Rainmaker Reports Positive Adjusted EBITDA for the Third Quarter of 2012

Announces Financial Results for the Third Quarter and Nine Months Ended September 30, 2012

Marketwired

CAMPBELL, CA--(Marketwire - Oct 30, 2012) - Rainmaker Systems, Inc. (NASDAQ: RMKR), a leading global e-Commerce software company that helps multi-national companies address the B2B market by maximizing sales revenue for their products and services, today reported financial results for its third quarter and nine months ended September 30, 2012.

Net revenue for the third quarter ended September 30, 2012 was $6.9 million. Net revenue in the nine months ended September 30, 2012 was $20.2 million, a 5% year-over-year increase from net revenue of $19.3 million in the same period of 2011.

Recent Business Highlights

  • Achieved positive adjusted EBITDA of $100,000 for the third quarter of 2012 compared to negative $191,000 in the second quarter of 2012
  • Announced during the quarter new $2 million two-year agreement for B2B sales with existing major global software client
  • Launched new e-commerce platform, GrowCommerce for Renewals, on SalesForce.com's AppExchange
  • Signed three new clients for the B2B e-commerce solution with Cox Communications, Leads360 and Vendavo
  • Awarded multi-year expansion with Polycom that includes all customer, partner and employee training
  • Ranked one of the world's top software companies by Software Magazine
  • Named David Guercio as Senior Vice President of Sales and Marketing

Gross margin in the third quarter of 2012 increased to 45%, compared to 44% in the preceding quarter and 41% in the third quarter of 2011. Gross margin in the nine months ended September 30, 2012 increased to 44%, compared to 41% in the same period of 2011.

Net loss from continuing operations for the third quarter of 2012 was $944,000, or a loss of $0.03 per share, compared to a net loss from continuing operations in the third quarter of 2011 of $2.4 million, or a loss of $0.10 per share. Net loss from continuing operations for the nine months ended September 30, 2012 was $3 million, or a loss of $0.11 per share, compared to a net loss from continuing operations in the same period of 2011 of $8.5 million, or a loss of $0.38 per share.

Third quarter 2012 non-GAAP net loss, which excludes stock-based compensation expense, amortization of purchased intangible assets, and a loss due to change in fair value of warrant liability was $362,000, or a loss of $0.01 per share, compared to a non-GAAP net loss in the preceding quarter of $673,000, or a loss of $0.02 per share, and a non-GAAP net loss in the third quarter of 2011 of $1.8 million, or a loss of $0.07 per share. See Exhibit A for a reconciliation of GAAP net loss from continuing operations to non-GAAP net loss.

Third quarter 2012 adjusted EBITDA, which excludes non-cash stock compensation expense, was $100,000, compared to negative $191,000 in the preceding quarter and negative $1.3 million in the third quarter of 2011. See Exhibit B for a reconciliation of GAAP net loss from continuing operations to EBITDA and adjusted EBITDA.

Total shares outstanding at September 30, 2012 were approximately 27.3 million common shares, which include approximately 1.3 million unvested restricted shares. In addition, Rainmaker had 735,000 unexercised options outstanding with a weighted average exercise price of approximately $1.63 per share and 1.6 million unexercised warrants outstanding with a weighted average exercise price of approximately $1.38 per share.

Total cash and cash equivalents were $4.4 million at September 30, 2012, compared to $8.5 million at December 31, 2011. Approximately 75% of the Company's cash burn over the first nine months of 2012 related to its call center operations in Manila. Total cash used by discontinued operations was $2.6 million for the nine month ended September 30, 2012.

Conference Call
Rainmaker Systems will host a conference call and webcast today at 1:30 p.m. Pacific Time to discuss its third quarter 2012 financial results. Those wishing to participate in the live call should dial (877) 941-2332 using the password "Rainmaker." A replay of the call will be available for one week beginning approximately one hour after the call's conclusion by dialing (800) 406-7325 and entering 4571176 followed by the "#" key when prompted for a code. To access the live webcast of the call, go to the Investors section of Rainmaker's website at www.rainmakersystems.com. A webcast replay of the conference call will be available for one year on the Conference Calls/Events page of the Investors section at www.rainmakersystems.com

About Rainmaker
Rainmaker is an e-Commerce software company that helps multi-national companies address the B2B market by maximizing sales revenue for their products and services. The Rainmaker e-Commerce platform can be enhanced with Rainmaker global telesales agents to maximize revenue and customer satisfaction through the entire customer life cycle. For more information, visit www.rainmakersystems.com or call 800-631-1545.

NOTE: Rainmaker Systems and the Rainmaker logo are registered with the U.S. Patent and Trademark Office. All other service marks or trademarks are the property of their respective owners.

Safe Harbor Statement
This press release may contain forward-looking statements regarding future events. These forward-looking statements are based on information available to Rainmaker as of this date and we assume no obligation to update any such forward-looking statements. These statements are not guarantees of future performance, and actual results could differ materially from current expectations. Among the important factors which could cause actual results to differ materially from those in the forward-looking statements are our client concentration, as we depend on a small number of clients for a significant percentage of our revenue, the possibility of the discontinuation and/or realignment of some client relationships, general market conditions, the current difficult macro-economic environment and its impact on our business, as our clients are reducing their overall marketing spending and our clients' customers are reducing their purchase of services contracts, the high degree of uncertainty and our limited visibility due to economic conditions, our ability to execute our business strategy, our ability to integrate acquisitions without disruption to our business, our ability to sell our Manila operations in a timely manner and reduce its use of our cash, our ability to transition to a new Chief Executive Officer without disruption to our business, the effectiveness of our sales team and approach, our ability to target, analyze and forecast the revenue to be derived from a client and the costs associated with providing services to that client, the date during the course of a calendar year that a new client is acquired, the length of the integration cycle for new clients and the timing of revenues and costs associated therewith, our ability to expand our channel hosted contract solution and drive adoption of this solution by resellers, potential competition in the marketplace, the ability to retain and attract employees, market acceptance of our service programs and pricing options, our ability to maintain our existing technology platform and to deploy new technology, our ability to sign new clients and control expenses, the financial condition of our clients' businesses, our ability to raise additional equity or debt financing, and other factors detailed in the Company's filings with the Securities and Exchange Commission ("SEC"), including our filings on Forms 10-K and 10-Q.

- Financial tables to follow -

   
RAINMAKER SYSTEMS, INC.  
CONSOLIDATED BALANCE SHEETS  
(In thousands, except share data)  
(Unaudited)  
   
      September 30, 2012       December 31, 2011  
ASSETS                
Current assets:                
  Cash and cash equivalents   $ 4,425     $ 8,490  
  Restricted cash     28       18  
  Accounts receivable, net     4,520       4,587  
  Prepaid expenses and other current assets     1,543       876  
  Assets held for sale     4,023       4,164  
    Total current assets     14,539       18,135  
Property and equipment, net     2,631       2,861  
Intangible assets, net     2       85  
Goodwill     5,337       5,268  
Other non-current assets     410       422  
    Total assets   $ 22,919     $ 26,771  
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
  Accounts payable     $6,888       $5,702  
  Accrued compensation and benefits     550       740  
  Other accrued liabilities     3,158       3,097  
  Deferred revenue     2,154       2,629  
  Current portion of notes payable     955       4,306  
  Liabilities related to assets held for sale     2,327       2,163  
    Total current liabilities     16,032       18,637  
Deferred tax liability     525       473  
Long-term deferred revenue     78       103  
Common stock warrant liability     832       517  
Notes payable, less current portion     3,593       --  
    Total liabilities     21,060       19,730  
Commitments and contingencies                
Stockholders' equity:                
  Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding     --       --  
  Common stock, $0.001 par value; 50,000,000 shares authorized, 29,294,663 shares issued and 27,271,238 shares outstanding at September 30, 2012 and 28,686,486 shares issued and 26,812,935 shares outstanding at December 31, 2011     27       26  
  Additional paid-in capital     130,129       129,373  
  Accumulated deficit     (123,662 )     (117,926 )
  Accumulated other comprehensive loss     (1,912 )     (1,827 )
  Treasury stock, at cost, 2,023,425 shares at September 30, 2012 and 1,873,551 shares at December 31, 2011     (2,723 )     (2,605 )
    Total stockholders' equity     1,859       7,041  
    Total liabilities and stockholders' equity   $ 22,919     $ 26,771  
                 
                 
                 
RAINMAKER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(Unaudited)
 
 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
     2012      2011      2012      2011  
Net revenue   $ 6,900     $ 7,089     $ 20,196     $ 19,282  
Cost of services     3,808       4,189       11,315       11,341  
  Gross margin     3,092       2,900       8,881       7,941  
Operating expenses:                        
  Sales and marketing     524       1,015       1,569       2,935  
  Technology and development     1,199       1,832       4,318       5,652  
  General and administrative     1,486       1,898       4,238       5,725  
  Depreciation and amortization     420       524       1,226       1,968  
  Gain on fair value re-measurement     --       114       --       44  
  Total operating expenses     3,629       5,383       11,351       16,324  
    Loss from operations     (537 )     (2,483 )     (2,470 )     (8,383 )
Loss (gain) due to change in fair value of warrant liability     337       (70 )     315       (95 )
Interest and other expense, net     63       43       134       99  
  Loss from continuing operations before income tax expense     (937 )     (2,456 )     (2,919 )     (8,387 )
Income tax expense     7       (15 )     125       73  
  Net loss from continuing operations   $ (944 )   $ (2,441 )   $ (3,044 )   $ (8,460 )
  Loss from discontinued operations, net of tax   $ (706 )   $ (245 )   $ (2,692 )   $ (626 )
      Net loss   $ (1,650 )   $ (2,686 )   $ (5,736 )   $ (9,086 )
                         
Foreign currency translation adjustments     24       (38 )     (85 )     (315 )
  Comprehensive loss   $ (1,626 )   $ (2,724 )   $ (5,821 )   $ (9,401 )
                         
Basic and diluted net loss per share - continuing operations   $ (0.03 )   $ (0.10 )   $ (0.11 )   $ (0.38 )
Basic and diluted net loss per share - discontinued operations   $ (0.03 )   $ (0.01 )   $ (0.10 )   $ (0.03 )
Basic and diluted net loss per share   $ (0.06 )   $ (0.11 )   $ (0.21 )   $ (0.41 )
                         
  Weighted average common shares - Basic and diluted     27,066       24,900       27,013       22,385  
                                 
                                 
                                 
RAINMAKER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
    Nine Months Ended September 30,  
    2012     2011  
Operating activities:                 
Net loss   $ (5,736 )   $ (9,086 )
  Adjustment for loss from discontinued operations, net of tax     2,692       626  
  Adjustments to reconcile net loss to net cash used in operating activities:            
    Depreciation and amortization of property and equipment     1,141       1,774  
    Amortization of intangible assets     85       194  
    Gain on fair value re-measurement     --       44  
    Loss (gain) due to change in fair value of warrant liability     315       (95 )
    Stock-based compensation expense     607       1,564  
    Credit for allowances for doubtful accounts     (35 )     (21 )
    Changes in operating assets and liabilities:            
      Accounts receivable     227       (1,167 )
      Prepaid expenses and other assets     (762 )     (205 )
      Accounts payable     1,705       1,465  
      Accrued compensation and benefits     (19 )     89  
      Other accrued liabilities     (360 )     816  
      Income tax payable     30       (39 )
      Deferred tax liability     51       73  
      Deferred revenue     (501 )     (591 )
          Net cash used in continuing operations     (560 )     (4,559 )
        Net cash provided by (used in) discontinued operations     (1,021 )     530  
        Net cash used in operating activities     (1,581 )     (4,029 )
Investing activities:            
    Purchases of property and equipment     (907 )     (1,279 )
    Restricted cash, net     (10 )     75  
          Net cash used in continuing operations     (917 )     (1,204 )
        Net cash used in discontinued operations     (837 )     (70 )
        Net cash used in investing activities     (1,754 )     (1,274 )
Financing activities:            
    Proceeds from issuance of common stock     --       3,290  
    Proceeds from issuance of common stock from option exercises     --       15  
    Proceeds from borrowings     4,555       1,224  
    Repayment of borrowings     (3,933 )     (660 )
    Repayment of Optima acquisition earnout     (113 )     --  
    Net proceeds of overdraft facility     (381 )     26  
    Tax payments in connection with treasury stock surrendered     (233 )     (217 )
          Net cash provided by (used in) continuing operations     (105 )     3,678  
        Net cash provided by (used in) discontinued operations     (708 )     148  
        Net cash provided by (used in) financing activities     (813 )     3,826  
Effect of exchange rate changes on cash     83       (120 )
Net decrease in cash and cash equivalents     (4,065 )     (1,597 )
             
Cash and cash equivalents at beginning of period     8,490       11,757  
Cash and cash equivalents at end of period   $ 4,425     $ 10,160  
             
Supplemental disclosures of cash flow information:            
  Cash paid for interest   $ 106     $ 128  
  Cash paid for income taxes   $ 42     $ 91  
             
Supplemental disclosures of non-cash investing and financing activities:            
  Common stock issued in acquisitions   $ 112     $ --  
                   

Discussion of Non-GAAP Financial Measures
Rainmaker Systems' management evaluates and makes operating decisions using various performance measures. In addition to GAAP results, Rainmaker also considers non-GAAP net loss and non-GAAP net loss per share, EBITDA and adjusted EBITDA, which excludes non-cash stock compensation expense from EBITDA. These non-GAAP measures are derived from the revenue generated by Rainmaker's business and the costs directly related to the generation of that revenue, such as costs of services, sales and marketing expenses, technology expenses and general and administrative expenses, that management considers in evaluating the Company's operating performance. These non-GAAP measures exclude certain expenses that management does not consider to be related to the Company's core operating performance.

Non-GAAP net loss, non-GAAP net loss per share, EBITDA and adjusted EBITDA are supplemental measures of Rainmaker's performance that are not required by, or presented in accordance with, GAAP. Moreover, they should not be considered as an alternative to any performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of liquidity. Rainmaker presents these non-GAAP measures because management considers them to be important supplemental measures of Rainmaker's operating performance and profitability trends, and because management believes they give investors useful information on period-to-period performance as evaluated by management. Rainmaker believes that the use of these non-GAAP measures provides consistency and comparability with Rainmaker's past financial reports and also facilitates comparisons with other companies in Rainmaker's industry, a number of which use similar non-GAAP financial measures to supplement their GAAP results. Management has used these non-GAAP measures when evaluating operating performance because management believes that the inclusion or exclusion of the items described above provides an additional measure of the Company's core operating results and facilitates comparisons of the Company's core operating performance against prior periods and the Company's business model objectives. Rainmaker has chosen to provide this information to investors to enable them to perform additional analysis of past, present and future operating performance and as a supplemental means to evaluate the Company's ongoing core operations.

Non-GAAP net loss was $362,000 for the third quarter of 2012 and consists of net loss from continuing operations excluding stock based compensation expense, amortization of purchased intangible assets and a loss due to change in fair value of warrant liability. The change in fair value of warrant liability was a $337,000 loss for the three months ended September 30, 2012 and related to an increase in the fair value of the common stock warrant liability. Stock based compensation expense was $217,000 for the three months ended September 30, 2012 and represents the current quarter recognition of compensation expense related to stock options and restricted stock awards granted prior to and during the quarter. Amortization of intangible assets was $28,000 for the three months ended September 30, 2012. See Exhibit A for a reconciliation of GAAP net loss from continuing operations to non-GAAP net loss.

EBITDA was negative $117,000 for the third quarter of 2012. EBITDA consists of net loss from continuing operations excluding interest and other expense, income taxes, depreciation & amortization and certain other non-cash items. Non-cash charges for depreciation of property and equipment were $392,000 for the three months ended September 30, 2012. Non-cash charge for the change in fair value of warrant liability was a $337,000 loss for the three months ended September 30, 2012 and related to an increase in the fair value of the common stock warrant liability. Net interest and other expense was $63,000 for the three months ended September 30, 2012. Non-cash charges for amortization of acquisition related intangibles were $28,000 for the three months ended September 30, 2012. Income tax expense was $7,000 for the three months ended September 30, 2012. 

Adjusted EBITDA was positive $100,000 for the three months ended September 30, 2012 and adds back to EBITDA non-cash stock based compensation expense of $217,000 incurred in the third quarter of 2012. See Exhibit B for a reconciliation of GAAP net loss from continuing operations to EBITDA and adjusted EBITDA.

 
RAINMAKER SYSTEMS, INC.
EXHIBIT A
RECONCILIATION OF GAAP NET LOSS FROM CONTINUING OPERATIONS TO NON-GAAP NET LOSS (1)
(In thousands, except per share)
(Unaudited)
 
    Three months ended  
    September 30,     June 30,     September 30,  
    2012     2012     2011  
Net loss from continuing operations - GAAP basis   $ (944 )   $ (901 )   $ (2,441 )
Stock compensation adjustments (2):                  
  Cost of services     24       28       15  
  Sales and marketing     12       12       57  
  Technology and development     32       32       51  
  General and administrative     149       143       399  
Amortization of intangible assets (3)     28       28       47  
Gain on fair value re-measurement (4)     --       --       114  
Loss (gain) due to change in fair value of warrant liability (5)     337       (15 )     (70 )
Net loss - Non-GAAP basis   $ (362 )   $ (673 )   $ (1,828 )
                   
Diluted weighted average shares outstanding     27,066       27,049       24,900  
                   
Non-GAAP diluted net loss per share   $ (0.01 )   $ (0.02 )   $ (0.07 )
                         
(1)   To supplement our financial results presented on a GAAP basis, we use non-GAAP net loss, which excludes certain business combination accounting entries and expenses related to acquisitions as well as other expenses including stock-based compensation and non-recurring items. As we have completed several acquisitions since 2005, we believe non-GAAP net loss provides useful information to investors regarding the underlying business trends and performance of the Company's ongoing operations and is useful for period over period comparisons of such operations. Non-GAAP net loss is not meant to be considered in isolation or as a substitute for GAAP net loss from continuing operations, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
(2)   We estimate the fair value of share based payment awards on the date of grant using an option-pricing model for option grants and our closing share price as reported on NASDAQ for restricted share grants. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. Stock-based compensation expenses will recur in future periods.
(3)   We have excluded the effect of amortization of intangibles from our non-GAAP net loss. We believe this helps investors understand a significant reason why our GAAP operating expenses increase following acquisitions. Investors should note that the use of intangible assets contributed to revenue earned during the period and will contribute to future revenue generation and should also note that these amortization expenses are recurring.
(4)   In the quarter ended September 30, 2011, we recorded a loss on fair value re-measurement of $114,000 related to the change in the accrued estimated liability for the earnout payable by us in connection with our acquisition of Optima.
(5)   We have recorded gains or losses in fair value of warrant liability related to the change in the common stock warrant liability.
     
     
     
RAINMAKER SYSTEMS, INC.
EXHIBIT B
RECONCILIATION OF NET LOSS FROM CONTINUING OPERATIONS TO EBITDA AND ADJUSTED EBITDA (1)
(In thousands)
(Unaudited)
 
    Three months ended  
    September 30,     June 30,     September 30,  
    2012     2012     2011  
Net loss from continuing operations   $ (944 )   $ (901 )   $ (2,441 )
Add:                  
  Provision for income taxes     7       65       (15 )
  Depreciation of property and equipment     392       374       477  
  Amortization of intangible assets     28       28       47  
  Gain on fair value re-measurement     --       --       114  
  Loss (gain) due to change in fair value of warrant liability     337       (15 )     (70 )
  Interest and other expense, net     63       43       43  
      827       495       596  
                   
    EBITDA - Non-GAAP basis   $ (117 )   $ (406 )   $ (1,845 )
Add:                  
  Stock based compensation     217       215       522  
                   
    Adjusted EBITDA - Non-GAAP basis   $ 100     $ (191 )   $ (1,323 )
                         
(1)   To supplement our financial results presented on a GAAP basis, we use EBITDA, which excludes certain cash and non-cash expenses, and adjusted EBITDA, which excludes stock based compensation from EBITDA. We believe EBITDA and adjusted EBITDA provide useful information to investors regarding the underlying business trends and performance of the Company's ongoing operations and are useful for period over period comparisons of such operations. EBITDA and adjusted EBITDA are not meant to be considered in isolation or as a substitute for comparable GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. We regularly use EBITDA and adjusted EBITDA internally to manage our business and make operating decisions.
     
Contact:
CONTACT:

Timothy Burns
Chief Financial Officer
Rainmaker Systems, Inc.
(512) 949-6021
Email Contact

Steve Polcyn
Investor Relations
Rainmaker Systems, Inc.
(925) 548-3516
Email Contact
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