warrant liability (2)	$	—	$	—	$	93

  ____________

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

(2) The fair value of our common stock warrant liability 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 the common stock warrant liability and the derivative liability conversion option. The following are the assumptions used to measure the warrant liability at September 30, 2014 and 2013 and at date of issuance, which were determined in a manner consistent with that described for stock option awards as set forth in Note 8:

	September 30, 2014			At Issuance	September 30, 2013
	2011 Warrants	2013 Warrants	2014 Warrants	2014 Warrants	2011 Warrants
Number of shares underlying the Warrants	1,578,000	217,000	12,360,000	12,360,000	1,578,000
Exercise price	$1.05 - $1.40	$0.45	$0.08	$0.08	$1.05 - $1.40
Remaining contractual life in years	1.75	6.08	9.8	10.00	2.75
Volatility	144.30%	108.25%	107.35%	107.35%	85%
Risk-free interest rate	0.58%	2.00%	2.64%	2.57%	0.63%
Expected dividend yield	—%	—%	—%	—%	—%
Closing price of common stock	$0.12	$0.12	$0.12	$0.10 - $0.19

The following are the assumptions used to measure the derivative liability conversion option with respect to the convertible notes payable at September 30, 2014 and at date of issuance:

	September 30, 2014	At Issuance
Number of shares underlying the conversion option feature	12,570,400	12,360,000
Conversion price	$0.25	$0.25
Remaining contractual life in years	4.75	5
Volatility	100.57%	100.57%
Risk-free interest rate	1.78%	1.70%
Expected dividend yield	—	—
Closing price of common stock	$0.12	$0.10 - $0.19

The amounts reported as cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities at September 30, 2014 and December 31, 2013 approximate fair value due to their short-term maturities.

9.    STOCKHOLDERS' EQUITY

Treasury Stock

16

During the nine months ended September 30, 2014, the Company had restricted stock awards that vested. The Company is required to withhold income taxes at statutory rates based on the closing market value of the vested shares on the date of vesting. Accordingly, the Company offers employees the ability to have vested shares withheld in an amount equal to the amount of taxes to be withheld. The Company purchased 23,057 shares during the nine months ended September 30, 2014 with a cost of approximately $5,000 from employees to cover federal and state taxes due.

During the nine months ended September 30, 2014, the Company issued 1,000,000 shares from treasury pursuant to the settlement agreement with our former CEO, Michael Silton. The weighted cost of shares issued from treasury was approximately $1.3 million of which $200,000 was recorded as a reduction of other accrued liabilities and the remaining $1.1 million was recorded as a reduction of additional paid-in capital.

Stock Compensation

The Company expenses 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 and nine months ended September 30, 2014 and 2013 (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Stock-based compensation expense included in:
Cost of services	$	15	$	24	$	55	$	57
Sales and marketing	17		15		54		136
Technology and development	2		59		35		157
General and administrative	10		126		147		1,002
	$	44	$	224	$	291	$	1,352

At September 30, 2014, approximately $834,000 of stock-based compensation expense 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 $30,000 will be expensed in the remainder of 2014 as stock-based compensation, subject to true-up adjustments for forfeitures and vestings during the year.

During the nine months ended September 30, 2014 and 2013, the weighted average valuation assumptions for stock option awards and forfeiture rates used for the expense calculations for stock option and restricted stock awards were as follows:

	Nine Months Ended
	September 30,
	2014		2013
Expected life in years	4.39		3.94
Volatility	93.12	%	75.16	%
Risk-free interest rate	1.57	%	0.50	%
Dividend rate	—	%	—	%
Forfeiture Rates:
Options	21.89	%	21.66	%
Restricted stock	—	%	15.90	%

Expected life of option grants is estimated based on an analysis of actual historical option exercises and cancellations. Expected stock price volatility is based on the historical volatility from traded shares of the Company's stock over the most recent period of time equal to the expected term of the options. 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. The Company has not historically paid dividends, and does not expect to pay dividends in the near term. Therefore the dividend rate has been set to zero.

A summary of activity under the 2003 Stock Incentive Plan (the "2003 Plan") and 2012 Equity Inducement Plan (the "2012 Plan") for the nine months ended September 30, 2014 is as follows (in thousands):

17

			Options Outstanding
	Available for Grant		Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Balance at December 31, 2013	1,534		2,698		$	0.67	8.7 years
Authorized	1,660		—
Options granted	(60	)	60		0.22
Restricted stock awards granted	(100	)	—
Options exercised	—		—
Options canceled	1,409		(1,409	)	0.60
Restricted stock awards forfeited	315		—
Balance at September 30, 2014	4,758		1,349		$	0.73	6.8 years
Exercisable at September 30, 2014			706		$	0.99	5.1 years

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 the outstanding common stock at the previous December 31 or 2,000,000 shares. Shares outstanding at December 31, 2013 were 41,495,000 and the additional shares authorized amounted to 1,660,000 under the 2003 Plan.

The following table summarizes the activity with regard to restricted stock awards during the nine months ended September 30, 2014. Restricted stock awards were issued from the 2003 Plan and any issuances reduce the shares available for grant as indicated in the previous table. During the three months ended September 30, 2014, the Company granted restricted stock awards for 100,000 shares to two members of our board of directors with immediate vesting. Restricted stock awards are valued at the closing market price of our stock on the date of the grant (in thousands).

	Number of Shares		Weighted Average Grant Price
Balance of nonvested shares at December 31, 2013	582		$	0.69
Granted	100		0.25
Vested	(311	)	0.51
Forfeited	(315	)	0.69
Balance of nonvested shares at September 30, 2014	56		$	0.89

The total grant date fair value of the nonvested restricted stock awards was $50,000 as of September 30, 2014.

10.    SUBSEQUENT EVENTS

Subsequent events have been evaluated through the date that the financial statements were issued. All appropriate subsequent event disclosures, if any, have been made in the notes to the financial statements.

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, 2013, as filed with the SEC on April 1, 2014, that may cause our, or our industry’s, actual results, levels

18

of activity, performance or achievements to be materially different from any future results, levels of activities, performance or achievements expressed in or implied by such forward-looking statements.

Important factors which could cause actual results to differ materially from those in the forward-looking statements include:

• our ability to raise additional equity or debt financing,

• our ability to restructure our debt and accounts payable,

• our ability to execute our business strategy,

• our client concentration given that we are currently dependent on a few significant client relationships,

• the possibility of the discontinuation of some client relationships,

• market acceptance of our solutions and pricing options,

• our ability to acquire new clients and increase demand,

• our ability to control costs,

• general market conditions,

• the high degree of uncertainty around whether or not we can successfully restructure our business,

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

• the date during the course of a calendar year that a new client is acquired,

• the length of the integration cycle for new clients and the timing of revenues and costs associated therewith,

• potential competition in the marketplace,

• the ability to retain and attract employees and board members,

• our ability to maintain and develop our existing technology platform and to deploy new technology,

• the financial condition of our clients’ businesses,

• the protection of our intellectual property,

• our ability to integrate domestic and/or foreign acquisitions without disruption to our business,

• we may be subject to additional obligations to collect and remit sales tax and successful action by state, foreign or other authorities to collect additional sales tax could adversely harm our business,

• 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, 2013, as filed with the SEC on April 1, 2014.

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 Systems, Inc. and its subsidiaries ("Rainmaker", "we", "our", or "the Company") is focused on the development and marketing of a platform for the management of outside training for profit. In addition, we generate sales from lead generation services, and SMB sales and contract renewals.

Our ViewCentral SaaS platform provides an end-to-end solution for the management and delivery of training and certification programs, or training-as-a-business, for corporations. The ViewCentral Learning Management System ("LMS") platform is a SaaS, cloud based, on-demand, training management system, available 24x7 with no software installation. This self-service platform is highly configurable, so our customers utilize only the modules they need, branded as they choose. Designed specifically to automate

19

time-consuming manual administration and to maximize training participation, the ViewCentral suite contains tools for before, during and after course delivery.

We are headquartered in Campbell, California, in the heart of the Silicon Valley. Our global clients consist primarily of large enterprises operating in a range of industries. Our strategy for long-term success of the business is to maintain and improve our position as a leading LMS provider. This will involve ongoing investment in our LMS platform to meet market demands, as well as building the sales and marketing infrastructure to support growth.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. Although actual results have historically been reasonably consistent with management’s expectations, future results may differ from these estimates or our estimates may be affected by different assumptions or conditions.

Management has discussed the development of our critical accounting policies with the audit committee of the board of directors and they have reviewed the disclosures of such policies and management’s estimates in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

With the establishment of our Canadian foreign subsidiary and the subsequent purchase of Canadian based assets in 2007, we adopted a policy for recording foreign currency transactions and translation in accordance with FASB ASC 830, Foreign Currency Matters. For our Canadian subsidiary, the functional currency has been determined to be the local currency, and therefore, assets and liabilities are translated at period-end exchange rates, and statement of operations items are translated at an average exchange rate prevailing during the period. Such translation adjustments are recorded in accumulated comprehensive loss, a component of stockholders’ equity, and in the consolidated statements of operations and comprehensive loss. 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.

The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 Derivatives and Hedging Activities. Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable GAAP.

Management believes there have been no significant changes during the nine months ended September 30, 2014 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, 2013, as filed with the SEC on April 1, 2014.

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, 2013.

20

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Net revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services	97.4		72.3		88.3		68.8
Gross margin	2.6	%	27.7	%	11.7	%	31.2	%
Operating expenses:
Sales and marketing	23.6		21.8		24.7		17.9
Technology and development	41.3		29.6		27.5		26.7
General and administrative	37.1		50.5		28.2		50.6
Restructuring	19.4		—		4.0		—
Depreciation and amortization	6.2		9.5		3.1		9.2
Total operating expenses	127.6	%	111.4	%	87.5	%	104.4	%
Operating loss	(125.0	)	(83.7	)	(75.8	)	(73.2	)
Gain due to change in fair value of warrant liability and derivative liability	(67.3	)	1.6		(14.0	)	(1.1	)
Loss on issuance of convertible notes payable	25.7		—		5.3		—
Interest and other expense, net	17.1		1.4		6.4		1.5
Loss before income tax expense	(100.5	)%	(86.7	)%	(73.5	)%	(73.6	)%
Income tax expense	(4.6	)	(0.5	)	(0.6	)	0.3
Net loss from continuing operations	(95.9	)%	(86.2	)%	(72.9	)%	(73.9	)%
Income from discontinued operations, net of tax	—		(0.8	)	—		0.4
Net loss	(95.9	)%	(87.0	)%	(72.9	)%	(73.5	)%
Foreign currency translation adjustments	0.5		2.0		(0.3	)	(0.6	)
Comprehensive loss	(95.4	)%	(85.0	)%	(73.2	)%	(74.1	)%

Comparison of Three Months Ended September 30, 2014 and 2013

Net Revenue. Net revenue decreased$2.3 million, or 55%, to $1.9 million in the three months ended September 30, 2014, compared to $4.2 million for the three months ended September 30, 2013. This was primarily due to the elimination of GrowCommerce revenue of $1.6 million with the expiration of the Symantec contracts in the first quarter of 2014, a net decline in the Global Commerce Services revenue $627,000 due to the loss of contracts with Microsoft, and a decrease in revenue related to the ViewCentral business of $94,000.

Cost of Services and Gross Margin. Cost of services decreased$1.2 million, or 39%, to $1.8 million in the three months ended September 30, 2014, as compared to $3.0 million in the 2013 comparative period. This was primarily due to lower revenue as described above. Our gross margin percentages were 3% and 28%, respectively, in the three months ended September 30, 2014 and 2013. The erosion in gross margin is due to declines in our higher margin GrowCommerce business with the expiration of the Symantec contracts and decreases in the Global Commerce Services and ViewCentral businesses.

Sales and Marketing Expenses. Sales and marketing expenses decreased$460,000, or 51%, to $445,000 in the three months ended September 30, 2014, as compared to $905,000 in the 2013 comparative period. The decrease was primarily attributable to lower sales payroll and related expenses of $332,000 and a drop in marketing program spending of $130,000, both of which were the result of the continuing de-emphasis of the Global Commerce Services business.

Technology and Development Expenses. Technology and development expenses decreased$453,000, or 37%, to $778,000 during the three months ended September 30, 2014, as compared to $1.2 million in the 2013 comparative period. The decrease was primarily attributable to a decrease in employee expenses of $329,000, lower outside consulting fees of $86,000, a drop in IT/telecoms expenses of $23,000 and lower allocated overheads of $17,000.

General and Administrative Expenses. General and administrative expenses decreased$1.4 million, or 67%, to $699,000 during the three months ended September 30, 2014, as compared to $2.1 million in the 2013 comparative period. $420,000 of the decrease was the result of a one-time charge in Q3 2013 for the overstatement of credit card receivables. Audit, legal, investor relations, and board compensation fees declined $377,000, and payroll and benefits expenses fell $558,000.

Restructuring. Restructuring expenses for the three months ended September 30, 2014 consisted of $346,000 in executive severance charges and $19,000 in facility lease early termination costs from the closing of the Godalming (UK) office.

Depreciation and Amortization Expenses. Depreciation and amortization expenses decreased$279,000, or 70%, to $117,000 for the three months ended September 30, 2014, as compared to $396,000 in the 2013 comparative period. The majority of the

21

decrease in depreciation and amortization expense was due to a lower asset base from the impairment charge on long-lived assets taken in the year ended December 31, 2013 of $2.3 million.

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

	Three Months Ended September 30,						Change
	2014			2013
Interest expense, net	$	305		$	44		$	261
Currency translation (gain)/loss	(2		)	18			(20		)
Other	18			(3		)	21
Total	$	321		$	59		$	262

Income Tax Expense.  Income tax benefit was $86,000 for the three months ended September 30, 2014 as compared to a benefit of $20,000 for the three months ended September 30, 2013. The income tax benefit for the three months ended September 30, 2014 was the result of an estimate of taxable income for the full year ending December 31, 2014, augmented by true ups on estimates of state and foreign taxes.

Loss from Discontinued Operations, Net of Tax. Loss from discontinued operations for the three months ended September 30, 2013 of $34,000 was attributable to an adjustment to the sales price pursuant to the stock purchase agreement for the sale of the Company's Manila operations in December 2012.

Comparison of Nine Months Ended September 30, 2014 and 2013

Net Revenue. Net revenue decreased$4.4 million, or 33%, to $9.1 million in the nine months ended September 30, 2014, compared to $13.5 million for the nine months ended September 30, 2013. This was primarily due to the decline of GrowCommerce revenue of $4.2 million compared to the 2013 comparative period, including $2.8 million related to Symantec contracts that expired in the first quarter of 2014. A decline in ViewCentral revenue of $470,000 compared to the 2013 comparative period was offset by an increase of $268,000 in Global Commerce Solutions revenue that was the result of the initiation of the Verizon contract in Q4 2013.

Cost of Services and Gross Margin. Cost of services decreased$1.3 million, or 13%, to $8.1 million in the nine months ended September 30, 2014, compared to $9.3 million for the nine months ended September 30, 2013. Our gross margin percentages were 12% and 31%, respectively, in the nine months ended September 30, 2014 and 2013. The erosion in gross margin is due to declines in our higher margin GrowCommerce business and ViewCentral business and lower margin on the Global Commerce Services business.

Sales and Marketing Expenses. Sales and marketing expenses decreased$162,000, or 7%, to $2.3 million in the nine months ended September 30, 2014, compared to $2.4 million in the 2013 comparative period. The change was primarily attributable to a decrease in sales and marketing staff compensation expenses.

Technology and Development Expenses. Technology and development expenses decreased$1.1 million, or 30%, to $2.5 million during the nine months ended September 30, 2014, as compared to $3.6 million in the 2013 comparative period. The decrease was primarily attributable to a decrease in compensation expense of $840,000 and a decrease in consulting and temporary service charges of $225,000.

General and Administrative Expenses. General and administrative expenses decreased$4.3 million, or 62%, to $2.6 million during the nine months ended September 30, 2014, as compared to $6.9 million in the 2013 comparative period. The decrease was primarily due to non-recurring expenses recorded in the nine months ended September 30, 2013 of $1.8 million comprised of $345,000 for relocation of the finance function from the Austin, Texas facility to our Campbell, California facility, a charge of $150,000 to close the Austin facility, a $280,000 impairment charge against vendor deposits, a $420,000 write-off of credit card receivables, and a charge of $582,000 related to stock compensation expense for restricted stock awards which were fully vested upon grant and acceleration of vesting of restricted stock awards for a former CEO. In addition, in the nine months ended September 30, 2014, employee and related expenses excluding severance dropped $1.1 million, and audit legal, investor relations and board fees fell $1.5 million compared to the 2013 comparative period. Offsetting these decreases were asset impairment charges of $130,000.

Restructuring. Restructuring expenses for the nine months ended September 30, 2014 consisted of $346,000 in executive severance charges and $19,000 in facility lease early termination costs from the closing of the Godalming (UK) office.

22

Depreciation and Amortization Expenses. Depreciation and amortization expenses decreased$955,000, or 77%, to $286,000 for the nine months ended September 30, 2014, as compared to $1.2 million in the 2013 comparative period. The decrease in depreciation and amortization expense was due to a lower asset base from the impairment charge on long-lived assets taken in the year ended December 31, 2013 of $2.3 million.

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

	Nine Months Ended September 30,				Change
	2014		2013
Interest expense, net	$	546	$	153	$	393
Currency translation loss	3		19		(16		)
Other	40		33		7
Total	$	589	$	205	$	384

Income Tax Expense.  Income tax benefit was $53,000 for the nine months ended September 30, 2014 as compared to a $35,000 expense for the nine months ended September 30, 2013. Our income tax expense for the nine months ended September 30, 2014 was based on our estimate of taxable income for the full year ending December 31, 2014, augmented by true-ups on estimates of state and foreign taxes.

Income from Discontinued Operations, Net of Tax. Income from discontinued operations for the nine months ended September 30, 2013 of $53,000 was a result of the wind down of a contract that was assigned to Shore Solutions, Inc. as part of the sale of our Manila operations in December 2012 offset by an adjustment to the sales price pursuant to the stock purchase agreement for that sale.

Liquidity and Sources of Capital

Cash used in operating activities for the nine months ended September 30, 2014 was $2.4 million, compared to cash used in operating activities of $2.9 million in the nine months ended September 30, 2013. Cash used in operating activities in the nine months ended September 30, 2014 was primarily the result of the net loss of $6.7 million augmented by a warrant liability fair value adjustment of $1.3 million. The combination of these two items was offset by non-cash expenses for depreciation of property and asset impairment of $345,000, debt discount amortization of $291,000, stock-based compensation expenses of $291,000 and changes in operating assets and liabilities that provided cash of $4.2 million as a result of collecting receivables and extending accounts payable. Also added back to net income for the purpose of calculating cash used in operating activities was a $483,000 loss on the issuance of convertible debt.

Cash used in operating activities for the nine months ended September 30, 2013 was $2.9 million, primarily as a result of the net loss from continuing operations of $9.9 million augmented by a warrant liability fair value adjustment of $148,000; offset by non-cash expenses for depreciation of property of $1.2 million, stock-based compensation expenses of $1.4 million, a charge for impairment related to vendor deposits of $280,000, a provision for allowances of credit card receivables of $420,000, changes in operating assets and liabilities that provided cash of $3.9 million primarily as a result of managing working capital, and cash provided by discontinued operations of $53,000.

Cash used in investing activities was $543,000 in the nine months ended September 30, 2014, as compared to cash used in investing activities of $1.6 million in the nine months ended September 30, 2013. Cash used in investing activities in the nine months ended September 30, 2014 was a result of capital expenditures of $543,000. Cash used in investing activities in the nine months ended September 30, 2013 was primarily the result of capital expenditures of $1.6 million.

Cash used in financing activities was approximately $510,000 in the nine months ended September 30, 2014, as compared to cash provided by financing activities of $4.2 million in the nine months ended September 30, 2013. Cash used in financing activities in the nine months ended September 30, 2014 was primarily a result of repayment of borrowings of $3.0 million under our Term Loan and Revolving Line with Comerica Bank, $550,000 under our line of credit with Agility Capital II, LLC, $208,000 under the insurance note payable to First Insurance Funding Corp, and the funding of a restricted cash account of $58,000 to secure a standby letter of credit with Comerica Bank. Offsetting these outflows was gross proceeds of $3.1 million from the issuance of the Convertible Notes, $200,000 from the Revolving Line of Credit Notes, and $50,000 from the Agility Capital loan.

Cash provided by financing activities in the nine months ended September 30, 2013 of $4.2 million was primarily the result of net proceeds of $5.5 million from the sale of common stock, plus borrowings of $200,000 under our Revolving Line with Comerica Bank, offset by repayment of borrowings of $1.4 million under our Term Loan and Revolving Line with Comerica Bank

23

and purchases of $132,000 of treasury stock from employees for shares withheld for income tax payable on restricted stock awards vested during the nine months ended September 30, 2013.

At September 30, 2014, the Company had a net working capital deficit of $19.2 million. Our principal source of liquidity as of September 30, 2014 consisted of $170,100 of cash and cash equivalents and $1.3 million of net accounts receivable. Convertible and Supplemental Notes payable as of September 30, 2014 was $4.7 million, plus another $200,000 payable under the Revolving Line of Credit Notes. See Note 5 to the Financial Statements for further discussion of our debt agreements.

Our accounts payable balance increased from $13.0 million as of December 31, 2013 to $15.6 million as of September 30, 2014. $12.9 million of the September 30, 2014 accounts payable balance is related to a merchant account of a customer.

In order to meet our operating requirements, we will need to raise additional capital from outside third parties or from the sale of assets, and restructure our obligations. As part of this process, in October 2014 we sold a customer contract and subcontracts to N3 North America, LLC. Additionally, we are pursuing a plan to achieve profitable operations through a combination of increased sales and decreased expenses. There can be no assurance that we will be successful in obtaining third party capital, selling assets or restructuring our obligations. We do not have adequate cash or financial resources to operate for the next twelve months without raising significant additional capital, which raises substantial doubt about our ability to continue as a going concern.

In addition to the liquidity issues noted above, some key vendors of the Company have either formally or informally,  via phone, email, mail, or a combination of one or more of these methods, given the Company a notice of material breach for non-payment, and have informed us of their rights under the various service agreements to which we entered.  Their rights include the suspension or cancellation of service and a demand for immediate payment, among other remedies.  The Company is in communications with these vendors and in some cases has worked out extended payment terms.  There is no guarantee that the Company will be able to reach agreements with all vendors or that it will in all future circumstances be able to fulfill the terms of all extended payment terms, which could have a significant negative impact on our operations and financial position.  Our revenue generation is dependent on the ability of the Company to continue to (1) avoid the cancellation of key vendor services (2) raise money through the sale of assets or the addition of new debt or equity to pay down and pay off key vendors and (3) meet the terms of existing and future payment plans.  The failure to accomplish these goals could seriously impact our operations and financial position.

Credit Arrangements

On July 15, 2014, the Company entered into a Purchase Agreement with certain investors pursuant to which the Company agreed to issue units each consisting of (i) a secured convertible promissory note in the face amount of $1.00 (the “Convertible Notes”), (ii) a supplemental secured promissory note in the face amount of $0.50 (the “Supplemental Notes”) and (iii) warrants to purchase up to four shares of the Company’s common stock (the “Warrants”) (collectively, the “Financing Transaction”).

On July 15, 2014, the Company completed an initial closing of the Financing Transaction for the sale of 2,550,000 units, representing gross proceeds to the Company of $2,550,000 and net proceeds of approximately $2,275,000 after deducting fees and expenses payable by the Company. On August 12, 2014, the Company completed a secondary closing of the Financing Transaction for the sale of 450,000 units, representing gross proceeds to the Company of $450,000 and net proceeds of approximately $415,000. On September 9, 2014, the Company completed a third closing of the Financing Transaction for the sale of 90,000 units, representing gross proceeds of $90,000 and net proceeds of $83,700. The Company used a portion of the net proceeds from the Financing Transaction to repay its outstanding indebtedness owing to Comerica Bank and Agility Capital II, LLC and used the balance of the net proceeds for general corporate purposes, including working capital.

The Convertible Notes of $3.1 million will mature on July 15, 2019 and accrue interest at a fixed rate of 8.0% per annum payable quarterly. Interest accrued from the date of issuance through June 30, 2015 will be paid in kind and added to the principal amount of the Convertible Notes quarterly. During the continuance of an event of default, the Convertible Notes may accrue interest at a default rate of 15% per annum. Subject to stockholder approval of an increase in the number of authorized shares of the Company’s common stock in an amount sufficient to permit full conversion of the Convertible Notes, the Convertible Notes will be convertible into shares of the Company’s common stock at a conversion rate of $0.25 per share. The Convertible Notes also contain provisions that protect the holders thereof against dilution by adjustment of the conversion rate in certain events such as stock dividends, stock splits and other similar events and certain issuances of common stock by the Company at a price per share less than the conversion rate then in effect.

The Supplemental Notes of $1.5 million will mature on July 15, 2019 and accrue interest at a fixed rate of 8.0% per annum payable at maturity. During the continuance of an event of default, the Supplemental Notes may accrue interest at a default rate of 15% per annum. However, the Supplemental Notes may be canceled after two years if certain insolvency related events have been remediated.

24

The Convertible Notes and Supplemental Notes are secured by a first lien on substantially all of the Company’s consolidated assets. The Convertible Notes and Supplemental Notes contain covenants that will, subject to limited exceptions, require the approval of the holders of a majority of the outstanding principal amount thereof to, among other things, (i) incur other indebtedness; (ii) create liens; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The Convertible Notes and Supplemental Notes also provide for customary events of default, including nonpayment, breach of covenants, material adverse events, payment defaults of other indebtedness and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Convertible Notes and Supplemental Notes. If we are not able to comply with such covenants or if any event of default otherwise occurs, our outstanding note balances could become due and payable immediately. See below for a discussion of notices of default and acceleration received by the Company from holders of the Convertible Notes and the Supplemental Notes.

In connection with the Financing Transaction, the Company issued 12,360,000 Warrants which have an initial 10-year term with an exercise price of $0.08 per share. The Warrants are subject to stockholder approval of an increase in the number of authorized shares of the Company’s common stock in an amount sufficient to permit full exercise of the Warrants into shares of the Company's common stock. The Warrants may also 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 and issuances of common stock at a price per share less than the exercise price then in effect.

On September 2, 2014, the Company obtained $200,000 under Revolving Line of Credit Notes from two investors in the Financing Transaction. The Revolving Line of Credit Notes are secured by a second lien on substantially all of the Company's consolidated assets. Outstanding principal accrues interest at fixed rate of 5% per annum, payable quarterly starting December 31, 2014. During the continuance of an event of default, the Revolving Line of Credit Notes may accrue interest at a default rate of 7% per annum. Each advance must be paid within 30 days of the date of such advance. The Company borrowed the full $200,000 under the Revolving Line of Credit Notes on September 2, 2014 and this amount remained outstanding as of September 30, 2014.

On November 6, 2014, the Company received a notice of default from investors holding the Revolving Line of Credit Notes. The notice of default stated that an event of default had occurred as a result of the Company’s failure to repay principal when due on October 2, 2014, and declared all principal and accrued interest outstanding under the Revolving Line of Credit Notes to be immediately due and payable. At November 6, 2014 accrued interest on the Revolving Line of Credit Notes was $2,176.

On November 6, 2014, the Company also received a notice of default from investors (the “Majority Investors”) holding $1.8 million of the outstanding principal amount of the Company’s Convertible Notes and $900,000 of the outstanding principal amount of the Company’s Supplemental Notes. The notice of default stated that an event of default had occurred under the Convertible Notes and Supplemental Notes as a result of the Company’s failure to repay the above-referenced Revolving Line of Credit Notes when due, and declared all principal and accrued interest outstanding under the Convertible Notes and Supplemental Notes held by the Majority Investors to be immediately due and payable.

On November 17, 2014, the Company received a notification of disposition of collateral from the collateral agent for the holders of the Convertible Notes and Supplemental Notes notifying the Company that a foreclosure sale of the Company’s assets would take place on December 4, 2014. If the Majority Investors and collateral agent elect to proceed with the foreclosure sale of the Company’s assets, upon completion of such sale the Company would no longer be able to continue as a going concern and would immediately cease operations.

On June 14, 2012, the Company entered into a Loan and Security Agreement with Comerica Bank (the "Comerica Credit Facility"). The maximum amount of credit available to the Company under the Comerica Credit Facility at inception was $5 million, comprised of a $3 million term loan facility ("Term Loan") and a $2 million revolving line of credit ("Revolving Line"), which included a $500,000 sub-facility for letters of credit and certain credit card services. The outstanding amount under the Term Loan was repaid by the Company in June 2014. Amounts borrowed under the Revolving Line became due on December 14, 2013, which was subsequently extended to May 1, 2014. The outstanding amount under the Revolving line of $998,000 was repaid by the Company on July 15, 2014 and the Comerica Credit Facility was terminated. However, Comerica continues to maintain a cash-secured letter of credit in the face amount of $61,000 issued to our landlord for our leased headquarters in Campbell, California.

On October 30, 2013, the Company closed a Loan Agreement (the "Agility Loan Agreement") with Agility Capital II, LLC (“Agility”), providing for a revolving line of credit of up to $500,000, which amount could be increased to $650,000 under certain conditions (the “Maximum Revolving Line”). The Agility Loan Agreement became due on December 14, 2013, commensurate

25

with the Comerica Credit Facility, which was subsequently extended to May 1, 2014, commensurate with the extension of the scheduled maturity date of the Comerica Revolving Line. The outstanding amount under the Agility Loan Agreement of $432,000 was repaid by the Company on July 15, 2014, and the Agility Loan Agreement was terminated.

On December 11, 2013, we entered into an agreement with AON Private Risk Management to finance our 2013 to 2014 insurance premiums with First Insurance Funding Corp. in the amount of $237,000. The interest rate on the note payable was 4.99% and the note was payable in eight equal monthly installment payments beginning in December 2013. The outstanding balance of the note payable was repaid in June 2014.

Off-Balance Sheet Arrangements

As of September 30, 2014 and December 31, 2013, we had no off-balance sheet arrangements or obligations as defined under SEC rules and regulations.

Potential Impact of Inflation

26

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

Recent Accounting Standards

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.

In August 2014, the FASB issued a new accounting standard which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim reporting period. If substantial doubt exists, additional disclosure is required. This new standard will be effective for the Company for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

27

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of September 30, 2014, 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 September 30, 2014.

Change in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 sought 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. On May 15, 2013, the American Arbitration Association appointed an arbitrator. Thereafter, Mr. Silton withdrew his arbitration claim and on May 22, 2013, filed a complaint against the Company in the Santa Clara Superior Court. The allegations and causes of action are the same as the complaint filed with the American Arbitration Association. On July 5, 2013, the Company filed an answer to Mr. Silton's complaint and a cross-complaint against Mr. Silton. On or about August 1, 2013, Mr. Silton filed an answer to the cross-complaint. Between July and December 2013, the parties served and responded to written discovery requests and produced documents. In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a confidential settlement agreement. Pursuant to the settlement agreement, and in exchange for a release of claims, Mr. Silton received a payment from the Company's insurer and 1,000,000 shares of the Company's common stock, which were issued during the three months ended March 31, 2014. A portion of the payment and the shares of common stock was paid to Mr. Silton's legal counsel. After effectuating the terms of the settlement, the case was formally dismissed on March 17, 2014. In connection with the settlement agreement, the Company recorded a charge of $200,000 in the year ended December 31, 2013.

On July 9, 2013, YKnot Holdings LLC (“YKnot”) filed a complaint seeking damages against the Company in the Santa Clara Superior Court alleging breach of contract and related causes of action arising from the eCommerce Processor Agreement (the “Agreement”) entered into by YKnot and the Company in January 2012.  The central allegation in the complaint alleged that the Company failed to timely pay over certain reserves held by the Company against chargebacks and returns relating to YKnot's products in accordance with the Agreement.  On August 12, 2013, the Company filed an answer to the complaint and filed a cross-complaint against YKnot.  In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a settlement agreement pursuant to which the Company and YKnot agreed to a mutual "walk away" settlement and release with no money or other consideration paid to either party.

On September 29, 2014, the Company received a complaint filed against the Company by Symantec Corporation (“Symantec”) in the Superior Court of California, Santa Clara County, alleging breach of contract arising from the Master Services Agreement entered into by the Company and Symantec in June 2006, the statement of work entered into by the parties in June 2008 and the Online Store Agreement for SMB and Midmarket Businesses entered into by the parties in June 2010. In the complaint Symantec seeks payment of unpaid amounts thereunder in the approximate amount of $12.4 million, plus interest and attorneys’ fees and costs.

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, 2013, as filed with the SEC on April 1, 2014, for additional discussion of the litigation and regulatory risks facing our Company.

28

ITEM 1A. RISK FACTORS

Not applicable for smaller reporting companies.

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 September 30, 2014. The shares were repurchased by us in connection with satisfaction of tax withholding obligations on vested restricted stock.

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
July 1, 2014 - July 31, 2014	—	—	N/A	N/A
August 1, 2014 - August 31, 2014	2,965	$0.14	N/A	N/A
September 1, 2014 - September 30, 2014	688	$0.11	N/A	N/A
Total	3,653	$0.13	N/A	N/A

On February 5, 2014, the Company issued 1,000,000 shares of the Company's common stock to the Company's former CEO and his attorney pursuant to a settlement agreement. The issuance was exempt from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended, as the issuance of securities was in exchange for bona fide outstanding claims,

29

where the terms and conditions of such issuance were approved by the Court after a hearing upon the fairness of such terms and conditions.

30

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As previously disclosed, on February 27, 2014, Comerica Bank issued a notice of default as the amounts outstanding under the Revolving Line were past due. The notice of default also stated that Comerica Bank would not take any action to enforce its rights and remedies under the Comerica Credit Facility but reserved the right to do so in the future. As previously disclosed, on March 19, 2014, the Company and Comerica Bank entered into a forbearance agreement pursuant to which Comerica Bank agreed to extend the scheduled maturity date of the Revolving Line until May 1, 2014. In addition, under the terms of the forbearance agreement, among other things, the amounts outstanding under the Term Loan would become due on May 1, 2014, coterminous with the Revolving Line. On May 12, 2014, Comerica Bank issued a notice of default as the amounts outstanding under the Comerica Credit Facility were past due and the Company did not satisfactorily address a material accounts payable owed to a customer. The notice of default also stated that Comerica Bank would not take any action to enforce its rights and remedies under the Comerica Credit Facility but reserved the right to do so in the future. Due to the notice of default, pursuant to the Comerica Credit Facility, effective May 12, 2014, the applicable margin for the Revolving Line and the Term Loan was increased to five percent (5%). The outstanding amount under the Term Loan was repaid by the Company in June 2014. The outstanding amount under the Revolving Line was repaid by the Company on July 15, 2014 and the Comerica Credit Facility was terminated. However, Comerica continues to maintain a cash-secured letter of credit in the face amount of $61,000 issued to our landlord for our leased headquarters in Campbell, California.

The Agility Loan Agreement became due on December 14, 2013, commensurate with the Comerica Credit Facility. As previously disclosed, on February 28, 2014, Agility issued a notice of default due to the notice of default issued by Comerica Bank, as discussed above. Such default was subsequently cured as a result of the extension of the maturity date to May 1, 2014, commensurate with the extension of the scheduled maturity date of the Comerica Revolving Line. On May 12, 2014, Agility issued a notice of default as the amounts outstanding under the Agility Loan Agreement were past due. The notice of default also stated that Agility would not take any action to enforce its rights and remedies under the Agility Loan Agreement, but reserved the right to do so in the future. The outstanding amount under the Agility Loan Agreement was repaid by the Company on July 15, 2014, and the Agility Loan Agreement was terminated.

On November 6, 2014, the Company received a notice of default from investors holding the Company's Revolving Line of Credit Notes.  The notice of default stated that an event of default had occurred as a result of the Company’s failure to repay principal when due on October 2, 2014, and declared all principal and accrued interest outstanding under the Revolving Line of Credit Notes to be immediately due and payable. At November 6, 2014 accrued interest on the Revolving Line of Credit Notes was $2,176.

On November 6, 2014, the Company also received a notice of default from investors (the “Majority Investors”) holding $1.8 million of the outstanding principal amount of the Company’s secured Convertible Notes and $900,000 of the outstanding principal amount of the Company’s Supplemental Notes.  The notice of default stated that an event of default had occurred under the Convertible Notes and Supplemental Notes as a result of the Company’s failure to repay the above-referenced Revolving Line of Credit Notes when due, and declared all principal and accrued interest outstanding under the Convertible Notes and Supplemental Notes held by the Majority Investors to be immediately due and payable. 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

31

ITEM 5. OTHER INFORMATION

On November 17, 2014, the Company received a notification of disposition of collateral from the collateral agent for the holders of the Company’s Convertible Notes and Supplemental Notes notifying the Company that a foreclosure sale of all or substantially all of the Company’s assets would take place on December 4, 2014. If the Majority Investors and collateral agent elect to proceed with the foreclosure sale of the Company’s assets, upon completion of such sale the Company would no longer be able to continue as a going concern and would immediately cease operations. The Majority Investors have represented to the Company that in the event of a foreclosure sale in which the Majority Investors acquire the Company’s assets, their intent would be to continue operating the ViewCentral business in a separate legal entity that continues existing contractual agreements with the Company’s ViewCentral customers.

32

ITEM 6.    EXHIBITS

(a) Exhibits

The following exhibits are incorporated by reference or filed with this report as indicated below:

10.1	Executive Employment Agreement dated September 8, 2014 between Rainmaker Systems, Inc. and Bryant Tolles
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
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.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

33

SIGNATURES

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

		RAINMAKER SYSTEMS, INC.
Dated:	November 19, 2014	/s/ Bryant Tolles, III
		Bryant Tolles, III
		Chief Financial Officer

34

EX-10.1

EXECUTIVE EMPLOYMENT AGREEMENT

DATE:    September 8, 2014 (the “Effective Date”)

PARTIES:

Rainmaker Systems, Inc.

900 E. Hamilton Ave.

Campbell, CA 95086

Attention: Chair of the Compensation Committee
of the Board of Directors

Telephone: (408) 626-3800

(the “Company”)

and

Bryant Tolles

(“Executive”)

RECITALS:

A.The Company desires to employ Executive in the role set forth herein below and Executive desires to be employed by the Company.

AGREEMENT:

In consideration of the foregoing recitals (which are incorporated herein), and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows:

1.Employment; Duties. The Company shall employ Executive, and Executive accepts such employment, under the terms and conditions set forth in this Agreement. Executive’s duties shall be consistent with those of a Chief Financial Officer, as defined from time to time by the Chief Executive Officer of the Company. Executive’s employment with the Company shall commence on September 8, 2014.

2.Full-Time Best Efforts.

a.Time and Effort. Executive shall devote Executive’s full professional time and attention to the performance of Executive’s obligations under this Agreement, and shall at all times faithfully, industriously and to the best of Executive’s ability, experience and talent perform all of Executive’s obligations hereunder. So long as this Agreement is in effect, Executive shall not be employed or engaged by any other person or entity other than the Company unless otherwise authorized in writing by the Board of Directors.

87454-0005/LEGAL27977079.127977079.2

b.Performance Standards; Underperformance. No later than 180 days after the Effective Date, the Chief Executive Officer of the Company shall establish performance expectations and standards, which shall (i) be reasonably acceptable to Executive, (ii) may change from time to time as the needs of the Company change, and (iii) shall serve as a basis to evaluate Executive’s performance from time to time. Within six months following the establishment of performance expectations and standards, and at least annually thereafter, the Chief Executive Officer and the Executive shall meet in order for the Chief Executive Officer to provide a formal evaluation of Executive’s performance. “Underperformance” shall mean Executive’s failure to meet some or all of the then-current performance expectations and standards, and can be the basis for a change in job description, salary and benefits, or termination of Executive’s employment under this Agreement if such Underperformance is not cured within 60 days’ following the date on which notice of the elements of such Underperformance has been given to Executive by the Company.

3.Term. Executive shall be an at-will employee who may resign or be terminated at any time, with or without Cause (as defined below). Nothing in this Agreement shall give Executive the right to continued employment. Executive’s at-will status can be altered only by a written document signed by the Compensation Committee of the Board of Directors (the “Compensation Committee”).

4.Compensation and Benefits. The Company shall pay compensation to Executive consisting of an annual base salary, any applicable discretionary bonuses and other benefits as described in this Agreement. In addition to the financial compensation and benefits set forth below, Executive shall be reimbursed in accordance with subsection (d) below for any approved business-related expenses and shall receive vacation, sick leave and other time off as is customary and usual for executives of Executive’s status in the Company.

a.Base Salary; Unpaid Wages. Executive’s annual base salary as of the Effective Date is Two Hundred and Eight Thousand and 00/100 dollars ($208,000.00). Executive’s base salary shall be reviewed annually in conjunction with Executive’s annual performance review and may be adjusted as appropriate in light of Executive’s performance. Executive’s annual base salary shall be paid in accordance with the standard payroll practices of the Company.

b.Benefits. Executive shall be entitled to participate in such life insurance, disability, medical, dental, stock options, stock grants, retirement plans and other programs as may be made generally available from time to time by the Company for the benefit of executives of Executive’s level or its employees generally (the “Benefits”). Executive understands and acknowledges that some Benefits will not apply to non-U.S. residents/employees.

c.Discretionary Bonuses. Executive and the Company desire to create a performance-based bonus compensation arrangement. As of January 1, 2015 the Company agrees that the Executive shall be eligible for an annual bonus (the “Bonus”) of up to Forty-two Thousand dollars ($42,000.00) as determined in accordance with the formula established annually by the Board of Directors. The Target Bonus Amount will be established annually by the Board of Directors. It is the intent of the Company and Executive to use this performance-based bonus compensation arrangement to tie a portion of Executive’s total compensation to the financial performance of the

2

Tolles Agreement 09-19-14

Company. The Bonus formula and Target Bonus Amount will be established by the Board of Directors each year by January 31, and may be adjusted from time to time during the year.

d.Expense Reimbursement. The Company shall reimburse Executive for all reasonable and necessary out-of-pocket expenses properly incurred in the performance of this Agreement and in accordance with the Company’s applicable policies, but only to the extent that Executive submits to the Company a detailed itemized account of such expenses. Reimbursement for such expenses shall occur promptly after their approval and receipt by the Company of such documentary evidence of such expenses as the Company may reasonably require.

5.Restricted Stock Grant. Subject to the approval of the Compensation Committee, Executive shall be granted 550,000 incentive options of common stock of the Company pursuant to the Company’s 2012 Executive Incentive Plan or as otherwise determined by the Compensation Committee. Such restricted shares shall vest 1/16 quarterly over four years upon Executive’s completion of each 3-month period of service over the 4-year period measured from the grant date. In the event of any Change of Control occurring within 90 days after the grant date of such restricted shares, then (x) fifty percent (50%) of such restricted shares shall, to the extent not already vested, vest on an accelerated basis immediately prior to the effectiveness of such Change of Control, and (y) unless otherwise determined by the Compensation Committee, the remainder of such restricted shares then remaining unvested shall terminate and cease to be outstanding and/or shall be forfeited by Executive upon the consummation of the Change of Control. In the event of any Change of Control occurring more than 90 days after the grant date of such restricted shares, then one hundred percent (100%) of such restricted shares shall, to the extent not already vested, vest on an accelerated basis immediately prior to the effectiveness of such Change of Control.

6.Documents and Materials. Except in the performance of Executive’s duties in the ordinary course of business for which Executive is employed by the Company, Executive shall not make or cause to be made any copies or other reproductions or recordings or any abstracts or summaries of any reports, studies, memoranda, correspondence, manuals, records, plans or other written, printed, computerized or otherwise recorded materials of any kind belonging to or in the possession of the Company or any of its Affiliates (defined below). Nor shall the Executive distribute or disclose such materials to third parties except as necessary to perform his or her duties for the Company and as expressly authorized by the Company. Immediately upon the termination of Executive’s employment with the Company or at any time upon the request of the Company, Executive shall surrender all such material to the Company and execute a document acknowledging that Executive has complied with the provisions of this Agreement.

7.Trade Secrets and Other Confidential Information. Executive shall not at any time, whether during or after the term of this Agreement, use for Executive’s own benefit or purposes or for the benefit or purposes of any other person or entity, or disclose (except in the performance of Executive’s duties in the ordinary course of business for which Executive is employed by the Company) in any manner to any person or entity, any trade secrets, information, data, know-how or knowledge (including that relating to service techniques, purchasing and sales organization and methods, client lists, market development and expansion plans, personnel training and development programs and client and supplier relationships) or any other Discoveries (defined below) belonging

3

Tolles Agreement 09-19-14

to or relating to the affairs of the Company or any of its Affiliates or to the clients of the Company or any of its Affiliates.

8.Customers and Vendors. Executive acknowledges that the lists of the Company’s and its Affiliates’ customers and vendors as they may exist from time to time constitute a valuable and unique asset of the Company, and Executive shall not, during or after the term of Executive’s employment, disclose such lists or any part thereof to any person or entity for any reason whatsoever, nor shall Executive use such customer or vendor lists for Executive’s own benefit or purposes or for the benefit or purposes of any business with whom Executive may become associated.

9.Discoveries. Any and all inventions, discoveries, improvements, designs, methods, systems, developments, know-how, ideas, suggestions, devices, trade secrets and processes (collectively, “Discoveries”), whether patentable or not, which are discovered, disclosed to or otherwise obtained by Executive during Executive’s employment with the Company are confidential, proprietary information and are the sole and absolute property of the Company. Executive shall disclose promptly to the Company all Discoveries and shall assist the Company in making any application in the United States and in foreign jurisdictions for patents of any kind with respect thereto.

10.Works for Hire. All works and writings of a professional nature that are produced by Executive during Executive’s employment with the Company that relate to the Company’s business or that are produced during regular working hours with the Company or with the use of the Company’s resources constitute works made for hire and are the sole and absolute property of the Company. Executive grants the Company the exclusive right to copyright all such works made for hire in the United States and in foreign jurisdictions. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments or other instruments that the Company may deem necessary to protect the Company’s interest therein for the works made for hire. To the extent permitted by Section 2870 of the California Labor Code, a copy of which is attached hereto as Exhibit “A,” Executive hereby assigns all rights to all inventions to the Company and agrees that all inventions which he or she invents, conceives, develops or improves shall be the sole property of the Company.

11.Non-Competition/Non-solicitation.

a.Corporate Relationship. Executive acknowledges (i) that Executive’s employment as a member of the Company’s executive management team creates a relationship of confidence and trust between Executive and the Company with respect to confidential and proprietary information applicable to the business of the Company, its Affiliates and its clients, and (ii) the highly competitive nature of the business of the Company. Accordingly, the Company and Executive agree that the restrictions contained in this Section are reasonable and necessary for the protection of the immediate interests of the Company and that any violation of these restrictions would cause substantial injury to the Company.

b.Competitive Business Defined. The term “Competitive Business” means any business which is similar to or competitive with the business of the Company or its Affiliates with

4

Tolles Agreement 09-19-14

respect to which Executive has had direct responsibility and which is located in the same regions or markets as the business of the Company or its Affiliates.

c.Existing Client Defined. The term “Existing Client” means a client for whom the Company or any of its Affiliates is performing services or marketing products as of the date of the termination of Executive’s employment with the Company or for whom the Company or any of its Affiliates performed services or marketed products within the two-year period immediately preceding the termination of Executive’s employment with the Company.

d.Employment Restrictions. During Executive’s employment with the Company, Executive shall not:

i.own, manage, operate, control, have any financial interest in, or lend Executive’s name to any person or entity engaged in, a Competitive Business or assist others in the ownership, management, operation or control of any Competitive Business;

ii.solicit directly or indirectly on behalf of any Competitive Business, the business of any Existing Client; or

iii.solicit or encourage any employees or independent contractors who are engaged full-time by the Company or any of its Affiliates or temporary employees of the Company or any of its Affiliates to leave the Company or to work for anyone in competition with the Company.

e.Post-Employment Restrictions. Following Executive’s employment with the Company, Executive shall not:

i.solicit, entice or in any way divert any Existing Client, candidate or supplier of the Company to do business with any business or entity in competition with the Company where to do so involves the use or disclosure of Company trade secrets or other confidential information,

ii.for a period of one year after termination, solicit or encourage any employees or independent contractors who are engaged full-time by the Company or any of its Affiliates or temporary employees of the Company or any of its Affiliates to leave the Company or to work for anyone in competition with the Company.

f.Remedies. The parties acknowledge that the damages sustained by the Company or its Affiliates as a result of a breach of the agreements contained herein will subject the Company or its Affiliates to immediate, irreparable harm and damage, the amount of which, although substantial, cannot be reasonably ascertained, and that recovery of damages at law will not be an adequate remedy. Therefore, the Company and its Affiliates, in addition to any other remedies they may have under this Agreement or at law, shall be entitled to injunctive and other equitable relief to prevent or curtail any breach of any provision of this Agreement. If an action is instituted to enforce this Agreement or any of the terms and conditions hereof, including suit for preliminary injunction, the prevailing party shall be entitled to costs and reasonable attorneys’ fees.

5

Tolles Agreement 09-19-14

12.Disability. Unless otherwise required by law, the Company may terminate this Agreement and the employment relationship upon notice to Executive if Executive is physically or mentally incapacitated so as to render Executive unable to perform, with reasonable accommodations, Executive’s duties under this Agreement for a period of 90 out of any 180 days. If a question arises as to the incapacity of Executive, then the Company shall promptly employ one physician who is a member of the American Medical Association and who is reasonably acceptable to Executive to examine Executive and determine if Executive’s physical or mental condition is such as to render Executive unable to perform Executive’s duties under this Agreement. The decision of the physician shall be certified in writing to the Company, shall be sent by the Company to Executive or Executive’s representative and shall be conclusive for purposes of this Agreement. Any compensation payments payable to Executive hereunder shall be reduced by the amount of any disability payments Executive receives as a result of disability policies on which the Company has paid the premiums. The Company shall not have obligations to pay severance or provide other benefits if Executive’s employment ends because of Disability.

13.Death During Employment. This Agreement shall terminate upon Executive’s death, and the Company shall pay to Executive’s surviving spouse, or if none, to the executors and administrators of Executive’s estates, all amounts due to Executive as of the date of death. The Company shall not have obligations to pay severance or provide other benefits.

14.Termination for Other Than Disability or Death.

a.By the Company. The Company may terminate Executive’s employment under this Agreement as follows:

i.Immediately without Cause, or

ii.immediately upon the showing of Cause. For purposes of this Agreement, “Cause” will mean: (a) commission of any felony or crime involving dishonesty; (b) participation in any fraud against the Company; (c) material breach of Executive’s duties to the Company; (d) persistent unsatisfactory performance of job duties after written notice from the Board and a reasonable opportunity to cure (if deemed curable), including Underperformance; (e) intentional damage to any property of the Company; (f) misconduct, or other violation of Company policy that causes harm; (g) breach of any written agreement with the Company, including this Agreement; (h) conduct by Executive which in the good faith and reasonable determination of the Board demonstrates gross unfitness to serve, including any act or acts of dishonesty; and (i) Executive is convicted of, or enters a plea of nolo contendere with respect to, any offense that, if committed in the State of California, would have constituted a felony under the laws of the State of California or the United States.

b.By Executive. Executive may terminate Executive’s employment under this Agreement upon 30 days’ notice to the Company. In the Company’s discretion, the Company may pay Executive one month base salary in lieu of 30 days’ notice. An Executive’s termination shall be deemed for “Good Reason” if such termination (A) is the result of: (i) a change materially adverse to Executive in the nature or scope of Executive’s position, status, responsibilities or duties with the Company as they existed as of the Effective Date (other than for uncured Underperformance),

6

Tolles Agreement 09-19-14

(ii) a material reduction by the Company in Executive’s base salary as in effect on the Effective Date or as the same may be increased from time to time or a material reduction of the Target Bonus Amount in any one year, other than pursuant to an across the board reduction of an equal or greater percentage affecting all of the Company’s executive officers or due to uncured Underperformance; (iii) a change, exceeding a thirty-five mile radius, in Executive’s principal work location established on the Effective Date, except for required travel on the Company’s business to an extent substantially consistent with business travel obligations of the other officers of the Company; (iv) failure of the Company to pay Executive amounts required to be paid under this Agreement if not cured within ten business days after notice of such failure is given to the Company by Executive; or (v) a material breach by the Company of any other material provision of this Agreement that has not been cured by the Company within 30 days after notice of such breach is given to the Company by Executive, or (B) is within 90 days following a Change of Control as defined in Section 14(g) that results in the circumstances described in any of the preceding clauses (A)(i) through (A)(v).

c.Termination Obligations. Upon termination of Executive’s employment with the Company, the Company shall have no further obligation to Executive except as provided under this Agreement; provided, however, that termination of Executive’s employment shall not affect Executive’s right to receive any compensation or applicable bonuses that have accrued but have not been paid through the date of termination. Executive shall return to the Company any and all equipment including but not limited to electronic equipment, keys, credit cards, and the like, owned by the Company and used by Executive.

d.Severance. Provided Executive has been employed by the Company for at least six (6) months following the Effective Date, upon the termination of Executive’s employment with the Company under this Section, the Company shall pay to Executive a severance benefit equal to that portion of Executive’s then current base salary as follows: (i) if termination is by the Company without Cause the severance shall be six months base salary; (ii) if the termination is by the Company for Cause, Executive shall receive no severance benefit of any kind; (iii) if the termination is by Executive for Good Reason, the severance shall be six months base salary; and (iv) if the termination is by Executive without Good Reason, Executive shall receive no severance benefit of any kind. In addition, in the event any severance payment is due pursuant to the foregoing, as partial consideration for payment of such severance amounts, Executive shall execute at the time of such termination and as a condition of receipt of the severance amounts, a Release Agreement in form and substance satisfactory to the Company, including a general release pursuant to California Civil Code section 1542. Executive will not be entitled to any severance benefits if he does not execute a Release Agreement. Payments due to Executive under this Section shall be paid in cash or by check on the same dates on which Executive would otherwise have received payments of Executive’s annual base salary hereunder if employment had continued.

e.Payments upon Termination. Regardless of the reason for the termination of Executive’s employment, the Company shall pay to Executive all salary and expenses due to Executive through the effective date of termination less any amounts owed to the Company by Executive; provided that any applicable severance payments shall be paid in accordance with the standard payroll practices of the Company over the period utilized to determine the applicable severance payment.

7

Tolles Agreement 09-19-14

f.Taxes. The Company shall be entitled to withhold taxes from payments it makes pursuant to this Agreement as it reasonably determines to be required by applicable law. Executive shall be solely responsible for all taxes imposed on Executive by reason of the receipt of any amount of compensation or benefits payable to Executive hereunder. The Company shall not have any obligation to pay, mitigate, or protect Executive from any such tax liabilities; provided, however, that if the Company reasonably determines that Executive’s receipt of payments or benefits pursuant to this Agreement would cause Executive to incur liability for additional tax under Section 409A of the Internal Revenue Code, then the Company shall suspend such payments or benefits until the end of the six-month period following termination of Executive’s employment (the “409A Suspension Period”). As soon as reasonably practical after the end of the 409A Suspension Period, the Company will make a lump sum payment to Executive, in cash, in an amount equal to any payments and benefits that the Company does not make during the 409A Suspension Period. Thereafter, Executive will receive any remaining payments and benefits due pursuant to this Agreement in accordance with the applicable terms of this Agreement (as if there had not been any suspension beforehand).

g.Change of Control Defined. For purposes of this Agreement, “Change of Control” means:

i.When any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; or

ii.Any merger, consolidation or transfer of securities of the Company with or into another corporation, other than a merger, consolidation or transfer of securities in which the holders of more than 50% of the shares of capital stock of the Company outstanding immediately prior to such transaction continue to hold (either by the voting securities remaining outstanding or by their being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company, or such surviving entity, outstanding immediately after such transaction; or

iii.The sale, transfer, or disposal by other means of all or substantially all of the Company’s assets (or consummation of any transaction having similar effect).

15.Rights of Indemnity. Executive shall be entitled to the same rights of indemnification as provided to all other executives, officers and directors of the Company pursuant to applicable law and the Company’s governing documents.

16.Arbitration. This paragraph is governed by the Federal Arbitration Act, 9 U.S.C. § 1 et seq. and evidences a transaction involving commerce. This Agreement applies to any dispute arising out of or related to Executive’s employment with or termination of employment with the Company or one of its affiliates, subsidiaries, successors or parent companies, any present or former employee, officer, director, manager and/or supervisor, benefit plan administrator, sponsor, and/or fiduciary in their capacity as benefit plan administrators and as individuals, and any agent of the

8

Tolles Agreement 09-19-14

Company. Nothing contained in this paragraph shall be construed to prevent or excuse Executive from utilizing the Company’s existing internal procedures for resolution of complaints, and this Agreement is not intended to be a substitute for the utilization of such procedures.

a.Except as it otherwise provides, this paragraph is intended to apply to the resolution of any controversy or claim arising out of or related to this Agreement, including without limitation disputes arising out of or relating to interpretation or application of this Agreement, and disputes that would otherwise be resolved in a court of law (as applicable, a “Dispute”). This paragraph requires all such disputes to be resolved only by neutral arbitrators as described below through final and binding arbitration and not by way of court or jury trial. Certain claims may be brought before an administrative agency but only to the extent applicable law permits access to such an agency notwithstanding the existence of an agreement to arbitrate.

b.Except as otherwise required under applicable law, Executive and the Company expressly intend and agree that class action and representative action procedures shall not be asserted, nor will they apply, in any arbitration pursuant to this Agreement; and each of Executive and the Company shall only submit their own, individual claims in arbitration and will not seek to represent the interests of any other person.

c.The arbitration will proceed pursuant to the then-effective JAMS Policy on Employment Arbitration Minimum Standards of Procedural Fairness and limited discovery shall be permitted, a current version of which may be found at http://www.jamsadr.com/employment-minimum-standards/. Arbitration shall be held at the location chosen by the party that has not initiated the arbitration, which location shall be limited to California (as applicable, the “Arbitration Location”). Upon notification by a party of such party’s intention to arbitrate a Dispute (the “Notice Date”), each party shall select one arbitrator, and the two arbitrators so chosen shall select one arbitrator. Each of the arbitrators chosen shall be impartial and independent of the parties. If a party fails to select an arbitrator within twenty days after delivery of the Notice Date, or if the arbitrators chosen fail to select a third arbitrator within twenty days after being chosen, then any party may in writing request the judge of the United States District Court closest to the Arbitration Location senior in term of service to appoint the arbitrator or arbitrators. The arbitration shall be conducted in accordance with the then-effective JAMS’ Employment Arbitration Rules and Procedures to the extent such rules do not conflict with the terms hereof.

d.A demand for arbitration must be in writing and delivered pursuant to the Notice paragraph in this Agreement. The arbitrators shall resolve all disputes regarding the timelines or propriety of the demand for arbitration.

e.Each party will pay the fees for his, her or its own attorneys, subject to any remedies to which that party may later be entitled under applicable law. However, in all cases where required by law, the Company will pay the arbitrators’ and arbitration fees. If under applicable law the Company is not required to pay all of the arbitrators’ and/or arbitration fees, such fee(s) will be apportioned between the parties by the arbitrators in accordance with said applicable law.

f.The decision of a majority of the arbitrators shall be reduced to writing, state the essential findings of fact and conclusions of law, and shall be binding on the parties. The

9

Tolles Agreement 09-19-14

arbitrators may award any party any remedy to which that party is entitled under applicable law, but such remedies shall be limited to those that would be available to a party in a court of law for the claims presented to and decided by the arbitrators. This award is subject to limited judicial review under 9 U.S.C. § 10. The charges and expenses of the arbitrators shall be allocated as determined by the arbitrators unless required otherwise by applicable law.

g.Notwithstanding any other provision herein, Executive and the Company may obtain any provisional remedy including, without limitation, injunctive or similar relief, from any court of competent jurisdiction as may be necessary to protect their respective rights and interests pending arbitration, particularly if necessary, to avoid irreparable harm. For example, the Company shall, in addition to any other rights or remedy which it may have, be entitled to seek equitable and/or injunctive relief as may be available from any court of competent jurisdiction to restrain Executive from violating any of his/her confidentiality obligations to the Company.

17.Survival. The covenants contained in this Agreement shall survive any termination of Executive’s employment with the Company and any termination of this Agreement. The existence of any claim or cause of action of Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of the covenants contained in this Agreement.

18.Severability. If the scope of any restriction contained in this Agreement is too broad to permit enforcement of such restriction to its fullest extent, then such restriction shall be enforced to the maximum extent permitted by law, and Executive and the Company hereby consent and agree that the scope of such restriction may be judicially modified in any proceeding brought to enforce such restriction. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted from this Agreement and the remainder of this Agreement shall remain in full force and effect.

19.Notice. Any notices required or permitted to be given under this Agreement shall be sufficient if in writing and delivered by personal delivery, air courier, or if mailed by registered or certified first-class mail, return receipt requested, to the residence of Executive as it appears in the corporate records for notice to Executive, or to the principal office of the Company for notice to the Company. All notices delivered in accordance with this Section shall be deemed to have been received and shall be deemed effective if delivered in person or by air courier, upon actual receipt by the intended recipient, or if mailed, upon the date of delivery or refusal to accept delivery as shown by the return receipt therefore.

20.Affiliate; Construction and Interpretation. An “Affiliate” means any person or entity that directly or indirectly controls, is controlled by, or is under common control with another. Control shall mean beneficial ownership of more than fifty percent (50%) of the outstanding voting securities or other ownership interests. Unless the context of this Agreement otherwise requires, (a) words of any gender include each other gender; (b) words using the singular or plural number also include the plural or singular number, respectively; (c) the terms “include,” “includes,” “including” and derivative or similar words shall be construed to be followed by the phrase “without limitation”; (d) the word “or” is not exclusive; and (e) reference to any document (including this Agreement)

10

Tolles Agreement 09-19-14

and to any law, rule, or regulation means such document, law, rule or regulation as amended from time to time.

21.No Waiver. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel to enforce any provision of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, and shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.

22.Amendments. No amendment or modification of this Agreement shall be deemed effective unless made in writing and signed by the parties hereto.

23.Assignment. The rights and obligations of the Company under this Agreement shall, without the prior written consent of Executive, inure to the benefit of and be binding upon the successors and assigns of the Company. This is a personal service contract and may not be assigned by Executive except that rights of Executive to receive severance or benefits under Sections 12, 13, or 14 shall be assignable through a testamentary disposition or by the laws of descent and distribution or the laws of guardianship, in the case of death or disability.

24.Governing Law. This Agreement is made under and shall be governed by and construed in accordance with the internal laws of the State of California. By execution of this Agreement, each party submits to in personam jurisdiction of the courts of the State of California.

25.Headings. The headings of sections in this Agreement are solely for convenience of reference and shall not control the meaning or interpretation of any provision of this Agreement.

26.Counterparts and Facsimile Signatures. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which, taken together, shall constitute one agreement. Any counterpart may be delivered by any party by facsimile or email transmission of signature pages to the other parties at the addresses set forth herein, and delivery shall be effective and complete upon completion of such transmission; manually signed copies of signature pages shall nonetheless be delivered promptly after any such facsimile or email delivery.

27.Entire Agreement. This instrument contains the entire agreement of the parties relating to the subject matter hereof and supersedes all prior and simultaneous agreements, communications and understandings with respect to such subject matter, whether oral or written.

28.Recoupment. Notwithstanding any other provisions in this Agreement to the contrary, any incentive-based compensation, or any other compensation, paid or payable to Executive pursuant to this Agreement or any other agreement or arrangement with the Company which is subject to recovery under any law, government regulation, order or stock exchange listing requirement, will be subject to such adjustments and recoupment (the "Recoupment Rights") as may be required to be made pursuant to law, government regulation, order, stock exchange listing requirement (or any policy of the Company adopted pursuant to any such law, government regulation, order or stock exchange listing requirement). The parties acknowledge it is their intention

11

Tolles Agreement 09-19-14

that the foregoing Recoupment Rights conform in all respects to the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd Frank Act”) and requires recovery of all “incentive-based” compensation, pursuant to the provisions of the Dodd Frank Act and any and all rules and regulations promulgated thereunder from time to time in effect. Accordingly, the terms and provisions of this Agreement shall be deemed automatically amended from time to time to assure compliance with the Dodd Frank Act and such rules and regulation as hereafter may be adopted and in effect. In the event the Company is entitled to, and seeks, recoupment under this Section 28, the Executive shall promptly reimburse the portion of such bonus or other compensation which the Company is entitled to recoup hereunder. In the event the Executive fails to make prompt reimbursement of any such bonus or other compensation which the Company is entitled to recoup and as to which the Company seeks recoupment hereunder, the Executive acknowledges and agrees that, the Company shall have the right to, in addition to its other rights and remedies, (i) deduct the amount to be reimbursed hereunder from the compensation or other payments due to the Executive from the Company or (ii) to take any other appropriate action to recoup such payments.

This Agreement is executed and delivered on the day and year first above written.

Executive	Rainmaker Systems, Inc.
Bryant Tolles	Finnegan Faldi, Chairman of the Compensation Committee of the Board of Directors
Date	Date

12

Tolles Agreement 09-19-14

Exhibit “A”

California Labor Code 2870

(a)    Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:

(1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably     anticipated research or development of the employer; or

(1)Result from any work performed by the employee for the employer.

(b)To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.

13

Tolles Agreement 09-19-14

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Terence Lydon, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Rainmaker Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have;

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's Fourth Fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.

Date:	November 19, 2014	/s/ Terence Lydon
		Terence Lydon
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Bryant Tolles, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Rainmaker Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have;

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's Fourth Fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.

Date:	November 19, 2014	/s/ Bryant Tolles
		Bryant Tolles
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of The Sarbanes-Oxley Act of 2002

I, Terence Lydon, President and Chief Executive Officer of Rainmaker Systems, Inc. (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) the Quarterly Report of the Company on Form 10-Q for the quarterly period ended September 30, 2014, as filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Terence Lydon

Terence Lydon

President and Chief Executive Officer

(Principal Executive Officer)

November 19, 2014

EX-32.2

Exhibit 32.2

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant To

Section 906 of The Sarbanes-Oxley Act of 2002

I, Bryant Tolles, Chief Financial Officer of Rainmaker Systems, Inc. (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) the Quarterly Report of the Company on Form 10-Q for the quarterly period ended September 30, 2014, as filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Bryant Tolles

Bryant Tolles

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

November 19, 2014

XML

FAIR VALUE MEASUREMENTS - Fair Value Hierarchy on Recurring Basis (Details) (Measured at fair value on a recurring basis, USD $) In Thousands, unless otherwise specified	Sep. 30, 2014		Dec. 31, 2013
Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Common stock warrant liability	$ 0	[1]	$ 0	[1]
Derivative liability conversion option	0
Level 1 | Money market funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Money market funds			1,641	[2]
Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Common stock warrant liability	0	[1]	0	[1]
Derivative liability conversion option	0
Level 2 | Money market funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Money market funds			0	[2]
Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Common stock warrant liability	1,446	[1]	93	[1]
Derivative liability conversion option	952
Level 3 | Money market funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Money market funds			$ 0	[2]

[1] The fair value of our common stock warrant liability 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.

[2] Money market funds are valued using active quoted market rates.

XML

STOCKHOLDERS' EQUITY - Stock Compensation Narrative (Details) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended	3 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2014 Members of the Board	Sep. 30, 2014 Members of the Board Restricted stock board_director_members	Dec. 31, 2013 2003 Plan	Sep. 30, 2014 2003 Plan Common stock	Sep. 30, 2014 2003 Plan Common stock Maximum
Share-based Compensation Arrangements:
Stock-based compensation relating to unvested awards	$ 834
Current unvested and outstanding grants expected to be expensed in current year	$ 30
Percentage limit to annual increase in total shares authorized						4.00%
Limit to annual increase in total shares authroized (in shares)					2,000,000
Shares outstanding				41,495,000
Authorized (in shares)	1,659,781			1,660,000
Restricted stock awards granted in period (in shares)		100,000
Number of board of director members			2

XML

NOTES PAYABLE - September 2014 Revolving Line of Credit Note (Details) (Revolving line of credit, USD $)	0 Months Ended
	Sep. 02, 2014	Sep. 02, 2014 investor	Nov. 06, 2014 Subsequent event
Line of Credit Facility [Line Items]
Maximum borrowing capacity		$ 200,000
Number of investors		2
Fixed interest rate	5.00%
Debt default, interest rate		7.00%
Period to repay advance	30 days
Amount borrowed	200,000
Accrued interest			$ 2,176

XML

CUSTOMER CONCENTRATION (Details) (Customer concentration risk)	3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended				12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended
	Sep. 30, 2014 Sales revenue, services, net Microsoft Corporation	Sep. 30, 2013 Sales revenue, services, net Microsoft Corporation	Sep. 30, 2014 Sales revenue, services, net Microsoft Corporation	Sep. 30, 2013 Sales revenue, services, net Microsoft Corporation	Sep. 30, 2014 Sales revenue, services, net Symantec Corporation	Sep. 30, 2013 Sales revenue, services, net Symantec Corporation	Sep. 30, 2014 Sales revenue, services, net Symantec Corporation	Sep. 30, 2013 Sales revenue, services, net Symantec Corporation	Sep. 30, 2014 Sales revenue, services, net Verizon Communications	Sep. 30, 2013 Sales revenue, services, net Verizon Communications	Sep. 30, 2014 Sales revenue, services, net Verizon Communications	Sep. 30, 2013 Sales revenue, services, net Verizon Communications	Sep. 30, 2014 Sales revenue, services, net Hewlett-Packard Company	Sep. 30, 2013 Sales revenue, services, net Hewlett-Packard Company	Sep. 30, 2014 Sales revenue, services, net Hewlett-Packard Company	Sep. 30, 2013 Sales revenue, services, net Hewlett-Packard Company	Sep. 30, 2014 Sales revenue, services, net N3	Sep. 30, 2014 Accounts receivable Microsoft Corporation	Dec. 31, 2013 Accounts receivable Microsoft Corporation	Sep. 30, 2014 Accounts receivable Symantec Corporation	Dec. 31, 2013 Accounts receivable Symantec Corporation	Sep. 30, 2014 Accounts receivable Hewlett-Packard Company	Dec. 31, 2013 Accounts receivable Hewlett-Packard Company	Sep. 30, 2014 Accounts receivable Splunk Inc.	Dec. 31, 2013 Accounts receivable Splunk Inc.
Concentration Risk [Line Items]
Concentration risk percentage	38.00%	42.00%	52.00%	41.00%	0.00%	26.00%	0.00%	25.00%	14.00%	0.00%	11.00%	0.00%	12.00%	12.00%	0.00%	10.00%	20.00%	17.00%	25.00%	36.00%	40.00%	11.00%	11.00%	15.00%	0.00%

XML

STOCKHOLDERS' EQUITY - Allocation of Share-based Compensation Expense (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	$ 44	$ 224	$ 291	$ 1,352
Cost of services
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	15	24	55	57
Sales and marketing
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	17	15	54	136
Technology and development
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	2	59	35	157
General and administrative
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	$ 10	$ 126	$ 147	$ 1,002

XML

COMMITMENTS AND CONTINGENCIES (Details) (USD $) In Millions, except Share data, unless otherwise specified		0 Months Ended	12 Months Ended
	Feb. 08, 2013 Breach of employment contract Threatened litigation	Jan. 28, 2014 Breach of employment contract Settled litigation	Dec. 31, 2013 Breach of employment contract Settled litigation	Sep. 29, 2014 Breach of contract [Member] Pending litigation
Litigation:
Stock issued during period (in shares)		1,000,000
Litigation charge			$ 0.2
Estimate of possible loss	$ 1.0			$ 12.4

XML

RESTRUCTURING (Details) (USD $)	3 Months Ended		9 Months Ended		0 Months Ended		0 Months Ended	1 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Jul. 15, 2014 Employee severance President and Chief Executive Officer	Sep. 30, 2014 Employee severance President and Chief Executive Officer	Jul. 15, 2014 Employee severance Executive Vice President and Chief Financial Officer monthly_payment	Sep. 30, 2014 Office closing
Restructuring Cost and Reserve [Line Items]
Restructuring expense	$ 365,000	$ 0	$ 365,000	$ 0	$ 221,250		$ 125,000	$ 19,138
Period for base salary calculation					9 months		6 months
Number of monthly payments							6
Amount outstanding						$ 175,866

XML

BALANCE SHEET COMPONENTS

9 Months Ended

Sep. 30, 2014

Balance Sheet Related Disclosures [Abstract]

BALANCE SHEET COMPONENTS

BALANCE SHEET COMPONENTS

Prepaids and Other Current Assets

Prepaids and other current assets consist of the following (in thousands):

	September 30, 2014		December 31, 2013
Prepaids and other current assets:
Prepaid expenses	$	344	$	623
Deferred financing costs	295		—
Deferred professional service costs	275		252
VAT tax receivable	281		440
Other current assets	92		303
Prepaids and other current assets	$	1,287	$	1,618

Property and Equipment

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

	Estimated Useful Life	September 30, 2014			December 31, 2013
Property and equipment:
Computer equipment	3 years	$	3,945		$	3,993
Capitalized software and development	2-5 years	13,899			13,208
Furniture and fixtures	5 years	308			309
Leasehold improvements	Lease term	110			123
		18,262			17,633
Accumulated depreciation and amortization		(17,375		)	(17,099		)
Construction in process		4			157
Property and equipment, net		$	891		$	691

Other Non-current Assets

Other non-current assets consist of the following (in thousands):

	September 30, 2014		December 31, 2013
Other non-current assets:
Credit card reserve deposits and other	$	95	$	395
Deferred professional service costs	824		445
Other non-current assets	$	919	$	840

Accounts Payable

Approximately $12.9 million in accounts payable as of September 30, 2014 represents collections by the Company on behalf of software sales to third party customers associated with a customer's value added reseller arrangement.  This balance is owed to the customer and the Company is currently negotiating a settlement arrangement on the balance due. As of September 30, 2014, included in accounts receivable is $447,000 associated with this customer.

Other Accrued Liabilities

Other accrued liabilities consist of the following (in thousands):

	September 30, 2014		December 31, 2013
Other accrued liabilities:
Payable to customers *	$	1,344	$	1,460
Accrued professional fees	89		663
VAT taxes payable	270		248
Settlement liability	—		200
Reseller rebates	—		190
Sales reserve	—		117
Other liabilities	560		787
Other accrued liabilities	$	2,263	$	3,665

* - Amounts represent collections on customer receivables associated with "product sales" in excess of amounts owed to state jurisdictions. The Company is in the process of evaluating remediation plans for the balances due.

Deferred Revenue and Deferred Professional Services Costs:

In April 2013, the Company entered into an arrangement to provide subscription services and perform material modifications to its LMS platform for a significant customer. The Company received acceptance of the material modifications on July 18, 2014 and began to amortize the deferred costs and recognize revenue over the remaining subscription period of 50 months.

As of September 30, 2014, the Company has recorded deferred revenue of $4.1 million of which $2.0 million is included in current deferred revenue and $2.1 million is included in noncurrent deferred revenue. The Company has also deferred related professional service costs incurred associated with the customization of the LMS platform of $1.1 million. Deferred professional service costs of $275,000 and $824,000 is included in prepaid and other current assets and other noncurrent assets, respectively, at September 30, 2014.

XML

STOCKHOLDERS' EQUITY - Valuation Assumptions (Details)	9 Months Ended	12 Months Ended	9 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2014 Options	Sep. 30, 2013 Options	Sep. 30, 2014 Restricted stock	Sep. 30, 2013 Restricted stock
Share-based Compensation Arrangements:
Expected life in years	6 years 10 months 6 days	8 years 8 months 12 days	4 years 4 months 20 days	3 years 11 months 10 days
Volatility			93.12%	75.16%
Risk-free interest rate			1.57%	0.50%
Dividend rate			0.00%	0.00%
Forfeiture rate			21.89%	21.66%	0.00%	15.90%

XML

BALANCE SHEET COMPONENTS - Accounts Payable and Other Accrued Liabilities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014		Dec. 31, 2013
Balance Sheet Related Disclosures [Line Items]
Accounts payable	$ 15,581		$ 13,042
Accounts receivable	1,262		3,554
Payable to customers	1,344	[1]	1,460	[1]
Accrued professional fees	89		663
VAT taxes payable	270		248
Settlement liability	0		200
Reseller rebates	0		190
Sales reserve	0		117
Other liabilities	560		787
Other accrued liabilities	2,263		3,665
Collections of software sales due to customer
Balance Sheet Related Disclosures [Line Items]
Accounts payable	12,900
Accounts receivable	$ 447

[1] Amounts represent collections on customer receivables associated with "product sales" in excess of amounts owed to state jurisdictions. The Company is in the process of evaluating remediation plans for the balances due.

XML

BALANCE SHEET COMPONENTS - Other Non-current Assets (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Balance Sheet Related Disclosures [Abstract]
Credit card reserve deposits and other	$ 95	$ 395
Deferred professional service costs	824	445
Other non-current assets	$ 919	$ 840

XML

STOCKHOLDERS' EQUITY - Options Activity (Details) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Available for Grant
Balance at beginning of period (in shares)	1,533,516
Authorized (in shares)	1,659,781
Options granted (in shares)	(60,000)
Restricted stock awards granted (in shares)	(100,000)
Options canceled (in shares)	1,408,690
Restricted stock awards forfeited (in shares)	315,000
Balance at end of period (in shares)	4,758,000	1,533,516
Number of Options
Balance at beginning of period (in shares)	2,698,310
Options granted (in shares)	60,000
Options exercised (in shares)	0
Options canceled (in shares)	(1,408,690)
Balance at end of period (in shares)	1,349,000	2,698,310
Exercisable at end of period (in shares)	706,311
Weighted Average Exercise Price
Balance at beginning of period (USD per share)	$ 0.67
Options granted (USD per share)	$ 0.22
Options exercised (USD per share)
Options canceled (USD per share)	$ 0.60
Balance at end of perido (USD per share)	$ 0.73	$ 0.67
Exercisable at end of period (USD per share)	$ 0.99
Weighted Average Remaining Contractual Term
Balance at beginning of period	6 years 10 months 6 days	8 years 8 months 12 days
Balance at end of period	6 years 10 months 6 days	8 years 8 months 12 days
Exercisable at end of period	5 years 1 month 20 days

XML

BALANCE SHEET COMPONENTS - Deferred Revenue and Deferred Professional Service Costs (Details) (USD $)			9 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2014 Subscription Services of LMSP	Sep. 30, 2014 Subscription Services of LMSP Prepaid and other current assets	Sep. 30, 2014 Subscription Services of LMSP Other noncurrent assets
Balance Sheet Related Disclosures [Line Items]
Remaining subscription period			50 months
Deferred revenue			$ 4,100,000
Current deferred revenue	2,027,000	1,965,000	2,000,000
Noncurrent deferred revenue	2,135,000	1,629,000	2,100,000
Deferred professional service costs	$ 275,000	$ 252,000	$ 1,100,000	$ 275,000	$ 824,000

XML

NOTES PAYABLE - Long-term Debt (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Jul. 15, 2014	Dec. 31, 2013
Debt Instrument [Line Items]
Total convertible and supplemental notes	$ 231		$ 0
Discount	(4,457)		0
Total notes payable	200		3,641
Revolving credit facility
Debt Instrument [Line Items]
Total notes payable	200		0
Secured promissory notes | Revolving credit facility
Debt Instrument [Line Items]
Total notes payable	200
Secured promissory notes | Convertible notes
Debt Instrument [Line Items]
Total convertible and supplemental notes		3,143	0
Secured promissory notes | Supplemental notes
Debt Instrument [Line Items]
Total convertible and supplemental notes	1,545	1,545	0
Secured debt
Debt Instrument [Line Items]
Discount	(53)
Secured debt | Comerica Bank | Comerica Bank credit facility | Term loan
Debt Instrument [Line Items]
Total notes payable	0		1,800
Secured debt | Comerica Bank | Comerica Bank credit facility | Revolving credit facility
Debt Instrument [Line Items]
Total notes payable	0		1,230
Line of credit | Agility Capital II, LLC
Debt Instrument [Line Items]
Total notes payable	0		404
Notes payable, other payables | AON Private Risk Management | Notes payable - insurance
Debt Instrument [Line Items]
Total notes payable	$ 0		$ 207

XML

CUSTOMER CONCENTRATION

9 Months Ended

Sep. 30, 2014

Risks and Uncertainties [Abstract]

CUSTOMER CONCENTRATION

CUSTOMER CONCENTRATION

We have generated a significant portion of our revenue from sales to limited number of clients. The following table presents the concentration of revenue from significant customers for the three and nine months ended September 30, 2014 and 2013.

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2014	2013	2014	2013
Microsoft Corporation	38%	42%	52%	41%
Symantec Corporation	—%	26%	—%	25%
Verizon Communications	14%	—%	11%	—%
Hewlett-Packard Company	12%	12%	—%	10%

The following table presents the concentration of accounts receivable as of September 30, 2014 and December 31, 2013.

	September 30, 2014	December 31, 2013
Microsoft Corporation	17%	25%
Symantec Corporation	36%	40%
Hewlett-Packard Company	11%	11%
Splunk Inc.	15%	—%

We have outsourced services agreements with our significant clients that expire at various dates ranging through March 2018. Our agreements with Symantec expired on March 31, 2014. Certain agreements with Microsoft expired on June 30, 2014 and were not renewed. On October 15, 2014, the Company and N3 North America, LLC signed and closed an Asset Purchase Agreement pursuant to which the Company sold to N3 our remaining Microsoft contract. This contract represented 20% of net revenue for the nine months ended September 30, 2014.

XML

NOTES PAYABLE - 2014 Convertible Notes Financing (Details) (USD $)	0 Months Ended										0 Months Ended
	Sep. 09, 2014 unit	Aug. 12, 2014 unit	Jul. 15, 2014 unit	Jul. 15, 2014	Sep. 30, 2014	Dec. 31, 2013	Jul. 15, 2014 Maximum	Jul. 15, 2014 Secured promissory notes Convertible notes	Dec. 31, 2013 Secured promissory notes Convertible notes	Nov. 06, 2014 Secured promissory notes Convertible notes Subsequent event	Jul. 15, 2014 Secured promissory notes Supplemental notes	Sep. 30, 2014 Secured promissory notes Supplemental notes	Jul. 15, 2014 Secured promissory notes Supplemental notes	Dec. 31, 2013 Secured promissory notes Supplemental notes	Nov. 06, 2014 Secured promissory notes Supplemental notes Subsequent event
Debt Conversion [Line Items]
Face amount per unit (USD per unit)								1.00					0.50
Number of shares that can be purchased							4
Number of units sold	90,000	450,000	2,550,000
Proceeds from sale of units	$ 90,000	$ 450,000	$ 2,550,000
Proceeds from sale of units, net	83,700	415,000	2,275,000
Total convertible and supplemental notes					231,000	0		3,143,000	0			1,545,000	1,545,000	0
Stated interest rate								8.00%					8.00%
Debt default, interest rate								15.00%					15.00%
Conversion price					$ 0.25			$ 0.25
Cancellation period											2 years
Number of shares underlying the warrants				12,360,000
Initial term of the warrants				10 years
Exercise price				0.08
Outstanding amount										$ 1,800,000					$ 900,000

XML

FAIR VALUE MEASUREMENTS - Assumptions (Details) (USD $)	9 Months Ended		9 Months Ended							9 Months Ended
	Sep. 30, 2014	Jul. 15, 2014	Sep. 30, 2014 At Issuance	Sep. 30, 2014 2011 Warrants	Sep. 30, 2013 2011 Warrants	Sep. 30, 2014 2011 Warrants Minimum	Sep. 30, 2013 2011 Warrants Minimum	Sep. 30, 2014 2011 Warrants Maximum	Sep. 30, 2013 2011 Warrants Maximum	Sep. 30, 2014 2013 Warrants	Sep. 30, 2014 2014 Warrants	Sep. 30, 2014 2014 Warrants At Issuance	Sep. 30, 2014 2014 Warrants At Issuance Minimum	Sep. 30, 2014 2014 Warrants At Issuance Maximum
Fair value measurements:
Number of shares underlying the Warrants		12,360,000		1,578,000	1,578,000					217,000	12,360,000	12,360,000
Exercise price		0.08				1.05	1.05	1.40	1.40	0.45	0.08	0.08
Number of shares underlying the conversion option feature	12,570,000		12,360,000
Conversion price	$ 0.25		$ 0.25
Remaining contractual life in years	4 years 9 months		5 years 0 months	1 year 9 months	2 years 9 months					6 years 1 month	9 years 9 months	10 years 0 months
Volatility	100.57%		100.57%	144.30%	84.60%					108.25%	107.35%	107.35%
Risk-free interest rate	1.78%		1.70%	0.58%	0.63%					2.00%	2.64%	2.57%
Expected dividend yield	0.00%		0.00%	0.00%	0.00%					0.00%	0.00%	0.00%
Closing price of common stock	$ 0.12			$ 0.12						$ 0.12	$ 0.12		$ 0.10	$ 0.19

XML

CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 170	$ 3,633
Restricted cash	61	3
Accounts receivable, net of allowance of $10 and $11, respectively	1,262	3,554
Prepaid expenses and other current assets	1,287	1,618
Total current assets	2,780	8,808
Property and equipment, net	891	691
Other non-current assets	919	840
Total assets	4,590	10,339
Current liabilities:
Accounts payable	15,581	13,042
Accrued compensation and benefits	769	1,001
Other accrued liabilities	2,263	3,665
Deferred revenue	2,027	1,965
Convertible and supplemental notes payable, net of discount of $4,457 and $0	231	0
Derivative liability conversion option	952	0
Notes payable	200	3,641
Total current liabilities	22,023	23,314
Deferred tax liability	0	26
Deferred revenue, less current portion	2,135	1,629
Common stock warrant liability	1,446	93
Other long-term liabilities	90	172
Total liabilities	25,694	25,234
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.001 par value; 5,000 shares authorized, none issued and outstanding	0	0
Common stock, $0.001 par value; 50,000 shares authorized, 43,582 shares issued and 42,259 shares outstanding at September 30, 2014 and 43,795 shares issued and 41,495 shares outstanding at December 31, 2013	42	41
Additional paid-in capital	136,685	137,445
Accumulated deficit	(155,837)	(149,169)
Accumulated other comprehensive loss	(363)	(336)
Treasury stock, at cost; 1,323 shares at September 30, 2014 and 2,300 shares at December 31, 2013	(1,631)	(2,876)
Total stockholders’ deficit	(21,104)	(14,895)
Total liabilities and stockholders’ deficit	$ 4,590	$ 10,339

XML

STOCKHOLDERS' EQUITY - Restricted Stock Activity (Details) (Restricted stock, USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended
	Sep. 30, 2014
Restricted stock
Number of Shares
Balance at beginning of period (in shares)	581,875
Granted (in shares)	100,000
Vested (in shares)	(311,250)
Forfeited (in shares)	(315,000)
Balance at end of period (in shares)	56,000
Weighted Average Grant Price
Balance at beginning of period (USD per share)	$ 0.69
Granted (USD per share)	$ 0.25
Vested (USD per share)	$ 0.51
Forfeited (USD per share)	$ 0.69
Balance at end of period (USD per share)	$ 0.89
Fair value of nonvested awards	$ 50

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Rainmaker Systems, Inc. and its subsidiaries ("Rainmaker", "we", "our", or "the Company") is focused on the development and marketing of a platform for the management of outside training for profit. In addition, we generate sales from lead generation services, and SMB sales and contract renewals.

Our ViewCentral SaaS platform provides an end-to-end solution for the management and delivery of training and certification programs, or training-as-a-business, for corporations. The ViewCentral Learning Management System ("LMS") platform is a SaaS, cloud based, on-demand, training management system, available 24x7 with no software installation. This self-service platform is highly configurable, so our customers utilize only the modules they need, branded as they choose. Designed specifically to automate time-consuming manual administration and to maximize training participation, the ViewCentral suite contains tools for before, during and after course delivery.

We are headquartered in Campbell, California, in the heart of the Silicon Valley. Our global clients consist primarily of large enterprises operating in a range of industries. Our strategy for long-term success of the business is to maintain and improve our position as a leading LMS provider. This will involve ongoing investment in our LMS platform to meet market demands, as well as building the sales and marketing infrastructure to support growth.

Principles of Consolidation

The accompanying condensed 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 and nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014, 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, 2013 ("2013 Form 10-K"), as filed with the SEC on April 1, 2014. Balance sheet information as of December 31, 2013 has been derived from the audited financial statements for the year then ended.

Reclassifications

Certain reclassifications have been made to the prior year's condensed consolidated statements of comprehensive loss to conform to the current year presentation.

Liquidity and Going Concern

As reflected in the accompanying consolidated financial statements, we had a net loss from continuing operations of $6.7 million for the nine months ended September 30, 2014. During the nine months ended September 30, 2014, we used $2.4 million in cash in operating activities.

At September 30, 2014, the Company had a net working capital deficit of $19.2 million. Our principal source of liquidity as of September 30, 2014 consisted of $170,100 of cash and cash equivalents and $1.3 million of net accounts receivable. Notes payable under the Convertible and Supplemental Notes were $3.1 million and $1.5 million, respectively, as of September 30, 2014. Another $200,000 was payable under the Revolving Line of Credit Notes. We have received notices of default and acceleration from investors holding our Revolving Line of Credit Notes, Convertible Notes and Supplemental Notes. See Note 5 for further discussion of our debt agreements and notices of default thereunder.

Our accounts payable balance increased from $13.0 million as of December 31, 2013 to $15.6 million as of September 30, 2014. $12.9 million of the September 30, 2014 accounts payable balance is related to a merchant account of a customer.

In order to meet our operating requirements, we will need to raise additional capital from outside third parties or from the sale of assets and restructure our obligations. As part of this process, in October 2014 we sold a customer contract and subcontracts to N3 North America, LLC. Additionally, we are pursuing a plan to achieve profitable operations through a combination of increased sales and decreased expenses. There can be no assurance that we will be successful in obtaining third party capital, selling assets or restructuring our obligations. We do not have adequate cash or financial resources to operate for the next twelve months without raising significant additional capital, which raises substantial doubt about our ability to continue as a going concern.

In addition to the liquidity issues noted above, some key vendors of the Company have either formally or informally,  via phone, email, mail, or a combination of one or more of these methods, given the Company a notice of material breach for non-payment, and have informed us of their rights under the various service agreements to which we entered.  Their rights include the suspension or cancellation of service and a demand for immediate payment, among other remedies.  The Company is in communications with these vendors and in some cases has worked out extended payment terms.  There is no guarantee that the Company will be able to reach agreements with all vendors or that it will in all future circumstances be able to fulfill the terms of all extended payment terms, which could have a significant negative impact on our operations and financial position.  Our revenue generation is dependent on the ability of the Company to continue to (1) avoid the cancellation of key vendor services (2) raise money through the sale of assets or the addition of new debt or equity to pay down and pay off key vendors and (3) meet the terms of existing and future payment plans.  The failure to accomplish these goals could seriously impact our operations and financial position.

On November 6, 2014, the Company received a notice of default from investors holding the Revolving Notes.  The notice of default stated that an event of default had occurred as a result of the Company’s failure to repay principal when due on October 2, 2014, and declared all principal and accrued interest outstanding under the Revolving Notes to be immediately due and payable. At November 6, 2014 accrued interest on the Revolving Notes was $2,176.

On November 6, 2014, the Company also received a notice of default from investors (the “Majority Investors”) holding $1.8 million of the outstanding principal amount of the Company’s Convertible Notes and $900,000 of the outstanding principal amount of the Company’s Supplemental Notes.  The notice of default stated that an event of default had occurred under the Convertible Notes and Supplemental Notes as a result of the Company’s failure to repay the above-referenced Revolving Notes when due, and declared all principal and accrued interest outstanding under the Convertible Notes and Supplemental Notes held by the Majority Investors to be immediately due and payable.

On November 17, 2014, the Company received a notification of disposition of collateral from the collateral agent for the holders of the Convertible Notes and Supplemental Notes notifying the Company that a foreclosure sale of all or substantially all of the Company’s assets would take place on December 4, 2014. If the Majority Investors and collateral agent elect to proceed with the foreclosure sale of the Company’s assets, upon completion of such sale the Company would no longer be able to continue as a going concern and would immediately cease operations. The Majority Investors have represented to the Company that in the event of a foreclosure sale in which the Majority Investors acquire the Company’s assets, their intent would be to continue operating the ViewCentral business in a separate legal entity that continues existing contractual agreements with the Company’s ViewCentral customers.

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, commitments and contingencies, fair value estimates for the expense of employee stock options, embedded derivative features and warrants and the assessment of recoverability and impairment long-lived assets.

Significant Accounting Policies - Convertible Instruments

The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 Derivatives and Hedging Activities. Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable GAAP.

Recent Accounting Standards

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.

In August 2014, the FASB issued a new accounting standard which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim reporting period. If substantial doubt exists, additional disclosure is required. This new standard will be effective for the Company for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the condensed consolidated financial statements.

XML

NOTES PAYABLE - Agility Capital Credit Facility (Details) (Agility, USD $)	Sep. 30, 2014	Oct. 30, 2013
Agility
Debt Instrument [Line Items]
Current borrowing capacity		$ 500,000
Maximum borrowing capacity		650,000
Notes payable	$ 432,000

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013	Dec. 31, 2012	Sep. 30, 2014 Revolving line of credit	Dec. 31, 2013 Revolving line of credit	Nov. 06, 2014 Revolving line of credit Subsequent event	Sep. 30, 2014 Secured promissory notes Revolving line of credit	Jul. 15, 2014 Secured promissory notes Convertible notes	Dec. 31, 2013 Secured promissory notes Convertible notes	Nov. 06, 2014 Secured promissory notes Convertible notes Subsequent event	Sep. 30, 2014 Secured promissory notes Supplemental notes	Jul. 15, 2014 Secured promissory notes Supplemental notes	Dec. 31, 2013 Secured promissory notes Supplemental notes	Nov. 06, 2014 Secured promissory notes Supplemental notes Subsequent event
Debt Instrument [Line Items]
Notes payable	$ 200,000		$ 200,000		$ 3,641,000		$ 200,000	$ 0		$ 200,000
Total convertible and supplemental notes	231,000		231,000		0						3,143,000	0		1,545,000	1,545,000	0
Accrued interest									2,176
Outstanding amount													1,800,000				900,000
Net loss from continuing operations	(1,807,000)	(3,587,000)	(6,669,000)	(9,999,000)
Net cash used in operating activities from continuing operations			(2,374,000)	(2,938,000)
Working capital deficit	(19,200,000)		(19,200,000)
Cash and cash equivalents	170,000	4,166,000	170,000	4,166,000	3,633,000	4,494,000
Accounts receivable	1,262,000		1,262,000		3,554,000
Accounts payable	15,581,000		15,581,000		13,042,000
Accounts payable related to merchant account of customer	$ 12,900,000		$ 12,900,000

XML

NOTES PAYABLE - Notes Payable Insurance (Details) (AON Private Risk Management, Notes payable, other payables, Notes payable - insurance, USD $) In Thousands, unless otherwise specified	Dec. 11, 2013 installments
AON Private Risk Management | Notes payable, other payables | Notes payable - insurance
Debt Instrument [Line Items]
Notes payable	$ 237
Stated interest rate	4.99%
Number of monthly installments of principal	8

XML

NET LOSS PER SHARE - Antidilutive Securities (Details) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total anti-dilutive securities	4,237	1,650	2,315	2,094
Stock options and warrants not in the money	4,100	2,879	4,100	2,879
Unvested restricted stock awards
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total anti-dilutive securities	132	1,571	377	1,963
Stock options
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total anti-dilutive securities	0	79	1	131
Stock warrants
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total anti-dilutive securities	4,105	0	1,937	0

XML

NET LOSS PER SHARE

9 Months Ended

Sep. 30, 2014

Earnings Per Share [Abstract]

NET LOSS PER SHARE

NET LOSS PER SHARE

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

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Net loss from continuing operations	$	(1,807	)	$	(3,587	)	$	(6,669	)	$	(9,999	)
Net income (loss) from discontinued operations	—			(34		)	—			53
Net loss	$	(1,807	)	$	(3,621	)	(6,669		)	(9,946		)
Weighted-average shares of common stock outstanding – basic and diluted	41,891			40,684			41,980			35,566
Basic and diluted net income (loss) per share:
Continuing operations	$	(0.04	)	$	(0.09	)	$	(0.16	)	$	(0.28	)
Discontinued operations	—			—			—			—
Net loss	$	(0.04	)	$	(0.09	)	$	(0.16	)	$	(0.28	)

The following table presents the unvested restricted stock awards and "in the money" stock options and stock warrants that were excluded from the calculation of diluted net loss per share for the three and nine months ended September 30, 2014 and 2013 as these securities were anti-dilutive (in thousands).

	Nine Months Ended
	September 30,
	2014	2013
Unvested restricted stock awards	377	1,963
Stock options	1	131
Stock warrants	1,937	—
Total anti-dilutive securities	2,315	2,094

Stock options and warrants that were not "in the money" at September 30, 2014 and 2013 were 4,100,000 and 2,879,000, respectively.

XML

CONSOLIDATED BALANCE SHEET (Unaudited) (Parentheticals) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Statement of Financial Position [Abstract]
Accounts receivable, allowance	$ 10	$ 11
Convertible notes payable, discount	$ 4,457	$ 0
Preferred stock, par value (USD per share)	$ 0.001	$ 0.001
Preferred stock, authorized (in shares)	5,000,000	5,000,000
Preferred stock, issued (in shares)	0	0
Preferred stock, outstanding (in shares)	0	0
Common stock, par value (USD per share)	$ 0.001	$ 0.001
Common stock, authorized (in shares)	50,000,000	50,000,000
Common stock, issued (in shares)	43,582,000	43,795,000
Common stock, oustanding (in shares)	42,259,000	41,495,000
Treasury stock (in shares)	1,323,000	2,300,000

XML

NET LOSS PER SHARE (Tables)

9 Months Ended

Sep. 30, 2014

Earnings Per Share [Abstract]

Calculation of basic and diluted net loss per common share

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Net loss from continuing operations	$	(1,807	)	$	(3,587	)	$	(6,669	)	$	(9,999	)
Net income (loss) from discontinued operations	—			(34		)	—			53
Net loss	$	(1,807	)	$	(3,621	)	(6,669		)	(9,946		)
Weighted-average shares of common stock outstanding – basic and diluted	41,891			40,684			41,980			35,566
Basic and diluted net income (loss) per share:
Continuing operations	$	(0.04	)	$	(0.09	)	$	(0.16	)	$	(0.28	)
Discontinued operations	—			—			—			—
Net loss	$	(0.04	)	$	(0.09	)	$	(0.16	)	$	(0.28	)

Schedule of antidilutive securities excluded from computation of earnings per share

The following table presents the unvested restricted stock awards and "in the money" stock options and stock warrants that were excluded from the calculation of diluted net loss per share for the three and nine months ended September 30, 2014 and 2013 as these securities were anti-dilutive (in thousands).

	Nine Months Ended
	September 30,
	2014	2013
Unvested restricted stock awards	377	1,963
Stock options	1	131
Stock warrants	1,937	—
Total anti-dilutive securities	2,315	2,094

XML

DOCUMENT AND ENTITY INFORMATION	9 Months Ended
	Sep. 30, 2014	Nov. 14, 2014
Document and Entity Information [Abstract]
Entity Registrant Name	RAINMAKER SYSTEMS INC
Entity Central Index Key	0001094007
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Document Type	10-Q
Document Period End Date	Sep. 30, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q3
Amendment Flag	false
Entity Common Stock, Shares Outstanding		42,252,329

XML

BALANCE SHEET COMPONENTS (Tables)

9 Months Ended

Sep. 30, 2014

Balance Sheet Related Disclosures [Abstract]

Components of prepaids and other current assets

Prepaids and other current assets consist of the following (in thousands):

	September 30, 2014		December 31, 2013
Prepaids and other current assets:
Prepaid expenses	$	344	$	623
Deferred financing costs	295		—
Deferred professional service costs	275		252
VAT tax receivable	281		440
Other current assets	92		303
Prepaids and other current assets	$	1,287	$	1,618

Components of property and equipment

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

	Estimated Useful Life	September 30, 2014			December 31, 2013
Property and equipment:
Computer equipment	3 years	$	3,945		$	3,993
Capitalized software and development	2-5 years	13,899			13,208
Furniture and fixtures	5 years	308			309
Leasehold improvements	Lease term	110			123
		18,262			17,633
Accumulated depreciation and amortization		(17,375		)	(17,099		)
Construction in process		4			157
Property and equipment, net		$	891		$	691

Schedule of other non-current assets

Other non-current assets consist of the following (in thousands):

	September 30, 2014		December 31, 2013
Other non-current assets:
Credit card reserve deposits and other	$	95	$	395
Deferred professional service costs	824		445
Other non-current assets	$	919	$	840

Schedule of other accrued liabilities

Other accrued liabilities consist of the following (in thousands):

	September 30, 2014		December 31, 2013
Other accrued liabilities:
Payable to customers *	$	1,344	$	1,460
Accrued professional fees	89		663
VAT taxes payable	270		248
Settlement liability	—		200
Reseller rebates	—		190
Sales reserve	—		117
Other liabilities	560		787
Other accrued liabilities	$	2,263	$	3,665

* - Amounts represent collections on customer receivables associated with "product sales" in excess of amounts owed to state jurisdictions. The Company is in the process of evaluating remediation plans for the balances due.

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Net revenue	$ 1,882	$ 4,160	$ 9,139	$ 13,546
Cost of services	1,834	3,008	8,068	9,324
Gross profit	48	1,152	1,071	4,222
Operating expenses:
Sales and marketing	445	905	2,260	2,422
Technology and development	778	1,231	2,517	3,613
General and administrative	699	2,102	2,577	6,853
Restructuring expense	365	0	365	0
Depreciation and amortization	117	396	286	1,241
Total operating expenses	2,404	4,634	8,005	14,129
Operating loss	(2,356)	(3,482)	(6,934)	(9,907)
(Gain) loss due to change in fair value of warrant liability and derivative liability	(1,267)	66	(1,284)	(148)
Loss on issuance of convertible notes payable	483	0	483	0
Interest and other expense, net	321	59	589	205
Loss before income tax expense	(1,893)	(3,607)	(6,722)	(9,964)
Income tax expense	(86)	(20)	(53)	35
Net loss from continuing operations	(1,807)	(3,587)	(6,669)	(9,999)
Net income (loss) from discontinued operations, net of tax	0	(34)	0	53
Net loss	(1,807)	(3,621)	(6,669)	(9,946)
Foreign currency translation adjustments	10	85	(26)	(87)
Comprehensive loss	$ (1,797)	$ (3,536)	$ (6,695)	$ (10,033)
Basic and diluted net income (loss) per share:
Net loss from continuing operations (USD per share)	$ (0.04)	$ (0.09)	$ (0.16)	$ (0.28)
Net income (loss) from discontinued operations (USD per share)	$ 0.00	$ 0.00	$ 0.00	$ 0.00
Net loss (USD per share)	$ (0.04)	$ (0.09)	$ (0.16)	$ (0.28)
Weighted average common shares - basic and diluted (in shares)	41,891	40,684	41,980	35,566

XML

FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

A summary of the activity of the fair value of the Level 3 liabilities (common stock warrant liability and derivative liability conversion option) for the nine months ended September 30, 2014 and 2013 is as follows (in thousands):

	Nine Months Ended
	September 30,
	2014			2013
Balance at December 31, 2013 and 2012, respectively	$	93		$	348
Issuances	—			—
Gain on fair value remeasurement	(17		)	(225		)
Balance at March 31, 2014 and 2013, respectively	76			123
Issuances	—			—
Loss on fair value remeasurement	—			11
Balance at June 30, 2014 and 2013, respectively	76			134
Issuances	3,589			—
(Gain) loss on fair value remeasurement	(1,267		)	66
Balance at September 30, 2014 and 2013, respectively	$	2,398		$	200

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

	Level 1		Level 2		Level 3
September 30, 2014
Liabilities:
Common stock warrant liability (2)	$	—	$	—	$	1,446
Derivative liability conversion option	$	—	$	—	$	952
December 31, 2013
Assets:
Money market funds (1)	$	1,641	$	—	$	—
Liabilities:
Common stock warrant liability (2)	$	—	$	—	$	93

  ____________

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

(2) The fair value of our common stock warrant liability 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 the common stock warrant liability and the derivative liability conversion option. The following are the assumptions used to measure the warrant liability at September 30, 2014 and 2013 and at date of issuance, which were determined in a manner consistent with that described for stock option awards as set forth in Note 8:

	September 30, 2014			At Issuance	September 30, 2013
	2011 Warrants	2013 Warrants	2014 Warrants	2014 Warrants	2011 Warrants
Number of shares underlying the Warrants	1,578,000	217,000	12,360,000	12,360,000	1,578,000
Exercise price	$1.05 - $1.40	$0.45	$0.08	$0.08	$1.05 - $1.40
Remaining contractual life in years	1.75	6.08	9.8	10.00	2.75
Volatility	144.30%	108.25%	107.35%	107.35%	85%
Risk-free interest rate	0.58%	2.00%	2.64%	2.57%	0.63%
Expected dividend yield	—%	—%	—%	—%	—%
Closing price of common stock	$0.12	$0.12	$0.12	$0.10 - $0.19

The following are the assumptions used to measure the derivative liability conversion option with respect to the convertible notes payable at September 30, 2014 and at date of issuance:

	September 30, 2014	At Issuance
Number of shares underlying the conversion option feature	12,570,400	12,360,000
Conversion price	$0.25	$0.25
Remaining contractual life in years	4.75	5
Volatility	100.57%	100.57%
Risk-free interest rate	1.78%	1.70%
Expected dividend yield	—	—
Closing price of common stock	$0.12	$0.10 - $0.19

The amounts reported as cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities at September 30, 2014 and December 31, 2013 approximate fair value due to their short-term maturities.

XML

COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

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 sought 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. On May 15, 2013, the American Arbitration Association appointed an arbitrator. Thereafter, Mr. Silton withdrew his arbitration claim and on May 22, 2013, filed a complaint against the Company in the Santa Clara Superior Court. The allegations and causes of action were the same as the complaint filed with the American Arbitration Association. On July 5, 2013, the Company filed an answer to Mr. Silton's complaint and a cross-complaint against Mr. Silton. On or about August 1, 2013, Mr. Silton filed an answer to the cross-complaint. Between July and December 2013, the parties served and responded to written discovery requests and produced documents. In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a confidential settlement agreement. Pursuant to the settlement agreement, and in exchange for a release of claims, Mr. Silton received a payment from the Company's insurer and 1,000,000 shares of the Company's common stock, which were issued during the three months ended March 31, 2014. A portion of the payment and the shares of common stock was paid to Mr. Silton's legal counsel. After effectuating the terms of the settlement, the case was formally dismissed on March 17, 2014. In connection with the settlement agreement, the Company recorded a charge of $200,000 in the year ended December 31, 2013.

On July 9, 2013, YKnot Holdings LLC (“YKnot”) filed a complaint seeking damages against the Company in the Santa Clara Superior Court alleging breach of contract and related causes of action arising from the eCommerce Processor Agreement (the “Agreement”) entered into by YKnot and the Company in January 2012.  The central allegation in the complaint alleged that the Company failed to timely pay over certain reserves held by the Company against chargebacks and returns relating to YKnot's products in accordance with the Agreement.  On August 12, 2013, the Company filed an answer to the complaint and filed a cross-complaint against YKnot.  In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a settlement agreement pursuant to which the Company and YKnot agreed to a mutual "walk away" settlement and release with no money or other consideration paid to either party.

On September 29, 2014, the Company received a complaint filed against the Company by Symantec Corporation (“Symantec”) in the Superior Court of California, Santa Clara County, alleging breach of contract arising from the Master Services Agreement entered into by the Company and Symantec in June 2006, the statement of work entered into by the parties in June 2008 and the Online Store Agreement for SMB and Midmarket Businesses entered into by the parties in June 2010. In the complaint Symantec seeks payment of unpaid amounts thereunder in the approximate amount of $12.4 million, plus interest and attorneys’ fees and costs.

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.

XML

NET LOSS PER SHARE - Basic and Diluted Net Loss Per Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Earnings Per Share [Abstract]
Net loss from continuing operations	$ (1,807)	$ (3,587)	$ (6,669)	$ (9,999)
Net income (loss) from discontinued operations	0	(34)	0	53
Net loss	$ (1,807)	$ (3,621)	$ (6,669)	$ (9,946)
Weighted-average shares of common stock outstanding – basic and diluted	41,891	40,684	41,980	35,566
Basic and diluted net income (loss) per share:
Continuing operations (USD per share)	$ (0.04)	$ (0.09)	$ (0.16)	$ (0.28)
Discontinued operations (USD per share)	$ 0.00	$ 0.00	$ 0.00	$ 0.00
Net loss (USD per share)	$ (0.04)	$ (0.09)	$ (0.16)	$ (0.28)

XML

NOTES PAYABLE (Tables)

9 Months Ended

Sep. 30, 2014

Debt Disclosure [Abstract]

Components of long-term debt

Notes payable consist of the following (in thousands):

	September 30, 2014			December 31, 2013
Convertible notes, including accrued interest of $53	$	3,143		$	—
Supplemental notes	1,545			—
Discount	(4,457		)	—
Total convertible and supplemental notes	231			—
Comerica term loan	$	—		$	1,800
Comerica revolving line	—			1,230
Agility line of credit, net of discount of $0 and $96, respectively	—			404
Revolving Line of Credit	200			—
Notes payable – insurance	—			207
Total notes payable	200			3,641

XML

RESTRUCTURING

9 Months Ended

Sep. 30, 2014

Restructuring and Related Activities [Abstract]

RESTRUCTURING

RESTRUCTURING

Effective July 15, 2014, Donald Massaro resigned as President and Chief Executive Officer of the Company. Effective July 15, 2014, Bradford Peppard agreed to resign as Executive Vice President and Chief Financial Officer of the Company; this resignation became effective September 12, 2014.

In connection with Mr. Massaro’s separation from the Company, the Company and Mr. Massaro entered into a Settlement Agreement and General Release. Pursuant to the agreement, Mr. Massaro is entitled to a severance payment in accordance with his employment contract of $221,250, which is equal to nine (9) months base salary, payable in accordance with the Company’s normal payroll schedule. As of September 30, 2014, $175,866 of this amount remained outstanding.

In connection with Mr. Peppard's separation from the Company, the Company intends to pay Mr. Peppard a severance payment in accordance with his employment contract in the amount of $125,000, which is equal to six (6) months base salary. Payment would be made in six (6) monthly payments beginning in January 2015.

In September, 2014, the Company decided to close its Godalming (UK) office. The Company occupied premises at this location under a lease agreement that ends March 1, 2015. As part of its decision to close this office, the Company recorded a charge of $19,138 representing amounts owed on the lease from October 1, 2014 to the end of the lease.

XML

STOCKHOLDERS' EQUITY

9 Months Ended

Sep. 30, 2014

Equity [Abstract]

STOCKHOLDERS' EQUITY

STOCKHOLDERS' EQUITY

Treasury Stock

During the nine months ended September 30, 2014, the Company had restricted stock awards that vested. The Company is required to withhold income taxes at statutory rates based on the closing market value of the vested shares on the date of vesting. Accordingly, the Company offers employees the ability to have vested shares withheld in an amount equal to the amount of taxes to be withheld. The Company purchased 23,057 shares during the nine months ended September 30, 2014 with a cost of approximately $5,000 from employees to cover federal and state taxes due.

During the nine months ended September 30, 2014, the Company issued 1,000,000 shares from treasury pursuant to the settlement agreement with our former CEO, Michael Silton. The weighted cost of shares issued from treasury was approximately $1.3 million of which $200,000 was recorded as a reduction of other accrued liabilities and the remaining $1.1 million was recorded as a reduction of additional paid-in capital.

Stock Compensation

The Company expenses 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 and nine months ended September 30, 2014 and 2013 (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Stock-based compensation expense included in:
Cost of services	$	15	$	24	$	55	$	57
Sales and marketing	17		15		54		136
Technology and development	2		59		35		157
General and administrative	10		126		147		1,002
	$	44	$	224	$	291	$	1,352

At September 30, 2014, approximately $834,000 of stock-based compensation expense 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 $30,000 will be expensed in the remainder of 2014 as stock-based compensation, subject to true-up adjustments for forfeitures and vestings during the year.

During the nine months ended September 30, 2014 and 2013, the weighted average valuation assumptions for stock option awards and forfeiture rates used for the expense calculations for stock option and restricted stock awards were as follows:

	Nine Months Ended
	September 30,
	2014		2013
Expected life in years	4.39		3.94
Volatility	93.12	%	75.16	%
Risk-free interest rate	1.57	%	0.50	%
Dividend rate	—	%	—	%
Forfeiture Rates:
Options	21.89	%	21.66	%
Restricted stock	—	%	15.90	%

Expected life of option grants is estimated based on an analysis of actual historical option exercises and cancellations. Expected stock price volatility is based on the historical volatility from traded shares of the Company's stock over the most recent period of time equal to the expected term of the options. 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. The Company has not historically paid dividends, and does not expect to pay dividends in the near term. Therefore the dividend rate has been set to zero.

A summary of activity under the 2003 Stock Incentive Plan (the "2003 Plan") and 2012 Equity Inducement Plan (the "2012 Plan") for the nine months ended September 30, 2014 is as follows (in thousands):

			Options Outstanding
	Available for Grant		Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Balance at December 31, 2013	1,534		2,698		$	0.67	8.7 years
Authorized	1,660		—
Options granted	(60	)	60		0.22
Restricted stock awards granted	(100	)	—
Options exercised	—		—
Options canceled	1,409		(1,409	)	0.60
Restricted stock awards forfeited	315		—
Balance at September 30, 2014	4,758		1,349		$	0.73	6.8 years
Exercisable at September 30, 2014			706		$	0.99	5.1 years

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 the outstanding common stock at the previous December 31 or 2,000,000 shares. Shares outstanding at December 31, 2013 were 41,495,000 and the additional shares authorized amounted to 1,660,000 under the 2003 Plan.

The following table summarizes the activity with regard to restricted stock awards during the nine months ended September 30, 2014. Restricted stock awards were issued from the 2003 Plan and any issuances reduce the shares available for grant as indicated in the previous table. During the three months ended September 30, 2014, the Company granted restricted stock awards for 100,000 shares to two members of our board of directors with immediate vesting. Restricted stock awards are valued at the closing market price of our stock on the date of the grant (in thousands).

	Number of Shares		Weighted Average Grant Price
Balance of nonvested shares at December 31, 2013	582		$	0.69
Granted	100		0.25
Vested	(311	)	0.51
Forfeited	(315	)	0.69
Balance of nonvested shares at September 30, 2014	56		$	0.89

The total grant date fair value of the nonvested restricted stock awards was $50,000 as of September 30, 2014.

XML

SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2014

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

Subsequent events have been evaluated through the date that the financial statements were issued. All appropriate subsequent event disclosures, if any, have been made in the notes to the financial statements.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Principles of Consolidation

Principles of Consolidation

The accompanying condensed 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

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 and nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014, 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, 2013 ("2013 Form 10-K"), as filed with the SEC on April 1, 2014. Balance sheet information as of December 31, 2013 has been derived from the audited financial statements for the year then ended.

Reclassifications

Reclassifications

Certain reclassifications have been made to the prior year's condensed consolidated statements of comprehensive loss to conform to the current year presentation.

Use of Estimates

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, commitments and contingencies, fair value estimates for the expense of employee stock options, embedded derivative features and warrants and the assessment of recoverability and impairment long-lived assets.

Recent Accounting Standards

Recent Accounting Standards

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.

In August 2014, the FASB issued a new accounting standard which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim reporting period. If substantial doubt exists, additional disclosure is required. This new standard will be effective for the Company for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the condensed consolidated financial statements.

XML

NOTES PAYABLE - Comerica Bank Credit Facility (Details) (USD $)	Sep. 02, 2014 Revolving credit facility	Jun. 14, 2012 Comerica Bank Comerica Bank credit facility Secured debt	Jun. 14, 2012 Comerica Bank Comerica Bank credit facility Secured debt Term loan	May 01, 2014 Comerica Bank Comerica Bank credit facility Secured debt Revolving credit facility	Jun. 14, 2012 Comerica Bank Comerica Bank credit facility Secured debt Revolving credit facility	Jun. 14, 2012 Comerica Bank Comerica Bank credit facility Secured debt Letter of credit
Debt Instrument [Line Items]
Maximum borrowing capacity	$ 200,000	$ 5,000,000	$ 3,000,000		$ 2,000,000	$ 500,000
Revolving line, outstanding amount				998,000
Cash-secured letter of credit issued to landlord						$ 61,000

XML

STOCKHOLDERS' EQUITY (Tables)

9 Months Ended

Sep. 30, 2014

Equity [Abstract]

Stock-based compensation expense

The table below reflects stock-based compensation expense for the three and nine months ended September 30, 2014 and 2013 (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Stock-based compensation expense included in:
Cost of services	$	15	$	24	$	55	$	57
Sales and marketing	17		15		54		136
Technology and development	2		59		35		157
General and administrative	10		126		147		1,002
	$	44	$	224	$	291	$	1,352

Weighted average valuation assumptions for stock option awards and forfeiture rates used for the expense calculations for stock option and restricted stock awards

During the nine months ended September 30, 2014 and 2013, the weighted average valuation assumptions for stock option awards and forfeiture rates used for the expense calculations for stock option and restricted stock awards were as follows:

	Nine Months Ended
	September 30,
	2014		2013
Expected life in years	4.39		3.94
Volatility	93.12	%	75.16	%
Risk-free interest rate	1.57	%	0.50	%
Dividend rate	—	%	—	%
Forfeiture Rates:
Options	21.89	%	21.66	%
Restricted stock	—	%	15.90	%

Summary of activity under equity incentive plan

A summary of activity under the 2003 Stock Incentive Plan (the "2003 Plan") and 2012 Equity Inducement Plan (the "2012 Plan") for the nine months ended September 30, 2014 is as follows (in thousands):

			Options Outstanding
	Available for Grant		Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Balance at December 31, 2013	1,534		2,698		$	0.67	8.7 years
Authorized	1,660		—
Options granted	(60	)	60		0.22
Restricted stock awards granted	(100	)	—
Options exercised	—		—
Options canceled	1,409		(1,409	)	0.60
Restricted stock awards forfeited	315		—
Balance at September 30, 2014	4,758		1,349		$	0.73	6.8 years
Exercisable at September 30, 2014			706		$	0.99	5.1 years

Summary of restricted stock award activity

The following table summarizes the activity with regard to restricted stock awards during the nine months ended September 30, 2014. Restricted stock awards were issued from the 2003 Plan and any issuances reduce the shares available for grant as indicated in the previous table. During the three months ended September 30, 2014, the Company granted restricted stock awards for 100,000 shares to two members of our board of directors with immediate vesting. Restricted stock awards are valued at the closing market price of our stock on the date of the grant (in thousands).

	Number of Shares		Weighted Average Grant Price
Balance of nonvested shares at December 31, 2013	582		$	0.69
Granted	100		0.25
Vested	(311	)	0.51
Forfeited	(315	)	0.69
Balance of nonvested shares at September 30, 2014	56		$	0.89

XML

BALANCE SHEET COMPONENTS - Prepaids and Other Current Assets (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Balance Sheet Related Disclosures [Abstract]
Prepaid expenses	$ 344	$ 623
Deferred financing costs	295	0
Deferred professional service costs	275	252
VAT tax receivable	281	440
Other current assets	92	303
Prepaids and other current assets	$ 1,287	$ 1,618

XML

STOCKHOLDERS' EQUITY - Treasury Stock (Details) (USD $)	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Class of Stock [Line Items]
Payments related to tax witholding	$ 5,000	$ 132,000
Treasury stock issued, shares	1,000,000
Weighted cost of shares issued from treasury	1,300,000
Other accrued liabilities
Class of Stock [Line Items]
Weighted cost of shares issued from treasury	200,000
Additional paid-in capital
Class of Stock [Line Items]
Weighted cost of shares issued from treasury	1,100,000
Common stock
Class of Stock [Line Items]
Shares paid for tax witholding	23,057
Payments related to tax witholding	$ 5,000

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Operating activities:
Net loss	$ (6,669)	$ (9,946)
Adjustment for income from discontinued operations, net of tax	0	(53)
Adjustment to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property and equipment, incl. asset impairment	345	1,241
Amortization of debt discount	291	0
Gain due to change in fair value of warrant liability and derivative liability conversion feature	(1,284)	(148)
Stock-based compensation expense	291	1,352
Provision for allowance for doubtful accounts	(1)	0
Loss on issuance of convertible notes payable	483	0
Provision for allowance of credit card receivables	0	420
Provision for allowances for other assets	0	280
Changes in operating assets and liabilities:
Accounts receivable	2,318	(848)
Prepaid expenses and other assets	225	(207)
Accounts payable	2,557	3,475
Accrued compensation and benefits	(246)	576
Other accrued liabilities	(1,226)	230
Deferred tax liability	(26)	40
Deferred revenue	568	650
Net cash used in continuing operations	(2,374)	(2,938)
Net cash provided by discontinued operations	0	53
Net cash used in operating activities	(2,374)	(2,885)
Investing activities:
Purchases of property and equipment	(543)	(1,614)
Change in restricted cash, net	0	35
Net cash used in continuing operations	(543)	(1,579)
Net cash used in discontinued operations	0	0
Net cash used in investing activities	(543)	(1,579)
Financing activities:
Proceeds from issuance of common stock	0	5,534
Proceeds from borrowings	3,340	200
Repayment of borrowings	(3,787)	(1,397)
Restricted cash related to borrowings	(58)	0
Tax payments in connection with treasury stock surrendered	(5)	(132)
Net cash provided by (used in) continuing operations	(510)	4,205
Net cash provided by discontinued operations	0	0
Net cash provided by (used in) financing activities	(510)	4,205
Effect of exchange rate changes on cash	(36)	(69)
Net increase (decrease) in cash and cash equivalents	(3,463)	(328)
Cash and cash equivalents at beginning of period	3,633	4,494
Cash and cash equivalents at end of period	170	4,166
Supplemental disclosures of cash flow information:
Cash paid for interest	164	161
Cash paid for income taxes	16	49
Supplemental disclosures of non-cash investing and financing activities:
Retirement of fully depreciated property and equipment	0	590
Common stock issued in settlement of claim	200	0
Warrants issued to convertible note holders	2,050	0
Conversion feature of convertible notes payable	1,539	0
Supplemental notes payable	1,545	0
Accrued interest on convertible notes payable	$ 53	$ 0

XML

NOTES PAYABLE

9 Months Ended

Sep. 30, 2014

Debt Disclosure [Abstract]

NOTES PAYABLE

NOTES PAYABLE

Notes payable consist of the following (in thousands):

	September 30, 2014			December 31, 2013
Convertible notes, including accrued interest of $53	$	3,143		$	—
Supplemental notes	1,545			—
Discount	(4,457		)	—
Total convertible and supplemental notes	231			—
Comerica term loan	$	—		$	1,800
Comerica revolving line	—			1,230
Agility line of credit, net of discount of $0 and $96, respectively	—			404
Revolving Line of Credit	200			—
Notes payable – insurance	—			207
Total notes payable	200			3,641

2014 Convertible Notes Financing

On July 15, 2014, the Company entered into a Purchase Agreement with certain investors pursuant to which the Company agreed to issue units each consisting of (i) a secured convertible promissory note in the face amount of $1.00 (the “Convertible Notes”), (ii) a supplemental secured promissory note in the face amount of $0.50 (the “Supplemental Notes”) and (iii) warrants to purchase up to four shares of the Company’s common stock (the “Warrants”) (collectively, the “Financing Transaction”).

On July 15, 2014, the Company completed an initial closing of the Financing Transaction for the sale of 2,550,000 units, representing gross proceeds to the Company of $2,550,000 and net proceeds of approximately $2,275,000 after deducting fees and expenses payable by the Company. On August 12, 2014, the Company completed a secondary closing of the Financing Transaction for the sale of 450,000 units, representing gross proceeds to the Company of $450,000 and net proceeds of approximately $415,000. On September 9, 2014, the Company completed a third closing of the Financing Transaction for the sale of 90,000 units, representing gross proceeds of $90,000 and net proceeds of $83,700. The Company used a portion of the net proceeds from the Financing Transaction to repay its outstanding indebtedness owing to Comerica Bank and Agility Capital II, LLC and used the balance of the net proceeds for general corporate purposes, including working capital.

The Convertible Notes of $3.1 million will mature on July 15, 2019 and accrue interest at a fixed rate of 8.0% per annum payable quarterly. Interest accrued from the date of issuance through June 30, 2015 will be added to the principal amount of the Convertible Notes quarterly. During the continuance of an event of default, the Convertible Notes may accrue interest at a default rate of 15% per annum. Subject to stockholder approval of an increase in the number of authorized shares of the Company’s common stock in an amount sufficient to permit full conversion of the Convertible Notes, the Convertible Notes will be convertible into shares of the Company’s common stock at a conversion rate of $0.25 per share. The Convertible Notes also contain provisions that protect the holders thereof against dilution by adjustment of the conversion rate in certain events such as stock dividends, stock splits and other similar events and certain issuances of common stock by the Company at a price per share less than the conversion rate then in effect.

The Supplemental Notes of $1.5 million will mature on July 15, 2019 and accrue interest at a fixed rate of 8.0% per annum payable at maturity. During the continuance of an event of default, the Supplemental Notes may accrue interest at a default rate of 15% per annum. However, the Supplemental Notes can be canceled after two years if certain insolvency related events have been remediated.

The Convertible Notes and Supplemental Notes are secured by a first lien on substantially all of the Company’s consolidated assets. The Convertible Notes and Supplemental Notes contain covenants that will, subject to limited exceptions, require the approval of the holders of a majority of the outstanding principal amount thereof to, among other things, (i) incur other indebtedness; (ii) create liens; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The Convertible Notes and Supplemental Notes also provide for customary events of default, including nonpayment, breach of covenants, material adverse events, payment defaults of other indebtedness and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Convertible Notes and Supplemental Notes. If the Company is not able to comply with such covenants or if any event of default otherwise occurs, the outstanding note balances could become due and payable immediately. On November 6, 2014, we received a notice of default and acceleration from certain holders of our Convertible Notes and Supplemental Notes. See below under the heading “Events of Default - Convertible Notes, Supplemental Notes and Revolving Notes” for a further discussion of the notices of default and acceleration received under our debt agreements.

In connection with the Financing Transaction, the Company issued 12,360,000 Warrants which have an initial 10-year term with an exercise price of $0.08 per share. The Warrants are subject to stockholder approval of an increase in the number of authorized shares of the Company’s common stock in an amount sufficient to permit full exercise of the Warrants into shares of the Company's common stock. The Warrants may also 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 and issuances of common stock at a price per share less than the exercise price then in effect. As such, the Company is required to record the warrants which do not have fixed settlement provisions as liabilities and mark to market at the end of each reporting period.

September 2014 Revolving Line of Credit Note

On September 2, 2014, the Company obtained $200,000 under Revolving Line of Credit Notes (the "Revolving Notes") from two investors in the Financing Transaction. The Revolving Notes are secured by a second lien on substantially all of the Company's consolidated assets. Outstanding principal accrues interest at a fixed rate of 5% per annum, payable quarterly starting December 31, 2014. During the continuance of an event of default, outstanding principal may accrue interest at a default rate of 7% per annum. Each advance must be paid within 30 days of the date of such advance. The Company borrowed the full $200,000 on the Revolving Notes on September 2, 2014 and this amount remained outstanding as of September 30, 2014. On November 6, 2014, we received a notice of default and acceleration from the holders of our Revolving Notes. See below under the heading “Events of Default - Convertible Notes, Supplemental Notes and Revolving Notes” for a further discussion of the notices of default and acceleration received under our debt agreements.

Events of Default - Convertible Notes, Supplemental Notes, and Revolving Notes

On November 6, 2014, the Company received a notice of default from investors holding the Revolving Notes.  The notice of default stated that an event of default had occurred as a result of the Company’s failure to repay principal when due on October 2, 2014, and declared all principal and accrued interest outstanding under the Revolving Notes to be immediately due and payable. At November 6, 2014 accrued interest on the Revolving Notes was $2,176.

On November 6, 2014, the Company also received a notice of default from investors (the “Majority Investors”) holding $1.8 million of the outstanding principal amount of the Company’s Convertible Notes and $900,000 of the outstanding principal amount of the Company’s Supplemental Notes.  The notice of default stated that an event of default had occurred under the Convertible Notes and Supplemental Notes as a result of the Company’s failure to repay the above-referenced Revolving Notes when due, and declared all principal and accrued interest outstanding under the Convertible Notes and Supplemental Notes held by the Majority Investors to be immediately due and payable.

On November 17, 2014, the Company received a notification of disposition of collateral from the collateral agent for the holders of the Convertible Notes and Supplemental Notes notifying the Company that a foreclosure sale of all or substantially all of the Company’s assets would take place on December 4, 2014. If the Majority Investors and collateral agent elect to proceed with the foreclosure sale of the Company’s assets, upon completion of such sale the Company would no longer be able to continue as a going concern and would immediately cease operations. The Majority Investors have represented to the Company that in the event of a foreclosure sale in which the Majority Investors acquire the Company’s assets, their intent would be to continue operating the ViewCentral business in a separate legal entity that continues existing contractual agreements with the Company’s ViewCentral customers.

Comerica Bank Credit Facility

On June 14, 2012, the Company entered into a Loan and Security Agreement with Comerica Bank (the "Comerica Credit Facility"). The maximum amount of credit available to the Company under the Comerica Credit Facility at inception was $5 million, comprised of a $3 million term loan facility ("Term Loan") and a $2 million revolving line of credit ("Revolving Line"), which included a $500,000 sub-facility for letters of credit and certain credit card services. The outstanding amount under the Term Loan was repaid by the Company in June 2014. Amounts borrowed under the Revolving Line became due on December 14, 2013, which was subsequently extended to May 1, 2014. The outstanding amount under the Revolving Line of $998,000 was repaid by the Company on July 15, 2014 and the Comerica Credit Facility was terminated. However, Comerica continues to maintain a cash-secured letter of credit in the face amount of $61,000 issued to our landlord for our leased headquarters in Campbell, California.

Agility Capital Credit Facility

On October 30, 2013, the Company closed a Loan Agreement (the "Agility Loan Agreement") with Agility Capital II, LLC (“Agility”), providing for a revolving line of credit of up to $500,000, which amount could be increased to $650,000 under certain conditions (the “Maximum Revolving Line”). The Agility Loan Agreement became due on December 14, 2013, commensurate with the Comerica Credit Facility, which was subsequently extended to May 1, 2014, commensurate with the extension of the scheduled maturity date of the Comerica Revolving Line. The outstanding amount under the Agility Loan Agreement of $432,000 was repaid by the Company on July 15, 2014, and the Agility Loan Agreement was terminated.

Notes Payable – Insurance

On December 11, 2013, the Company entered into an agreement with AON Private Risk Management to finance our 2013 to 2014 insurance premiums with First Insurance Funding Corp. in the amount of $237,000. The interest rate on the note payable was 4.99% and the note was payable in eight equal monthly installment payments beginning in December 2013. The outstanding balance of the note payable was repaid in June 2014.

XML

BALANCE SHEET COMPONENTS - Property and Equipment (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Components of property and equipment:
Property and equipment, gross	$ 18,262	$ 17,633
Accumulated depreciation and amortization	(17,375)	(17,099)
Construction in process	4	157
Property and equipment, net	891	691
Computer equipment
Property and equipment:
Useful life of property and equipment	3 years
Components of property and equipment:
Property and equipment, gross	3,945	3,993
Capitalized software and development
Components of property and equipment:
Property and equipment, gross	13,899	13,208
Capitalized software and development | Minimum
Property and equipment:
Useful life of property and equipment	2 years
Capitalized software and development | Maximum
Property and equipment:
Useful life of property and equipment	5 years
Furniture and fixtures
Property and equipment:
Useful life of property and equipment	5 years
Components of property and equipment:
Property and equipment, gross	308	309
Leasehold improvements
Components of property and equipment:
Property and equipment, gross	$ 110	$ 123

XML

FAIR VALUE MEASUREMENTS - Unobservable Input Reconciliation (Details) (Level 3, USD $) In Thousands, unless otherwise specified	3 Months Ended
	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013
Level 3
Summary of the activity of the fair value of the Level 3 liabilities:
Balance at beginning of period	$ 76	$ 76	$ 93	$ 134	$ 123	$ 348
Transfers in (out)	3,589	0	0	0	0	0
Loss on fair value remeasurement	(1,267)	0	(17)	66	11	(225)
Balance at end of period	$ 2,398	$ 76	$ 76	$ 200	$ 134	$ 123

XML

FAIR VALUE MEASUREMENTS (Tables)

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Summary of the activity of the fair value of the Level 3 liabilities

A summary of the activity of the fair value of the Level 3 liabilities (common stock warrant liability and derivative liability conversion option) for the nine months ended September 30, 2014 and 2013 is as follows (in thousands):

	Nine Months Ended
	September 30,
	2014			2013
Balance at December 31, 2013 and 2012, respectively	$	93		$	348
Issuances	—			—
Gain on fair value remeasurement	(17		)	(225		)
Balance at March 31, 2014 and 2013, respectively	76			123
Issuances	—			—
Loss on fair value remeasurement	—			11
Balance at June 30, 2014 and 2013, respectively	76			134
Issuances	3,589			—
(Gain) loss on fair value remeasurement	(1,267		)	66
Balance at September 30, 2014 and 2013, respectively	$	2,398		$	200

Fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis

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

	Level 1		Level 2		Level 3
September 30, 2014
Liabilities:
Common stock warrant liability (2)	$	—	$	—	$	1,446
Derivative liability conversion option	$	—	$	—	$	952
December 31, 2013
Assets:
Money market funds (1)	$	1,641	$	—	$	—
Liabilities:
Common stock warrant liability (2)	$	—	$	—	$	93

  ____________

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

(2) The fair value of our common stock warrant liability 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.

Assumptions used to measure the accrued warrant liability and embedded derivative feature liability

The following are the assumptions used to measure the warrant liability at September 30, 2014 and 2013 and at date of issuance, which were determined in a manner consistent with that described for stock option awards as set forth in Note 8:

	September 30, 2014			At Issuance	September 30, 2013
	2011 Warrants	2013 Warrants	2014 Warrants	2014 Warrants	2011 Warrants
Number of shares underlying the Warrants	1,578,000	217,000	12,360,000	12,360,000	1,578,000
Exercise price	$1.05 - $1.40	$0.45	$0.08	$0.08	$1.05 - $1.40
Remaining contractual life in years	1.75	6.08	9.8	10.00	2.75
Volatility	144.30%	108.25%	107.35%	107.35%	85%
Risk-free interest rate	0.58%	2.00%	2.64%	2.57%	0.63%
Expected dividend yield	—%	—%	—%	—%	—%
Closing price of common stock	$0.12	$0.12	$0.12	$0.10 - $0.19

The following are the assumptions used to measure the derivative liability conversion option with respect to the convertible notes payable at September 30, 2014 and at date of issuance:

	September 30, 2014	At Issuance
Number of shares underlying the conversion option feature	12,570,400	12,360,000
Conversion price	$0.25	$0.25
Remaining contractual life in years	4.75	5
Volatility	100.57%	100.57%
Risk-free interest rate	1.78%	1.70%
Expected dividend yield	—	—
Closing price of common stock	$0.12	$0.10 - $0.19