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Rainmaker Systems, Inc. (NASDAQ:RMKR)

Q2 2013 Earnings Call

August 12, 2013, 5:00 PM ET

Executives

Brenda Chastaine - Marketing Programs Manager, Rainmaker Global e-Commerce

Donald Massaro - President and Chief Executive Officer

Mallorie Burak - Chief Financial Officer

Analysts

Gregg Abella - Investment Partners Asset Management

Operator

Good afternoon, ladies and gentlemen, and welcome to Rainmaker second quarter conference call. This call is being recorded. Now, I'd like to turn it over to Brenda from Rainmaker Systems.

Brenda Chastaine

Welcome to Rainmaker Systems' second quarter 2013 investor conference call. With us today are Don Massaro, our President and CEO; and Mallorie Burak, our CFO.

Before we begin, let me note that during today's call, management will make forward-looking statements. All such forward-looking statements are based on information available to Rainmaker as of this date and Rainmaker assumes no obligation to update any such forward-looking statements. These statements are not guarantees of future performance and actual results could differ materially from current expectations.

Among the important factors which could cause actual results to differ materially from those in the forward-looking statements are our ability to raise additional equity or debt financings to fund our operations, our ability to execute new business strategy, the current challenging macroeconomic environment, the possibility of the discontinuation and/or realignment of some client relationships, our client concentration as we depend on a small number of clients for a significant percentage of our revenue, market acceptance of our new service programs and pricing options, our ability to maintain our existing technology platform and to deploy new technology, and other factors detailed in the company's filings with the Securities and Exchange Commission, including our filings on Forms 10-K, 10-Q and other reports and filings.

An audio replay of the conference call can be accessed at 888-203-1112. The replay will be available starting two hours after the call and remain in effect for 30 days. The required passcode is 7533987.

Now, I will turn the call over to Mallorie for the details of the second quarter of 2013. Mallorie?

Mallorie Burak

Thank you, Brenda, and good afternoon, everyone. I will provide the second quarter 2013 results, and Don will follow with an update on our progress during the first half of this year. The first half of 2013 represented a pivotal period for the company.

As we concluded our restructuring efforts at the end of the first quarter, managements focus in the second quarter was to begin investing in our key growth initiatives, mainly technology development and rebuilding Rainmaker's sales and marketing function. Coupled with our strategic investment with our latest focus on gaining traction in the marketplace and closing new business that will generate incremental revenue beginning in the second half of this year.

The second quarter results were in line with our expectations with revenues of $4.7 million compared to $6.9 million in the same quarter a year ago. Year-to-date revenue through June was $9.4 million compared to $13.3 million in the 2012 comparative period.

The net loss from continuing operations in Q2 was $3 million compared with a net loss from continuing operations of $836,000 in the second quarter of 2012. The net loss from continuing operations per share was $0.08 compared with a net loss of $0.10 per share in the same quarter a year ago.

The year-to-date net loss from continuing operations through June 2013 was $6.4 million compared to $2.1 million in the 2012 comparative period. At June 30, our current portion of long-term debt was $2.5 million compared with $2.7 million at December 31, 2012. Total debt was $3.7 million at June 30, 2013.

At June 30, our tax and cash equivalent was $5 million, up from $4.5 million we recorded as of December 2012. In April, we closed a registered direct public offering and was re-raised net $5.5 million of new capital. Management's intent is to use this new capital to fund growth. However, we are faced with the challenges of addressing a history we have inherited, and fortunately these objectives are not neutrally exclusive.

At the conclusion of our restructuring efforts in Q1, we began our aggressive investment in technology development, sales, marketing and operations, and anticipation of implementing recently contracted software and services agreement. And parallel to these efforts and in order to enable us to more effectively utilize existing cash, we needed to clean up the balance sheet. This task is paramount in order for the company to grow and to be in a position where we can use the current cash generated to fund growth.

Two fundamental objectives must be achieved in order to accomplish this. First is tackling accounts payable. Currently, we are working to restructure a significant portion of the existing balance as a long-term payment agreement, in order to allow the company more time to bring that liability current, discussions are underway with respect to this initiative.

Second, we plan to restructure our existing credit and debt facilities to afford the ability to more effectively manage our working capital. This month we signed term sheets with financial institutions who have offered less restricted terms under which the company can borrow. We expect the loan agreements to be finalized by the end of Q3.

2013 as discussed on previous earnings calls marks a pivotal year for the new Rainmaker Systems. We plotted our course for growth involving, a fundamental shift in the company's corporate strategy. As the new management team, we have been facing financial hurdles head on and today we are tracking against that plan and remain optimistic. As Olympic champion, Matt Biondi once said, persistence can change failure into extraordinary achievements.

I will now turn it over to our CEO, Don Massaro.

Donald Massaro

Thank you, Mallorie, and good afternoon. As Mallorie noted in her remarks the first half of the year was consumed with restructure and rebuilding. The reality is that while our investments in sales, marketing and engineering is reflected in our results for Q1 and Q2, the impact of these investments is not.

There is an inherent lag in the investment booking revenue cycle, which we know about and which we built into our operating plan. So given these lags how do you measure progress. Now, we believe the unreported numbers to be a useful indicator of our progress, here I am specifically referring to bookings.

As you may have read in our July press release, we closed $8.6 million in new business in Q2, although this is a non-GAAP measure, the announcement mark a significant milestone in the progress we're making. The new contracts are positive indicators that Rainmaker is gaining traction in the marketplace. We expect the incremental revenue associated with these new deals to start to ramp beginning in August, equally as encouraging is the pipeline that our new sales force has developed over the last several months.

We are seeing demand pickup with our existing strategic customers as well as with new prospects including several Fortune 500 companies. We believe that this renewed interest in Rainmaker can certainly be tied to our efforts to invest in and accelerate critical functionality in our e-commerce and our learning management systems platforms, as well as our investments in creating a world-class global commerce service center in Surrey, England. We believe that this bundled solution provides a compelling value proposition to our customers.

The last quarter we made significant progress in our marketing efforts. As previously mentioned in our last call, Rainmaker has not had a marketing organization for sometime. We hired a very senior VP of Marketing who is also a known entity to the company and to our current and long-term clients. She is very experienced in the B2B e-commerce market and has assembled a strong team.

You will begin to see their output in Q3 with new branding, new market positioning, increased PR and analyst outreach and amplified demand generation to increase leads and strength our pipeline. We also made significant progress in rebuilding our engineering team. Our engineering group is at full strength and was able to successfully execute on six code releases in Q2, all delivered with the full functionality as planned.

Some very significant features and functions were incorporated in our GrowCommerce platform, including expanded channel selling capability and the introduction of subscription and recurring billing functionality towards specifically for the B2B cloud market.

With respect our learning management system, we continue to invest in the technology and response to customer request and changing market conditions. The ViewCentral product is a true cloud-based platform in a proven marketplace with a strong customer base and very high gross margins. We feel very positive about the revenue potential growth from this product offering and has significantly increased our sales investment over the last three months.

Also this quarter we have initiated efforts to evaluate and develop a portfolio of intellectual property that would consist of product and process related packs. This effort is driven by our desire to safeguard our intellectual property and know how thereby, insuring Rainmaker maintains a competitive advantage to the marketplace.

My near-term concerns and focus is on the entire lead generation to revenue cycle. We must concentrate on building more inbound leads and improving our sales pipeline management. Our ability to close businesses is impacted by several factors, including our messaging, technology and financial situation. We realize this and we are working to address these issues.

As noted earlier, we have accelerated investments in development and marketing in order to address market demand. Our restructuring efforts, searchable approach to cleaning up the balance sheet and concise strategy for repositioning the company as a technology leader have already proven successful in addressing customers concerns regarding our financial liability.

In parallel to these efforts is our focus on pipeline management in order to shorten the time it takes to close a business. As an example, the recent bookings of $8.6 million were above significant. Three quarters of it occurred in the last month of the quarter.

Likewise, well, now we see these bookings beginning to convert to revenue in Q3, will not to be advised to full potential into Q4. This is why it does not affect the long-term potential for Rainmaker, but it does affect the profitability and cash in near-term. Therefore, our goal is to reduce the cash conversion cycle by improving the fund into that process, providing our sales force with necessary tools that will enable to focus on customers' needs rather than defending Rainmaker's past.

In summary, we remained positive regarding Rainmaker's future. We continue to gain forward momentum in building a stable and profitable business.

Now, what I'd like to do is open it up to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And we'll take our first question from Gregg Abella with Investment Partners Asset Management.

Gregg Abella - Investment Partners Asset Management

A quick question regarding the P&L and how it translates into your former guidance of getting to profitability hopefully by Q4? And because I've noticed that, as you mentioned you've ramped up SG&A and marketing in advance of the bookings, and that would make sense, as you're trying to rebuild the business. But if I look at the P&L, I'm seeing that SG&A compared to this time last year is some 65% higher, I believe. I'd have to check the numbers, but I think that's right. So do you still foresee having had to ramp up those two components of your cost structure? Do you still foresee that you're going to be able to get in Q4 to a breakeven or profitable level?

Donald Massaro

So if you looked at our plan that we put forward, we had operating expenses in $4.5 million range, pretty flat during the year. So on previous calls, I mentioned that our breakeven at 50% margin would be somewhere around $9 million to $9.5 million. We're still shooting for that. My concern, as I mentioned in my presentation, is the delay in conversion from bookings to revenue. So obviously, the $8.6 million in bookings was very strong. The problem as I mentioned is that it occurred late in the quarter.

Now, historically software companies do not have linear bookings. As a matter of fact, the rule of thumb that I have always used and it's been pretty consistent is that, in a given quarter, you book about 15% in the first month, 25% in the second month and 60% in the third month of the quarter. And then within the month, its worst, it's 25% the first two weeks and 75% in the second two weeks.

So you get this hockey stick. So ours is even worst than that. So we basically, we booked about $6 million in literally the last week to two weeks of the quarter. So if this phase shift that concerns me in terms of, can I build the revenue up to $9.5 million, is not a concern of whether I can build it up, can I build it up in the fourth quarter, because you have to understand that kind of one month shift in bookings produces a one month shift in revenue, and you carry that out to Q4 and all of a sudden it falls into the first month.

So I am concerned about the shift. We are working on pipeline management, to see if we can pipe that whole cycle up. My breakeven point hasn't changed. It's about $9.5 million. But we're going to have to really hustle to be able to recognize revenue from of $9.5 million in Q4, although from a cash standpoint, it might actually be breakeven. I know that's a long answer to a really short question, but it's really complex. Did I answer your question?

Gregg Abella - Investment Partners Asset Management

It does. In the short-term there was, you negotiate how to repair the balance sheet with respect to what a lender might look at. You'll certainly have to have a lender I think that understands what you've just described. So that they'll lend money to the company on pretty own risk terms. So that was my question, which is the different companies that are considering lending to the company, is it on terms that are going to be dilutive to the common shareholders now? I mean, in another words are there lots of warrants attached to this or is it just straight lending?

Mallorie Burak

So the warrant coverage on the new debt is minimal and we actually spent quite a bit of time talking to different lenders. And finally agreed with a certain set, who were the ones to really share the risk a little bit with us, and understood the nature of a SaaS company. And so they actually were able to provide us with facilities that have a covenant structure that are more appropriate for a technology company. So it's actually very positive and that when we switch banks, it's going to free up all of our cash. So there is no, kind of, liquidity covenants that are going to be part of the new facility.

Gregg Abella - Investment Partners Asset Management

And this is the last question. Do you know when roughly you might announce something along what the final terms are?

Mallorie Burak

I did sign the term sheets. And so hopefully in the Q3 10-Q, I hope we'll be able to include the criteria in this loan.

Donald Massaro

But it's not an endless line. Mallorie did a good job of negotiating this one.

Operator

And it appears that at this time there are no further questions. Brenda, I hand it back over to you for any closing remarks.

Brenda Chastaine

Okay, great, thank you. Thank you, Don and Mallorie, for this call and I want to state once again that an audio replay of the call can be accessed at 888-203-1112, and the replay will be available starting two hours after this call and remain in effect for 30 days. And once again, the required pass code, please make a note, is 2771789. Thank you all.

Operator

That does conclude today's conference. We thank you for your participation.

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