Rainmaker Systems (VCTL) 10-K 2012 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________________

FORM 10-K

(MARK ONE)

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2012

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 CAMPBELL, CALIFORNIA	95008
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (408) 626-3800

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Names of Each Exchange on which Registered
Common Stock, $0.001 par value per share	The NASDAQ Capital Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.    Yes  ¨    No ý

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No ý

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  ý    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  ý    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company  ý

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

The aggregate market value of common stock held by non-affiliates of the registrant was approximately $24 million as of June 29, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sales price of the registrant’s common stock reported by the Nasdaq Capital Market on that date. For purposes of this disclosure, shares of common stock held by persons who hold more than 10% of the outstanding shares of common stock and shares held by officers and directors of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

At March 28, 2013, the registrant had 28,949,533 shares of common stock, $0.001 par value, outstanding.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 “Risk Factors,” that may cause our, or our industry’s, actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activities, performance or achievements expressed in or implied by such forward-looking statements.

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

• general market conditions,

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

• the high degree of uncertainty and our limited visibility due to economic conditions,

• our ability to execute our business strategy and manage growth,

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

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

• our ability to control costs,

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

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

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

• potential competition in the marketplace,

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

• market acceptance of our solutions and pricing options,

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

• our ability to acquire new clients and increase demand,

• the possibility of the discontinuation of some client relationships,

• the financial condition of our clients’ businesses,

• the protection of our intellectual property,

• our ability to raise additional equity or debt financing,

• the potential delisting of our common stock from the NASDAQ Capital Market,

• and other factors as detailed in Part I Item 1A—“Risk Factors” of this Form 10-K.

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.

RAINMAKER SYSTEMS, INC.

TABLE OF CONTENTS

		Page
PART I.
Item 1.	Business	4
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Mine Safety Disclosures	20
PART II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Financial Data	21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 8.	Financial Statements and Supplementary Data	33
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	59
Item 9A.	Controls and Procedures	59
Item 9B.	Other Information	60
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	60
Item 11.	Executive Compensation	60
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	60
Item 13.	Certain Relationships and Related Transactions, and Director Independence	60
Item 14.	Principal Accounting Fees and Services	60
PART IV.
Item 15.	Exhibits, Financial Statement Schedules	70
	Signatures	78

PART I

ITEM 1. BUSINESS

Introduction

Rainmaker Systems, Inc. and its subsidiaries (“Rainmaker”, “we”, “our”, or the “Company”) is a Commerce-as-a-Service (“CaaS”) company that helps large enterprises gain greater market share and increased brand awareness for their cloud-based or on-premise based product offerings in the worldwide small and medium-sized business (“SMB”) markets.

Recent Events

In January 2010, we acquired Optima Consulting Partners Limited (“Optima”), a B2B lead development provider with offices then in the United Kingdom, France, and Germany. During 2010, we integrated our European operations into one primary office in the United Kingdom and closed our Canadian call center facility.

On December 17, 2012, we completed a stock purchase agreement with Shore Solutions Inc. (“Shore”) pursuant to which we agreed to sell our Manila-based operations of Rainmaker Systems, Ltd. and its wholly owned subsidiary, Rainmaker Asia, Inc. (together, "Manila" or "RSL"). Under the stock purchase agreement, we received an initial cash payment at closing of $845,000. In addition to the closing payment, we may receive additional contingent consideration based on multiple earn-out provisions included within the stock purchase agreement, which provide us the ability to receive additional consideration of $300,000 at target plus a nominal percentage of certain revenues of RSL during the period from January 1, 2013 through December 31, 2015. We determined the income statement caption "Loss on disposal of discontinued operations" based on the net book value of RSL as of December 17, 2012.

On January 25, 2013, we announced the closure of our Austin, Texas facility as operations are to be consolidated in our headquarters in Campbell, California and our United Kingdom location as part of a strategic reallocation of resources designed to increase levels of service to customers and operating cost savings.

On April 1, 2013, we announced that we had entered into subscription agreements with various investors for the sale of 13.0 million shares of our common stock in a registered direct offering. We expect to receive gross proceeds of approximately $5.8 million from the equity offering. The offering is expected to close on or about April 3, 2013.

Overview

Our business-to-business (“B2B”), e-commerce solutions drive online sales and renewals for products, subscriptions and training for our clients and their channel partners. Rainmaker does this with an advanced e-commerce open architecture Software-as-a-Service (“SaaS”) platform that easily integrates cloud-based applications and on-premise applications with its Global Commerce Services to provide its clients with a strategic partnership. We believe that a key differentiator of the Rainmaker solution is that we provide Global Commerce Services supporting multiple payment methods, currencies and language capabilities. Rainmaker offers three primary solutions designed to provide our clients with a mechanism to increase revenue from our clients' mid-market customers:

GrowCommerce B2B Storefront: Our GrowCommerce platform allows customers to sell digital, physical or subscription based products directly to their SMB customers or via their channel partners. Customers have the potential to build sales and expand into fast growing online markets worldwide, while we handle the applicable country's specific details, such as taxes, regulations, payments, e-marketing and more. Our solution's key features are its ability to handle complex pricing configurations including volume discounts and its ability to support standard business buying processes, such as purchase orders and price quotes good for up to 30-days, all while providing the end customer the ability to request assistance from a Global Commerce Service Agent to support product or purchase questions that are often needed for large dollar value orders.

GrowCommerce for Renewals: By integrating software, managed services and data, GrowCommerce for Renewals provides end-to-end management and optimization of the service contract renewals process and high-level visibility into contract details that can result in increased renewal rates. GrowCommerce for Renewals delivers personalized, multi-mode integrated marketing notifications, allows customers to streamline business process to effectively manage orders, and automates complex pricing, including co-termination, contract consolidation and quote management, and delivers support for complete click-to-cash process, including invoicing, credit and collection.

ViewCentral Learning Management System: The Rainmaker ViewCentral ("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, and typical implementation time is between three to five weeks.

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Rainmaker delivers a high value service to our clients' customers in a cost effective manner while delivering channel friendly ways designed to increase online sales. The scalability of our solution enables us to sell in over 34 languages from sales centers around the globe. Our solution is designed to help provide optimized service revenue performance across different revenue models, distribution models and segments within technology and technology-enabled industries, including hardware, software, software-as-a-service, medical, telco, and industrial systems.

We currently have approximately 40 clients, operating primarily in the computer hardware and software and information services industries.

Rainmaker Solutions

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

GrowCommerce B2B Storefront: Designed to allow our clients to sell more of their products and maintenance contracts directly to their customers or via their channel partners through the GrowCommerce platform. Benefits include:

i. Direct and channel friendly sales through clearly defined rules designed to ensure that client business rules drive the outcome of each client contact point in order to overcome confusion and deliver an integrated communication of the status of each customer to both the client and its channel partners.

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

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

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

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

GrowCommerce for Renewals: Designed to maximize renewal rates, subscriptions and other contracts to allow our clients to significantly increase the lifetime value of their customers. Benefits of this solution include:

i. The ability to deliver time sensitive pre-expiration countdown emails and phone campaigns potentially resulting in higher renewal rates.

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

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

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

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

View Central Learning Management System: Our LMS solution is designed to provide our clients with the potential to generate more revenue selling training programs to their customers. Benefits include:

i. The ability to educate without our client losing sight of its core competency:

1. Targeted delivery methods to each specific market segment.

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

3. Tools and reporting for on-going process improvements.

ii. Product modules include:

1. Instructor led training.

2. Vclassroom.

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3. Elearning.

4. Replay.

We offer high touch inbound and outbound Global Commerce Service Agents utilizing multiple communication methods including online chat, email, social media and phone support to assist potential buyers. Our Global Commerce Service Agents are trained to capitalize on opportunities to cross-sell and up-sell new products and services to potentially increase total revenue on existing sales.

Each product in the Rainmaker e-commerce solution suite can be purchased individually to meet specific client needs or as an integrated product suite designed to deliver maximum revenue during the B2B customer buying process.

Strategy

Our objective is to be the leading global provider of B2B e-commerce solutions in selected markets. Key elements of our strategy include:

• More Revenue for Our Existing Clients.    We continually seek to identify areas where we can apply technology and our expertise to improve renewal rates and sell higher levels of service and online training on behalf of our clients.

• Cross-Sell Opportunities with Existing Clients.    We continually seek cross-selling opportunities to increase the range of services provided to our existing clients, most of which currently use our services to support only selected product or customer segments. Our growth strategy includes seeking opportunities to expand our services within our existing customer base. We believe our clients desire to reduce the number of vendors they utilize, therefore providing us significant cross-sales opportunities to expand our services to our existing clients.

• Sign New Clients.    Our focus on specific sectors enables us to employ industry experts, pursue targeted sales and marketing campaigns, develop effective marketing and customer retention programs, and capitalize on referrals from existing clients.

• Enhance Technology and Add New Products and Services.    We believeour integrated approach, which marries online cloud-based selling with the human element of global sales agents to ensure our clients are positioned to “make the sale” regardless of the end user's preferred contact method, is a powerful competitive edge. Nevertheless, we plan to continue to enhance our technological capability with new products and services that deliver high value to our clients' customers in a cost effective manner.

In addition to strategically expanding our reach, we believe approaching the right target market segments is also a factor in our success. Our target markets include:

• Platform and management companies characterized as software and hardware systems and tools needed to run any major business;

• Operations and professional groups in software and services businesses;

• Product manufacturing and service delivery businesses; and

• Data management and information services companies.

Together these target markets represent a market size of more than 5,000 brands. The key elements these brands have in common include:

• They sell a product or a service with a recurring revenue stream;

• They sell B2B into a defined SMB segment;

• There is an intellectual property component to our clients' products as they are not individual purchase commodity items;

• They sell direct, through channel partners, or a combination of both; and

• They utilize trial programs.

Our Clients

Our clients consist of large enterprises in a range of industries, including computer hardware and software and information services selling into their SMB market. Our clients typically have large customer bases and products and services that require complex selling processes to generate sales, thereby enabling them to benefit from our focused sales and marketing programs to assist them to generate more revenue. In the year ended December 31, 2012, three clients each accounted for 10% or more of our revenue, with Microsoft Corporation ("Microsoft") representing approximately 35% of our net revenue, Symantec Corporation ("Symantec") representing approximately 21% of our net revenue and the Hewlett-Packard Company ("Hewlett-Packard") representing approximately 11% of our net revenue. During the year ended December 31, 2011, three clients each accounted for

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10% or more of our net revenue, with Microsoft representing approximately 22% of our net revenue, Symantec representing approximately 21% of our net revenue and Hewlett-Packard representing approximately 14% of our net revenue. In 2010, three clients each accounted for 10% or more of our net revenue, with Sun Microsystems representing approximately 22% of our net revenue, Hewlett-Packard representing approximately 19% of our net revenue and Symantec accounting for approximately 16% of our net revenue.

Sales and Marketing

We market our services through a direct sales force of representatives. We also have an opportunity to cross-sell our solutions to our existing clients. We use direct marketing, public relations and trade association programs to communicate our service offerings to potential clients. Our direct sales professionals typically have significant enterprise-level sales experience. We employ sales professionals who are responsible for developing new clients, as well as new opportunities with existing clients. We support the sales process with cross-functional representation from other departments, including operations, finance, client marketing, data services and technology. We also support this effort with product management professionals responsible for continued development and enhancement of our service offerings.

Competition

The market for sales and marketing solutions is intensely competitive, evolving rapidly and highly fragmented. We believe the following factors are the principal methods of competition in our market:

• Ability to offer integrated solutions, for both Internet and traditional sales and marketing;

• Sales and marketing focus and domain expertise;

• Product performance, scalability and reliability;

• Breadth and depth of solutions;

• Strong reference customers;

• Return on investment; and

• Total cost of ownership.

In addition to the competitors listed below, we face competition from internal departments of current and potential clients. The competition we encounter includes:

• e-commerce capabilities from companies such as Digital River;

• Solutions designed to sell service and renewal contracts and provide lead generation services from companies such as Encover and ServiceSource;

• Providers of business databases, data processing and database marketing services such as Harte-Hanks and infoUSA;

• Companies that offer various online marketing services, technologies and products, including Unica and ValueClick; and

• Companies that offer training management systems, such as Saba and SumTotal.

Many of our current and potential competitors have significantly greater financial, technical, marketing, service and other resources than we have. In addition, many of these companies also have a larger installed base of users, longer operating histories and greater name recognition than we have. Competitors with greater financial resources may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. These competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns.

Given our products, along with our sales and marketing solutions that address a company's needs at each customer contact point, we believe we have a competitive advantage in our space. While these solutions are available on an individual basis through other vendors, we are not aware at this time of other vendors that provide a comparable end-to-end solution such as ours. Purchasing individual solutions from multiple vendors would require investment, technical integration, and expert personnel. Thus, we believe we deliver a strong end-to-end solution among a sea of individually competitive products.

Technology and Development

We employ technology and development personnel who maintain and develop the software and hardware platforms that support our marketing and sales operations. We collect customer input and conduct regular internal reviews to identify areas for improvement of our existing processes and systems as well as opportunities for development of new service offerings. Our technology platforms are based on a combination of internally developed proprietary software and commercially available hardware and software.

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Employees

As of December 31, 2012, we employed approximately 130 employees. This compares to approximately 1,280 employees as of December 31, 2011, which included approximately 850 employees from our Manila operations, which we sold in December 2012. None of our employees are represented by labor unions or are subject to collective bargaining agreements, nor have we experienced any work stoppage. We consider our relationships with our employees to be good.

Intellectual Property

We protect our intellectual property through a combination of service mark, trade name and copyright protection, trade secret protection and confidentiality agreements with our employees and independent contractors, and have procedures to control access to and distribution of our technology, documentation and other proprietary information and the proprietary information of our clients. We do not own or have rights with respect to any patents or patent applications. Effective trade name, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services and products are made available on the Internet. The steps we take to protect our proprietary rights may not be adequate and third parties may infringe or misappropriate our copyrights, trade names, trademarks, service marks and similar proprietary rights. In addition, other parties may assert claims of infringement of intellectual property or other proprietary rights against us. The legal status of many aspects of intellectual property on the Internet is currently uncertain. We have applied to register the “Rainmaker Systems,” “Rainmaker” and design marks in the U.S. and certain foreign countries, and have received registrations for the “Rainmaker Systems” mark in the U.S., Canada, Australia, the European Community, Switzerland and Norway, and the “Rainmaker” mark and design in the U.S., Canada, Mexico and the European Community.

Government Regulation

We are subject, both directly and indirectly, to various laws and governmental regulations relating to our business. In addition, laws with respect to online commerce may cover issues such as pricing, distribution, characteristics and quality of products and services. Laws affecting the Internet may also cover content, copyrights, libel and personal privacy. Any new legislation or regulation or the application of existing laws and regulations to the Internet could have a material adverse effect on our business. Our costs of compliance with environmental laws are not material.

Governments of various states and certain foreign countries may attempt to regulate our transmissions or levy sales or other taxes relating to our activities. As our services are available over the Internet virtually anywhere in the world, multiple jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each of those jurisdictions. Our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties for the failure to qualify. It is possible that state and foreign governments might also attempt to regulate our transmissions of content on our website or prosecute us for violations of their laws. We cannot assure you that state or foreign governments will not charge us with violations of local laws or that we might not unintentionally violate these laws in the future.

A number of government authorities are increasingly focusing on online personal data privacy and security issues and the use of personal information. Our business could be adversely affected if new regulations regarding the use of personal information are introduced or if government authorities choose to investigate our privacy practices. In addition, the European Union has adopted directives addressing data privacy that may limit the collection and use of some information regarding Internet users. Such directives may limit our ability to target our clients' customers or to collect and use such information.

Our business is also subject to regulation in connection with our direct marketing activities. The Federal Trade Commission's(“FTC”) telesales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation and specifically addresses other perceived telesales abuses in the offering of prizes. Additionally, the FTC's rules and various state laws limit the hours during which telemarketers may call consumers and which consumers may be called. The Federal Telephone Consumer Protection Act of 1991 contains other restrictions on facsimile transmissions and on telemarketers, including a prohibition on the use of automated telephone dialing equipment to call certain telephone numbers. The Federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 contains restrictions on the content and distribution of commercial e-mail. A number of states also regulate telesales and some states have enacted restrictions similar to these federal laws. In addition, a number of states regulate e-mail and facsimile transmissions. State regulations of telesales, e-mail and facsimile transmissions may be more restrictive than federal laws. The failure to comply with applicable statutes and regulations could have a material adverse effect on our business. There can be no assurance that additional federal or state legislation, or changes in regulatory implementation or judicial interpretation of existing or future laws, would not limit our activities in the future or significantly increase the cost of regulatory compliance.

Corporate Information

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We were founded in 1991 and are headquartered in Silicon Valley in Campbell, California. As of December 31, 2012, we have operation centers in or near Austin, Texas and London, England. On January 25, 2013, we announced that our operations in Austin, Texas will be consolidated into our operations at our headquarters in Silicon Valley and in our operations center near London, England. We are incorporated in Delaware. Our principal office is located at 900 East Hamilton Ave., Suite 400, Campbell, CA 95008 and our phone number is (408) 626-3800. Our website is www.rainmakersystems.com. We make available, free of charge, on or through our website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission, or SEC. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K.

ITEM 1A. RISK FACTORS

Risks Related to Our Business

We have incurred recent losses and may incur losses in the future.

We incurred a net loss in three of the four quarters of 2010, as well as all four quarters of 2011 and 2012. Our accumulated deficit through December 31, 2012 is $128.2 million. We cannot guarantee that our future operations will result in net income. A failure to increase future revenues will harm our business. If our revenues grow more slowly than we anticipate or our operating expenses exceed our expectations, our operating results will suffer. Factors which may cause us to incur losses in the future include:

• the demand for and acceptance of our services;

• the demand for our clients’ products and services;

• the length of the sales and integration cycle for our new clients;

• our ability to expand relationships with existing clients;

• our ability to develop and implement additional services, products and technologies;

• the success of our direct sales force;

• our ability to retain existing clients;

• the granting of additional stock options and/or restricted stock awards resulting in additional stock-based compensation expense;

• new product and service offerings from our competitors;

• general economic conditions, especially given the very difficult and challenging macroeconomic environment and the difficulty in predicting demand during these uncertain times;

• regulatory compliance costs;

• our ability to integrate acquisitions and the costs and write-downs associated with them, including the amortization of intangibles;

• our ability to expand our operations, including potential further international expansion; and

• the loss of a significant client.

We may need to raise additional capital to meet our working capital and planned growth objectives it might not be available to us on acceptable terms, if at all.

We may need to secure additional capital to fund our working capital and capital expenditure requirements. To date, we have raised capital through both equity and debt financings. On April 25, 2007, we completed a follow-on public offering of our common stock in which we issued an additional 3.5 million shares and raised approximately $27 million in net proceeds. In June 2011, we issued and sold 3.7 million shares of our common stock, together with warrants to purchase up to an aggregate 1.6 million additional shares, in a public offering. We received gross cash proceeds of approximately $3.9 million from the equity offering. On April 1, 2013, we announced that we had entered into subscription agreements with various investors for the sale of 13.0 million shares of our common stock in a registered direct offering. We expect to receive gross proceeds of approximately $5.8 million from the equity offering. The offering is expected to close on or about April 3, 2013. Any additional equity financing will be dilutive to stockholders, and additional debt financing, if available, may involve restrictive covenants and interest expense that will affect our financial results. At December 31, 2012, our cash balance was $4.5 million, and our net working capital deficit was $6.2 million. We believe that our cash and cash equivalent balance and anticipated improvements in cash flows from operations due to forecasted revenue growth and operating cash savings from our implemented and planned cost saving initiatives will be sufficient to meet our operating requirements for the next twelve months. We expect to maintain our current level of borrowings, subject to our ability to arrange new or renew our existing debt facilities, to assist in funding our future growth and working capital

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requirements. If forecasted revenue growth does not materialize, or if we are unsuccessful in reducing the usage of cash to fund our operations, we will be required to seek additional external financing or further reduce operating costs, which could jeopardize our current operations and future strategic initiatives and business plans, and affect our ability to pay our liabilities as they become due. Other external financing sources may not be available, may be inadequate to fund our operations, or may be on terms unfavorable to the Company.

Because we depend on a small number of clients for a significant portion of our revenue, the loss of a single client or any significant reduction in the volume of services we provide to any of our significant clients could result in a substantial decrease in our revenue and have a material adverse impact on our financial position.

In the year ended December 31, 2012, three clients each accounted for 10% or more of our revenue, with Microsoft Corporation ("Microsoft") representing approximately 35% of our net revenue, Symantec Corporation ("Symantec") representing approximately 21% of our net revenue and the Hewlett-Packard Company ("Hewlett-Packard") representing approximately 11% of our net revenue. During the year ended December 31, 2011, three clients each accounted for 10% or more of our net revenue, with Microsoft representing approximately 22% of our net revenue, Symantec representing approximately 21% of our net revenue and Hewlett-Packard representing approximately 14% of our net revenue. In 2010, three clients each accounted for 10% or more of our net revenue, with Sun Microsystems representing approximately 22% of our net revenue, Hewlett-Packard representing approximately 19% of our net revenue and Symantec accounting for approximately 16% of our net revenue.

We expect that a small number of clients will continue to account for a significant portion of our net revenue for the foreseeable future. The loss of any of our significant clients or client initiated changes to our client programs may cause a significant decrease in our revenue. In addition, our software and technology clients operate in industries that experience consolidation from time to time, which could reduce the number of our existing and potential clients. Any loss of a single significant client or changes to client programs may have a material adverse effect on our financial position, cash flows and results of operations.

Our clients may, from time to time, restructure their businesses or get acquired by another company, which may adversely impact the revenues we generate from those clients. Sun Microsystems, formerly a significant client in 2010, was acquired by Oracle Corporation in 2010, and thereafter elected to terminate our services. Any restructuring, termination or non-renewal of our services by any of our significant clients could reduce the volume of services we provide and further reduce our expected future revenues, which would likely have a material adverse effect on our financial position, cash flows and results of operations.

Macro-economic conditions could negatively impact our results of operations.

Unfavorable macro-economic conditions have contributed to our clients reducing their overall marketing spending and our clients’ customers reducing their purchases of our clients’ products and services. If the economic climate in the U.S. or abroad does not improve from its current condition or deteriorates, our clients or prospective clients could reduce or delay their purchases of our services, and our clients’ customers could reduce or delay their purchases of our clients’ products and services, which would adversely impact our revenues and our profitability.

Our business plan requires us to effectively manage our costs. If we do not achieve our cost management objectives, our financial results could be adversely affected.

Our business plan and expectations for the future require that we effectively manage our cost structure, including our operating expenses and capital expenditures. To the extent that we do not effectively manage our costs, our financial results may be adversely affected, particularly if the current unfavorable macro-economic conditions in the U.S. and abroad continue to contribute to our clients reducing their overall marketing spending and our clients’ customers reducing their purchases of our clients’ products and services, thereby negatively affecting our revenue.

We have strong competitors and may not be able to compete effectively against them.

Competition in our industry is intense, and such competition may increase in the future. Our competitors include e-commerce service providers of service contract sales and lead generation services, enterprise application software providers, providers of database marketing services, online marketing services and companies that offer training management systems. We also face competition from internal marketing and technology departments of current and potential clients. Additionally, for portions of our service offering, we may face competition from outsource providers with substantial offshore facilities which may enable them to compete aggressively with similar service offerings at a substantially lower price. Many of our existing or potential competitors have greater brand recognition, longer operating histories, and significantly greater financial, technical and marketing resources, which could further impact our ability to address competitive pressures. Should competitive factors require us to increase spending for, and investment in, client acquisition and retention or for the development of new services, our expenses could increase disproportionately to our revenues. Competitive pressures may also necessitate price reductions and other actions that would likely affect our business adversely. Additionally, there can be no assurances that we will have the resources to maintain a higher level

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of spending to address changes in the competitive landscape. Failure to maintain or to produce revenue proportionate to any increase in expenses would have a negative impact on our financial position, cash flows and operating results.

Our agreements with our clients allow for termination with short notice periods.

Our agreements generally allow our clients to terminate such agreements without cause with 30 to 90 days notice. Our clients are under no obligation to renew their engagements with us when their contracts come up for renewal. In addition, our agreements with our clients are generally not exclusive. Our agreements with Symantec expire in March 2014 and can generally be terminated prior to expiration with ninety days notice. Our agreements with Microsoft expire at various dates from June 2013 through June 2015, and generally can be terminated with thirty days notice.

Our revenue will decline if demand for our clients’ products and services decreases.

A significant portion of our business consists of marketing and selling our clients’ products and services to their customers. In addition, a significant percentage of our revenue is based on a “revenue share” and “pay for performance” model in which our revenue is based on the revenue we generate for our clients or the amount of our clients’ products and services that we sell. Accordingly, if a particular client’s products and services fail to appeal to its customers for reasons beyond our control, such as preference for a competing product or service, our revenue may decline. In addition, revenue from our service offerings could decline if our clients reduce their marketing efforts.

Any efforts we may make in the future to expand our service offerings may not succeed.

To date, we have focused our business on providing our service offerings to enterprises in selected markets that retain our services in an effort to market and sell their offerings to their business customers. We may seek to expand our service offerings in the future to other markets, including other geographical areas and industry verticals or seek to provide other related services to our clients. Any such effort to expand could cause us to incur significant investment costs and expenses and could ultimately not result in significant revenue growth for us. In addition, any efforts to expand could divert management resources from existing operations and require us to commit significant financial and other resources to unproven businesses.

We have signed clients to our channel contract sales solution to increase revenue from our clients’ resellers. While this solution has been adopted by a number of resellers of our clients, there is no assurance that all major resellers will use this solution, which may limit us from achieving the full revenue potential of this solution.

Any acquisitions or strategic transactions in which we participate could result in dilution, unfavorable accounting charges and difficulties in successfully managing our business.

As part of our business strategy, we review from time to time acquisitions or other strategic transactions that would complement our existing business or enhance our technology capabilities. Future acquisitions or strategic transactions could result in potentially dilutive issuances of equity securities, the use of cash, large and immediate write-offs, the incurrence of debt and contingent liabilities, amortization of intangible assets or impairment of goodwill, any of which could cause our financial performance to suffer. Furthermore, acquisitions or other strategic transactions entail numerous risks and uncertainties, including:

• difficulties assimilating the operations, personnel, technologies, products and information systems of the combined companies;

• diversion of management’s attention;

• risks of entering geographic and business markets in which we have no or limited prior experience; and

• potential loss of key employees of acquired organizations.

We perform a valuation analysis on all of our acquisitions as a basis for initially recognizing and measuring intangible assets including goodwill in our financial statements. We are required to test for impairment the carrying value of our goodwill at the reporting unit level at least annually, and we are required to test for impairment the carrying value of these assets as well as our other intangible assets that are subject to amortization and our tangible long-lived assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Such events or changes in circumstances may include a persistent decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry.

We performed our annual goodwill impairment evaluation for 2012 as of December 31, 2012, and noted that no impairment existed at that time. At December 31, 2012, we had $5.3 million in goodwill. In the future, our test of impairment could result in further adjustments, or in write-downs or write-offs of assets, which would negatively affect our financial position and operating results.

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We cannot be certain that we would be able to successfully integrate any operations, personnel, technologies, products and information systems that might be acquired in the future, and our failure to do so could have a material adverse effect on our financial position, cash flows and operating results.

Our business strategy may include further expansion into foreign markets, which would require increased expenditures, and if our international operations are not successfully implemented, they may not result in increased revenue or growth of our business.

On January 25, 2007, we acquired the business of CAS Systems, which had operations near Montreal, Canada. In the first quarter of 2009, we established our Rainmaker Europe subsidiary in the United Kingdom. On January 29, 2010, we acquired Optima, headquartered near London, England. Our growth strategy may include further expansion into international markets. Our international expansion may require significant additional financial resources and management attention, and could have a negative effect on our financial position, cash flows and operating results. In addition, we may be exposed to associated risks and challenges, including:

• regional and economic political conditions;

• foreign currency fluctuations;

• different or lesser protection of intellectual property rights;

• longer accounts receivable collection cycles;

• different pricing environments;

• difficulty in staffing and managing foreign operations;

• laws and business practices favoring local competitors; and

• foreign government regulations.

We cannot guarantee that we will be successful in creating international demand for our services and software or that we will be able to effectively sell our clients’ products and services in international markets.

Our growth and success depend, in part, on our ability to add new clients.

Key elements of our growth strategy include adding new clients, extending the term of existing client agreements and growing the business of our existing clients. Competition for clients is intense, and we may not be able to add new clients or keep existing clients on favorable terms, or at all. If we are unable to add and launch new clients within the time frames projected by us, we may not be able to achieve our targeted results in the expected periods.

Our success depends on our ability to successfully restructure our business and manage growth.

We have recently undergone changes in our executive management team. Our new Chief Executive Officer, Donald Massaro, joined our Company in December 2012, and our new Chief Financial Officer, Mallorie Burak, joined our Company in January 2013. Our new executive management team has undertaken a restructuring of our Company's operations aimed at repositioning the Company for future growth. Execution of the plan by the new management team to restructure and reposition the business is essential to future growth. In addition, any future growth will place additional demands on our managerial, administrative, operational and financial resources. We will need to improve our operational, financial and managerial controls and information systems and procedures and will need to train and manage our overall work force. If we are unable to successfully implement our restructuring plan or manage additional growth effectively, our business, financial condition and results of operations will be significantly harmed.

The length and unpredictability of the sales and integration cycles could cause delays in our revenue growth.

Selection of our services and software can entail an extended decision making process on the part of prospective clients. We often must educate our potential clients regarding the use and benefit of our services and software, which may delay the evaluation and acceptance process. For our CaaS solutions, the selling cycle can extend to approximately 9 to 12 months or longer between initial client contact and signing of an agreement. Once our services and software are selected, integration with our clients’ systems can be a lengthy process, which further impacts the timing of revenue. Because we are unable to control many of the factors that will influence our clients’ buying decisions or the integration process of our services and software, it can be difficult to forecast the growth and timing of our revenue.

Our quarterly operating results may fluctuate, and if we do not meet market expectations, our stock price could decline.

Our future operating results may not follow past trends in every quarter. In any future quarter, our operating results may fall below the expectations of public market analysts and investors.

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Factors which may cause our future operating results to be below expectations include:

• the growth of the market for our sales and marketing solutions;

• the demand for and acceptance of our services;

• the demand for our clients’ products and services;

• the length of the sales and integration cycle for our new clients;

• our ability to expand relationships with existing clients;

• our ability to develop and implement additional services, products and technologies;

• the success of our direct sales force;

• our ability to retain existing clients;

• the granting of additional stock options and/or restricted stock awards resulting in additional stock-based compensation expense;

• new product and service offerings from our competitors;

• general economic conditions;

• regulatory compliance costs;

• seasonality in our sales;

• dependence on key personnel and employee turnover; and

• the loss of a significant client.

We are subject to certain financial covenants under our loan agreement with Comerica Bank. If we are unable to satisfy these covenants or obtain a waiver, the lender could demand immediate repayment of their loans made to us.

On June 14, 2012, we entered into a Loan and Security Agreement with Comerica Bank (the “Credit Facility”), which replaced Bridge Bank, N.A. as our primary lender. The maximum amount of credit available to us under the Credit Facility is $5 million, comprised of a $3 million term loan facility ("Term Loan") and a $2 million revolving line of credit (“Revolving Line”), which includes a $500,000 sub-facility for letters of credit and certain credit card services. The loan agreement is secured by substantially all of our consolidated assets. We must comply with certain financial covenants, including maintaining unrestricted cash with Comerica Bank equal to the greater of $1 million or the aggregate outstanding amount of Term Loan advances, and not less than $1 million upon achieving positive cash flow, and maintaining a minimum liquidity ratio with respect to all indebtedness owing to Comerica Bank of at least 1.25 to 1.00, which Comerica Bank agreed to reduce to 1.00 to 1.00 until April 15, 2013. The Credit Facility contains customary covenants that will, subject to limited exceptions, require Comerica Bank's approval to, among other things, (i) create liens; (ii) make capital expenditures; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The Credit Facility also provides for customary events of default, including nonpayment, breach of covenants, material adverse events, payment defaults of other indebtedness, failure to deliver audited financial statements with an unqualified opinion, and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Credit Facility. If we are not able to comply with such covenants or if any event of default otherwise occurs, our outstanding loan balance could become due and payable immediately and our existing credit facilities with Comerica Bank could be canceled. Unless we are able to obtain a waiver from Comerica Bank for any covenant violations, our business, financial condition and results of operations would be significantly harmed. For the year ended December 31, 2012, we were in compliance with these covenants.

We may experience seasonality in our sales, which could cause our quarterly operating results to fluctuate from quarter to quarter.

As we continue to grow our service offerings, we will experience seasonal fluctuations in our revenue as companies’ spending on marketing can be stronger in some quarters than others partially due to our clients’ budget and fiscal schedules. In addition, since certain of our service offerings have lower gross margins than our other service offerings, we may experience quarterly fluctuations in our financial performance as a result of a seasonal shift in the mix of our service offerings.

If we are unable to attract and retain highly qualified board members, management, sales and technical personnel, the quality of our services may decline, and our ability to execute our growth strategies may be harmed.

Our success depends, to a significant extent, upon the contributions of our board members, executive officers and key sales and technical personnel and our ability to attract and retain highly qualified sales, technical and managerial personnel. Competition for personnel is intense as these personnel are limited in supply. We have at times experienced difficulty in recruiting qualified personnel, and there can be no assurance that we will not experience difficulties in the future, which could limit our future growth. The loss of members of our board of directors or certain key personnel could seriously harm our business.

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We rely heavily on our communications infrastructure, and the failure to invest in or the loss of these systems could disrupt the operation and growth of our business and result in the loss of clients or our clients’ customers.

Our success is dependent in large part on our continued investment in sophisticated computer, internet and telecommunications systems. We have invested significantly in technology and anticipate that it will be necessary to continue to do so in the future to remain competitive. These technologies are evolving rapidly and are characterized by short product life cycles, which require us to anticipate technology developments. We may be unsuccessful in anticipating, managing, adopting and integrating technology changes on a timely basis, or we may not have the capital resources available to invest in new technologies.

Our operations could suffer from telecommunications or technology downtime, disruptions or increased costs.

In the event that one of our operations facilities has a lapse of service or damage to such facility, our clients could experience interruptions in our service as well as delays, and we might incur additional expense in arranging new facilities and services. Our disaster recovery computer hardware and systems located at our facilities in California, Texas and the United Kingdom have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring at one of our operations facilities. In the event of a disaster in which one of our operations facilities is irreparably damaged or destroyed, we could experience lengthy interruptions in our service. While we have not experienced extended system failures in the past, any interruptions or delays in our service, whether as a result of third party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with clients and our reputation. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability, cause us to issue credits or cause clients to fail to renew their contracts, any of which could adversely affect our business, financial condition and results of operations. Temporary or permanent loss of these systems could limit our ability to conduct our business and result in lost revenue.

We have made significant investments in technology systems that operate our business operations. Such assets are subject to reviews for impairment in the event they are not fully utilized.

We have made significant investments in technology and system improvements related to servicing clients and capitalized those costs while the technology was being developed. We have invested $9 million in e-commerce technology and system improvements, which have a carrying value of $2.2 million as of December 31, 2012, and are generally amortized over two to five years. If unforeseen events or circumstances prohibit us from using these systems, we may be forced to impair one or more of these systems, which could result in a non-cash impairment charge to our financial results. We expect to invest additional amounts into technology and system improvements in the future which would bear similar risks.

Defects or errors in our software could harm our reputation, impair our ability to sell our services and result in significant costs to us.

Our software is complex and may contain undetected defects or errors. We have not suffered significant harm from any defects or errors to date, but we have from time to time found defects in our software and we may discover additional defects in the future. We may not be able to detect and correct defects or errors before releasing software. Consequently, we or our clients may discover defects or errors after our software has been implemented. We have in the past implemented, and may in the future need to implement, corrections to our software to correct defects or errors. The occurrence of any defects or errors could result in:

• our inability to execute our services on behalf of our clients;

• delays in payment to us by customers;

• damage to our reputation;

• diversion of our resources;

• legal claims, including product liability claims, against us;

• increased service and warranty expenses or financial concessions; and

• increased insurance costs.

Our liability insurance may not be adequate to cover all of the costs resulting from any legal claims. Moreover, we cannot assure you that our current liability insurance coverage will continue to be available on acceptable terms or that the insurer will not deny coverage as to any future claim. The successful assertion against us of one or more large claims that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business and operating results. Furthermore, even if we succeed in any litigation, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

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If we are unable to safeguard our networks and clients’ data, our clients may not use our services and our business may be harmed.

Our networks may be vulnerable to unauthorized access, computer hacking, computer viruses and other security problems. An individual who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in our operations. We may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems caused by any breaches. Security measures that we adopt from time to time may be inadequate.

If we fail to adequately protect our intellectual property or face a claim of intellectual property infringement by a third party, we may lose our intellectual property rights and be liable for significant damages.

We cannot guarantee that the steps we have taken to protect our proprietary rights and information will be adequate to deter misappropriation of our intellectual property. In addition, we may not be able to detect unauthorized use of our intellectual property and take appropriate steps to enforce our rights. If third parties infringe or misappropriate our trade secrets, copyrights, trademarks, service marks, trade names or other proprietary information, our business could be seriously harmed. In addition, third parties may assert infringement claims against us that we violated their intellectual property rights. These claims, even if not true, could result in significant legal and other costs and may be a distraction to management. In addition, protection of intellectual property in many foreign countries is weaker and less reliable than in the U.S., so if our business further expands into foreign countries, risks associated with protecting our intellectual property will increase.

Taxing authorities could challenge our historical and future tax positions as well as our allocation of taxable income among our subsidiaries.

The amount of income taxes we pay is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. We have taken and will continue to take tax positions based on our interpretation of such tax laws. While we believe that we have complied with all applicable income tax laws, there can be no assurance that a taxing authority will not have a different interpretation of the law and assess us with additional taxes. We have been audited from time to time and should additional taxes be assessed, this may result in a material adverse effect on our results of operations or financial condition.

We conduct sales, marketing, and other services through our subsidiaries located in various tax jurisdictions around the world. While our transfer pricing methodology is based on economic studies which we believe are reasonable, the price charged for these services could be challenged by the various tax authorities resulting in additional tax liability, interest and/or penalties.

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

We file sales tax returns in certain states within the U.S. as required by law and collect and remit sales tax on certain client contracts for a portion of the sales and marketing services that we provide. We do not collect sales or other similar taxes in other states and many of the states do not apply sales or similar taxes to the vast majority of the services that we provide. However, one or more states could seek to impose additional sales or use tax collection and record-keeping obligations on us. Any successful action by state, foreign or other authorities to compel us to collect and remit sales, use or similar taxes, either retroactively, prospectively or both, could adversely affect our results of operations and business.

We are from time to time involved in litigation incidental to our business, which in the event of an adverse determination could have a material adverse effect on our business, financial condition or results of operations.

From time to time in the ordinary course of business, we are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations. Litigation, in general, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings cannot be predicted with any certainty and in the case of more complex legal proceedings, such as intellectual property and securities litigation, the results are difficult to predict at all. We may incur substantial expenses and devote substantial time to defend these claims as they arise, whether or not such claims are meritorious. In addition, in the event of a determination adverse to us, we may incur substantial monetary liability and may be required to implement changes in our business practices, which could have a material adverse effect on our business, financial condition or results of operations. See Item 3 — “Legal Proceedings” for a description of any pending legal proceedings against us.

Risks Related to Our Industry and Other Risks

We operate in a rapidly changing industry and have recently entered new lines of business, all of which make our operating results difficult to predict.

The industry in which we operate is rapidly changing and evolving. The evolution of this industry makes our risks, capital needs and operating results difficult to predict. Any failure to adapt our services in response to changing market and technological

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requirements could adversely affect our operating results. In 2009, we acquired the e-commerce technology of Grow Commerce. We have entered into new lines of business to integrate the Grow Commerce assets to advance our CaaS strategies. We will be required to devote substantial financial, technical, managerial and other resources to such new lines of business and cannot ensure that they will be successful.

We are subject to government regulation of distribution and direct marketing, which could restrict the operation and growth of our business.

The FTC’s telesales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation and specifically address other perceived telemarketing abuses in the offering of prizes. Additionally, the FTC’s rules limit the hours during which telemarketers may call consumers. The Federal Telephone Consumer Protection Act of 1991 contains other restrictions on facsimile transmissions and on telemarketers, including a prohibition on the use of automated telephone dialing equipment to call certain telephone numbers. The Federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 contains restrictions on the content and distribution of commercial e-mail. A number of states also regulate telemarketing and some states have enacted restrictions similar to these federal laws. In addition, a number of states regulate e-mail and facsimile transmissions. State regulations of telesales, e-mail and facsimile transmissions may be more restrictive than federal laws. Additionally, our e-commerce services are subject to U.S. and foreign export laws and regulations. Any failure by us to comply with applicable statutes and regulations could result in penalties and/or restrictions on our ability to provide services. There can be no assurance that additional federal or state legislation, or changes in regulatory implementation or judicial interpretation of existing or future laws, would not limit our activities in the future or significantly increase the cost of regulatory compliance.

The demand for sales and marketing services is highly uncertain.

Demand and acceptance of our sales and marketing services is dependent upon companies’ willingness to allow third parties to provide these services. It is possible that these solutions may never achieve broad market acceptance. If the market for our services does not grow or grows more slowly than we anticipate at any time, our business, financial condition and operating results may be materially adversely affected.

Increased government regulation of the Internet could decrease the demand for our services and increase our cost of doing business.

The increasing popularity and use of the internet and online services may lead to the adoption of new laws and regulations in the U.S. or elsewhere covering issues such as online privacy, copyrights and trademarks, sales taxes and fair business practices, or which require qualification to do business as a foreign corporation in certain jurisdictions. Increased government regulation, or the application of existing laws to online activities, could inhibit Internet growth. A number of government authorities are increasingly focusing on online personal data privacy and security issues and the use of personal information. Our business could be adversely affected if new regulations regarding the use of personal information are introduced or if government authorities choose to investigate our privacy practices. In addition, the European Union has adopted directives addressing data privacy that may limit the collection and use of some information regarding Internet users. Such directives may limit our ability to target our clients’ customers or collect and use information. A decline in the growth of the Internet could decrease demand for our services and increase our cost of doing business and otherwise harm our business.

Failure by us to achieve and maintain effective internal control over financial reporting in accordance with the rules of the SEC could harm our business and operating results and/or result in a loss of investor confidence in our financial reports, which could in turn have a material adverse effect on our business and stock price.

We are required to comply with the management certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We are required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a deficiency or combination of deficiencies that results in a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. If we fail to continue to comply with the requirements of Section 404, we might be subject to sanctions or investigation by regulatory authorities such as the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our consolidated financial statements, and our stock price may be adversely affected as a result. If we fail to remedy any material weakness, our consolidated financial statements may be inaccurate, we may face restricted access to the capital markets and our stock price may be adversely affected.

Terrorist acts and acts of war may harm our business and revenue, costs and expenses, and financial position.

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Terrorist acts or acts of war may cause damage to our employees, facilities, clients, our clients’ customers and vendors which could significantly impact our revenues, costs and expenses, financial position and results of operations. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that cannot be presently predicted. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.

Risks Associated with Our Stock

If we fail to meet the Nasdaq Capital Market listing requirements, our common stock will be delisted.

If we experience losses from our operations, are unable to raise additional funds or our stock price does not meet minimum standards, we may not be able to maintain the standards for continued listing on the Nasdaq Capital Market, which include, among other things, that our common stock maintain a minimum closing bid price of at least $1.00 per share and that we maintain a minimum stockholders’ equity of $2.5 million (subject to applicable grace and cure periods).

On November 12, 2012, we received notification from Nasdaq indicating that we were not in compliance with the Nasdaq's continued listing requirements because we did not meet the minimum stockholders' equity requirement of $2.5 million, nor the alternatives of market value of listed securities or net income from continuing operations.

On December 26, 2012, Nasdaq notified us that we no longer complied with Nasdaq's minimum bid price requirement, because the price of our common stock had closed at less than $1.00 per share over the then previous 30 consecutive trading days. The notice also stated that we would be provided an initial 180 calendar days to regain compliance with minimum bid price requirement, and that we would be eligible for an additional 180 calendar days to regain compliance with the minimum bid price requirement if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid price requirement, and we provide written notice to Nasdaq of our intention to cure the deficiency during the additional compliance period by effecting a reverse stock split, if necessary.

On February 14, 2013, Nasdaq further notified us that the Nasdaq Listing Qualifications Staff had determined to deny our request for continued listing on the Nasdaq Capital Market because we did not meet the minimum stockholders' equity requirement of $2.5 million. We appealed the Staff's determination by requesting a hearing before the Nasdaq Listing Qualifications Panel, which stayed the suspension of trading and de-listing of the Company's common stock while the appeals process is pending. The hearing occurred on March 28, 2013. Accordingly, the common stock will continue to trade on the Nasdaq Capital Market pending the Panel's decision. The Nasdaq Staff has recommended to the Panel that our common stock be delisted from the Nasdaq Capital Market.

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

Our charter documents and Delaware law contain anti-takeover provisions that could deter takeover attempts, even if a transaction would be beneficial to our stockholders.

Our certificate of incorporation and bylaws and certain provisions of Delaware law may make it more difficult for a third party to acquire us, even though an acquisition might be beneficial to our stockholders. For example, our certificate of incorporation provides our board of directors the authority, without stockholder action, to issue up to 5,000,000 shares of preferred stock in one or more series. Our board determines when we will issue preferred stock and the rights, preferences and privileges of any preferred stock. Our certificate of incorporation also provides for a classified board, with each board member serving a staggered three-year term. In addition, our bylaws establish an advance notice procedure for stockholder proposals and for nominating candidates for election as directors. Delaware law also contains provisions that can affect the ability of a third party to take over a company. For example, we are subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, unless certain conditions are met. Section 203 may discourage, delay or prevent an acquisition of our company even at a price our stockholders may find attractive.

Our common stock price is volatile.

During the year ended December 31, 2012, the price for our common stock fluctuated between $0.55 per share and $1.37 per share. During the year ended December 31, 2011, the price for our common stock fluctuated between $0.38 per share and $1.68 per share. The trading price of our common stock may continue to fluctuate widely, including due to:

• quarter to quarter variations in results of operations;

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• loss of a major client;

• changes in the economic environment which could reduce our potential;

• announcements of technological innovations by us or our competitors;

• changes in, or our failure to meet, the expectations of securities analysts;

• new products or services offered by us or our competitors;

• changes in market valuations of similar companies;

• announcements of strategic relationships or acquisitions by us or our competitors;

• other events or factors that may be beyond our control;

• dilution resulting from the raising of additional capital; or

• other factors discussed elsewhere in this Item 1A—“Risk Factors”.

In addition, the securities markets in general have experienced extreme price and trading volume volatility in the past. The trading prices of securities of companies in our industry have fluctuated broadly, often for reasons unrelated to the operating performance of the specific companies. These general market and industry factors may adversely affect the trading price of our common stock, regardless of our actual operating performance.

Our stock price is volatile, and we could face securities class action litigation. In the past, following periods of volatility in the market price of their stock, many companies have been the subjects of securities class action litigation. If we were sued in a securities class action, it could result in substantial costs and a diversion of management’s attention and resources and could cause our stock price to fall.

We may have difficulty obtaining director and officer liability insurance in acceptable amounts for acceptable rates.

We cannot assure that we will be able to obtain in the future sufficient director and officer liability insurance coverage at acceptable rates and with acceptable deductibles and other limitations. Failure to obtain such insurance could materially harm our financial condition in the event that we are required to defend against and resolve any future securities class actions or other claims made against us or our management. Further, the inability to obtain such insurance in adequate amounts may impair our future ability to retain and recruit qualified officers and directors.

Our directors, executive officers and their affiliates own a significant percentage of our common stock and can significantly influence all matters requiring stockholder approval.

As of March 28, 2013, our directors, executive officers and entities affiliated with them together beneficially control approximately 9% of our outstanding shares. As a result, these stockholders, acting together, may have the ability to disproportionately influence all matters requiring stockholder approval, including the election of all directors, and any merger, consolidation or sale of all or substantially all of our assets. Accordingly, such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of our company, which, in turn, could depress the market price of our common stock.

Shares eligible for sale in the future could negatively affect our stock price.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock or the perception that these sales could occur. This might also make it more difficult for us to raise funds through the issuance of securities. As of December 31, 2012, we had 28.4 million outstanding shares of common stock which included 2.3 million unvested shares issued pursuant to restricted stock awards granted to certain employees and directors. These restricted shares will become available for public sales subject to the respective employees’ and directors’ continued employment or service with the Company over vesting periods of not more than four years. In addition, there were an aggregate of 2.8 million shares of common stock issuable upon exercise of outstanding stock options and warrants, including 1.2 million shares of common stock issuable upon exercise of options outstanding under our option plan and 1.6 million shares of common stock issuable upon exercise of the outstanding warrants issued to the investors in our June 2011 equity offering. These warrants have a five-year term. We may issue and/or register additional shares, options, or warrants in the future in connection with acquisitions, employee compensation or otherwise.

On January 28, 2011, we filed a form S-3 registration statement, which was amended February 18, 2011 and declared effective by the SEC on March 7, 2011, for the potential issuance of up to $15 million of securities in the form of our common stock, preferred stock, warrants, units, and/or debt securities, subject to SEC rules limiting any issuance under such registration statement to one-third of our nonaffiliate market capitalization (“public float”) over any period of 12 calendar months for so long as our public float is less than $75 million. We may choose any combination of such securities depending on the market conditions at

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the time of issuance, if any. In June 2011, we issued and sold 3.7 million shares of our common stock, together with warrants to purchase up to an aggregate 1.6 million additional shares, in a public offering. The offering was made pursuant to a prospectus filed with our existing shelf registration statement on Form S-3 noted above, a prospectus supplement dated June 22, 2011 and a free writing prospectus dated June 23, 2011. We received gross cash proceeds of approximately $3.9 million from the equity offering. We may issue additional securities under the above referenced S-3 while it remains effective, subject to the above-described SEC limitations, which may be dilutive to stockholders.

If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. Presently, analysts do not publish reports on us on a regular basis, which in turn may have an adverse effect on our stock price or trading volume. If any of the analysts who cover us now or in the future issue an adverse opinion regarding our stock, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Facilities

In October 2009, we executed a second amendment to the operating lease for our corporate headquarters in Campbell, California to reduce our lease cost. Under this amendment, we reduced the amount of space that we lease to 16,430 square feet. On October 31, 2012, the Company executed a third amendment of the operating lease for our corporate headquarters, effective December 1, 2012, with a P3Y-year term. Under the third amendment, annual base rent was set at approximately $227,000 in the first year of the lease, or $208,000 after deducting free base rent in the first three months of the amended lease, increasing by approximately 3% each year thereafter for the remaining term. In addition, we would continue to pay our proportionate share of operating costs and taxes based on our occupancy, and a letter of credit issued to the landlord for a security deposit of $30,000 replaced the prior letter of credit of $100,000. On January 31, 2013, the Company executed a fourth amendment to the operating lease for our corporate headquarters in Campbell, California, effective February 1, 2013, providing an additional 3,936 square feet of additional space. The fourth amendment did not modify the 3-year term, effective December 1, 2012. Annual base rent under the amended lease is approximately $365,000 in the first year of the lease, or $321,000 after deducting free base rent in the first three months of the amended lease, and increases by 3% each year thereafter for the remaining term. We will continue to pay our proportionate share of operating costs and taxes based on our occupancy, and a letter of credit will be issued to the landlord for a security deposit of $40,000, which will replace the prior letter of credit of $30,000.

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

In October 2012, we executed an office lease agreement for office space in Godalming outside of London, where we have call center operations. The facility's 5,000 square feet of call center space will be utilized to better accommodate our current operations in Europe and provide additional space for expansion. The lease has a thirty-month term and terminates in March 2015. Annual base rent for this facility is 28,000 Great Britain Pounds. Based on the exchange rate at December 31, 2012, annual rent is approximately 46,000 in U.S. dollars.

ITEM 3. LEGAL PROCEEDINGS

On February 8, 2013, the Company's former Chief Executive Officer, Michael Silton, filed a demand for arbitration and complaint with the American Arbitration Association, alleging breach of contract and other causes of action relating to the termination of Mr. Silton's employment with the Company in October 2012. Mr. Silton is seeking full payment of severance benefits in the amount of approximately $1.0 million, plus compensation for unused vacation time, related penalties and punitive damages. On March 21, 2013, the Company filed a responsive pleading in the arbitration proceedings. We dispute and deny the allegations, and we intend to defend the claims.

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

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believe would have a material adverse effect on our financial condition or results of operations. See Item 1A— “Risk Factors” for additional discussion of the litigation and regulatory risks facing our Company.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq Capital Market under the symbol “RMKR”. The following table lists the high and low sale prices for our common stock as reported on Nasdaq for each full quarterly period within the two most recent fiscal years.

	Q1		Q2		Q3		Q4
2012
High	$	0.89	$	0.86	$	1.24	$	1.37
Low	$	0.60	$	0.55	$	0.75	$	0.60
2011
High	$	1.53	$	1.33	$	1.68	$	0.99
Low	$	1.01	$	0.89	$	0.83	$	0.38

As of March 28, 2013, we had approximately 121 common stockholders of record. On March 28, 2013, the last reported sale price of our common stock on the Nasdaq Capital Market was $0.45 per share.

Dividend Policy

We have never declared or paid any cash dividends on our common stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, covenants in our Credit Facility described below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” limit our ability to pay cash dividends.

Issuer Purchases of Equity Securities

During the twelve months ended December 31, 2012, 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. The Company offers employees the ability to have vested shares withheld by the Company in an amount equal to the amount of taxes to be withheld. Based on this, the Company purchased 152,399 shares during the twelve months ended December 31, 2012, with a cost of approximately $122,000 from employees to cover federal and state taxes due.

The table below presents share repurchase activity for the three months ended December 31, 2012. The shares were repurchased by us in connection with satisfaction of tax withholding obligations on vested restricted stock awards.

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
October 2012	496	$1.13	N/A	N/A
November 2012	1,339	$0.77	N/A	N/A
December 2012	690	$0.65	N/A	N/A
Total	2,525	$0.81	N/A	N/A

ITEM 6. SELECTED FINANCIAL DATA

Not applicable for smaller reporting companies.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains forward-looking statements within the meaning of Section 72A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual events and/or future results of operations may differ materially from those contemplated by such forward-looking statements, as a result of the factors described herein, and in the documents incorporated herein by reference, including those factors described under Item 1A—“Risk Factors.”

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Overview

The accompanying consolidated financial statements include the accounts of Rainmaker Systems, Inc. and its wholly-owned subsidiaries. We are a Commerce-as-a-Service (“CaaS”) company that helps large enterprises gain greater market share and increased brand awareness for their cloud-based or on-premise based product offerings in the worldwide SMB markets. Our B2B, e-commerce solutions drive online sales and renewals for products, subscriptions and training for our clients and their channel partners. Rainmaker does this with an advanced e-commerce open architecture SaaS platform that easily integrates cloud-based applications and on-premise applications with its Global Commerce Services to provide its clients with a strategic partnership.

We are headquartered in Silicon Valley in Campbell, California, and have additional operations in or near Austin, Texas and London, England. As announced on January 25, 2013, our operations in Austin, Texas will be consolidated into our operations at our headquarters and in London, England. We also utilize outsourced service providers located in the Dominican Republic and the Philippines. Our global clients consist primarily of large enterprises operating in the computer hardware and software and information services industries.

Our strategy for long-term, sustained growth is to maintain and improve our position as a leading global provider of B2B e-commerce solutions. A key aspect of this enhanced solution is to provide our clients a way to partner with Rainmaker on a scalable, repeatable and reliable sales model. This enables our clients to turn customer contacts into revenue generating opportunities while simplifying otherwise complex sales and marketing needs. We operate as a seamless extension of our clients' sales and marketing teams incorporating their brands and trademarks and leveraging business practices to amplify existing efforts.

Background

We completed our initial public offering in November 1999, raising net proceeds of approximately $37 million. During the period from the initial public offering through 2004, we focused on expanding our market share of the sale of service contracts for our clients.

In February 2005, we completed our first acquisition, Sunset Direct, which added a new service offering—the generation of sales leads, or lead generation, for clients. Sunset Direct provided us with new clients for our service contract sales solution. We relocated most of our operations from California to Sunset Direct’s lower cost location in Texas. Our net revenues grew to $32.1 million in 2005 from $15.3 million in 2004. This growth was due both to $3.9 million, or 25%, year-over-year growth (excluding acquisitions) in our service contract sales solution and $12.9 million from our lead development services. In 2005, we incurred losses of $5.0 million, due in part to redundancy, severance and other transition costs incurred in moving our base of operations to Texas.

Our acquisition of ViewCentral, our Educate solution, in September 2006 added hosted application software for training sales to our service offerings and a significant new customer base. We reported net revenue of $48.9 million for the year 2006, representing year-over-year growth, excluding acquisitions, of 49%, in addition to the $1.2 million of net revenue from our hosted application software for training sales offering. We were profitable in each quarter of 2006 and reported net income of $3.4 million for the year.

In January 2007, we acquired CAS Systems to provide additional complementary lead development functionality, customers, execution expertise and an international presence with its location near Montreal, Canada. In July 2007, we purchased all of the outstanding stock of Qinteraction Limited, which operated an offshore call center located in the Philippines. Qinteraction provided a variety of business solutions including inbound sales and order taking, inbound customer care, outbound telemarketing and lead generation, logistics support and back-office processing. The nature of these services was highly complementary to our other product offerings.

In October 2009, we acquired the e-commerce technology of Grow Commerce. Grow Commerce provided hosting of fan club and membership websites that offered monthly subscriptions and the ability for fee-based downloading of music, videos and other items. Additionally, the technology offered the ability to route orders of merchandise for fulfillment. Since this acquisition, we have invested in this technology to add significant B2B e-commerce functionality.

In January 2010, we acquired Optima Consulting Partners Limited (“Optima”), a B2B lead development provider with offices then in the United Kingdom, France, and Germany. During 2010, we integrated our European operations into one primary office in the United Kingdom and closed our Canadian call center facility.

On February 5, 2010, we received written notice from Sun Microsystems that they had elected to terminate the Global Inside Sales Program Statement of Work agreement dated March 31, 2009, effective as of February 28, 2010. The notice followed the acquisition of Sun Microsystems by Oracle Corporation and affected the contract sales services that we were performing for Sun Microsystems. The Global Inside Sales Program services accounted for approximately 13% of our fiscal 2009 annual net revenue. The Global Inside Sales agreement had a minimum term with notice periods to August 31, 2010. We entered into a settlement

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agreement on March 8, 2010, and received a cash payment of $4,550,000 from Oracle Corporation for the buyout of the Global Inside Sales agreement. The settlement payment was recognized as revenue in the first quarter of 2010. In addition, Oracle agreed to reimburse us $347,000 for employee severance costs related to terminating employees who worked on the Global Inside Sales program. This reimbursement was recognized in payroll and payroll tax expense to offset the employee severance costs.

On December 17, 2012, we completed a stock purchase agreement with Shore Solutions Inc. (“Shore”) pursuant to which we agreed to sell our Manila-based operations of Rainmaker Systems, Ltd. and its wholly owned subsidiary, Rainmaker Asia, Inc. (together, "Manila" or "RSL") Under the stock purchase agreement, we received an initial cash payment at closing of $845,000. In addition to the closing payment, we may receive additional contingent consideration based on multiple earn-out provisions included within the stock purchase agreement, which provide us the ability to receive additional consideration of $300,000 at target plus a nominal percentage of certain revenues of RSL during the period from January 1, 2013 through December 31, 2015. We determined the income statement caption "Loss on disposal of discontinued operations" based on the net book value of RSL as of December 17, 2012.

On January 25, 2013, we announced the closure of our Austin, Texas facility as operations are to be consolidated in our headquarters in Campbell, California and our United Kingdom location as part of a strategic reallocation of resources designed to increased levels of service to customers and operating cost savings.

On January 31, 2013, we executed a fourth amendment to the operating lease for our corporate headquarters in Campbell, California, effective February 1, 2013, providing an additional 3,936 square feet of additional space. The amendment did not modify the 3-year term, effective December 1, 2012. Annual base rent under the amended lease is approximately $365,000 in the first year of the lease, or $321,000 after deducting free base rent in the first three months of the amended lease, and increases by 3% each year thereafter for the remaining term. We will continue to pay our proportionate share of operating costs and taxes based on our occupancy, and a letter of credit will be issued to the landlord for a security deposit of $40,000, which will replace the prior letter of credit of $30,000 to the landlord.

On April 1, 2013, we announced that we had entered into subscription agreements with various investors for the sale of 13.0 million shares of our common stock in a registered direct offering. We expect to receive gross proceeds of approximately $5.8 million from the equity offering. The offering is expected to close on or about April 3, 2013.

We reported net revenue of $32.8 million in 2010, representing a decline over the prior year due primarily to customer losses including the loss of Sun Microsystems, a significant client in 2010. We reported a net loss of $10.0 million for 2010.

We reported net revenue of $26.4 million in 2011, representing a 20% decline over the prior year due primarily the loss of Sun Microsystems during 2010. We reported a net loss of $11.0 million for 2011.

We reported net revenue of $25.4 million in 2012, representing a 4% decline over the prior year. We reported a net loss of $10.3 million for 2012.

Net Revenue

We derive substantially all of our revenue from (i) the online sale of our clients products to their SMB customers, (ii) the sale of our clients' service contracts and maintenance renewals, (iii) lead development and other telesales services, and (iv) software subscriptions for hosted Internet sales of web-based training.

eCommerce and Service Contract Renewals (Contract Sales).    We sell, on behalf of our clients, (i) our clients' products through online sales and (ii) our clients’ service contracts and maintenance renewals. We earn commissions on the sale of these services to our clients’ customers, which we report as our net revenue. We are typically responsible for the complete sales process, including marketing and customer identification and order processing. We also take responsibility for collecting the amount paid by our clients' customers. As a result, when we complete a sale, we record the full amount of the sale on our balance sheet as accounts receivable. We record revenue for the commissions we earn on the transaction, which is based on a fixed percentage of the amount payable by our clients’ customer based on the agreement with our client. We record the difference between the sale amount and our commission as an account payable, representing the amount we will remit to our client according to our payment terms. Our clients’ customers pay us by credit card, check or on payment terms which are generally 30 days from sale. None of our clients’ customers represented more than 10% of our net revenue in 2012. Because our revenue is commission-based, it can vary significantly. Our agreements with our clients for these services typically have one- to three-year terms, with automatic renewal provisions. These agreements are generally terminable on 90 days notice by either party.

We also provide hosted application software which enables our clients’ resellers to renew service contracts with end-users directly. In these situations we earn commissions on sales by our clients or their resellers but take no responsibility or credit risk for collection from the end user of the services.

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Lead Development and Other Telesales Services.    We provide lead development and other telesales services to generate, qualify and develop corporate leads, turning these prospects into sales opportunities and qualified appointments for our clients’ field sales forces and for their channel partners. Our agreements with our clients are generally for fixed fees, have terms ranging from three months to one year and require us to provide fixed resources for the term of the contract. Some of our contracts contain performance requirements. For the significant majority of our lead generation and other telesales service agreements, we recognize revenue as our services are provided; for our performance based contracts, we recognize revenue as we meet the performance objectives. To the extent that our clients pay us in advance of the provision of services, we record deferred revenue and recognize the revenue ratably over the contract period. These agreements are generally terminable on 30 days notice by either party.

Application Software (Training Sales).    We license our hosted application software that our clients use to manage their online and in-person training programs. The licenses are usually for one to three year terms, and are often fully or annually paid in advance. These advance payments are recorded as deferred revenue, and recognized ratably over the contract period.

Gross Margin

Gross margin is calculated as net revenue less the costs associated with selling our clients’ products and services or delivering our services to our clients. Cost of services include compensation costs of telesales personnel, telesales commissions and bonuses, costs of designing, producing and delivering marketing services, credit card fees, bad debts, and salaries and other personnel expenses related to fee-based activities. Costs of services also include the cost of allocated facility and telephone usage for our telesales representatives as well as other direct costs associated with the delivery of our services. Cost of services related to training sales relates primarily to the cost of personnel to support our hosted application. Most of the costs of services are personnel related and are mostly variable in relation to our net revenue. Bonuses and sales commissions will typically change in proportion to net revenue or profitability. Commission and bonus expense included in gross margin are typically related to incentives paid to our telesales representatives for incremental sales of our clients’ contracts and leads generated. Our gross margin will fluctuate in the future with changes in our product mix.

Sales and Marketing Expenses

Sales and marketing expenses are primarily costs associated with client acquisition, including compensation costs of marketing and sales personnel, sales commissions, marketing and promotional expenses, and participation in trade shows and conferences. Commission expense included in sales and marketing expenses relates to the variable compensation paid to our sales people who generate sales growth from new and existing clients. The sales cycle required to generate new clients varies within our product mix. In some cases, the lead time to create a new client can be substantial and we will incur sales and marketing costs for efforts that may not be successful.

Technology and Development Expenses

Technology and development expenses include costs associated with the technology infrastructure that supports our solutions. These costs include compensation and related costs for technology personnel, consultants, purchases of non-capitalizable software and hardware, and support and maintenance costs related to our systems. We also invest in the continued development of our solutions. Technology and development expenses do not include depreciation of hardware and software systems.

General and Administrative Expenses

General and administrative expenses include costs associated with the administration of our business and consist primarily of compensation and related costs for administrative personnel, insurance, and legal, audit and other professional fees.

Depreciation and Amortization Expenses

Depreciation and amortization expenses consist of depreciation and amortization of property, equipment, software licenses and intangible assets. We have completed the acquisition of several businesses in the past five years, and accordingly have been amortizing the intangible assets, other than goodwill, acquired in these transactions.

Interest and Other Expense, Net

Interest and other expense, net reflects income received on cash and cash equivalents, interest expense on debt and capital lease agreements, foreign currency gains/losses and other income and expense.

Critical Accounting Policies/Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America

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(“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.

Use of Estimates

The preparation of the financial statements and related disclosures, in conformity with GAAP, requires us to establish accounting policies that contain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The policies that contain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes include:

• revenue recognition and financial statement presentation;

• the allowance for doubtful accounts;

• impairment of long-lived assets, including goodwill, intangible assets and property and equipment;

• measurement of our deferred tax assets and corresponding valuation allowance;

• allocation of purchase price in business combinations; and

• fair value estimates for the expense of employee stock options, our common stock warrant liability and the Optima contingent consideration.

We have other equally important accounting policies and practices. However, once adopted, these policies either generally do not require us to make significant estimates or assumptions or otherwise only require implementation of the adopted policy, not a judgment as to the application of policy itself. Despite our intention to establish accurate estimates and assumptions, actual results could differ materially from those estimates under different assumptions or conditions.

Revenue Recognition and Financial Statement Presentation

Substantially all of our revenue is generated from (i) the online sale of our clients products to their SMB customers, (ii) the sale of our clients' service contracts and maintenance renewals, (iii) lead development and other telesales services, and (iv) software subscriptions for hosted Internet sales of web-based training. Revenue is recorded using the proportional performance model, where revenue is recognized as performance occurs over the term of the contract and any initial set up fees are recognized over the estimated customer life. We recognize revenue from the online sale of our clients products and the sale of our clients’ service contracts and maintenance renewals on the “net basis”, which represents the amount billed to the end customer less the amount paid to our client. Revenue from the sale is recognized when a purchase order from a client’s customer is received, the service or service contract or maintenance agreement is delivered, the fee is fixed or determinable, the collection of the receivable is reasonably assured, and no significant post-delivery obligations remain unfulfilled. Revenue from lead development and other telesales services we perform is recognized as the services are accepted and is generally earned ratably over the service contract period. Some of our lead development service revenue is earned when we achieve certain attainment levels and is recognized upon customer acceptance of the service. We earn revenue from our software application subscriptions of hosted online sales of web-based training ratably over each contract period. Since these software subscriptions are usually paid in advance, we have recorded a deferred revenue liability on our balance sheet that represents the prepaid portions of subscriptions that will be earned over the next one to three years.

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

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

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

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers or clients’ customers to make required payments of amounts due to us. The allowance is comprised of specifically identified account balances for which collection is currently deemed doubtful. In addition to specifically identified accounts, estimates of amounts that may not be collectible from those accounts whose collection is not yet deemed doubtful but which may become doubtful in the future are made based on historical bad debt write-off experience. If the financial condition of our clients or our clients' customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. At December 31, 2012 and 2011, our allowance for potentially uncollectible accounts was $15,000 and $80,000, respectively.

Property and Equipment

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

Costs of internal use software are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40, Internal Use Software and FASB ASC 350-50, Website Development Costs. This guidance requires that we expense computer software and website development costs as they are incurred during the preliminary project stage. Once the capitalization criteria of FASB ASC 350-40 and ASC 350-50 have been met, external direct costs of materials and services consumed in developing or obtaining internal-use software, including website development, the payroll and payroll-related costs for employees who are directly associated with and who devote time to develop the internal use computer software and associated interest costs are capitalized. Capitalized costs are amortized using the straight-line method over the shorter of the term of the related client agreement, if such development relates to a specific outsource client, or the software’s estimated useful life, ranging from two to five years. Capitalized internal use software and website development costs are included in property and equipment in the accompanying balance sheets.

Goodwill

We completed several acquisitions during the period of February 2005 through January 2010. Goodwill represents the excess of the acquisition purchase price over the estimated fair value of the net tangible and intangible assets acquired. Goodwill is not amortized, but instead is tested for impairment at least annually or more frequently if events and circumstances indicate that the asset might be impaired. Most recently, in January 2010, we acquired Optima Consulting Partners, assigning $1.5 million to goodwill.

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

As of December 31, 2012, we performed our annual goodwill impairment evaluation for 2012, as required under FASB ASC 350-20-35, and concluded that goodwill was not impaired as the estimated fair value exceeded the carrying value. At December 31, 2012 and 2011, we had approximately $5.3 million in goodwill recorded on our consolidated balance sheets.

We report segment results in accordance with FASB ASC 280, Segment Reporting. The method for determining what information is reported is based on the way that management organizes the operating segments for making operational decisions and assessments of financial performance. Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The chief operating decision maker does not use product line financial performance as a basis for business operating decisions. In accordance with FASB ASC 350-20-35, we are required to test goodwill for impairment at the reporting unit level, which is an operating segment or one level below an operating segment. Thus, the reporting units utilized in 2011 for goodwill impairment testing were Contract Sales, Lead

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Development, Rainmaker Asia and Rainmaker Europe. For 2012, after the sale of Rainmaker Asia and the consolidation of operations, we concluded that we have one operating and reportable segment and one reporting unit.

Long-Lived Assets

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

Based on information we received on April 30, 2010 from Market2Lead in which we invested in 2007 in the form of a secured note and a minority equity investment, we took a non-cash charge in the first quarter of 2010 of $740,000 for the carrying value of our minority equity investment.

Income Taxes

We account for income taxes using the liability method. The liability method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. Therefore, we provide a valuation allowance to the extent that we do not believe it is more likely than not that we will generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets. At December 31, 2012 and 2011, we had gross deferred tax assets of $31.8 million and $30.6 million, respectively. In 2012 and 2011, the deferred tax asset was subject to a 100% valuation allowance and therefore is not recorded on our balance sheet as an asset. Realization of our deferred tax assets is limited and we may not be able to fully utilize these deferred tax assets to reduce our tax rates.

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

Our policy for recording interest and penalties related to uncertain tax positions is to record such items as a component of income before taxes. Penalties, interest paid and interest received are recorded in interest and other expense, net, in the statement of operations. Interest and penalties recorded as of December 31, 2012 and 2011 were immaterial.

Stock-Based Compensation

FASB ASC 718, Compensation - Stock Compensation, establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share-based payment transactions. This guidance requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. See Note 10 to the consolidated financial statements for further discussion of this statement.

Foreign Currency Translation

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

Significant Client Concentrations

27

We have generated a significant portion of our revenue from sales to customers of a limited number of clients. In the year ended December 31, 2012, three clients each accounted for 10% or more of our revenue, with Microsoft Corporation ("Microsoft") representing approximately 35% of our net revenue, Symantec Corporation ("Symantec") representing approximately 21% of our net revenue and the Hewlett-Packard Company ("Hewlett-Packard") representing approximately 11% of our net revenue. During the year ended December 31, 2011, three clients each accounted for 10% or more of our net revenue, with Microsoft representing approximately 22% of our net revenue, Symantec representing approximately 21% of our net revenue and Hewlett-Packard representing approximately 14% of our net revenue. In 2010, three clients each accounted for 10% or more of our net revenue, with Sun Microsystems representing approximately 22% of our net revenue, Hewlett-Packard representing approximately 19% of our net revenue and Symantec accounting for approximately 16% of our net revenue. In the year ended December 31, 2012, one client accounted for 10% or more of our net accounts receivable, with Symantec representing approximately 12% of our net accounts receivable.

No individual client’s customer accounted for 10% or more of our net revenue in any period presented.

We had various agreements with Sun Microsystems, our largest client during 2010, with various termination provisions. On February 5, 2010, we received written notice from Sun Microsystems that they had elected to terminate the Global Inside Sales Program Statement of Work agreement dated March 31, 2009, effective as of February 28, 2010. The notice followed the acquisition of Sun Microsystems by Oracle Corporation and affected the contract sales services that we were performing for Sun Microsystems. The Global Inside Sales agreement had a minimum term with notice periods to August 31, 2010. We entered into a settlement agreement on March 8, 2010, and received a cash payment of $4,550,000 from Oracle Corporation for the buyout of the Global Inside Sales agreement. The settlement payment was recognized as revenue in the first quarter of 2010. In addition, Oracle agreed to reimburse us $347,000 for employee severance costs related to terminating employees who worked on the Global Inside Sales program. This reimbursement was recognized in payroll and payroll tax expense to offset the employee severance costs.

We have outsourced services agreements with our significant clients that expire at various dates ranging through June 2015. Our agreements with Symantec expire in March 2014 and can generally be terminated prior to expiration with ninety days notice. Our agreements with Microsoft expire at various dates from June 2013 through June 2015, and can be terminated with thirty days notice. Our agreements with Hewlett-Packard expire in October 2013 and can generally be terminated prior to expiration with ninety days notice.

We expect that a substantial portion of our net revenue will continue to be concentrated among a few significant clients. In addition, our technology clients operate in industries that are experiencing consolidation, which may reduce the number of our existing and potential clients.

28

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.

	Year Ended December 31,
	2012		2011		2010
Net revenue	100.0	%	100.0	%	100.0	%
Cost of services	56.8		58.2		49.7
Gross margin	43.2	%	41.8	%	50.3	%
Operating expenses:
Sales and marketing	7.8		14.7		11.0
Technology and development	21.9		28.3		27.0
General and administrative	21.5		29.6		28.1
Depreciation and amortization	6.5		9.0		10.7
Loss (gain) on fair value re-measurement	—		0.2		(0.6	)
Total operating expenses	57.7	%	81.8	%	76.2	%
Operating loss	(14.5	)	(40.0	)	(25.9	)
Gain due to change in fair value of warrant liability	(0.7	)	(1.1	)	—
Interest and other expense, net	0.9		0.7		2.9
Loss before income tax expense	(14.7	)%	(39.6	)%	(28.8	)%
Income tax expense	1.0		0.1		0.4
Net loss from continuing operations	(15.7	)%	(39.7	)%	(29.2	)%
Net loss from discontinued operations (including loss on disposal in 2012)	(24.9	)	(2.0	)	(1.1	)
Net loss	(40.6	)%	(41.7	)%	(30.3	)%
Foreign currency translation adjustments	1.3		(1.7	)	—
Comprehensive loss	(39.3	)%	(43.4	)%	(30.3	)%

Comparison of the Years Ended December 31, 2012 and 2011

Net Revenue. Net revenue decreased$1 million, or 4%, to $25.4 million in the year ended December 31, 2012, as compared to the year ended December 31, 2011. Net revenue decreased in the year ended December 31, 2012, as compared to the 2011 comparative period due to the elimination of non-strategic client programs, offset by multiple new programs with Microsoft, a significant client in both 2011 and 2012. Training sales net revenue also decreased in the year ended December 31, 2012, as compared to the 2011 comparative period due to net client attrition.

Cost of Services and Gross Margin. Cost of services decreased$947,000, or 6%, to $14.4 million in the year ended December 31, 2012, as compared to the 2011 comparative period primarily due to the impact of cost reduction initiatives and lower revenue. Our gross margin percentage was 43% and 42%, respectively, in the years ended December 31, 2012 and 2011. The improvement in gross margin was due to cost savings initiatives and growth in our higher margin e-commerce business.

Sales and Marketing Expenses. Sales and marketing expenses decreased$1.9 million, or 49%, to $2.0 million in the year ended December 31, 2012, as compared to the 2011 comparative period. The change was primarily attributable to a decrease in personnel costs of $1.2 million and decreases in marketing costs of $466,000.

Technology and Development Expenses. Technology and development expenses decreased$1.9 million, or 25%, to $5.6 million during the year ended December 31, 2012, as compared to the 2011 comparative period. The decrease was primarily attributable to decreases in outsourced services and maintenance contracts expense of $826,000, decreases in personnel costs of approximately $825,000 and reduced telecommunication costs of $289,000.

General and Administrative Expenses. General and administrative expenses decreased$2.4 million, or 30%, to $5.5 million during the year ended December 31, 2012, as compared to the 2011 comparative period. The decrease was primarily due to a decrease in personnel costs of $1.8 million, reduced board fees of $280,000 and reduced legal and outsource services costs of $58,000.

Depreciation and Amortization Expenses. Depreciation and amortization expenses decreased$738,000, or 31%, to $1.6 million for the year ended December 31, 2012, as compared to the 2011 comparative period. The decrease is due to assets becoming fully depreciated or amortized.

29

Loss(Gain) on Fair Value Re-measurement. In the year ended December 2011, the Company recorded a loss on fair value re-measurement of $44,000 related to the change in the accrued estimated liability for the potential earnout payment in connection with our acquisition of Optima. In April 2012, we made a payment of $225,000 based on the achievement of certain performance metrics for the year ended December 31, 2011 per the purchase agreement.

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

	Year Ended December 31,						Change
	2012			2011
Interest and other expense, net	$	237		$	193		$	(44	)
Currency translation gain	(21		)	(15		)	6
Total	$	216		$	178		$	(38	)

Net interest expense increased for the year ended December 31, 2012, as compared to the 2011 comparative period, due to increases from incremental and new borrowings related to our Comerica Bank Credit Facility.

Currency transaction loss (gain) is primarily due to the fluctuation of currency exchange rates among the U.S. Dollar and the British Pound. Fluctuations of currency exchange rates may have a negative effect in future periods on our financial results.

Gain Due to Change in Fair Value of Warrant Liability. Gain due to change in fair value of warrant liabilityincreased$129,000, or 43%, to $169,000 for year ended December 31, 2012, as compared to the 2011 comparative period. In June 2011, we issued 1.6 million warrants as part of our equity offering. We classified the warrants as liabilities under the balance sheet caption “Common stock warrant liability” and estimated their fair value, as of the balance sheet dates, utilizing the Black-Scholes valuation method.

Income Tax Expense. Income tax expense increased$222,000, or 1,168%, to $241,000 for the year ended December 31, 2012, as compared to the year ended December 31, 2011. Our income tax expense for year ended December 31, 2012 was based on our estimate of taxable income for the full year ending December 31, 2012, and primarily consists of estimates of foreign taxes and domestic gross margin taxes for certain states.

Net Loss from Discontinued Operations. Net loss from discontinued operations was $6.3 million for the year ended December 31, 2012, as compared to $531,000 in the 2011 comparative period. The loss for 2012 includes a loss from the disposal of discontinued operations of $3.3 million for the sale of the Manila operations. The loss from the disposal of discontinued operations represents the difference between the gross sale proceeds of $845,000, net of associated legal fees and closing costs, and the net book value of Rainmaker Systems, Ltd. The remaining change was primarily due to the write-off of a receivable for the bankruptcy of a client in the amount of $499,000, costs related to exit of a lease and move into a larger facility of $445,000, the initial costs incurred to launch a significant new program and over-capacity, due to net customer attrition. For further discussion of our discontinued operations, refer to Note 3 to our consolidated financial statements.

Comparison of Years Ended December 31, 2011 and 2010

Net Revenue. Net revenue decreased$6.4 million, or 20%, to $26.4 million in the year ended December 31, 2011, as compared to the year ended December 31, 2010. Net revenue decreased compared to the prior year primarily resulting from the receipt of a one-time settlement payment of approximately $4.6 million during the first quarter of 2010 for a contract termination/buyout with Sun Microsystems. Excluding this one-time settlement payment, revenue decreased approximately $2.0 million. The decrease was primarily due to the loss of Sun Microsystems as a client in the first quarter of 2010.

Cost of Services and Gross Margin. Cost of services decreased$930,000 to $15.3 million in the year ended December 31, 2011, as compared to the 2010 comparative period. Our gross margin percentage decreased to 41.8% for the year ended December 31, 2011 compared to 50.3% in the year ended December 31, 2010 primarily as a result of the one-time settlement payment for the contract termination/buyout with Sun Microsystems in the first quarter of 2010.

Sales and Marketing Expenses. Sales and marketing expenses increased$262,000, or 7%, to $3.9 million in the year ended December 31, 2011, as compared to the 2010 comparative period. The increase was attributable to an increase in personnel related expense of $142,000 and increased marketing costs of $141,000.

Technology and Development Expenses. Technology and development expenses decreased$1.4 million, or 16%, to $7.5 million during the year ended December 31, 2011, as compared to the 2010 comparative period. The decrease was due to reductions in personnel costs.

30

General and Administrative Expenses. General and administrative expenses decreased$1.4 million, or 15%, to $7.8 million during the year ended December 31, 2011, as compared to the 2010 comparative period. The decrease was primarily due to a decrease in personnel costs of $962,000, as well as a $469,000 reduction of costs related to the 2010 exit of our Canadian facility.

Depreciation and Amortization Expenses. Depreciation and amortization expenses decreased$1.1 million, or 32%, to $2.4 million for the year ended December 31, 2011, as compared to the 2010 comparative period.

Loss(Gain) on Fair Value Re-measurement. In the year ended December 2011, the Company recorded a loss on fair value re-measurement of $44,000 related to the change in the accrued estimated liability for the potential earnout payment in connection with our acquisition of Optima based on performance-to-date and projections of performance through 2011. During the year ended December 31, 2010, the Company had recorded a $190,000 gain on re-measurement of this liability.

Gain Due to Change in Fair Value of Warrant Liability.    During the year ended December 31, 2011, the Company recorded a gain on the change in fair value of our warrant liability of $298,000. In June 2011, we issued 1.6 million warrants as part of our equity offering. We classified the warrants as liabilities under the balance sheet caption “Common stock warrant liability” and estimated their fair value, as of the balance sheet date, utilizing the Black-Scholes valuation method.

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

	Year Ended December 31,					Change
	2011			2010
Interest and other expense, net	$	193		$	178	$	15
Currency translation loss (gain)	(15		)	47		(62		)
Write-down of investment	—			740		(740		)
Total	$	178		$	965	$	(787	)

Net interest expense was relatively flat for the year ended December 31, 2011, as compared to the 2010 comparative period, as increases from incremental and new borrowings were offset by decreases in interest rates.

Currency transaction loss (gain) is primarily due to the fluctuation of currency exchange rates among the U.S. Dollar and the British Pound. Fluctuations of currency exchange rates may have a negative effect in future periods on our financial results.

Income Tax Expense. Income tax expense decreased$107,000, or 85%, to $19,000 for the year ended December 31, 2011, as compared to $126,000 for the year ended December 31, 2010. Our income tax expense for the year ended December 31, 2011 was based on our estimate of taxable income for the full year ending December 31, 2011, and primarily consists of estimates of foreign taxes and domestic gross margin taxes for certain states.

Net loss from Discontinued Operations. Net loss from discontinued operations was $531,000 for the year ended December 31, 2011, as compared to $368,000 in the year ended December 31, 2010. The change was primary due to net client attrition for our Manila operations.

Liquidity and Sources of Capital

Cash used in operating activities for the year ended December 31, 2012 was $2.1 million, as compared to cash used in operating activities of $5.3 million in the year ended December 31, 2011. Cash used in operating activities in the year ended December 31, 2012 was primarily the result of net loss from continuing operations of $4 million, offset by non-cash expenses for depreciation and amortization of property and intangibles of $1.6 million and stock-based compensation expenses of $810,000, cash used by discontinued operations of $2.1 million and changes in operating assets and liabilities that provided cash of $1.7 million.

Cash used in operating activities for the year ended December 31, 2011 was $5.3 million, primarily the result of net loss from continuing operations of $10.4 million, offset by non-cash expenses for depreciation and amortization of property and intangibles of $2.4 million and stock-based compensation expenses of $2 million, changes in operating assets and liabilities that provided cash of $701,000 and cash provided by discontinued operations of $265,000.

Cash used in investing activities was $1.2 million in the year ended December 31, 2012, as compared to cash used in investing activities of $1.6 million in the year ended December 31, 2011. The change was primarily the result of increases in capital expenditures used by our discontinued operations of approximately $744,000 during the year ended December 31, 2012, as compared to the year ended December 31, 2011, offset by a reduction in capital expenditures used by continuing operations of $422,000 during the same period.

31

Cash used in financing activities was approximately $846,000 in the year ended December 31, 2012, as compared to cash provided by financing activities of $3.8 million in the year ended December 31, 2011. Cash used in financing activities was primarily a result of cash used by discontinued operations of $738,000 and purchases of $237,000 of treasury stock from employees for shares withheld for income taxes payable on restricted stock awards vested during the year ended December 31, 2012. Cash provided by financing activities in the year ended December 31, 2011 was primarily result of the $3.3 million in proceeds from our June 2011 offering of common stock and net proceeds from borrowings of $590,000.

At December 31, 2012, the Company had a net working capital deficit of $6.2 million. Our principal source of liquidity as of December 31, 2012 consisted of $4.5 million of cash and cash equivalents and $3.7 million of net accounts receivable. Our debt balance as of December 31, 2012 was $4.5 million, of which $2.7 million is payable within the next twelve months. See below under “Credit Arrangements” for further discussion of our credit facility with Comerica Bank.

As reflected in the accompanying consolidated financial statements, we had a net loss from continuing operations of $4.0 million for the year ended December 31, 2012. During the year, we used cash of $10,000 in operating activities from continuing operations and $2.1 million in operating activities from discontinued operations.

We believe we are now executing a plan that will establish profitable operations through increased sales and decreased expenses. There can be no assurance that we will be successful in increasing sales, reducing expenses or achieving profitable operations. In addition, the Company has completed the sale our of operations in Manila. We are also evaluating our options to sell other non-strategic assets as we continue to focus on the Company's core business. The sale of our Manila operations, and potentially other assets, is intended to both improve our cash position as well as to improve our business focus. In the event that the Company fails to achieve profitable operations, fails to close on the intended sale of assets or if we are unable to raise additional capital, we will be required to further reduce operating costs, which could jeopardize our current operations and future strategic initiatives and business plans. Other external financing sources may not be available, may be inadequate to fund our operations, or may be on terms unfavorable to the Company.

Credit Arrangements

On June 14, 2012, the Company entered into a Loan and Security Agreement with Comerica Bank (the “Credit Facility”), replacing Bridge Bank, N.A. as the Company's primary lender. The maximum amount of credit available to us under the Credit Facility is $5 million, comprised of a $3 million term loan facility (“Term Loan”) and a $2 million revolving line of credit (“Revolving Line”), which includes a $500,000 sub-facility for letters of credit and certain credit card services. Under the terms of the Credit Facility, we could request advances under the Term Loan until December 14, 2012. Term Loan advances outstanding on December 14, 2012 are payable in thirty equal monthly installments of principal, plus accrued interest, beginning on January 1, 2013 and ending on June 14, 2015. As of December 31, 2012, there was $3.0 million outstanding under the Term Loan and $1.5 million under the Revolving Line.

Rainmaker also may request additional advances under the Revolving Line in an aggregate outstanding amount not to exceed the lesser of (i) the Revolving Line or (ii) the borrowing base, which is 80% of our eligible accounts receivable balances, less the aggregate face amount of letters of credit issued and the aggregate limits of any credit cards issued and any merchant credit card processing reserves. Amounts borrowed under the Revolving Line are due on December 14, 2013. The interest rate per annum for advances under the Credit Facility is the Prime Referenced Rate, as defined in the Credit Facility, plus the applicable margin. The applicable margin is one and one half percent (1.50%) per annum for the Revolving Line and two and one quarter percent (2.25%) per annum for the Term Loan. The interest rate on our Term Loan and Revolving Line were 5.50% and 4.75%, respectively, as of December 31, 2012.

The Credit Facility is secured by substantially all of Rainmaker’s consolidated assets. Rainmaker must comply with certain financial covenants, including maintaining unrestricted cash with Comerica Bank equal to the greater of $1 million or the aggregate outstanding amount of Term Loan advances, and not less than $1 million upon achieving positive cash flow, and maintaining a minimum liquidity ratio with respect to all indebtedness owing to Comerica Bank of at least 1.25 to 1.00, which Comerica Bank agreed to reduce to 1.00 to 1.00 until April 15, 2013. The Credit Facility contains customary covenants that will, subject to limited exceptions, require Comerica's approval to, among other things, (i) create liens; (ii) make capital expenditures; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The Credit Facility also provides for customary events of default, including nonpayment, breach of covenants, material adverse events, payment defaults of other indebtedness, failure to deliver audited financial statements with an unqualified opinion, and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Credit Facility. If we are not able to comply with such covenants or if any event of default otherwise occurs, our outstanding loan balance could become due and payable immediately and our existing credit facilities with Comerica Bank could be canceled. As of December 31, 2012, we were in compliance with all loan covenants.

Off-Balance Sheet Arrangements

32

As of December 31, 2012 and 2011, we had no off-balance sheet arrangements or obligations.

Potential Impact of Inflation

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

Recent Accounting Standards

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

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

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

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Schedule

	Page
Financial Statements:
Report of Independent Registered Public Accounting Firm	34
Consolidated Balance Sheets as of December 31, 2012 and December 31, 2011	35
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2012, 2011, and 2010	36
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2012, 2011, and 2010	37
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010	38
Notes to Consolidated Financial Statements	39
Consolidated Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts	70

33

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Rainmaker Systems, Inc.

Campbell, California

We have audited the accompanying consolidated balance sheets of Rainmaker Systems, Inc. as of December 31, 2012 and 2011 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and comprehensive loss, and cash flows for each of the three years in the period ended December 31, 2012. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rainmaker Systems, Inc. at December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/    BDO USA, LLP

San Jose, California

April 1, 2013

34

RAINMAKER SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

	December 31,
	2012			2011
ASSETS
Current assets:
Cash and cash equivalents	$	4,494		$	8,490
Restricted cash	52			18
Accounts receivable, net	3,720			4,587
Prepaid expenses and other current assets	1,292			876
Assets held for sale	—			4,164
Total current assets	9,558			18,135
Property and equipment, net	2,455			2,861
Goodwill	5,337			5,268
Other non-current assets	416			507
Total assets	$	17,766		$	26,771
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	7,159		$	5,702
Accrued compensation and benefits	425			740
Other accrued liabilities	3,142			3,097
Deferred revenue	2,311			2,629
Current portion of notes payable	2,727			4,306
Liabilities related to assets held for sale	—			2,163
Total current liabilities	15,764			18,637
Deferred tax liability	567			473
Long-term deferred revenue	44			103
Common stock warrant liability	348			517
Notes payable, less current portion	1,800			—
Total liabilities	18,523			19,730
Commitments and contingencies (Note 7)
Stockholders’ equity (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, 30,454 shares issued and 28,428 shares outstanding at December 31, 2012 and 28,686 shares issued and 26,813 shares outstanding at December 31, 2011	27			26
Additional paid-in capital	130,402			129,373
Accumulated deficit	(128,198		)	(117,926		)
Accumulated other comprehensive loss	(261		)	(1,827		)
Treasury stock, at cost, 2,026 shares at December 31, 2012 and 1,874 shares at December 31, 2011	(2,727		)	(2,605		)
Total stockholders’ equity (deficit)	(757		)	7,041
Total liabilities and stockholders’ equity (deficit)	$	17,766		$	26,771

See accompanying notes.

35

RAINMAKER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

	Year Ended December 31,
	2012			2011			2010
Net revenue	$	25,360		$	26,377		$	32,771
Cost of services	14,397			15,344			16,274
Gross margin	10,963			11,033			16,497
Operating expenses:
Sales and marketing	1,978			3,883			3,621
Technology and development	5,557			7,457			8,834
General and administrative	5,463			7,818			9,215
Depreciation and amortization	1,642			2,380			3,508
Loss (gain) on fair value re-measurement	—			44			(190		)
Total operating expenses	14,640			21,582			24,988
Operating loss	(3,677		)	(10,549		)	(8,491		)
Gain due to change in fair value of warrant liability	(169		)	(298		)	—
Interest and other expense, net	216			178			965
Loss before income tax expense	(3,724		)	(10,429		)	(9,456		)
Income tax expense	241			19			126
Net loss from continuing operations	(3,965		)	(10,448		)	(9,582		)
Net loss from discontinued operations (including loss on disposal of $3,341 in 2012)	(6,307		)	(531		)	(368		)
Net loss	$	(10,272	)	$	(10,979	)	$	(9,950	)
Foreign currency translation adjustments	329			(452		)	6
Comprehensive loss	$	(9,943	)	$	(11,431	)	$	(9,944	)
Basic and diluted net loss per share:
Net loss from continuing operations	$	(0.15	)	$	(0.42	)	$	(0.47	)
Net loss from discontinued operations	(0.23		)	(0.02		)	(0.02		)
Net loss	$	(0.38	)	$	(0.44	)	$	(0.49	)
Weighted average common shares - Basic and diluted	27,123			25,050			20,380

See accompanying notes.

36

RAINMAKER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

	Common Stock					Treasury Stock				Additional paid-in capital			Accumulated deficit			Accumulated other comprehensive loss			Total
	Shares		Amount			Shares	Amount
Balance at December 31, 2009	21,996		$	20		1,039	$	(1,714	)	$	121,138		$	(96,997	)	$	(1,381	)	$	21,066
Net loss	—		—			—	—			—			(9,950		)	—			(9,950		)
Foreign currency translation loss	—		—			—	—			—			—			6			6
Exercise of employee stock options	480		1			—	—			700			—			—			701
Issuance of common stock under employee stock purchase plan	19		—			—	—			18			—			—			18
Issuance of restricted stock awards	1,569		1			—	—			—			—			—			1
Cancellation of restricted stock awards	(353	)	—			—	—			—			—			—			—
Stock based compensation	—		—			—	—			2,970			—			—			2,970
Surrender of shares for tax withholding	(357	)	—			357	(455		)	—			—			—			(455		)
Purchases of treasury stock	(79	)	—			79	(98		)	—			—			—			(98		)
Balance at December 31, 2010	23,275		22			1,475	(2,267		)	124,826			(106,947		)	(1,375		)	14,259
Net loss	—		—			—	—			—			(10,979		)	—			(10,979		)
Foreign currency translation gain	—		—			—	—			—			—			(452		)	(452		)
Issuance of common stock in public offering, net of expenses	3,670		4			—	—			3,281			—			—			3,285
Proceeds from public offering allocated to warrant liability	—		—			—	—			(815		)	—			—			(815		)
Exercise of employee stock options	15		—			—	—			15			—			—			15
Issuance of restricted stock awards	995		1			—	—			—			—			—			1
Cancellation of restricted stock awards	(743	)	(1		)	—	—			—			—			—			(1		)
Stock based compensation	—		—			—	—			2,066			—			—			2,066
Surrender of shares for tax withholding	(399	)	—			399	(338		)	—			—			—			(338		)
Balance at December 31, 2011	26,813		26			1,874	(2,605		)	129,373			(117,926		)	(1,827		)	7,041
Net loss	—		—			—	—			—			(10,272		)	—			(10,272		)
Foreign currency translation gain	—		—			—	—			—			—			329			329
Release of foreign currency translation loss related to disposal of discontinued operations	—		—			—	—			—			—			1,237			1,237
Issuance of common stock	139		—			—	—			135			—			—			135
Issuance of restricted stock awards	2,145		2			—	—			—			—			—			2
Cancellation of restricted stock awards	(516	)	(1		)	—	—			—			—			—			(1		)
Stock based compensation	—		—			—	—			894			—			—			894
Surrender of shares for tax withholding	(152	)	—			152	(122		)	—			—			—			(122		)
Balance at December 31, 2012	28,428		$	27		2,026	$	(2,727	)	$	130,402		$	(128,198	)	$	(261	)	$	(757	)

See accompanying notes.

37

RAINMAKER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended December 31,
	2012			2011			2010
Operating activities:
Net loss	$	(10,272	)	$	(10,979	)	$	(9,950	)
Adjustment for net loss from discontinued operations	6,307			531			368
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment	1,555			2,151			3,012
Amortization of intangible assets	87			229			496
Loss (gain) on fair value re-measurement	—			44			(190		)
Gain due to change in fair value of warrant liability	(169		)	(298		)	—
Stock-based compensation expense	810			2,022			2,902
Provision (credit) for allowance for doubtful accounts	(38		)	5			163
Loss on disposal of fixed assets	—			2			10
Write-down of investment	—			—			740
Changes in operating assets and liabilities:
Accounts receivable	908			(255		)	2,750
Prepaid expenses and other assets	(397		)	29			757
Accounts payable	1,900			1,017			(2,533		)
Accrued compensation and benefits	(202		)	(81		)	(254		)
Other accrued liabilities	(324		)	245			651
Income tax payable	110			(89		)	(148		)
Deferred tax liability	93			91			47
Deferred revenue	(378		)	(256		)	10
Net cash used in continuing operations	(10		)	(5,592		)	(1,169		)
Net cash provided by (used in) discontinued operations	(2,050		)	265			(112		)
Net cash used in operating activities	(2,060		)	(5,327		)	(1,281		)
Investing activities:
Purchases of property and equipment	(1,146		)	(1,568		)	(2,050		)
Restricted cash, net	(34		)	70			(75		)
Acquisition of business, net of cash acquired	—			—			(582		)
Repayment of note receivable	—			—			1,250
Consideration received in disposal of discontinued operations	845			—			—
Net cash used in continuing operations	(335		)	(1,498		)	(1,457		)
Net cash used in discontinued operations	(842		)	(98		)	(1,120		)
Net cash used in investing activities	(1,177		)	(1,596		)	(2,577		)
Financing activities:
Proceeds from issuance of common stock	22			3,285			—
Proceeds from issuance of common stock from option exercises	—			15			18
Proceeds from borrowings	4,555			1,224			2,550
Repayment of borrowings	(3,954		)	(680		)	(1,893		)
Repayment of acquisition earnout	(113		)	—			—
Net proceeds (repayment) on overdraft facility	(381		)	46			—
Tax payments in connection with treasury stock surrendered	(237		)	(223		)	(455		)
Repayment of capital lease obligations	—			—			(98		)
Purchase of treasury stock	—			—			(240		)
Net cash provided by (used in) continued operations	(108		)	3,667			(118		)
Net cash provided by (used in) discontinued operations	(738		)	115			637
Net cash provided by (used in) financing activities	(846		)	3,782			519
Effect of exchange rate changes on cash	87			(126		)	82
Net decrease in cash and cash equivalents	(3,996		)	(3,267		)	(3,257		)
Cash and cash equivalents at beginning of period	8,490			11,757			15,014
Cash and cash equivalents at end of period	$	4,494		$	8,490		$	11,757
Supplemental disclosures of cash flow information:
Cash paid for interest	$	187		$	189		$	197
Cash paid for income taxes	$	36		$	36		$	227
Supplemental disclosures of non-cash investing and financing activities:
Common stock issued in acquisitions	$	112		$	—		$	—

See accompanying notes.

38

RAINMAKER SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

The accompanying consolidated financial statements include the accounts of Rainmaker Systems, Inc. and its wholly-owned subsidiaries (“Rainmaker”, “we”, “our” or “the Company”). Rainmaker is a Commerce-as-a-Service (“CaaS”) company that helps large enterprises gain greater market share and increased brand awareness for their cloud-based or on-premise based product offerings in the worldwide small to medium-sized business (“SMB”) markets. Our B2B e-commerce solutions drive online sales and renewals for products, subscriptions and training for our clients and their channel partners. Rainmaker does this with an advanced e-commerce open architecture SaaS platform that easily integrates cloud-based applications and on-premise applications with its Global Commerce Services to provide its clients with a strategic partnership. The Rainmaker e-commerce platform can be enhanced with Rainmaker Global Commerce Services agents to maximize revenue and customer satisfaction through the entire customer life cycle. We offer three primary solutions designed to increase revenue for our clients from their small and medium-sized business customers:

• GrowCommerce B2B Storefront: Sell digital, physical or subscription based products directly to our clients' SMB customers or via your channel partners, through the GrowCommerce platform.

• GrowCommerce for Renewals: Systematically provides visibility into contract details for our clients' channel and customers designed to result in increased renewal rates.

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

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

Principles of Consolidation

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

Basis of Presentation

Certain prior year amounts have been reclassified to conform to the current year presentation. In the year ended December 31, 2012, the Company completed the sale of Rainmaker Systems, Ltd. and its wholly owned subsidiary, Rainmaker Asia, Inc. (together “Manila” or “RSL”). RSL met the requirements for presentation as assets held for sale and discontinued operations, and all assets of RSL have been separately presented under current assets and all liabilities of RSL are included under current liabilities as presented for the year ended December 31, 2011. Manila's operating activities are segregated from the Company's continuing operations including within the consolidated statement of operations and comprehensive loss, and classified solely under the caption loss from discontinued operations, net of tax. As such, certain amounts reported in the accompanying financial statements for 2011 and 2010 have been retrospectively revised to conform to the 2012 presentation. There were no other reclassifications that had a material effect on previously reported results of operations, total assets or accumulated deficit.

Going Concern

As reflected in the accompanying consolidated financial statements, we had a net loss from continuing operations of $4.0 million and $10.4 million for the years ended December 31, 2012 and 2011, respectively. During the year ended December 31, 2012, we used $10,000 in operating activities from continuing operations and $2.1 million in operating activities from discontinued operations.

At December 31, 2012, the Company had a net working capital deficit of $6.2 million and our principal source of liquidity consisted of $4.5 million of cash and cash equivalents and $3.7 million of net accounts receivable. Our debt balance as of December 31, 2012 was $4.5 million, of which $2.7 million is payable within the next twelve months. See Note 6 for further discussion of our debt agreements.

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As more fully described in Note 14, on April 1, 2013, we announced that we had entered into subscription agreements with various investors for the sale of 13.0 million shares of our common stock in a registered direct offering. We expect to receive gross cash proceeds of approximately $5.8 million from the equity offering. The offering is expected to close on or about April 3, 2013. The Company is now executing a plan that it believes will establish profitable operations through increased sales and decreased expenses. There can be no assurance that we will be successful in increasing sales, reducing expenses or achieving profitable operations. We are evaluating our options to sell other non-strategic assets as we focus on the Company's core business. In the event that the Company fails to achieve profitable operations, fails to reduce expenses, fails to close on the intended sale of assets and/or is unable to raise additional capital, we will not have adequate cash or financial resources to operate for the next twelve months as a going concern and pay our liabilities as they become due.

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

Use of Estimates

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

Cash and Cash Equivalents

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

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

	December 31,
	2012		2011
Cash and cash equivalents:
Cash	$	2,854	$	2,838
Money market funds	1,640		5,652
Total cash and cash equivalents	$	4,494	$	8,490

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers or clients’ customers to make required payments of amounts due to us. The allowance is comprised of specifically identified account balances for which collection is currently deemed doubtful. In addition to specifically identified accounts, estimates of amounts that may not be collectible from those accounts whose collection is not yet deemed doubtful but which may become doubtful in the future are made based on historical bad debt write-off experience. If the financial condition of our clients or our clients' customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. At December 31, 2012 and 2011, our allowance for potentially uncollectible accounts was $15,000 and $80,000, respectively.

Property and Equipment

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

40

Costs of internal-use software are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40, Internal Use Software, and FASB ASC 350-50, Website Development Costs. The guidance requires that we expense computer software and website development costs as they are incurred during the preliminary project stage. Once the capitalization criteria of ASC 350-40 and ASC 350-50 have been met, external direct costs of materials and services consumed in developing or obtaining internal-use software, including website development costs, payroll and payroll-related costs for employees who are directly associated with and who devote time to develop the internal-use computer software and associated interest costs are capitalized. We capitalized approximately $1.1 million, $1.3 million and $1.7 million of such costs during the years ended December 31, 2012, 2011 and 2010, respectively. Capitalized costs are amortized using the straight-line method over the shorter of the term of the related client agreement, if such development relates to a specific outsource client, or the software’s estimated useful life, ranging from two to five years. Capitalized internal-use software and website development costs are included in property and equipment on the accompanying balance sheets.

Goodwill and Other Intangible Assets

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

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

We report segment results in accordance with FASB ASC 280, Segment Reporting. The method for determining what information is reported is based on the way that management organizes the operating segments for making operational decisions and assessments of financial performance. Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The chief operating decision maker does not use product line financial performance as a basis for business operating decisions. In accordance with FASB ASC 350-20-35, we are required to test goodwill for impairment at the reporting unit level, which is an operating segment or one level below an operating segment. Thus, the reporting units utilized in 2011 for goodwill impairment testing were Contract Sales, Lead Development, Rainmaker Asia and Rainmaker Europe. For 2012, after the sale of Rainmaker Asia and the consolidation of operations, we concluded that we have one operating and reportable segment and one reporting unit.

As of December 31, 2012, we performed our annual goodwill impairment evaluation, as required under FASB ASC 350-20-35, and concluded that goodwill was not impaired as the estimated fair value exceeded the carrying value. At December 31, 2012 and 2011, we had approximately $5.3 million in goodwill recorded on our consolidated balance sheets.

Long-Lived Assets

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

Revenue Recognition and Presentation

Substantially all of our revenue is generated from (i) the online sale of our clients products to their small and medium-sized business (“SMB”) customers, (ii) the sale of our clients’ service contracts and maintenance renewals, (iii) lead development and other telesales services, and (iv) software subscriptions for hosted internet sales of web-based training. Revenue is recorded using the proportional performance model, where revenue is recognized as performance occurs over the term of the contract and any initial set up fees are recognized over the estimated customer life. We recognize revenue from the online sale of our clients' products

41

and the sale of our clients’ service contracts and maintenance renewals on the “net basis”, which represents the amount billed to the end customer less the amount paid to our client. Revenue from the sale is recognized when a purchase order from a client’s customer is received, the service or service contract or maintenance agreement is delivered, the fee is fixed or determinable, the collection of the receivable is reasonably assured, and no significant post-delivery obligations remain unfulfilled. Revenue from lead development and other telesales services we perform is recognized as the services are accepted and is generally earned ratably over the service contract period. We earn revenue from our software application subscriptions of hosted online sales of web-based training ratably over each contract period. Since these software subscriptions are usually paid in advance, we have recorded a deferred revenue liability on our balance sheet that represents the prepaid portions of subscriptions that will be earned over the next one to five years.

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

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

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

Cost of Services

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

Income Taxes

We account for income taxes using the liability method. The liability method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. Therefore, we provide a valuation allowance to the extent that we do not believe it is more likely than not that we will generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets. At December 31, 2012 and 2011, we had gross deferred tax assets of $31.8 million and $30.6 million, respectively. At December 31, 2012 and 2011, the deferred tax assets were subject to a 100% valuation allowance and therefore are not recorded on our balance sheet as assets. Realization of our deferred tax assets is limited and we may not be able to fully utilize these deferred tax assets to reduce our tax rates.

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

Our policy for recording interest and penalties related to uncertain tax positions is to record such items as a component of income before taxes. Penalties, interest paid and interest received are recorded in interest and other expense, net, in the statement of operations. There were immaterial amounts accrued for interest and penalties related to uncertain tax positions as of December 31, 2012, 2011 and 2010.

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Stock-Based Compensation

FASB ASC 718, Compensation - Stock Compensation, establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share-based payment transactions. This guidance requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. See Note 10 for further discussion of this standard and its effects on the financial statements presented herein.

Concentrations of Credit Risk and Credit Evaluations

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

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

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

In the year ended December 31, 2012, three clients each accounted for 10% or more of our net revenue, with Microsoft representing approximately 35% of our net revenue, Symantec representing approximately 21% of our net revenue and Hewlett-Packard representing approximately 11% of our net revenue. In the year ended December 31, 2011, three clients each accounted for 10% or more of our net revenue, with Microsoft representing approximately 22% of our net revenue, Symantec representing approximately 21% of our net revenue and Hewlett-Packard representing approximately 14% of our net revenue. In the year ended December 31, 2010, three clients each accounted for 10% or more of our net revenue, with Sun Microsystems representing approximately 22% of our net revenue, Hewlett-Packard representing approximately 19% of our net revenue and Symantec representing approximately 16% of our net revenue.

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

As of December 31, 2012, one client accounted for 10% or more of our net accounts receivable, with Symantec representing approximately 12% of our net accounts receivable.

We have outsourced services agreements with our significant clients that expire at various dates ranging through June 2015. Our agreements with Symantec expire in March 2014 and can generally be terminated prior to expiration with ninety days notice. Our agreements with Microsoft expire at various dates from June 2013 through June 2015, and can be terminated with thirty days notice. Our agreements with Hewlett-Packard expire in October 2013 and can generally be terminated prior to expiration with ninety days notice.

Fair Value of Financial Instruments

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

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

Segment Reporting

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

We utilize our call centers in the United States and the United Kingdom and a network of managed telesales representatives in Canada to fulfill these contracts. We also utilized our former operations based in Manila prior to their sale in December 2012. See Note 3 for more details regarding our discontinued Manila operations. In June 2012, we began providing telesales services throughout Latin America utilizing a strategic partner located in the Dominican Republic.

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Foreign Currency Translation

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

Recent Accounting Standards

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

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

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

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):

	Year Ended December 31,
	2012			2011			2010
Net loss from continuing operations	$	(3,965	)	$	(10,448	)	$	(9,582	)
Net loss from discontinued operations	(6,307		)	(531		)	(368		)
Net loss	$	(10,272	)	$	(10,979	)	$	(9,950	)
Weighted-average shares of common stock outstanding – basic and diluted	27,123			25,050			20,380
Basic and diluted net loss per share - continuing operations	$	(0.15	)	$	(0.42	)	$	(0.47	)
Basic and diluted net loss per share - discontinued operations	(0.23		)	(0.02		)	(0.02		)
Basic and diluted net loss per share	$	(0.38	)	$	(0.44	)	$	(0.49	)

For the years ended December 31, 2012, 2011 and 2010, we excluded approximately 4 million, 3.9 million and 3.6 million options, warrants and unvested restricted share awards, respectively, from the calculation of diluted net loss per share as these securities were anti-dilutive.

3.    DISCONTINUED OPERATIONS

In the quarter ended June 30, 2012, the Company concluded that RSL, our Manila-based operations, no longer fit with the long term strategic plans of the Company. The Company committed to a plan to sell our Manila-based operations, which were

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sold to Shore Solutions, Inc. (“Shore”) in December 2012. RSL's operating results for the years ended December 31, 2012, 2011and 2010 are reported as discontinued operations in the consolidated financial statements.

On December 17, 2012, the Company completed its Stock Purchase Agreement (the “SPA”) with Shore Solutions Inc. (the “Purchaser”) pursuant to which the Company agreed to sell the Company's Manila-based operations of Rainmaker Systems, Ltd. and its wholly owned subsidiary, Rainmaker Asia, Inc.

Pursuant to the stock purchase agreement, Shore acquired 100% of the issued and outstanding stock of RSL. Under the stock purchase agreement, the Company received an initial cash payment at closing of $845,000. In addition to the closing payment, the Company may receive additional contingent consideration based on multiple earn-out provisions included within the stock purchase agreement, which provides the Company the ability to receive additional consideration of $300,000 at target plus a nominal percentage of certain revenues of RSL during the period from January 1, 2013 through December 31, 2015. Rainmaker determined the loss on disposal of our Manila-based operations based on the net book value of RSL as of December 17, 2012 offset by the closing payment, net of the Company’s closing costs. All contingent consideration will be considered earned as determinable at the future measurement periods. The loss on disposal of discontinued operations for the year ended December 31, 2012 was $3,341,000.

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

	Year ended December 31,
	2012			2011			2010
Revenue	$	10,225		$	11,888		$	10,977
Cost of services	11,103			10,048			8,576
Gross margin	(878		)	1,840			2,401
Operating expenses	1,988			2,190			2,586
Non-operating expenses	100			181			183
Loss from discontinued operations, net of tax	(2,966		)	(531		)	(368		)
Loss on disposal of discontinued operations	(3,341		)	—			—
Net loss from discontinued operations	$	(6,307	)	$	(531	)	$	(368	)

Cost of services for the year ended December 31, 2012 includes $499,000 related to the write-off of a receivable due to the bankruptcy of a client.

4.    BALANCE SHEET COMPONENTS (in thousands)

	Estimated Useful Life	December 31,
		2012			2011
Property and equipment:
Computer equipment	3 years	$	3,974		$	4,602
Capitalized software and development	2-5 years	13,686			12,273
Furniture and fixtures	5 years	437			431
Leasehold improvements	Lease term	232			256
		18,329			17,562
Accumulated depreciation and amortization		(16,015		)	(15,577		)
Construction in process (1)		141			876
Property and equipment, net		$	2,455		$	2,861

 _____________

(1) Construction in process at December 31, 2012 consists primarily of costs incurred to further develop and enhance our e-commerce platforms. Estimated costs to complete these projects are in the range of $75,000 to $100,000, subject to future revisions.

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The following table reflects the activity in our accounting for goodwill for the years ended December 31, 2012 and 2011 (in thousands):

	Business Telemetry		ViewCentral		Grow Commerce		Optima			Total
Balance at December 31, 2010	$	658	$	2,849	$	270	$	1,492		$	5,269
Foreign currency adjustments	—		—		—		(1		)	(1		)
Balance at December 31, 2011	658		2,849		270		1,491			5,268
Foreign currency adjustments	—		—		—		69			69
Balance at December 31, 2012	$	658	$	2,849	$	270	$	1,560		$	5,337

At December 31, 2012 and 2011, we had accumulated goodwill impairment losses of $11.5 million. As of December 31, 2011, we had four reporting units, Contract Sales, Lead Development, Rainmaker Asia and Rainmaker Europe. As of December 31, 2012, after the sale of Rainmaker Asia, as discussed in Note 3, and the consolidation of our operations, we concluded that we have one reporting unit. We performed our 2012 goodwill impairment evaluation, required under FASB ASC 350-20-35, Intangibles – Goodwill and Other-Subsequent Measurement, as of December 31, 2012 and concluded that goodwill was not impaired as of December 31, 2012.

Other long-term assets consist of the following (in thousands):

	December 31,
	2012		2011
Other long-term assets:
Deposits	$	26	$	—
Credit card reserve deposits	390		422
Intangible assets, net	—		85
Balance at December 31, 2012	$	416	$	507

5.     ACQUISITIONS

Optima Consulting Partners Ltd.

On January 29, 2010, our wholly-owned subsidiary Rainmaker Europe entered into and closed a stock purchase agreement with the shareholders of Optima, a B2B lead development provider with offices then in England, France and Germany. Under the terms of the agreement, we acquired all of the outstanding stock of Optima in exchange for a cash payment of $492,000, 480,000 shares of Rainmaker common stock valued at approximately $701,000, and a note payable of $350,000 payable in two installments with $200,000 plus accrued interest due eighteen months from the closing date and $150,000 plus accrued interest due twenty-four months after the closing date, subject to post closing conditions.

The stock purchase agreement also provided for two potential additional payments of $375,000 each in a combination of stock and/or cash contingent on the achievement of certain performance metrics in fiscal 2010 and fiscal 2011, and subject to post closing conditions. The fair value of the potential additional payments was derived using the Company's estimates (Level 3 inputs) of a 50% probability of achievement. The 2010 achievement level was not met. In 2010, the Company reduced the estimated fair value of the contingent consideration liability by $190,000 and recorded a corresponding gain on re-measurement of this liability within operating expenses. In 2011, the Company recorded a $44,000 loss on the re-measurement of this liability as it became apparent that a portion of the achievement level was met. As of December 31, 2011, the Company accrued $225,000 as contingent consideration relating to the Optima acquisition. In April 2012, the Company made a payment of $225,000 based on the achievement of performance metrics for the year ended December 31, 2011 per the stock purchase agreement. The liability was settled with both cash and equity consideration in accordance with the stock purchase agreement. Also see Note 8 for disclosure regarding the fair value of financial instruments.

Our acquisition of Optima has been accounted for as a business combination under FASB ASC 805, Business Combinations. Assets acquired and liabilities assumed from Optima were recorded at their estimated fair values as of January 29, 2010. The total purchase price was approximately $1.9 million as follows (in thousands):

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Issuance of 480,000 shares of Rainmaker common stock	$	701
Cash payment for acquisition of Optima	492
Promissory note (discounted value)	321
Estimated fair value of future potential additional payments	375
Total purchase price	$	1,889

A portion of the purchase price was allocated to Optima’s net identifiable tangible and intangible assets based on their estimated fair values. The excess of the purchase price over the net identifiable tangible and intangible assets was recorded as goodwill. The total purchase price was allocated as follows (in thousands):

Identified tangible assets	$	796
Customer relationships	243
Goodwill	1,562
Liabilities assumed	(712		)
Total purchase price allocation	$	1,889

Amortization of the customer relationships intangible asset is recorded using an accelerated method that is based on the estimated future cash flows from the relationships. The estimated useful life of the customer relationships acquired is two years. We estimated the cash flows associated with the excess earnings the customers would generate and allocated the present value of those earnings to the asset. We used a discount rate of 25%.

As noted above, we issued common stock as consideration given in one acquisition during the three-year period ended December 31, 2012. The following table summarizes the common stock issued in this transaction:

	(in thousands, except share and per share amounts)
Acquisition	Transaction Date	# of Common Shares Issued	Market Price Used per Share		Value of Shares Issued		Registration Effective Date
Optima Consulting Partners Ltd.	January 29, 2010	480,000	$	1.46	$	701	Not applicable

These shares were not registered, as they are sellable under Rule 144 of the Securities Act of 1933, as amended, and the holding period had expired as of December 31, 2012. Half of these shares were subject to a contractual agreement and remained non-transferrable until July 29, 2011.

No pro forma information is presented for the Optima acquisition since the effect of this acquisition on the results of operations was deemed insignificant.

6.    LONG-TERM DEBT OBLIGATIONS

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

	December 31, 2012			December 31, 2011
Comerica term loan	$	3,000		$	—
Comerica revolving line	1,493			—
Bridge Bank credit facility	—			3,748
Overdraft facility	—			381
Notes payable – Optima	—			149
Notes payable – insurance	34			28
Total notes payable	4,527			4,306
Less: current portion	(2,727		)	(4,306		)
Total notes payable, less current portion	$	1,800		$	—

Comerica Bank Credit Facility

On June 14, 2012, the Company entered into a Loan and Security Agreement with Comerica Bank (the “Credit Facility”), which replaced Bridge Bank, N.A. as the Company's primary lender. The maximum amount of credit available to the Company

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under the Credit Facility is $5 million, comprised of a $3 million term loan facility (“Term Loan”) and a $2 million revolving line of credit (“Revolving Line”), which includes a $500,000 sub-facility for letters of credit and certain credit card services. The Company could request advances under the Term Loan until December 14, 2012. Term Loan advances outstanding on December 14, 2012 are payable in thirty equal monthly installments of principal, plus accrued interest, beginning on January 1, 2013 and ending on June 14, 2015.

Rainmaker also may request additional advances under the Revolving Line in an aggregate outstanding amount not to exceed the lesser of (i) the Revolving Line or (ii) the borrowing base, which is 80% of the Company’s eligible accounts receivable balances, less the aggregate face amount of letters of credit issued and the aggregate limits of any credit cards issued and any merchant credit card processing reserves. Amounts borrowed under the Revolving Line are due on December 14, 2013. The interest rate per annum for advances under the Credit Facility is the Prime Referenced Rate, as defined in the Credit Facility, plus the applicable margin. The applicable margin is one and one half percent (1.50%) per annum for the Revolving Line and two and one quarter percent (2.25%) per annum for the Term Loan. The interest rates on our Term Loan and Revolving Line were 5.50% and 4.75%, respectively, as of December 31, 2012.

The Credit Facility is secured by substantially all of Rainmaker’s consolidated assets. Rainmaker must comply with certain financial covenants, including maintaining unrestricted cash with Comerica Bank equal to the greater of $1 million or the aggregate outstanding amount of Term Loan advances, and not less than $1 million upon achieving positive cash flow, and maintaining a minimum liquidity ratio with respect to all indebtedness owing to Comerica Bank of at least 1.25 to 1.00. The Credit Facility contains customary covenants that will, subject to limited exceptions, require Comerica’s approval to, among other things, (i) create liens; (ii) make capital expenditures; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The loan agreement also provides for customary events of default, including nonpayment, breach of covenants, material adverse events, payment defaults of other indebtedness, failure to deliver audited financial statements with an unqualified opinion, and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the loan agreement. If we are not able to comply with such covenants or if any event of default otherwise occurs, our outstanding loan balance could become due and payable immediately and our existing credit facilities with Comerica Bank could be canceled. As of December 31, 2012, we were in compliance with all loan covenants. On March 13, 2013, Comerica Bank modified the minimum liquidity ratio financial covenant to at least 1.00 to 1.00 until April 15, 2013.

Bridge Bank Credit Facility

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

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

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

Overdraft Facility

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

Notes Payable – Optima acquisition

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

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Notes Payable – insurance

On August 13, 2012, we entered into an agreement with AON Private Risk Management to finance our 2012 to 2013 insurance premiums with AFCO Acceptance Corporation in the amount of $62,000. The interest rate on the note payable is 6.07% and the note is payable in nine equal monthly installment payments beginning in September 2012. As of December 31, 2012, the remaining liability under this financing agreement was $34,000.

Future debt maturities at December 31, 2012 are as follows (in thousands):

2013	$	2,727
2014	1,200
2015	600
Total	$	4,527

The estimated fair value of our debt based on a market approach was approximately $4.5 million and $4.3 million as of December 31, 2012 and 2011, respectively, and represent Level II valuations. The carrying value of our debt approximates its fair value. When determining the estimated fair value of our debt, we used a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk.

7.    COMMITMENTS AND CONTINGENCIES

Lease Commitments

As of December 31, 2012, our operating commitments include operating leases for our facilities and certain property and equipment that expire at various dates through 2015 which are described in more detail below. These arrangements allow us to obtain the use of facilities without purchasing them. If we were to acquire these assets, we would be required to obtain financing and record a liability related to the financing of these assets. Leasing these assets under operating leases allows us to use these assets for our business while minimizing the obligations and upfront cash flow related to purchasing the assets.

In October 2009, we executed a second amendment to the operating lease for our corporate headquarters in Campbell, California to reduce our lease cost. Under this amendment, we reduced the amount of space that we lease to 16,430 square feet. On October 31, 2012, the Company executed a third amendment of the operating lease for our corporate headquarters, effective December 1, 2012, with a three-year term. Annual base rent under the amended lease is approximately $227,000 in the first year of the lease, or $208,000 after deducting free base rent in the first three months of the amended lease, and increases by approximately 3% each year thereafter for the remaining term. In addition, we will continue to pay our proportionate share of operating costs and taxes based on our occupancy, and a letter of credit issued to the landlord for a security deposit of $30,000 will replaced the prior letter of credit of $100,000.

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

In October 2012, we executed an office lease agreement for office space in Godalming outside of London, where we have call center operations. The facility’s 5,000 square feet of call center space will be utilized to better accommodate our current operations in Europe and provide additional space for expansion. The lease has a thirty-month term and terminates in March 2015. Annual base rent for this facility is 28,000 Great Britain Pounds. Based on the exchange rate at December 31, 2012, annual rent is approximately $46,000.

Rent expense under operating lease agreements for continuing operations during the years ended December 31, 2012, 2011 and 2010 was $773,000, $903,000 and $1.4 million respectively. Rent expense for the years ended December 31, 2011 and 2010 includes $99,000 and $416,000, respectively, related to the closure of our Montreal facility. The Company incurred rent expense under operating lease agreement for our discontinued operations during the years ended December 31, 2012, 2011 and 2010 of $158,000, $207,000 and $145,000, respectively.

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Future minimum payments under our non-cancelable operating leases with terms in excess of one year at December 31, 2012 are as follows (in thousands):

2013	$	559
2014	421
2015 and thereafter	424
Total minimum payments	$	1,404

Contingencies

On February 8, 2013, the Company's former Chief Executive Officer, Michael Silton, filed a demand for arbitration and complaint with the American Arbitration Association, alleging breach of contract and other causes of action relating to the termination of Mr. Silton's employment with the Company in October 2012. Mr. Silton is seeking full payment of severance benefits in the amount of approximately $1.0 millon, plus compensation for unused vacation, related penalties and punitive damages. On March 21, 2013, the Company filed a responsive pleading in the arbitration proceedings. The Company disputes and denies the allegations and intends to defend the claim.

From time to time in the ordinary course of business, we are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations. We are not aware of any asserted or unasserted legal proceedings or claims that we believe would have a material adverse effect on our financial condition or results of operations.

Guarantees

On July 18, 2012, we issued an irrevocable standby letter of credit in the amount of $100,000 to our landlord for a security deposit for our corporate headquarters located in Campbell, California. The letter of credit was issued by Comerica Bank under the Credit Facility. On October 31, 2012, the Company executed a third amendment of the operating lease for our corporate headquarters in which the security deposit was reduced to $30,000.

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

Restricted Cash

Restricted cash represents the reserve for the refunds due for non-service payments inadvertently paid to us by our clients’ customers instead of paid directly to our clients. At the time of cash receipt, we record a current liability for the amount of non-service payments received.

8.    FAIR VALUE MEASUREMENTS

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

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

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

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

A summary of the activity of the fair value of the Level 3 liabilities for the years ended December 31, 2012 and 2011 is as follows (in thousands):

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	Beginning Value of Level 3 Liabilities		Transfers In (Out)			Loss(Gain) on Fair Value Re- measurement			Foreign Currency Adjustment			Ending Fair Value of Level 3 Liabilities
December 31, 2012
Contingent consideration — Optima (1)	$	225	$	(225	)	$	—		$	—		$	—
Common stock warrant liability	$	517	$	—		$	(169	)	$	—		$	348
December 31, 2011
Contingent consideration — Optima (1)	$	182	$	—		$	44		$	(1	)	$	225
Common stock warrant liability	$	—	$	815		$	(298	)	$	—		$	517

____________

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

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

	Level 1		Level 2		Level 3
December 31, 2012
Assets:
Money market funds (1)	$	1,640	$	—	$	—
Liabilities:
Common stock warrant liability (2)	$	—	$	—	$	348
December 31, 2011
Assets:
Money market funds (1)	$	5,652	$	—	$	—
Liabilities:
Common stock warrant liability (2)	$	—	$	—	$	517
Contingent consideration—Optima (3)	$	—	$	—	$	225

  ____________

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

(2) The fair value of our common stock warrant liability (see Note 10 - Stockholders' Equity) is determined using the Black–Scholes valuation method utilizing the quoted price of our common stock in an active market. Volatility is estimated based on the historical market activity of our stock. The expected life is based on the remaining contractual term of the warrants and the risk free interest rate is based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants' remaining contractual term. See detailed inputs below.

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

The Company uses the Black-Scholes model to value our common stock warrant liability. The following are the assumptions used to measure the common stock warrant liability at December 31, 2012 and 2011, which were determined in a manner consistent with that described for stock option awards as set forth in Note 10:

	December 31,
	2012		2011
Expected life in years	3.50		4.50
Volatility	65.99	%	65.99	%
Risk-free interest rate	0.34	%	0.83	%
Dividend rate	—	%	—	%

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

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

9.     INCOME TAXES

The components of loss before income taxes from continuing operations are as follows (in thousands):

	Year Ended December 31,
	2012			2011			2010
United States	$	(3,540	)	$	(10,176	)	$	(8,933	)
Foreign	(184		)	(253		)	(523		)
Loss before income tax expense	$	(3,724	)	$	(10,429	)	$	(9,456	)

Income tax expense for the years ended December 31, 2012, 2011 and 2010 consists of the following (in thousands):

	Year Ended December 31,
	2012		2011			2010
Current:
Federal	$	—	$	(38	)	$	—
State	43		44			45
Foreign	104		(74		)	31
	147		(68		)	76
Deferred:
Federal	86		86			88
State	8		4			6
Foreign	—		(3		)	(44		)
	94		87			50
Total income tax expense	$	241	$	19		$	126

Income tax expense for discontinued operations for the years ended December 31, 2012, 2011 and 2010 (in thousands) is $95, $96, and $153, respectively.

A reconciliation between the income tax benefit computed by applying the U.S. federal tax rate to loss before income taxes and actual income tax expense for the years ended December 31, 2012, 2011 and 2010 is as follows (in thousands):

	Year Ended December 31,
	2012			2011			2010
Tax benefit computed at federal statutory rate	$	(1,266	)	$	(3,546	)	$	(3,215	)
Effect of state income taxes	36			33			34
Foreign rate differential	61			8			40
Change in valuation allowance	1,163			3,392			2,900
Stock based compensation	96			391			379
Other	151			(259		)	(12		)
Total income tax expense	$	241		$	19		$	126

Deferred income taxes reflect the net tax effects of temporary differences between the value of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets as of December 31, 2012 and 2011 are as follows (in thousands):

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	December 31,
	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	27,841		$	26,488
Depreciation and amortization	2,778			3,060
Accrued reserves and other	1,162			1,070
Total deferred tax assets	31,781			30,618
Valuation allowance	(31,781		)	(30,618		)
Net deferred tax asset	—			—
Deferred tax liabilities:
Acquired goodwill	(567		)	(473		)
Total deferred tax liability	$	(567	)	$	(473	)

Realization of deferred tax assets is dependent upon future taxable earnings, the timing and amount of which are uncertain. Due to the cumulative operating losses in earlier years and continued significant loss in the most recent year, management believes that it is not more likely than not that the deferred tax assets will be realizable in future periods. The valuation allowance for deferred tax assets increased approximately $1.2 million and $2.8 million during the years ended December 31, 2012 and 2011, respectively. The increase in valuation allowance is due to current year losses.

As of December 31, 2012, we have net operating loss carryforwards for federal and state of California tax purposes of $73.5 million and $45.6 million, respectively. In addition, the Company has federal and California net operating losses of $10.1 million and 4.2 million which, if utilized, would benefit additional paid in capital. The net operating loss carryforwards will expire at various dates beginning in 2020 through 2030 for federal tax purposes, if not utilized. California has suspended the net operating losses for taxable years 2008 to 2011 and extended its net operating loss carry forward period from ten years to twenty years for net operating losses generated in tax years beginning on or after January 1, 2008. As a result of these law changes, the net operating loss for California tax purposes will begin to expire in 2014 through 2030, if not utilized.

We performed an analysis of prior ownership changes under IRC Section 382 up to December 31, 2006, and we have not performed a new ownership change analysis pursuant to IRC Section 382 since this date. The analysis indicated that the Company twice had ownership changes and that none of the operating losses subject to the limitations would expire unutilized due to the limitations. In the event that the Company had another ownership change as defined under IRC section 382 since December 31, 2006, the utilization of these losses could be further limited.

Effective April, 2007, the Company’s former BPI Buendia Center facility in the Philippines was certified by the Philippine Economic Zone Authority (“PEZA”), a government corporation, as a PEZA enterprise, as the facility was housed in a PEZA accredited building and had export revenue of not less than 70% of its total revenues. One of the incentives of PEZA certification is a lower rate tax of 5% based on gross income, which is defined as gross revenue less certain costs of services and other allowed deductions. For the period of July 2007 to December 2012, when our Manila operations were sold, this facility was subject to the 5% gross income tax. Effective May 2010, the Company's former Alphaland Southgate Tower facility in the Philippines was subject to a four year tax holiday.

The Company has adopted the accounting policy that interest and penalties will be classified as a component of operating income and losses. Interest and penalties recorded as of December 31, 2012 and 2011 were immaterial.

Federal income taxes have not been provided for on a portion of the unremitted earnings of foreign subsidiaries because such earnings are intended to be permanently reinvested. There are no unremitted earnings as of December 31, 2012.

The Company does not anticipate any significant changes to the FASB ASC 740 liability for unrecognized tax benefits within twelve months of this reporting date. The Company adopted the provisions of FASB ASC 740 as of January 1, 2007. The amount of unrecognized tax benefit as of December 31, 2012 and 2011 is not material.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. There are no ongoing examinations by income taxation authorities at this time. The Company’s tax years from 2008 to 2012 remain open to United States federal income tax and California examination. The Company’s tax years from no earlier than 2008 remain open to examination in certain foreign tax jurisdictions.

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10.    STOCKHOLDERS' EQUITY

Preferred Stock

We have 5,000,000 shares of preferred stock authorized. Our board of directors has the authority to issue the preferred stock and to fix or alter the rights, privileges, preferences and restrictions related to the preferred stock, and the number of shares constituting any such series or designation. No shares of preferred stock were outstanding at December 31, 2012 and 2011.

Common Stock

In June 2011, we issued and sold 3.7 million shares of our common stock, together with warrants to purchase up to an aggregate 1.6 million additional shares, in a public offering. The offering was made pursuant to a prospectus filed with our shelf registration statement on Form S-3 (File No. 333-171946), which was filed with the SEC on January 28, 2011, amended on February 18, 2011 and declared effective by the SEC on March 7, 2011, the prospectus supplement dated June 22, 2011, and the free writing prospectus dated June 23, 2011. We received gross cash proceeds of approximately $3.9 million from the equity offering. The $3.3 million of net cash proceeds from the offering were used for general corporate purposes, including working capital and capital expenditures.

Common Stock Warrants

The 1.5 million warrants issued in the public offering have an initial 5-year term and an exercise price of $1.40 per share and became exercisable six months after their issuance date. If at any time the shares of common stock issuable thereunder are not registered for resale pursuant to an effective registration statement, the warrants may be exercised by way of a cashless exercise. The warrants also contain provisions that protect the holders thereof against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as stock dividends, stock splits and other similar events. In addition, the placement agent received a warrant to purchase a number of shares of common stock equal to three percent (3.0%) of the number of shares purchased by investors in the offering, which approximates 110,000 shares. The placement agent warrant has an initial 5-year term and an exercise price of $1.05 per share and became exercisable six months after its issuance date. The placement agent warrant may also be exercised by way of a cashless exercise. The placement agent warrant also contains provisions that protect its holder against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as stock dividends, stock splits and other similar events.

We have classified all of the above mentioned warrants as liabilities under the caption “Common stock warrant liability” and recorded the liability at its estimated fair value with the corresponding gains or losses as a separate line item after operating loss from operations in the consolidated statement of operations and comprehensive loss, under the caption “Gain due to change in fair value of warrant liability.” See Note 8 for disclosures regarding the fair value of financial instruments. In the years ended December 31, 2012 and 2011, we recorded gains of $169,000 and $298,000, respectively, on the fair value re-measurement of the warrants.

The following table summarizes the terms of those outstanding warrants:

Date of Issuance	Exercise Price		Warrants Outstanding at December 31, 2012	Term from Date of Issuance
June 22, 2011	$	1.05	110,092	Five Years
June 24, 2011	$	1.40	1,467,887	Five Years

Treasury Stock

During the three year period ended December 31, 2012, 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. The Company offers to withhold vested shares in an amount equal to the amount of taxes to be withheld. During 2012, the Company purchased 152,399 shares with a cost of approximately $122,000 from employees to cover federal and state taxes due. During 2011, the Company purchased 398,741 shares with a cost of approximately $338,000 from employees to cover federal and state taxes due. During 2010, the Company purchased 356,931 shares with a cost of approximately $455,000 from employees to cover federal and state taxes due.

In July 2008, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $3 million of its common stock. Under the program, shares were repurchased from time to time in open market transactions at prevailing market prices. The timing and actual number of shares purchased depended on a variety of factors, such as price, corporate and regulatory requirements, and market conditions. Repurchases under the program were made using the Company’s available cash or borrowings. The program initially had a one-year term and could be commenced, suspended or terminated at any time, or from time-to-time, at management’s discretion without prior notice. In May 2009, the board of directors approved the extension of the program for an additional six months through January 31, 2010, and in December 2009 the board of directors

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approved extending the program for an additional six months through July 30, 2010. During the year ended December 31, 2010, we purchased 79,237 shares at a cost of approximately $98,000 or an average cost of $1.24 per share. The program ended as of July 30, 2010.

Equity Incentive Plans

2003 Stock Incentive Plan. In 2003, the Board of Directors adopted and the stockholders approved the 2003 Stock Incentive Plan (“2003 Plan”), which was approved by stockholders on May 14, 2003. The 2003 Plan provides for the issuance of incentive stock options or nonqualified stock options to employees, consultants and non-employee members of the board of directors, and issuance of shares of common stock for purchase or as a bonus for services rendered (restricted stock awards). Options granted under the 2003 Plan are priced at not less than 100% of the fair market value of the common stock on the date of grant and have a maximum term of ten years from the date of grant. In the case of incentive stock options granted to employees who own 10% or more of our outstanding common stock, the exercise price may not be less than 110% of the fair value of the common stock on the date of grant and such options will have a maximum term of five years from the date of grant. Options granted to employees and consultants become exercisable and vest in one or more installments over varying periods ranging up to four years as specified by the board of directors. Unexercised options generally expire upon, or within, three months of termination of employment, depending on the circumstances surrounding termination. Restricted stock awards granted to employees, consultants and non-employee directors typically vest over a one to four year period from the date of grant. Vesting of these awards is contingent upon continued service and any unvested awards are forfeited immediately upon termination of service, subject to the discretion of the board of directors.

The 2003 Plan also provides for a fixed issuance amount to non-employee members of the board of directors at prices not less than 100% of the fair value of the common stock on the date of grant and a maximum term of ten years from the date of grant. Generally, options granted to non-employee members of the board of directors are immediately exercisable and vest in two or more installments over periods ranging from twelve to twenty-four months from the date of grant. Unexercised options expire twelve months from the termination date of service as a non-employee member of the board of directors.

At the beginning of the 2012 and 2011 fiscal years, the number of shares authorized for grant under the 2003 Plan automatically increased on the first trading date of January by an amount equal to the lesser of 4% of our outstanding common stock at December 31 or 1,000,000 shares. For both 2012 and 2011, the number of shares authorized for grant under the 2003 Plan increased by 1,000,000 shares. Shares forfeited that were granted under the 2003 plan are available for future grant. In the future, the Company may seek shareholder approval to increase the shares available to grant to employees, consultants, and non-employee directors based on the growth of the Company. Total shares available for grant under the 2003 Plan was 810,000 at December 31, 2012.

2012 Inducement Equity Incentive Plan. On December 21, 2012, the Board of Directors approved and adopted the Company's 2012 Inducement Equity Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the issuance of nonqualified stock options and shares of common stock, either with or without a purchase price, to newly hired employees as a material inducement to such individuals entering into our employment. Stockholder approval of the 2012 Plan is not required under SEC or Nasdaq Capital Market rules. Options granted under the 2012 Plan are priced at not less than 100% of the fair market value of the common stock on the date of grant and have a maximum term of ten years from the date of grant. Awards granted to employees under the 2012 Plan vest in accordance with a schedule determined by the Compensation Committee of our Board of Directors. In December 2012, the Compensation Committee granted an inducement equity award to Donald Massaro under the Company's 2012 Inducement Equity Incentive Plan (the ���2012 Plan”) in connection with his entering into employment as our President and Chief Executive Officer. The number of shares subject to the awards issued to Mr. Massaro and the related vesting schedules are as follows: (1) a grant of 500,000 restricted shares of common stock which vest 1/16th quarterly over a four year term, (2) an option to purchase 500,000 shares of common stock which vest 1/16th quarterly over a four year term and (3) a grant of 250,000 restricted shares of common stock which vest in a single installment on March 31, 2013. Total shares available for grant under the 2003 Plan was 1,250,000 at December 31, 2012.

Stock-Based Compensation Expense

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

The fair value of stock options is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions, including expected time to exercise, future stock price volatility, risk-free interest rates, and dividend rates which greatly affect the calculated values. Stock-based compensation expense is recorded net of an estimated forfeiture rate and

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trued-up upon vesting. These factors could change in the future, which would affect the stock-based compensation expense in future periods. The estimated fair value of stock-based compensation awards is amortized using the straight-line method over the vesting period of the awards.

We expense stock-based compensation to the same expense categories that the respective award grantee’s salary expense is reported. The table below reflects stock-based compensation expense for the years ended December 31, 2012, 2011 and 2010 (in thousands):

	Year ended December 31,
	2012		2011		2010
Stock-based compensation expense included in:
Cost of services	$	84	$	73	$	80
Sales and marketing	51		169		235
Technology and development	116		186		345
General and administrative	559		1,594		2,242
	$	810	$	2,022	$	2,902

At December 31, 2012, approximately $1,639,000 of stock-based compensation relating to unvested awards had not been amortized and will be expensed in future periods through 2016. Under current grants that are unvested and outstanding, approximately $495,000 will be expensed in 2013 as stock-based compensation, subject to true-up adjustments for forfeitures and vestings during the year.

We calculate the value of our stock option awards when they are granted. Accordingly, we update our valuation assumptions for the risk-free interest rate on the date of grant. We prepare an analysis of the historical activity within our option plans as well as the demographic characteristics of the grantees of options within our stock option plan to determine the estimated life of the grants, stock volatility and an estimated forfeiture rate. During the years ended December 31, 2012, 2011 and 2010, 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:

	Year Ended December 31,
	2012		2011		2010
Expected life in years	3.76		3.76		3.40
Volatility	65.99	%	65.99	%	81.00	%
Risk-free interest rate	0.38	%	1.00	%	1.30	%
Dividend rate	—	%	—	%	—	%
Forfeiture Rates:
Options	27.61	%	27.61	%	31.00	%
Restricted stock	15.04	%	15.04	%	16.80	%

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

A summary of option activity under our active Stock Incentive Plans for the year ended December 31, 2012, 2011 and 2010 is as follows (in thousands):

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	Number of Shares		Weighted Average Exercise Price
Balance at December 31, 2009	871		$	2.35
Granted	138		1.40
Exercised	(19	)	0.90
Canceled	(316	)	2.23
Balance at December 31, 2010	673		2.25
Granted	600		0.98
Exercised	(15	)	1.00
Canceled	(238	)	1.96
Balance at December 31, 2011	1,021		1.59
Granted	585		0.70
Exercised	—		—
Canceled	(437	)	1.29
Balance at December 31, 2012	1,169		$	1.25

The weighted average grant date fair value of options granted during the years ended December 31, 2012, 2011 and 2010 was $0.31, $0.47 and $0.78, respectively, per share.

The following table summarizes information about stock options outstanding as of December 31, 2012 (in thousands):

	Options Outstanding						Options Vested
Range of Exercise Prices	Number Outstanding	Weighted Average Contractual Life (Years)	Weighted Average Exercise Price		Aggregate Intrinsic Value Closing Price at 12/31/12 of $0.73		Number Exercisable	Weighted Average Exercise Price	Aggregate Intrinsic Value Closing Price at 12/31/12 of $0.73
$  0.51 - $  0.68	90	7.63	$	0.56	$	36	46	0.53	$	9
$  0.69 - $  0.69	500	9.99	0.69		—		—	—	—
$  0.77 - $  1.12	325	7.38	0.94		—		145	0.98	—
$  1.25 - $13.20	254	4.07	2.98		—		232	2.14	—
$  0.51 - $13.20	1,169	7.80	$	1.25	$	36	423	2.11	$	9

The aggregate intrinsic value represents the net value which would have been received by the option holders had all option holders exercised their in-the-money options as of December 31, 2012. There were no options exercised during the year ended December 31, 2012. The Company received cash proceeds from the exercise of stock options of $15,000 and $18,000 in the years ended December 2011 and 2010, respectively. The total intrinsic value of the options exercised during the years ended December 31, 2011 and 2010 was approximately $4,000 and $5,000, respectively.

Restricted stock awards are issued from the 2003 and 2012 Plans and any issuances reduce the shares available for grant. Restricted stock awards are valued at the closing market price of our stock on the date of the grant. The following table summarizes the activity with regard to restricted stock awards during the year ended December 31, 2012, 2011 and 2010 (in thousands).

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	Number of Shares		Weighted Average Grant Price
Balance at December 31, 2009	2,438		$	1.94
Granted	1,569		1.21
Vested	(1,197	)	2.09
Forfeited	(352	)	1.45
Balance at December 31, 2010	2,457		1.47
Granted	995		1.03
Vested	(1,363	)	0.86
Forfeited	(743	)	1.36
Balance at December 31, 2011	1,346		1.03
Granted	2,145		0.79
Vested	(720	)	0.78
Forfeited	(516	)	0.93
Balance at December 31, 2012	2,255		$	0.78

The total fair value of the nonvested restricted stock awards at grant date was $1.8 million as of December 31, 2012.

11.     RELATED PARTY TRANSACTIONS

In June 2011, we issued and sold 3.7 million shares of our common stock, together with warrants to purchase up to an aggregate 1.6 million additional shares, in a public offering. Members of our board of directors purchased 135,660 shares at a price of $1.29 per share. They also received warrants to purchase up to an additional 54,264 shares with an initial exercise price of $1.40 per share. See Note 10 to our consolidated financial statements for more information regarding our equity offering.

In October 2007, we closed an OEM licensing agreement with Market2Lead, Inc. (“Market2Lead”), a software-as-a-service provider of B2B automated marketing solutions, to further enhance LeadWorks, Rainmaker's on-demand marketing automation application. In connection with this agreement, Rainmaker provided Market2Lead with growth financing of $2.5 million in secured convertible and term debt. In October 2008, one-half of the debt was converted into preferred shares of Market2Lead. In May 2010, we received payment from Market2Lead for the $1,250,000 in remaining term debt plus accrued interest of approximately $170,000 in connection with the acquisition of Market2Lead by a third party. In connection with this acquisition, we took a non-cash charge in the first quarter of 2010 of $740,000 for the carrying value of our minority equity investment.

12.    EMPLOYEE BENEFIT PLAN

We have a defined contribution benefit plan established under the provisions of Section 401(k) of the Internal Revenue Code. All employees may elect to contribute up to 20% of their compensation to the plan through salary deferrals, subject to annual limitations. Participants’ contributions are fully vested at all times. During the years ended December 31, 2012, 2011 and 2010, the Company had no matching contributions to the plan and incurred a credit of approximately $19,000, $12,000 and $15,000, respectively, relating to forfeitures under the plan.

13.     INTEREST AND OTHER EXPENSE, NET

The components of interest and other expense, net are as follows (in thousands):

	Year Ended December 31,
	2012		2011		2010
Interest expense, net	237		193		178
Currency transaction gain (loss)	(21	)	(15	)	47
Write-down of investment	—		—		740
Interest and other expense, net	216		178		965

14.    SUBSEQUENT EVENTS

On January 17, 2013, the Company announced that Mallorie Burak had been appointed as the Company's Chief Financial Officer, effective January 24, 2013. Ms. Burak most recently served as Chief Financial Officer of Foodlink Holdings, Inc. from August 2012 to January 2013. Prior to Foodlink, Ms. Burak held the roles of Vice President of Finance and Corporate Secretary,

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as well as Acting CFO, of Southwall Technologies Inc. from September 2007 to July 2012. Ms. Burak holds an MBA and B.S. in Business Administration from San Jose State University. Ms. Burak's executive employment agreement is attached as Exhibit 10.1.

On January 25, 2013, the Company announced the closure of the Company’s Austin facility as operations are to be consolidated in Rainmaker’s headquarters in Campbell, California, and our United Kingdom location as part of a strategic reallocation of resources designed to increased levels of service to customers and operating cost savings. The Company is actively seeking to sub-lease the Austin facility.

On January 31, 2013, the Company executed a fourth amendment to the operating lease for our corporate headquarters in Campbell, California, effective February 1, 2013, providing an additional 3,936 square feet of additional space. The amendment did not modify the 3-year term, effective December 1, 2012. Annual base rent under the amended lease is approximately $365,000 in the first year of the lease, or $321,000 after deducting free base rent in the first three months of the amended lease, and increases by 3% each year thereafter for the remaining term. We will continue to pay our proportionate share of operating costs and taxes based on our occupancy, and a letter of credit will be issued to the landlord for a security deposit of $40,000, will replace the prior letter of credit of $30,000.

On February 12, 2013, the Company's Board of Directors approved Amendment No.1 to the Company's 2012 Plan in connection with the hiring of Mallorie Burak as the Company's Chief Financial Officer. Amendment No. 1 was subsequently filed with the SEC on a Registration Statement on Form S-8 on February 19, 2013. Pursuant to Ms. Burak's employment agreement, the Company issued 375,000 shares of restricted stock to Ms. Burak as an inducement award which vests quarterly over a 4 year term.

On March 4, 2013, we and Comcast Cable Communications Management, LLC ("Comcast") executed Statement of Work #3 to our B2B e-commerce program, under which we and Comcast have mutually agreed to wind down the program over the next six months.

See Note 6 for discussion of change in financial covenant of Comerica Bank Credit Facility on March 13, 2013.

On April 1, 2013, we announced that we had entered into subscription agreements with various investors for the sale of 13.0 million shares of our common stock in a registered direct offering. We expect to receive gross cash proceeds of approximately $5.8 million from the equity offering. The offering is expected to close on or about April 3, 2013.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors.

Based on their evaluation as of December 31, 2012, our management, including our principal executive officer and principal financial officer, has concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective as of December 31, 2012 to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and information required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

(b) Management’s Annual Report on Internal Control over Financial Reporting

Our management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining an adequate system of internal control over financial reporting. This system of internal accounting controls is designed to provide reasonable assurance that assets are safeguarded, transactions are properly recorded and executed in accordance with management’s authorization and financial statements are prepared in accordance with GAAP. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls

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must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2012, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.

(c) Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during our quarter ended December 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers of the Registrant

The following table provides the name, age and positions of our directors and executive officers as of March 28, 2013.

Name	Age	Position
Donald Massaro	69	President, Chief Executive Officer, and Director
Mallorie Burak	42	Chief Financial Officer and Corporate Secretary
James Chung	42	Chief Technology Officer
David Guercio	59	Executive Vice President of Sales and Marketing
Bradford Peppard (1)(2)(3)	58	Chairman
Gary Briggs (1)(2)(3)	50	Director
C. Finnegan Faldi (1)(2)(3)	44	Director

___________________

(1) Member of the Audit Committee

(2) Member of the Governance and Nominating Committee

(3) Member of the Compensation Committee

Set forth below is a description of the backgrounds, including business experience over the past five years, for each of our directors and executive officers.

Donald J. Massaro, 69, joined our Company as President and Chief Executive Officer and a member of the Company's Board of Directors in December 2012. Mr. Massaro brings more than 30 years of experience, leading technology-based companies and bringing products to market. Most recently, he served as Chief Executive Officer of Sendmail, Inc., a leader in messaging infrastructure, from September 2006 to August 2012. Previously, Mr. Massaro was the President, CEO and founder of Reconnex Inc. from May 2003 to June 2005. From July 2001 to May 2003, he served as President and CEO of Array Networks, Inc. Mr.

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Massaro holds a BS degree in Aeronautical Engineering from the University of Notre Dame, a Master of Science degree in mechanical engineering from Northwestern University and studied for his PhD at University of California at Berkeley. Mr. Massaro’s previous work experience, including as a CEO of various other companies, enables him to bring valuable perspectives that are core to our Company’s business.

Mallorie Burak, 42, joined our Company in January 2013 as Chief Financial Officer and Corporate Secretary. Ms. Burak most recently served as Chief Financial Officer of Foodlink Holdings, Inc. from August 2012 to January 2013. Prior to Foodlink, Ms. Burak held the roles of Vice President of Finance and Corporate Secretary, as well as Acting CFO, of Southwall Technologies Inc. from September 2007 to July 2012. Ms. Burak holds an MBA and B.S. in Business Administration from San Jose State University.

James Chung, 42, has served as Chief Technology Officer since November 2011. Mr. Chung, a Web technology executive with 18 years of experience in high growth start-ups and Fortune 500 companies, is charged with taking the Rainmaker B2B, SaaS-based eCommerce platform forward while leading and optimizing the Company’s global IT, Development, Quality Assurance, Product Management, Professional Services and Corporate Security functions. Mr. Chung’s career covers a blend of IT, engineering and e-commerce with technology leadership experience. He served most recently, as the Director of Global eCommerce Engineering at Intuit, Inc., a provider of business and financial management solutions, from April 2009 to December 2010. From April 2008 to March 2009, Mr. Chung served as Head of Engineering for Apple, Inc.'s B2B Online Store and, from January 2005 to March 2008, as the Director of Engineering, Financial Systems at PayPal, Inc. Mr. Chung studied Industrial and Systems Engineering at San Jose State University and received a B.S. in Management Information Systems from the University of Phoenix.

David Guercio, 59, joined our Company in August 2012 and serves as our Executive Vice President of Sales and Marketing. Mr. Guercio brings more than 20 years of experience in sales, business development, marketing and customer support for software companies spanning the Americas, Asia-Pacific and Europe. Mr. Guercio most recently served as Senior Vice President of Field Operaton at KXEN, Inc. from May 2010 to November 2011. Prior to KXEN, Inc., Mr. Guercio held the roles of Executive Vice President of Sales and Services at Centric Software, Inc., from April 2008 to May 2010. From September 2003 to April 2008, Mr. Guercio served as Senior Vice President of Sales at Inxight Software, Inc. Mr. Guercio graduated with a BSC and attended the MBA program at Santa Clara University.

Gary Briggs, 50, has served as a director of our Company since March 2010 and is currently Chairman of the Compensation Committee and a member of our Audit Committee and our Governance and Nominating Committee. Mr. Briggs has served in various senior marketing roles at Google since October 2010. Mr. Briggs also served as the Chief Executive Officer Plastic Jungle, a leading web-based gift card exchange, from November 2008 through October 2010. Prior to his position at Plastic Jungle, Mr. Briggs served as Senior Vice President and Chief Marketing Officer at eBay from February 2006 to March 2008, where he was responsible for eBay’s branding and marketing activities in North America, including advertising, Internet marketing, direct marketing, onsite merchandising, partner relationships and core category initiatives. Prior to such role, from 2002 to 2006, Mr. Briggs held numerous positions at eBay, including VP of Consumer Marketing for eBay U.S., VP of Global Marketing for PayPal and General Manager for eBay Canada. He earned a Bachelor of Arts degree in 1984 from Brown University and a Masters in Business Administration in 1989 from J.L. Kellogg Graduate School of Management, Northwestern University. The Board nominated Mr. Briggs in consideration of his strong marketing and e-commerce background that includes extensive expertise and experience with both large and small companies and the additional leadership qualities that he brings to the Board.

Bradford Peppard, 58, has served as a director of our Company since 2004 and is currently Chairman of the Audit Committee and a member of our Governance and Nominating Committee and our Compensation Committee. Since 2002, Mr. Peppard has been President of Lime Tree Productions, a strategic marketing consulting firm. Mr. Peppard also served as a Director of International Sales at Smith Micro. From 1999 to 2002, Mr. Peppard was President of CinemaScore Online, an online source of movie rating information. Prior to that, Mr. Peppard held Vice President of marketing positions at Aladdin Systems, Software Publishing Corporation and Quarterdeck Office Systems. Mr. Peppard’s financial experience includes positions as Treasurer of Trader Joe’s, Director of Finance and Administration (Controller) for CBS TV and CBS/Fox Studios, an MBA from Stanford Business School with a concentration in Finance, and prior audit committee experience with a number of public companies, including: Aladdin Systems, Monterey Bay Technology, and Oppenheimer Industries. The Board nominated Mr. Peppard in consideration of his extensive sales and marketing experience in various industries together with his deep finance experience, which allows him to provide valuable guidance to our Company.

C. Finnegan Faldi, 44, has served as a director of our Company since November 2012 and is currently Chairman of the Governance and Nominating Committee and a member of our Audit Committee and our Compensation Committee. Mr. Faldi brings nearly 20 years of senior management experience in both start-ups and public technology companies. Mr. Faldi is currently serving as President and Chief Executive Officer of TruEffect, Inc. Prior to that, Mr. Faldi served as Chief Operating Officer at Datalogix, a database marketing and digital media company, from October 2011 to October 2012. From December 2007 to October 2011, he served as a Vice President over a number of Yahoo’s businesses including Global Broadband, Search Affiliate, NA Mobile

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and Strategic Partnerships & Operations. Prior to that, he held various senior operational and business development positions including managing the sales, marketing, product and business development teams for both the eCommerce and Direct Merchant business at Solidus Networks from August 2004 to November 2007. Mr. Faldi received a BS degree in Economics, with a concentration in Strategic and Entrepreneurial Management, from the Wharton School at the University of Pennsylvania. He earned his MBA degree from the Graziadio School at Pepperdine University. The Board nominated Mr. Faldi in consideration of his extensive experience with technology and e-commerce companies, which allows him to provide valuable guidance to our Company.

Section 16(a) Beneficial Ownership Reporting Compliance

Our directors, officers and persons who hold more than ten percent (10%) of the Company’s outstanding Common Stock are subject to the reporting requirements of Section 16(a) of the Exchange Act, which require them to file reports with respect to their ownership of the Common Stock and their transactions in such Common Stock. To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company and written representation that no other reports were required, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent shareholders were complied with, except as follows: our board members each received a grant of restricted shares on July 17, 2012; however, the Form 4s relating the grants were filed late on July 20, 2012. On October 18, 2012, Timothy Burns, Chief Financial Officer and Corporate Secretary, surrendered shares to cover tax withholding for the vesting of restricted shares. The related Form 4 was filed late on October 31, 2012.

Code of Ethics

Our directors, officers and employees are required to comply with our Standards of Business Ethics and Conduct. The purpose of our Standards of Business Ethics and Conduct is to deter wrongdoing and to promote, among other things, honest and ethical conduct and to ensure to the greatest possible extent that our business is conducted in a consistently legal and ethical manner. The Standards of Business Ethics and Conduct is intended to cover the requirement of a Code of Ethics for senior financial officers as provided by the SEC’s rules with respect to Section 406 of the Sarbanes-Oxley Act. Employees may submit concerns or complaints regarding ethical issues on a confidential basis by means of a telephone call to an assigned voicemail box or via e-mail. The Audit Committee investigates all such concerns and complaints.

Our Standards of Business Ethics and Conduct is posted on our website, at www.rainmakersystems.com, under the investors / corporate governance link. We will also disclose on our website any amendment to, or waiver from, a provision of the Standards of Business Ethics and Conduct that applies to a director or officer in accordance with applicable Nasdaq and SEC requirements.

Procedures for Shareholder Recommendations of Nominees to the Board of Directors

As of the date of this filing, there have been no material changes to the procedures described in our Proxy Statement relating to the 2012 Annual Meeting of Stockholders by which stockholders may recommend nominees to our Board of Directors.

Audit Committee

We have a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee presently consists of Messrs. Peppard, Briggs and Faldi. The Board has determined that Mr. Peppard, Chairman of the Audit Committee, is an “audit committee financial expert” as defined under applicable SEC rules. The Board of Directors has also determined that Mr. Peppard is an “independent director” as defined under applicable SEC and Nasdaq rules.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Committee Report—Executive Summary

Rainmaker’s executive compensation program for our named executive officers (NEOs) is administered by the Compensation Committee of the Board of Directors. The Compensation Committee currently consists of non-employee directors Bradford Peppard, Gary Briggs and C. Finnegan Faldi. None of the Company’s executive officers serves as a member of the Compensation Committee of the Company. The Compensation Committee acts pursuant to a written charter, a copy of which is available on our website at www.rainmakersystems.com.

The Compensation Committee is responsible for (i) reviewing and approving matters relating to employee compensation and benefit plans, (ii) reviewing and determining the salaries and bonuses of executive officers of the Company, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), and (iii) establishing the general compensation policies for such individuals. During 2008, the Compensation Committee delegated limited authority to our CEO to increase the base salary for the NEO’s, other than himself, by up to ten percent. With NEO retention as its purpose, this limited delegation of authority

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provides the CEO with an ability to negotiate to retain an executive officer if he deem necessary. As of March 28, 2013, our CEO has not exercised his discretionary authority. We believe that the compensation programs for the Company’s NEOs should reflect the Company’s performance and the value created for the Company’s stockholders. In addition, the compensation programs should support the short-term and long-term strategic goals and values of the Company, and should reward individual contributions to the Company’s success.

On behalf of our stockholders, the Compensation Committee has carefully monitored our executive compensation programs. The Compensation Discussion and Analysis and tables that follow will show, we believe, structures for executive compensation that are appropriate and carefully considered in view of the Company’s objectives and industry conditions and practices. It is our general objective to provide our NEOs with (i) base salary at levels appropriate for our economic circumstances and the goals set for our management and (ii) performance-based incentives that reward solid financial performance with cash bonuses, restricted stock, and stock option awards.

Overall, the Compensation Committee believes that the compensation provided for NEOs in 2012 was appropriate based upon our financial performance, general economic conditions, our analysis of compensation of surveyed companies, our assessments of individual and corporate performance, and other relevant factors.

1. Named Executive Officers

This Compensation Discussion and Analysis explains how our compensation program is designed and operates with respect to our NEOs. Our NEOs include (i) our CEO, (ii) our two most highly compensated executive officers in the fiscal year ended December 31, 2012 and (iii) a departing executive that would have qualified as an NEO if still employed with us at December 31, 2012. Our NEOs are identified in the Summary Compensation Table that appears following this Compensation Discussion and Analysis.

2. Overview of Executive Compensation Philosophy and Objective

Our Compensation Committee firmly believes that the compensation provided to our NEOs should directly reflect the financial performance of the Company, and be closely tied to stockholder value. Our compensation plans are consequently designed to link individual rewards with the Company’s performance by applying objective, quantitative factors including the Company’s own business performance and general economic factors. We also rely upon subjective and qualitative factors such as technical expertise, leadership and management skills when structuring executive compensation in a manner consistent with our pay-for-performance philosophy.

In addition to providing our NEOs with compensation opportunities that are based upon their personal performance, the financial performance of the Company and their individual contribution to that performance, our Compensation Committee generally provides our NEOs with compensation that is competitive enough to retain highly skilled individuals. The Company is engaged in a very competitive industry, and the Company’s success depends upon its ability to attract and retain qualified executives through the competitive compensation packages it offers to such individuals.

3. Procedures for Determining Executive Compensation

In making its decision, the Compensation Committee considers all aspects of NEO compensation, and takes into account (i) our corporate performance, (ii) the CEO’s recommendations with respect to the total compensation for all NEOs, including his own, and (iii) the Radford Executive Compensation Survey data that our Human Resources department summarizes for the Compensation Committee. In its sole discretion, the Compensation Committee may accept or reject, in whole or in part, the recommendations of our CEO. The Compensation Committee does not use a consultant, but has received some advice from its outside legal counsel about industry practices generally. For 2012, the Compensation Committee reviewed the recommendations of our CEO with respect to the compensation of our NEOs, determined the appropriateness of the recommendations in accordance with the market data and our corporate performance, and approved such recommendations without adjustment.

4. Elements of Executive Compensation

The material components of compensation for our NEOs from year to year, as well as the specific principles and purpose of each component, are set forth below. We believe that these components of compensation are necessary and appropriate in order to attract and retain qualified executive officers. The compensation of our NEOs consists primarily of four major components:

• Base salary;

• Annual bonus;

• Stock-based awards; and

• Employee benefits programs:

◦ Perquisites and other personal benefits

◦ Severance and change in control benefits

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(a) Base Salary. In general, base salary is the compensation for services rendered in the position that the NEO serves. We establish base salaries after considering a variety of factors including each NEO’s qualifications and experience, prior employment, industry knowledge, scope of responsibilities, and individual performance, as well as internal pay equity and market survey data. Specific weightings are not applied to these factors. Base salaries are generally reviewed annually as part of the compensation review process.

(b) Annual Bonus. Our pay-for-performance philosophy ensures that annual incentive compensation awards are tied to the achievement of business specific goals. Certain of the Company’s executive officers, including the CEO and CFO, have entered into employment agreements which provide for, in addition to base salary, bonuses to be awarded on the basis of the Company’s attainment of pre-established revenue and net income goals. It is the intent of the Compensation Committee to use these bonuses, in conjunction with the executive officer’s equity incentives, to tie a potentially large portion of the executive officer’s total compensation to the financial performance of the Company.

Our NEOs typically participate in the Rainmaker Systems, Inc. Corporate Bonus Plan, which was established in 2009 for the benefit of our executive officers. The Corporate Bonus Plan is generally structured as follows, with changes made from year-to-year to reflect changing business needs and competitive circumstances:

• At the beginning of each fiscal year, our CEO and CFO recommend quarterly and annual financial performance targets, as discussed below, subject to the approval of the Compensation Committee.

• At the close of each quarter of the fiscal year, the Compensation Committee assesses the Company’s performance against the pre-established quarterly metrics. Provided that the Company achieves at least 80 percent of its quarterly goals, the NEOs receive after the close of such quarter a bonus based on their individual payout target percentage and the weighted value of the applicable goal.

• Similarly, at the close of the fiscal year, the Compensation Committee assesses the Company’s performance against the pre-established annual metrics. Provided that the Company achieves at least 80 percent of its annual goals, the NEOs receive after the close of the fiscal year a bonus based on their individual payout target percentage and the weighted value of the applicable goal.

The Corporate Bonus Plan provides for cash bonuses to be paid quarterly and annually when the predetermined performance targets are achieved. The amount of the quarterly and annual bonuses that we pay to our NEOs participating in the plan is determined by a formula that weighs our quarterly and annual achievement of pre-established revenue and income goals. A bonus is only paid in the event the Company achieves at least 80 percent of its performance target. If our performance for any measure falls between 80 percent and 100 percent, we interpolate to determine the applicable payout percentage. If our performance for any measure exceeds 100 percent, the bonus amount payable to each such officer in respect of such component of the bonus formula shall be increased by 2.5% for each whole 1% increment achieved above such 100% attainment. The table below sets forth the bonus plan in which each NEO participated in 2012, the bonus opportunity (expressed as a percentage of compensation), the performance targets and the weights assigned to each target. All NEOs who participated in the Corporate Bonus Plan voluntarily forfeited any potential payment for the first and second quarters of 2012.

Fiscal Year 2012 Annual Bonus Plan

Executive	Plan	Target (% of base salary)	Corporate Bonus Plan Performance Targets	Weight
Donald Massaro (1) President and CEO	Corporate Bonus Plan	Not Applicable	•   Quarterly revenue •   Quarterly profitability •   Annual profitability	40% 40% 20%
Michael Silton Former President, CEO and Chairman	Corporate Bonus Plan	100%
Timothy Burns Former CFO	Corporate Bonus Plan	30%
James Chung Chief Technology Officer	Corporate Bonus Plan	25%

___________________

(1) Per Mr. Massaro's executive employment agreement dated December 11, 2012, he is eligible to receive an aggregate bonus of up to 75% of base salary, beginning in the second quarter of 2013. The target is 100% percent of base salary for subsequent years.

(c) Stock-based Awards. The Company maintains the 2003 Stock Incentive Plan (the 2003 Plan), which permits the Company’s Board of Directors or Compensation Committee to make awards of incentive stock options, non-qualified stock options, stock appreciation rights, shares, and restricted stock. In addition, in December 2012, the Board of Directors adopted and approved the 2012 Inducement Equity Incentive Plan (the “2012 Plan”). In December 2012, the Compensation Committee of our Board of

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Directors granted an inducement equity award to Donald Massaro under the 2012 Plan in connection with his entering into employment as Rainmaker’s President and Chief Executive Officer.

These awards are designed to create a meaningful opportunity for stock ownership based upon the NEO’s current position with the Company, the NEO’s personal performance in recent periods and his or her potential for future responsibility and promotion over the term of the award. The relevant weight given to each of these factors varies from individual to individual. Each grant is also designed to align the interests of the executive officer with those of the stockholders and provide each individual with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. In past years, the Company has annually granted restricted stock awards, incentive stock options (subject to the volume limitations contained in the Internal Revenue Code) and non-qualified stock options under the 2003 Plan to certain executive officers. Our Board has established the third Monday of November as the day on which to make annual grants of restricted stock awards and stock option awards. The Board selected this time for grants because the annual grant dates in November generally fall within the middle of the fourth fiscal quarter (when the trading window is expected to be open). The Board has the flexibility to set grants at other dates during the year, but prefers this annual grant date in order to ensure that there is no timing, nor reason to time, our release of material non-public information for the purpose of affecting the value of executive compensation. Through authority delegated by the Board, the Chairman of the Compensation Committee may approve stock grants to new employees on the third Monday of each month following a new hire.

Regardless of when grants occur, the exercise price for stock options is always determined based on the closing market price of the Company’s common stock on the date of grant. Each stock option generally becomes exercisable in a series of installments over a four-year period, contingent upon the executive officer’s continued employment with the Company. Stock option awards generally vest 25% at the end of one year following the grant date and 1/36 each month during the following three years. Restricted stock awards generally vest quarterly over a two to four year period following the award date. The Company does not have stock ownership requirements.

(d) Perquisites and Other Personal Benefits. Certain NEOs receive perquisites, principally pursuant to their employment agreements that were in effect in 2012. The perquisites include personal expense reimbursements relating to health care and life insurance premiums, car allowance and financial and tax planning.

(e) Severance and Change in Control Payments. Our NEOs are entitled to severance and change-in-control benefits pursuant to employment agreements or pursuant to offer letters entered into at the time of hire. As of March 28, 2013, the Company currently has employment agreements with Donald Massaro, President and Chief Executive Officer, and Mallorie Burak, Chief Financial Officer and Corporate Secretary. In addition, the Company had employment contracts with Michael Silton and Timothy Burns, whose employment with the Company terminated effective October 24, 2012, and February 22, 2013, respectively.

The employment agreement for Mr. Massaro generally provides that if his employment is constructively terminated or terminated by the Company without cause, then Mr. Massaro shall receive, with no duty to mitigate, an amount equal to six months base salary.

The employment agreement for Ms. Burak generally provides that if her employment is constructively terminated or terminated by the Company without cause, then Ms. Burak shall receive, with no duty to mitigate, an amount equal to six months base salary.

(f) Inter-Relationship of Elements. The Compensation Committee reviews overall compensation including base salary, bonus and stock/option grants to make sure they are commensurate with the executive’s position and experience, and determines the weighting of each component of compensation based on market survey information from the Radford Executive Compensation Survey data. The Compensation Committee allocates between long-term and currently-paid out compensation, based on market survey data, which shows the allocation of current paid-out compensation and long-term compensation for comparable positions in the same general geographic area. Quarterly and annual cash bonuses are intended to provide each executive incentives to achieve the financial objectives for the current fiscal period, whereas equity compensation is structured to reward the executive for long-term performance of the Company, since equity vests over a number of years—usually two to four years.

(g) Adjustment or Recovery of Awards. Under Section 304 of Sarbanes-Oxley, if the Company is required to restate its financials due to material noncompliance with any financial reporting requirements as a result of misconduct, the CEO and CFO must reimburse us for (1) any bonus or other incentive-based or equity-based compensation received during the 12 months following the first public issuance of the non-complying document, and (2) any profits realized from the sale of securities during those 12 months. The Company does not have other policies or recovery rights with respect to NEO compensation, other than the vesting schedules described below.

(h) Financial Accounting Considerations. The relative expense associated with stock option and restricted stock awards factored into the Compensation Committee’s decision to consider restricted stock awards in addition to stock options, because of

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the volatility of the Company’s common stock and the resulting FASB ASC 718 stock option expense attached to stock options. The Compensation Committee feels that the option value for purposes of computing the FASB ASC 718 expense attached to stock options is disproportionately high and that restricted stock provides NEOs with an appropriate long term incentive.

(i) Tax Considerations. Section 162(m) of the Internal Revenue Code imposes a limitation on the deductibility for federal income tax purposes of compensation exceeding $1.0 million paid to certain executive officers. Compensation above $1.0 million is not subject to the limitation if it is “performance-based compensation” within the meaning of the Internal Revenue Code. The Company anticipates that any compensation deemed paid by it under the 2003 Plan (whether by the disqualifying disposition of incentive stock options or the exercise of non-statutory stock options) in connection with options with exercise prices equal to the fair market of option shares on the grant date will qualify as performance-based compensation for purposes of Section 162(m) of the Internal Revenue Code and will not have to be taken into account for purposes of the $1.0 million limitation per covered individual. Equity awards granted under the 2012 Plan do not qualify as “performance-based compensation.” Because all compensation paid to the executive officers has not approached the Section 162(m) limitation, the Compensation Committee has not had to use any of the available exemptions from the deduction limit.

We have granted stock options as incentive stock options in accordance with Section 422 of the Internal Revenue Code, subject to the volume limitations. Generally, the exercise of an incentive stock option does not trigger any recognition of income or gain to the holder. If the stock is held until at least one year after the date of exercise (or two years from the date the option is granted, whichever is later), all of the gain on the sale of the stock, when recognized for income tax purposes, will be capital gain rather than ordinary income to the recipient. Consequently, we do not receive a tax deduction. For stock options that do not qualify as incentive stock options, we are entitled to a tax deduction in the year in which the stock options are exercised equal to the spread between the exercise price and the fair market value of the stock for which the stock option was exercised. The holders of the non-qualified stock options are generally taxed on this same amount in the year of exercise.

2012 Summary Compensation Table

The table below summarizes the compensation paid by the Company to our named executive officers for the fiscal years ended December 31, 2012 and 2011, as applicable.

Name and Principal Position	Year	Salary ($)	Bonus ($)	Stock Awards ($)	Option Awards ($)	Non-Equity Incentive Plan Compensation ($)	All Other Compensation ($)	Total ($)
Donald Massaro (4)	2012	—	—	517,500	142,000	—	—	659,500
President and Chief Executive Officer
Timothy Burns (5)	2012	200,000	—	133,700	—	2,100	—	335,800
Former Chief Financial Officer	2011	161,300	4,500	107,400	—	—	—	273,200
James Chung	2012	235,000	800	60,800	—	—	—	296,600
Chief Technology Officer	2011	22,600	—	66,300	—	—	—	88,900
Michael Silton (6)	2012	331,800	—	219,600	—	14,200	89,400	655,000
Former President, Chief Executive Officer and Chairman	2011	405,000	—	—	—	—	61,300	466,300

___________________

(1) The amounts included under the “Stock Awards” and “Option Awards” column reflect aggregate grant date fair value of the restricted stock and option awards granted in each respective fiscal year, computed in accordance with FASB ASC Topic 718, excluding the effect of any estimated forfeitures. Please see Note 10 in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for assumptions used in calculating these amounts.

(2) Our NEO's are eligible to receive non-equity incentive plan compensation, which is a bonus paid based on a measurable attainment schedule. During 2012, Messrs. Silton and Burns were paid non-equity incentive plan compensation based on achievement of performance goals in the third quarter of 2012.

(3) The figures reported in the “All Other Compensation” column above for 2012 consist the following items:

Executive	Company- paid Medical		Financial Planning		Auto Allowance		Company- paid Life Insurance		Accrued Vacation Payment		Total
Michael Silton	$	17,900	$	12,000	$	19,700	$	22,500	$	17,300	$	89,400

(4) Donald Massaro was hired as President and Chief Executive Officer on December 11, 2012.

(5) Timothy Burns was hired as Corporate Controller on November 30, 2010. He was named Acting CFO on April 20, 2011 and was promoted to CFO on November 4, 2011. His employment ended on February 22, 2013.

(6) Michael Silton's employment as CEO of the Company terminated on October 24, 2012.

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Outstanding Equity Awards at Fiscal Year-End

The following table sets forth certain information regarding the stock option grants and stock awards to the named executive officers as of December 31, 2012.

	Option Awards					Stock Awards
Name and Grant Date	Number of Securities Underlying Unexercised Options Unexercisable (#)		Options Exercise Price ($/Share)		Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units of Stock That Have Not Vested ($)(1)
Donald Massaro
12/27/2012	500,000	(2)	$	0.69	12/27/2022	—		$	—
12/27/2012	—		—			250,000	(3)	$	182,500
12/27/2012	—		—			500,000	(4)	$	365,000
Timothy Burns
11/19/2012	—		—			100,000	(7)	$	73,000
11/19/2012	—		—			65,000	(11)	$	47,500
11/21/2011	—		—			42,500	(8)	$	31,000
4/18/2011	—		—			18,750	(6)	$	13,700
12/20/2010	—		—			15,000	(10)	$	11,000
James Chung
11/19/2012	—		—			75,000	(5)	$	54,800
11/28/2011	—		—			97,500	(9)	$	71,200
Michael Silton
No outstanding options or stock awards	—		—			—		$	—

___________________

(1) Market value of shares that have not vested was calculated by using our closing market price at December 31, 2012 of $0.73 per share.

(2) These options vest 6.25% quarterly over 4 years from 2012 to 2016 and will be fully vested in 2016.

(3) These restricted stock awards fully vest on March 31, 2013.

(4) These restricted stock awards vest 6.25% quarterly from 2012 to 2016 and will be fully vested in 2016.

(5) These restricted stock awards vest 6.25% quarterly over 4 years from 2011 to 2015 and will be fully vested in 2015.

(6) These restricted stock awards vest 6.25% quarterly over 4 years from 2011 to August 22, 2013, six months after Mr. Burns ended his employment with the Company, per the transition agreement dated January 23, 2013.

(7) These restricted stock awards vest 12.5% quarterly over 2 years from 2012 to August 22, 2013, six months after Mr. Burns ended his employment with the Company, per the transition agreement dated January 23, 2013.

(8) These restricted stock awards vest 12.5% quarterly over 2 years from 2011 to August 22, 2013, six months after Mr. Burns ended his employment with the Company, per the transition agreement dated January 23, 2013.

(9) These restricted stock awards vest 25% annually over 4 years from 2011 to 2015 and will be fully vested in 2015.

(10) These restricted stock awards vest 25% annually over 4 years from 2010 to August 22, 2013, six months after Mr. Burns ended his employment with the Company, per the transition agreement dated January 23, 2013.

(11) 53,000 shares of this grant of restricted stock awards will vest on August 22, 2013, per the transition agreement dated January 23, 2013.

2012 Director Compensation

The following table summarizes the compensation paid by the Company to its non-employee directors for the year ended December 31, 2012.

Name and Title	Fees Earned or Paid in Cash ($) (1)	Stock Awards ($) (1) (2)	Option Awards ($) (2)	All Other Compensation ($)	Total ($)
Gary Briggs, Director	—	16,600	—	—	16,600
C. Finnegan Faldi, Director	—	38,500	7,400	—	45,900
Bradford Peppard, Chairman	30,000	16,600	—	—	46,600
Mitchell Levy, Director (3)	30,000	16,600	—	—	46,600

___________________

(1) The Company's Board of Directors agreed to eliminate each non-employee director's monthly fees for 2012. During 2012, all non-employee directors would have earned $4,167 in monthly fees for each month of service as a director, and no additional fees relating to meetings attended during the year. Each non-employee Board member who continued to serve as a non-employee Board member

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after the 2012 annual meeting of stockholders, including each of the Company's current non-employee Board members (other than Mr. Faldi, who joined our Board in November 2012), was granted 20,000 restricted shares of common stock under the Company's 2003 Stock Incentive Plan (the "2003 Plan"), as then provided in the 2003 Plan. These restricted stock grants to the non-employee Board members vest at the rate of 25% per year over four years following the award date and are otherwise subject to the terms and conditions of the 2003 Plan. In October 2012, our Board formed a special committee to assist with the transition to a new Chief Executive Officer for our Company. Messrs. Levy and Peppard were appointed to the committee and were paid $10,000 in monthly fees for their participation on the committee. Mr. Peppard deferred payment of his fees and we anticipate paying the fees in April 2013.

(2) The amounts included under the “Stock Awards” and “Option Awards” column reflect aggregate grant date fair value of the restricted stock and option awards granted in each respective fiscal year, computed in accordance with FASB ASC Topic 718, excluding the effect of any estimated forfeitures. Please see Note 10 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for assumptions used in calculating these amounts.

(3) On March 9, 2013, Mr. Levy resigned his position as a director of the Company.

Beginning in 2013, Board compensation for non-employee directors will consist of: (i) an aggregate annual retainer fee of $50,000, payable in equal quarterly installments of $12,500 for each quarter of Board service (payable in cash or restricted shares of the Company's common stock, at the election of each director); (ii) an annual grant of 100,000 restricted shares of the Company's common stock on the date each annual stockholders meeting, vesting in a series of four successive quarterly installments upon each director's completion of each three month period of service as a Board member over the 12-month period measured from the grant date, provided that such individual has served as a non-employee Board member for at least six (6) months; and (iii) an initial grant of 50,000 restricted shares of the Company's Common Stock to each new director upon such individual's first election or appointment as a non-employee Board member, vesting in a series of four successive quarterly installments upon such director's completion of each 3-month period of service as a Board member over the 12-month period measured from the grant date.

As of December 31, 2012, each non-employee director had the following number of stock options and unvested shares of restricted stock outstanding:

	Outstanding options at December 31, 2012	Unvested restricted stock awards outstanding at December 31, 2012
Gary Briggs	20,000	35,000
C. Finnegan Faldi	20,000	50,000
Bradford Peppard	—	50,000
Mitchell Levy	—	50,000

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plans

The following table sets forth information as of December 31, 2012 with respect to shares of the Company’s Common Stock that may be issued under the Company’s existing equity compensation plans, the 2003 Stock Incentive Plan and the 2012 Inducement Equity Incentive Plan.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	2,770,460	$	0.85	810,149
Equity compensation plans not approved by security holders	1,250,000	0.69		—
Total	4,020,460	$	0.77	810,149

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On December 21, 2012, the Board of Directors approved and adopted the Company's 2012 Inducement Equity Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the issuance of nonqualified stock options and shares of common stock, either with or without a purchase price, to newly hired employees as a material inducement to such individuals entering into our employment. Stockholder approval of the 2012 Plan is not required under SEC or Nasdaq Capital Market rules. Options granted under the 2012 Plan are priced at not less than 100% of the fair market value of the common stock on the date of grant and have a maximum term of ten years from the date of grant. Awards granted to employees under the 2012 Plan vest in accordance with a schedule determined by the Compensation Committee of our Board of Directors.

Beneficial Ownership of Securities

The following table sets forth certain information as of March 28, 2013, regarding the beneficial ownership of our common stock by (i) each person, to our knowledge, who is known by us to beneficially own more than five percent of our common stock, (ii) each named executive officer set forth in the Summary Compensation Table above, (iii) each of our Company’s directors, and (iv) all of our Company’s current directors and executive officers as a group. This table lists applicable percentage ownership based on 28,949,533 shares of common stock outstanding as of March 28, 2013. Beneficial ownership is determined in accordance with the rules and regulations of the SEC. Shares subject to options or warrants that are exercisable currently or within 60 days of March 28, 2013, are deemed to be outstanding and beneficially owned by the person for the purpose of computing share and percentage ownership of that person. They are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table and as affected by applicable community property laws, all persons listed have sole voting and investment power for all shares shown as beneficially owned by them. Unless otherwise indicated, all addresses for the stockholders set forth below is c/o Rainmaker Systems, Inc., 900 East Hamilton Avenue, Suite 400, Campbell, California 95008.

Name of Beneficial Owner	Number of Shares Beneficially Owned (Including the Number of Shares Shown in the Second Column)	Number of Shares Owned as a Result of Options and Warrants Exercisable Within 60 Days of March 28, 2013	Percentage of Shares Outstanding
Perkins Capital Management, Inc. (1)	2,647,785	—	9.1	%
Michael Silton (2)	2,175,984	—	7.5
Diker Management, LLC (3)	1,582,987	—	5.5
Stephen Feinberg (4)	1,549,000	—	5.7
Donald Massaro	750,000	62,500	2.7
Bradford Peppard	444,165	—	1.5
David Guercio	382,857	—	1.3
Mallorie Burak	375,000	—	1.3
Timothy Burns (5)	263,399	—	*
James Chung	488,422	—	1.7
Gary Briggs	78,760	20,000	*
C. Finnegan Faldi	50,000	—	*
All directors and officers as a group (7 persons)	2,651,704	82,500	9.1	%

___________________

*    Less than 1%.

(1) Beneficial ownership information is based solely on information contained in Schedule 13G/A filed with the SEC on February 1, 2013 by Perkins Capital Management, Inc. on behalf of itself and affiliated persons and entities. The address for Perkins Capital Management, Inc. is 730 Lake St. E., Wayzata, MN 55391.

(2) Michael Silton's employment with the Company ended effective October 24, 2012 and therefore shares beneficially owned by him are not included in the total amount owned by all directors and officers as a group. On March 26, 2013, the transfer agent's records show 793,595 shares transferred out of Mr. Silton's name.

(3) Beneficial ownership information is based solely on information contained in Schedule 13G/A filed with the SEC on February 15, 2013 by Diker Management, LLC on behalf of itself and affiliated persons and entities. The address for Diker Management, LLC is 730 Fifth Avenue, 15th Floor, New York, NY 10019.

(4) Beneficial ownership information is based solely on information contained in Schedule 13G filed with the SEC on June 8, 2011 by Stephen Feinberg on behalf of himself and affiliated persons and entities.

(5) Timothy Burns' employment with the Company ended effective February 22, 2013 and therefore shares beneficially owned by him are not included in the total amount owned by all directors and officers as a group.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

There were no material related party transactions during the year ended December 31, 2012.

Director Independence

The Board of Directors has determined that each of Messrs. Briggs, Faldi and Peppard is “independent,” as that term is defined by applicable rules of the SEC and the Nasdaq Capital Market.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

BDO USA, LLP (“BDO”) was engaged as the Company’s independent registered public accounting firm on October 7, 2004. Audit services provided by BDO during the 2012 fiscal year included the audit of our annual financial statements and services related to filings with the SEC and other regulatory bodies.

Principal Accountant Fees and Services

For the fiscal years ended December 31, 2012 and 2011, BDO, our independent registered public accounting firm, billed the approximate fees set forth below:

Audit Fees

Aggregate fees consist of fees billed for professional services rendered for the audit of the Company’s consolidated financial statements and internal control over financial reporting, reviews of the interim condensed consolidated financial statements included in quarterly filings, and services that are normally provided by BDO in connection with statutory and regulatory filings or engagements, including comfort letters and consents, except those not required by statute or regulation. Aggregate fees billed for audit services were $345,000 and $413,000 for the years ended December 31, 2012 and 2011, respectively.

Audit-Related Fees

Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “Audit Fees.” These services include due diligence and audits in connection with acquisitions, and consultations concerning financial accounting and reporting standards. Aggregate fees billed for audit-related services were $16,000 and $41,000 for the years ended December 31, 2012 and 2011, respectively.

Tax Fees

Tax fees consist of fees billed for professional services rendered for state and federal tax compliance and advice, and tax planning. Aggregate fees for tax services were $23,000 and $85,000 during the years ended December 31, 2012 and 2011, respectively.

All Other Fees

None.

All engagements for services by BDO or other independent registered public accountants are subject to pre-approval by the Audit Committee; however, de minimis non-audit services may instead be approved in accordance with applicable SEC rules. The pre-approval of the Audit Committee was obtained for all services provided by BDO in the 2012 and 2011 fiscal year.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following documents are filed with, or incorporated by reference into, this report:

1. Financial Statements

See Item 8 for a list of financial statements filed within.

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2. Financial Statement Schedules

See Item 8 for a list of financial statement schedules filed herewith. All other schedules have been omitted because they are not applicable or the required information is shown elsewhere in the consolidated financial statements or notes thereto.

3. Exhibit Index:

The following Exhibits are incorporated herein by reference or are filed with this report as indicated below.

3.1	Restated Certificate of Incorporation of Rainmaker Systems, Inc. (Incorporated by reference to Exhibit A to the Definitive Proxy Statement on Schedule 14A filed by Rainmaker on April 21, 2006.)
3.2	Bylaws of Rainmaker Systems, Inc. (Incorporated by reference to the similarly numbered Exhibit to the Registration Statement on Form S-1/A filed by Rainmaker on October 22, 1999 (Reg. No. 333-86445).)
4.1	Specimen certificate representing shares of common stock of Rainmaker Systems, Inc. (Incorporated by reference to the similarly numbered Exhibit to the Registration Statement on Form S-1/A filed by Rainmaker on October 22, 1999 (Reg. No. 333-86445).)
4.2	Purchase Agreement dated as of February 19, 2004, by and among Rainmaker Systems, Inc. and the purchasers set forth on the signature pages thereto. (Incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-3 filed by Rainmaker on March 22, 2004 (Reg. No. 333-113812).)
4.3	Stock Purchase Agreement dated as of June 10, 2004, by and among ABS Capital Partners III, L.P., Tarentella, Inc., Rainmaker Systems, Inc., and the purchasers identified on the schedule thereto. (Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed by Rainmaker on June 18, 2004.)
4.4	Registration Rights Agreement dated as of June 10, 2004, by and among ABS Capital Partners III, L.P., Tarentella, Inc., Rainmaker Systems, Inc., the purchasers identified on the schedule thereto and SDS Capital Group SPC, Ltd. (Incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K filed by Rainmaker on June 18, 2004.)
4.5	Form of Stock Purchase Agreement dated as of June 15, 2005, by and among Rainmaker Systems, Inc., and the purchasers identified on the signature page thereto. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on June 16, 2005.)
4.6	Form of Registration Rights Agreement dated as of June 15, 2005, by and among Rainmaker Systems, Inc. and the purchasers identified on the signature page thereto. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Rainmaker on June 16, 2005.)
4.7	Securities Purchase Agreement dated February 7, 2006, by and among the Company and the investors party thereto. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on February 10, 2006.)
4.8	Securities Purchase Agreement dated February 7, 2006, by and among the Company and the investors party thereto. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Rainmaker on February 10, 2006.)
4.9	Form of Warrant (Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8 filed by Rainmaker on June 23, 2011.)
10.1*	Form of Indemnification Agreement. (Incorporated by reference to the similarly numbered Exhibit to the Registration Statement on Form S-1/A filed by Rainmaker on October 22, 1999 (Reg. No. 333-86445).)
10.2*	1999 Stock Incentive Plan. (Incorporated by reference to the similarly numbered Exhibit to the Registration Statement on Form S-1/A filed by Rainmaker on October 22, 1999 (Reg. No. 333-86445).)
10.3*	1999 Stock Purchase Plan. (Incorporated by reference to the similarly numbered Exhibit to the Registration Statement on Form S-1/A filed by Rainmaker on October 22, 1999 (Reg. No. 333-86445).)
10.4*	Form of Notice of Grant of Stock Option. (Incorporated by reference to Exhibit 99.2 to the Registration Statement on Form S-8 filed by Rainmaker on November 17, 1999 (Reg. No. 333-91095).)
10.5*	Form of Stock Option Agreement. (Incorporated by reference to Exhibit 99.3 to the Registration Statement on Form S-8 filed by Rainmaker on November 17, 1999 (Reg. No. 333-91095).)

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10.6†	Internet Applications Division (IAD) Reseller Agreement dated March 22, 1999 between Sybase, Inc. and Rainmaker Systems, Inc. (Incorporated by reference to Exhibit 10.20 to the Quarterly Report on Form 10-Q filed by Rainmaker on May 15, 2000.)
10.7†	Amendment No. 1, dated February 5, 2001, to Internet Applications Division (IAD) Reseller Agreement dated March 22, 1999 between Sybase, Inc. and Rainmaker Systems, Inc. (Incorporated by reference to Exhibit 10.26 to the Quarterly Report on Form 10-Q filed by Rainmaker on May 2, 2001.)
10.8†	Non Technical Services Agreement, dated April 6, 2001 between Rainmaker Systems, Inc. and International Business Machines Corporation. (Incorporated by reference to Exhibit 10.27 to the Quarterly Report on Form 10-Q filed by Rainmaker on August 10, 2001.)
10.09	Option Exchange Offer, dated November 30, 2001. (Incorporated by reference to Exhibit (a)(1) to the Tender Offer Statement on Form SC TO-I filed by Rainmaker on November 30, 2001 (Reg. No 005-58179).)
10.10†*	Employment Agreement with Michael Silton, dated January 1, 2001. (Incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K filed by Rainmaker on March 29, 2002.)
10.11†	Services Sales Outsourcing Partner Agreement dated September 25, 2000, between Rainmaker Systems, Inc. and Hewlett-Packard Company. (Incorporated by reference to Exhibit 10.21 to the Quarterly Report on Form 10-Q filed by Rainmaker on November 14, 2002.)
10.12†	Services Sales Outsourcing Partner Agreement, Amendment No. 1 dated January 2, 2001, between Rainmaker Systems, Inc. and Hewlett-Packard Company. (Incorporated by reference to Exhibit 10.22 to the Quarterly Report on Form 10-Q filed by Rainmaker on November 14, 2002.)
10.13†	Schedule 4, Operational Plan/Business Rules Document to Service Sales Outsourcing Partner Agreement dated September 25, 2000, between Rainmaker Systems, Inc. and Hewlett-Packard Company. (Incorporated by reference to Exhibit 10.23 to the Quarterly Report on Form 10-Q filed by Rainmaker on November 14, 2002.)
10.14†	Services Sales Outsourcing Partner Agreement dated August 1, 2002, between Rainmaker Systems, Inc. and Hewlett-Packard Company. (Incorporated by reference to Exhibit 10.24 to the Quarterly Report on Form 10-Q filed by Rainmaker on November 14, 2002.)
10.15†	Business Rules Approval dated September 5, 2002, between Rainmaker Systems, Inc. and Hewlett-Packard Company (amend/adds to Exhibit 10.23). (Incorporated by reference to Exhibit 10.25 to the Quarterly Report on Form 10-Q filed by Rainmaker on November 14, 2002.)
10.16†	Amendment to Internet Applications Division (IAD) Reseller Agreement and Outsourcing Addendum dated June 12, 2002, between Rainmaker Systems, Inc. and Sybase, Inc. (Incorporated by reference to Exhibit 10.26 to the Quarterly Report on Form 10-Q filed by Rainmaker on November 14, 2002.)
10.17	Business Rules Approval dated February 6, 2003, between Rainmaker Systems, Inc. and Hewlett-Packard Company (amends/adds to Schedule 4, Operational Plan/Business Rules Document to Service Sales Outsourcing Partner Agreement dated September 25, 2000, filed as Exhibit 10.23 to the Report on Form 10-Q filed by Rainmaker Systems, Inc. on November 14, 2002). (Incorporated by reference to Exhibit 10.31 to the Quarterly Report on Form 10-Q filed by Rainmaker on May 15, 2003.)
10.18	Statement of Work for IBM ServicePac Sales Under IBM Non-Technical Service Agreement #4901AD0002 between International Business Machines and Rainmaker Systems, Inc. dated June 16, 2003 (amends/adds to the IBM Non-Technical Service Agreement #4901AD0002 dated April 6, 2001 filed as Exhibit 10.27 to the Report on Form 10-Q filed by Rainmaker Systems, Inc. on August 10, 2001). (Incorporated by reference to Exhibit 10.32 to the Quarterly Report on Form 10-Q filed by Rainmaker on August 14, 2003.)
10.22	Agreement and Plan of Merger, dated as of February 8, 2005, by and among Rainmaker Systems, Inc., CW Acquisition, Inc., Quarter End, Inc., the individuals listed on Exhibit A thereto and Jeffrey T. McElroy. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on February 11, 2005.)
10.23*	Amendment of Employment Agreement between Rainmaker Systems, Inc. and Michael Silton dated February 24, 2005. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on February 25, 2005.)
10.24*	Employment Agreement between Rainmaker Systems, Inc. and Steve Valenzuela dated February 24, 2005. (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by Rainmaker on February 25, 2005.)
10.25	Asset Purchase Agreement, dated as of July 1, 2005, by and among Rainmaker Systems, Inc., Sunset Direct, Inc., Launch Project LLC, The Members Identified on the signature page thereto, and Chad Nuss, as Representative. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on July 5, 2005.)

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10.26	Asset Purchase Agreement, dated as of May 12, 2006, by and among Rainmaker Systems, Inc., Business Telemetry, Inc., The Shareholders identified on the signature page thereto, and Kenneth S. Forbes, III, as Representative. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by Rainmaker on May 16, 2006.)
10.27	Asset Purchase Agreement by and among Rainmaker Systems, Inc., ViewCentral, Inc., certain shareholders of ViewCentral and Dan Tompkins, as representative. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on September 19, 2006.)
10.28†	Standard Services Agreement dated November 6, 2006 between Rainmaker Systems, Inc. and Hewlett Packard Company, a Delaware corporation. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on November 13, 2006.)
10.29†	Asset Purchase Agreement by and among Rainmaker Systems, Inc., Rainmaker Systems (Canada) Inc., CAS Systems, Inc., certain shareholders of CAS, Barry Hanson, as representative, and 3079028 Nova Scotia Company in respect of the purchase of substantially all of the assets of CAS Systems, Inc. (Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed by Rainmaker on January 31, 2007.)
10.30†	Asset Purchase Agreement by and among Rainmaker Systems, Inc., Rainmaker Systems (Canada) Inc., CAS Systems, Inc., certain shareholders of CAS, Barry Hanson, as representative, and 3079028 Nova Scotia Company in respect of the purchase of substantially all of the assets of 3079028 Nova Scotia Company. (Incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K filed by Rainmaker on January 31, 2007.)
10.31	Promissory note between Rainmaker Systems, Inc. and CAS Systems, Inc. (Incorporated by reference to Exhibit 99.4 to the Current Report on Form 8-K filed by Rainmaker on January 31, 2007.)
10.32	Promissory note between Rainmaker Systems (Canada) Inc., a Canadian federal corporation, and 3079028 Nova Scotia Company, a Nova Scotia unlimited liability company. (Incorporated by reference to Exhibit 99.5 to the Current Report on Form 8-K filed by Rainmaker on January 31, 2007.)
10.33*	Amendment to Executive Employment Agreement, dated as of February 1, 2007, by and among Rainmaker Systems, Inc. and Michael Silton. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by Rainmaker on February 5, 2007.)
10.34*	Amendment to Executive Employment Agreement, dated as of February 1, 2007, by and among Rainmaker Systems, Inc. and Steve Valenzuela. (Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed by Rainmaker on February 5, 2007.)
10.35†	Stock Purchase Agreement by and among Rainmaker Systems, Inc., Qinteraction Limited, and James F. Bere, as representative. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by Rainmaker on July 24, 2007.)
10.36*	Amended and Restated Executive Employment Agreement, dated as of September 17, 2007, by and among Rainmaker Systems, Inc. and Moe Bawa. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by Rainmaker on September 20, 2007.)
10.37*	Amendment of Employment Agreement, dated as of November 19, 2007, by and among Rainmaker Systems, Inc. and Michael Silton. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by Rainmaker on November 21, 2007.)
10.38*	Amendment of Employment Agreement, dated as of November 19, 2007, by and among Rainmaker Systems, Inc. and Steve Valenzuela. (Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed by Rainmaker on November 21, 2007.)
10.39*	2003 Stock Incentive Plan, as amended and restated effective May 15, 2008. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by Rainmaker on May 21, 2008.)
10.40*	Executive Employment Agreement, dated as of June 9, 2008, by and among Rainmaker Systems, Inc. and Mark de la Vega. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by Rainmaker on July 2, 2008.)
10.41	Lease Agreement, dated as of September 24, 2008, by and among Rainmaker Systems (Canada) Ltd. as Tenant and 2748134 Canada Inc. as Landlord. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by Rainmaker on October 7, 2008.)
10.42*	Amendment of Employment Agreement, dated as of January 1, 2009, by and among Rainmaker Systems, Inc. and Michael Silton. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by Rainmaker on January 7, 2009.)

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10.43†	Global Inside Sales Program Statement of Work, dated as of March 31, 2009, and effective as of April 1, 2009, between Rainmaker Systems, Inc. and Sun Microsystems, Inc. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on September 30, 2009.)
10.44†	Addendum No. 1 to the Master Purchase Agreement, dated as of March 31, 2009, between Rainmaker Systems, Inc. and Sun Microsystems, Inc. (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by Rainmaker on September 30, 2009.)
10.45†	Contact Center Master Services Agreement, dated as of August 30, 2009, between Rainmaker Systems, Inc. and Hewlett-Packard Company. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by Rainmaker on November 13, 2009.)
10.46	Second Amendment to Lease Agreement, dated as October 14, 2009, between Rainmaker Systems, Inc. and Legacy III Campbell, LLC. (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by Rainmaker on November 13, 2009.)
10.47	Loan and Security Agreement, dated as of November 17, 2009, between Rainmaker Systems, Inc. and Bridge Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on December 8, 2009.)
10.48†	Master Services Agreement, dated as of June 29, 2006, between Rainmaker Systems, Inc. and Symantec Corporation. (Incorporated by reference to Exhibit 10.46 to the Annual Report on Form 10-K filed by Rainmaker on March 31, 2010.)
10.49†	Symantec Outsourced North American (NAM) Renewals Statement of Work effective as of April 1, 2008 between Rainmaker Systems, Inc. and Symantec Corporation. (Incorporated by reference to Exhibit 10.47 to the Annual Report on Form 10-K filed by Rainmaker on March 31, 2010.)
10.50†	Amendment Two to the Symantec Outsourced NAM Renewals Statement of Work, dated as of April 1, 2010 between Rainmaker Systems, Inc. and Symantec Corporation. (Incorporated by reference to Exhibit 10.48 to the Annual Report on Form 10-K filed by Rainmaker on March 31, 2010.)
10.51	Loan and Security Modification Agreement, dated as of September 28, 2010, between Rainmaker Systems, Inc. and Bridge Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on October 4, 2010.)
10.52†	Vendor Services Agreement, dated as of February 26, 2010, between Rainmaker Systems, Inc. and Microsoft Corporation. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q/A filed by Rainmaker on February 28, 2011.)
10.53†	Statement of Work to the Vendor Services Agreement, dated as of September 20, 2010, between Rainmaker Systems, Inc. and Microsoft Corporation. (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by Rainmaker on November 12, 2010.)
10.54*	Offer letter, dated November 16, 2010, between Rainmaker Systems, Inc. and Thomas Venable. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on December 8, 2010.)
10.55	Placement Agent Agreement dated as of June 22, 2011 between Rainmaker Systems, Inc. and Merriman Capital, Inc. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker Systems, Inc. on June 23, 2011.)
10.56	Form of Subscription Agreement dated as of June 22, 2011 between Rainmaker Systems, Inc. and certain investors. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Rainmaker Systems, Inc. on June 23, 2011.)
10.57†	Statement of Work dated as of July 12, 2011 between Rainmaker Systems, Inc. and Microsoft Corporation and Change Order drafted August 1, 2011. (Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by Rainmaker Systems, Inc. on August 15, 2011.)
10.58*	Executive Employment Agreement dated November 4, 2011, between Rainmaker Systems, Inc. and Timothy Burns. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on November 10, 2011.)
10.59	Loan and Security Modification Agreement dated as of November 15, 2011 between Rainmaker Systems, Inc. and Bridge Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rainmaker on December 6, 2011.)

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10.60	Amendment No. 1 to the Symantec Online Store Agreement, dated as of March 9, 2012 between Rainmaker Systems, Inc. and Symantec Corporation. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by Rainmaker on May 15, 2012.)
10.61	Amendment No. 3 to the Symantec Outsourced NAM Renewals Statement of Work, dated as of March 9, 2012 between Rainmaker Systems, Inc. and Symantec Corporation. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by Rainmaker on May 15, 2012.)
10.62	Amendment No. l to the Symantec Outsourced Latin American (LAM) Statement of Work, dated as of March 9, 2012 between Rainmaker Systems, Inc. and Symantec Corporation. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by Rainmaker on May 15, 2012.)
10.63	Amendment No.1 to the Symantec License Renewal Center (LRC) Renewals Statement of Work, dated as of March 9, 2012 between Rainmaker Systems, Inc. and Symantec Corporation. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by Rainmaker on May 15, 2012.)
10.64	Loan and Security Agreement dated as of June 14, 2012, between Rainmaker Systems, Inc. and Comerica Bank. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by Rainmaker on August 14, 2012.)
10.65†	Master Services Agreement dated as of March 21, 2012 and Statement of Work #2 dated as of June 1, 2012, between Rainmaker Systems, Inc. and Comcast Cable Communications Management, LLC. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by Rainmaker on August 14, 2012.)
10.66†	Statement of Work to the Vendor Service Agreement dated as of July 23, 2012, between Rainmaker Systems, Inc. and Microsoft Corporation. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by Rainmaker on August 14, 2012.)
10.67	Change Order (#CR00022) to Statement of Work to the Vendor Services Agreement, dated as of September 20, 2010 between Rainmaker Systems, Inc. and Microsoft Corporation. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by Rainmaker on November 14, 2012.)
10.68*	Amendment of Executive Employment Agreement dated November 17, 2012, between Rainmaker and Timothy Burns. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by Rainmaker on November 20, 2012.)
10.69*	Executive Employment Agreement dated December 11, 2012, between Rainmaker Systems, Inc. and Donald Massaro. (Incorporated by reference to Exhibit 10.1 to the to the Current Report on Form 8-K filed by Rainmaker on December 13, 2012.)
10.70*	2012 Inducement Equity Incentive Plan. (Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 filed by Rainmaker on December 27, 2012 (Reg. No. 333-185716).)
10.71*	Executive Employment Agreement dated January 17, 2013, between Rainmaker Systems, Inc. and Mallorie Burak.
14	Standards of Business Ethics and Conduct. (Incorporated by reference to Exhibit 14 to the Annual Report on Form 10-K filed by Rainmaker on March 18, 2004.)
21.1	List of Subsidiaries.
23.1	Consent of Independent Registered Public Accounting Firm.
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

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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

Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under these sections.

†	Confidential treatment has previously been granted by the Securities and Exchange Commission for certain portions of the referenced exhibit.
*	Management contracts or compensatory plan or arrangement.

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SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(in thousands)

Description	Balance at Beginning of Year		Additions Charged to Costs and Expenses			Deductions *			Balance at End of Year
Allowance for doubtful accounts:
Year ended December 31, 2012	$	80	$	(61	)	$	(4	)	$	15
Year ended December 31, 2011	$	79	$	(40	)	$	41		$	80
Year ended December 31, 2010	$	42	$	78		$	(41	)	$	79

___________________

* Uncollectible accounts written off, net of recoveries.

Description	Balance at Beginning of Year		Additions		Deductions		Balance at End of Year
Deferred tax asset valuation account:
Year ended December 31, 2012	$	30,618	$	1,163	$	—	$	31,781
Year ended December 31, 2011	$	27,841	$	2,777	$	—	$	30,618
Year ended December 31, 2010	$	25,833	$	2,008	$	—	$	27,841

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
By:		/s/    DONALD MASSARO
		Donald Massaro, President and Chief Executive Officer (Principal Executive Officer)
Date:	April 1, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on April 1, 2013.

By:	/s/    DONALD MASSARO
	Donald Massaro, President and Chief Executive Officer, and Director (Principal Executive Officer)
By:	/s/   MALLORIE BURAK
	Mallorie Burak, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
By:	/s/    GARY BRIGGS
	Gary Briggs, Director
By:	/s/    C. FINNEGAN FALDI
	C. Finnegan Faldi, Director
By:	/s/    BRADFORD PEPPARD
	Bradford Peppard, Chairman

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