UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________

FORM 10-Q

__________________________

(MARK ONE)



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

FOR THE QUARTERLY PERIOD ENDED: ~~June~~September 30, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000-28009

__________________________

RAINMAKER SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

__________________________



Delaware		33-0442860
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

900 East Hamilton Ave., Suite 400

Campbell, California 95008

(Address of principal executive offices) (Zip Code)

(408) 626-3800

(Registrant’s telephone number, including area code)

__________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



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

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

As of ~~August~~November 814, 2014, the registrant had 42,~~261~~252,~~728~~329 shares of Common Stock, $0.001 par value, outstanding.

RAINMAKER SYSTEMS, INC.

FORM 10-Q

AS OF ~~JUNE~~SEPTEMBER 30, 2014

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013	3
	Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013	3
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2014 and 2013	4
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1618
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2227
Item 4.	Controls and Procedures	2228
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	2228
Item 1A.	Risk Factors	2329
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2329
Item 3.	Defaults Upon Senior Securities	2430
Item 4.	Mine Safety Disclosures	2431
Item 5.	Other Information	2431
Item 6.	Exhibits	2533
	Signatures	2634

PART I.—FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

RAINMAKER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	June 30, 2014			December 31, 2013
	September 30, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	~~568~~170		$	3,633
Restricted cash	61			3
Accounts receivable, net of allowance of $19 and $11, respectively	1,786			3,554
Accounts receivable, net of allowance of $10 and $11, respectively	1,262			3,554
Prepaid expenses and other current assets	1,~~063~~287			1,618
Total current assets	32,~~478~~780			8,808
Property and equipment, net	~~1,068~~891			691
Other non-current assets	~~1,308~~919			840
Total assets	$	54,~~854~~590		$	10,339
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	15,~~620~~581		$	13,042
Accrued compensation and benefits	~~643~~769			1,001
Other accrued liabilities	2,~~892~~263			3,665
Deferred revenue	2,~~182~~027			1,965
Notes payable	1,420			3,641
Convertible and supplemental notes payable, net of discount of $4,457 and $0	231			—
Total current liabilities	22,757			23,314
Derivative liability conversion option	952			—
Deferred tax liability	26			26
Notes payable	200			3,641
Deferred revenue, less current portion	2,226			1,629
Total current liabilities	22,023			23,314
Common stock warrant liability	76			93
Deferred tax liability	—			26
Other long-term liabilities	118			172
Deferred revenue, less current portion	2,135			1,629
Total liabilities	25,203			25,234
Common stock warrant liability	1,446			93
Other long-term liabilities	90			172
Total liabilities	25,694			25,234
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.001 par value; 5,000 shares authorized, none issued and outstanding	—			—
Common stock, $0.001 par value; 50,000 shares authorized, 43,894 shares issued and 42,574 shares outstanding at June 30, 2014 and 43,795 shares issued and 41,495 shares outstanding at December 31, 2013	43			41
Common stock, $0.001 par value; 50,000 shares authorized, 43,582 shares issued and 42,259 shares outstanding at September 30, 2014 and 43,795 shares issued and 41,495 shares outstanding at December 31, 2013	42			41
Additional paid-in capital	136,~~641~~685			137,445
Accumulated deficit	(~~154~~155,~~030~~837		)	(149,169		)
Accumulated other comprehensive loss	(~~372~~363		)	(336		)
Treasury stock, at cost; 1,320 shares at June 30, 2014 and 2,300 shares at December 31, 2013	(1,631		)	(2,876		)
Treasury stock, at cost; 1,323 shares at September 30, 2014 and 2,300 shares at December 31, 2013	(1,631		)	(2,876		)
Total stockholders’ deficit	(1921,~~349~~104		)	(14,895		)
Total liabilities and stockholders’ deficit	$	54,~~854~~590		$	10,339

See accompanying notes.

RAINMAKER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						~~Six~~Nine Months Ended
	June 30,						June 30,
	September 30,						September 30,
	2014			2013			2014			2013
Net revenue	$	31,~~131~~882		$	4,~~730~~160		$	79,~~257~~139		$	913,~~386~~546
Cost of services	21,~~960~~834			3,~~200~~008			68,~~234~~068			69,~~316~~324
Gross profit	~~171~~48			1,~~530~~152			1,~~023~~071			34,~~070~~222
Operating expenses:
Sales and marketing	~~879~~445			~~852~~905			12,~~815~~260			12,~~517~~422
Technology and development	~~842~~778			1,~~340~~231			12,~~740~~517			23,~~381~~613
General and administrative	~~739~~699			12,~~771~~102			12,~~877~~577			46,~~751~~853
Depreciation and amortization	84			439			168			845
Restructuring expense	365			—			365			—
Total operating expenses	2,544			4,402			5,600			9,494
Depreciation and amortization	117			396			286			1,241
Operating loss	(2,373		)	(2,872		)	(4,577		)	(6,424		)
Total operating expenses	2,404			4,634			8,005			14,129
(Gain) loss due to change in fair value of warrant liability	—			11			(17		)	(214		)
Operating loss	(2,356		)	(3,482		)	(6,934		)	(9,907		)
Interest and other expense, net	169			53			268			146
(Gain) loss due to change in fair value of warrant liability and derivative liability	(1,267		)	66			(1,284		)	(148		)
Loss before income tax expense	(2,542		)	(2,936		)	(4,828		)	(6,356		)
Loss on issuance of convertible notes payable	483			—			483			—
Income tax expense	6			25			33			55
Interest and other expense, net	321			59			589			205
Net loss from continuing operations	(2,548		)	(2,961		)	(4,861		)	(6,411		)
Loss before income tax expense	(1,893		)	(3,607		)	(6,722		)	(9,964		)
Net income (loss) from discontinued operations, net of tax	—			(69		)	—			87
Income tax expense	(86		)	(20		)	(53		)	35
Net loss	$	(2,548	)	$	(3,030	)	$	(4,861	)	$	(6,324	)
Net loss from continuing operations	(1,807		)	(3,587		)	(6,669		)	(9,999		)
Foreign currency translation adjustments	(25		)	(86		)	(36		)	(172		)
Net income (loss) from discontinued operations, net of tax	—			(34		)	—			53
Comprehensive loss	$	(2,573	)	$	(3,116	)	$	(4,897	)	$	(6,496	)
Net loss	$	(1,807	)	$	(3,621	)	$	(6,669	)	$	(9,946	)
Foreign currency translation adjustments	10			85			(26		)	(87		)
Comprehensive loss	$	(1,797	)	$	(3,536	)	$	(6,695	)	$	(10,033	)
Basic and diluted net income (loss) per share:
Net loss from continuing operations	$	(0.0604	)	$	(0.0809	)	$	(0.1216	)	$	(0.1928	)
Net income (loss) from discontinued operations	$	—		$	—		$	—		$	—
Net loss	$	(0.0604	)	$	(0.0809	)	$	(0.1216	)	$	(0.1928	)
Weighted average common shares - basic and diluted	41,~~893~~891			3940,~~124~~684			41,~~877~~980			3235,~~964~~566

See accompanying notes.

RAINMAKER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2014			2013
Operating activities:
Net loss	$	(46,~~861~~669	)	$	(69,~~324~~946	)
Adjustment for income from discontinued operations, net of tax	—			(8753		)
Adjustment to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property and equipment	168			845
Depreciation and amortization of property and equipment, incl. asset impairment	345			1,241
Amortization of debt discount	86291			—
Gain due to change in fair value of warrant liability	(17		)	(214		)
Gain due to change in fair value of warrant liability and derivative liability conversion feature	(1,284		)	(148		)
Stock-based compensation expense	~~247~~291			1,~~128~~352
Provision for allowance for doubtful accounts	8(1		)	13—
Loss on issuance of convertible debt	483			—
Provision for allowance of credit card receivables	—			420
Provision for allowances for other assets	—			280
Changes in operating assets and liabilities:
Accounts receivable	12,~~785~~318			~~151~~(848		)
Prepaid expenses and other assets	73225			(27207		)
Accounts payable	2,~~582~~557			~~785~~3,475
Accrued compensation and benefits	(~~378~~246		)	~~512~~576
Other accrued liabilities	(~~635~~1,226		)	~~(261~~230		)
Deferred tax liability	—(26		)	2940
Deferred revenue	~~814~~568			~~(120~~650		)
Net cash used in continuing operations	(~~128~~2,374		)	(32,~~290~~938		)
Net cash provided by discontinued operations	—			8753
Net cash used in operating activities	(~~128~~2,374		)	(32,~~203~~885		)
Investing activities:
Purchases of property and equipment	(~~540~~543		)	(~~873~~1,614		)
Change in restricted cash, net	—			1435
Net cash used in continuing operations	(~~540~~543		)	(~~859~~1,579		)
Net cash used in discontinued operations	—			—
Net cash used in investing activities	(~~540~~543		)	(~~859~~1,579		)
Financing activities:
Proceeds from issuance of common stock	—			5,534
Proceeds from borrowings	353,340			200
Repayment of borrowings	(23,~~342~~787		)	(~~987~~1,397		)
Restricted cash related to borrowings	(58		)	—
Tax payments in connection with treasury stock surrendered	(5		)	(~~111~~132		)
Net cash provided by (used in) continuing operations	(~~2,370~~510		)	4,~~636~~205
Net cash provided by discontinued operations	—			—
Net cash provided by (used in) financing activities	(~~2,370~~510		)	4,~~636~~205
Effect of exchange rate changes on cash	(2736		)	(9869		)
Net increase (decrease) in cash and cash equivalents	(3,~~065~~463		)	~~476~~(328		)
Cash and cash equivalents at beginning of period	3,633			4,494
Cash and cash equivalents at end of period	$	~~568~~170		$	4,~~970~~166
Supplemental disclosures of cash flow information:
Cash paid for interest	$	98164		$	~~114~~161
Cash paid for income taxes	$	16		449
Supplemental disclosures of non-cash investing and financing activities:
Retirement of fully depreciated property and equipment	$	—		$	~~291~~590
Common stock issued in settlement of claim	$	200		$	—
Warrants issued to convertible note holders	$	2,050		$	—
Conversion feature of convertible notes payable	$	1,539		$	—
Supplemental notes payable	$	1,545		$	—
Accrued interest on convertible notes payable	$	53		$	—

See accompanying notes.

RAINMAKER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

— UNAUDITED —

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Rainmaker Systems, Inc. and its subsidiaries ("Rainmaker", "we", "our", or "the Company") is focused on ~~serving~~the ~~large~~development ~~business~~and ~~enterprises~~marketing toof ~~help~~a ~~them~~platform ~~increase~~for ~~sales~~the tomanagement ~~small~~of ~~and~~outside ~~medium~~training ~~sized~~for ~~businesses ("SMB")~~profit. ~~The~~In ~~Company's~~addition, ~~services~~we ~~include~~generate sales from lead generation services, and SMB sales and contract renewals ~~and the management of outside training for profit~~.

We have developed an integrated solution, the Rainmaker Revenue Delivery PlatformSM, that combines specialized sales and marketing services with our proprietary, renewals software and business analytics. Our services include marketing strategy development, personalized renewals or subscription e-commerce and microsite creation and hosting, inbound and outbound e-mail, direct mail, chat, and high-end global call center services.

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

We are headquartered in Campbell, California, in the heart of the Silicon Valley. Our inglobal ~~Campbell,~~clients ~~California,~~consist ~~and~~primarily ~~have~~of ~~additional~~large ~~operations~~enterprises ~~outside~~operating ofin ~~London,~~a ~~England.~~range Weof ~~also~~industries. Our ~~utilize~~strategy ~~outsourced~~for ~~service~~long-term ~~providers~~success ~~located~~of in the ~~Dominican~~business ~~Republic~~is to maintain and ~~the~~improve ~~Philippines.~~our ~~Our~~position ~~global~~as ~~clients~~a ~~consist~~leading ~~primarily~~LMS ofprovider. This ~~large~~will ~~enterprises~~involve ~~operating~~ongoing investment in aour ~~range~~LMS ofplatform ~~industries,~~to ~~including~~meet ~~hardware,~~market ~~software~~demands, ~~software-~~as- ~~a-service~~well ~~and~~as ~~telecommunications,~~building ~~selling~~the ~~into~~sales ~~their~~and ~~SMB~~marketing ~~market~~infrastructure to support growth.

Our strategy for long-term, sustained growth is to maintain and improve our position as a leading global provider of B2B sales and marketing solutions in selected markets. 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.

Principles of Consolidation

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

Basis of Presentation

The consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. The interim financial statements are unaudited but reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the results of these periods.

The results of our operations for the three and ~~six~~nine months ended ~~June~~September 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014, or any other period. These consolidated financial statements should be read in conjunction with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 ("2013 Form 10-K"), as filed with the SEC on April 1, ~~2013~~2014. Balance sheet information as of December 31, 2013 has been derived from the audited financial statements for the year then ended.

Reclassifications

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

Liquidity and Going Concern

As reflected in the accompanying consolidated financial statements, we had a net loss from continuing operations of $46.97 million for the ~~six~~nine months ended ~~June~~September 30, 2014. During the ~~six~~nine months ended ~~June~~September 30, 2014, we used $~~128,000~~2.4 million in cash in operating activities.

At ~~June~~September 30, 2014, the Company had a net working capital deficit of $19.32 million. Our principal source of liquidity as of ~~June~~September 30, 2014 consisted of $~~568~~170,~~000~~100 of cash and cash equivalents and $1.83 million of net accounts receivable. Notes payable ~~due~~under asthe ofConvertible ~~June 30,~~and ~~2014~~Supplemental ~~was~~Notes were $13.41 million, ofand ~~which~~ $1.05 million, ~~was~~respectively, ~~due~~as toof ~~Comerica~~September 30, ~~Bank~~2014. Another ~~and~~ $~~432~~200,000 was ~~due~~payable tounder ~~Agility~~the ~~Capital~~Revolving ~~II,~~Line ~~LLC. On~~of ~~July~~Credit ~~15, 2014, the Company raised $2~~Notes.6 We ~~million~~have inreceived ~~debt~~notices ~~financing and used a portion~~ of ~~the~~default ~~net~~and ~~proceeds~~acceleration from ~~the~~investors ~~financing~~holding toour ~~repay~~Revolving ~~its~~Line ~~outstanding~~of ~~indebtedness~~Credit ~~owing~~Notes, toConvertible ~~Comerica~~Notes ~~Bank~~ and ~~Agility~~Supplemental ~~Capital II, LLC~~Notes. See Note 5 for further discussion of our debt agreements~~. Our~~ ~~accounts~~and ~~payable~~notices ~~balance increased from $13.0 million as~~ of ~~December~~default ~~31, 2013 to $15~~thereunder.~~6 million as of June 30, 2014. $12.9 million of the June 30, 2014 accounts payable balance is related to a merchant account of a customer.~~

InOur ~~order~~accounts topayable ~~meet~~balance ~~our~~increased ~~operating requirements, we will need to raise additional capital~~ from ~~outside~~$13.0 ~~third~~million ~~parties~~as ~~or from the sale~~ of ~~assets~~December ~~and restructure our obligations. Additionally~~31, we2013 ~~are pursuing a plan~~ to ~~achieve~~$15.6 ~~profitable~~million ~~operations~~as ~~through a combination~~ of ~~increased sales and decreased expenses. There can be no assurance that we will be successful in obtaining third party capital~~September 30, ~~selling assets or restructuring our obligations~~2014. We$12.9 domillion ~~not~~of ~~have adequate cash or financial resources to operate for~~ the ~~next twelve months without raising significant additional capital~~September 30, ~~which~~2014 ~~raises~~accounts ~~substantial~~payable ~~doubt~~balance ~~about~~is ~~our~~related ~~ability~~ to ~~continue~~a asmerchant aaccount ~~going~~of ~~concern~~a customer.

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

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

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

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

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

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

Use of Estimates

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

Significant Accounting Policies - Convertible Instruments

~~There~~The ~~have~~Company ~~been~~evaluates noand ~~material~~accounts ~~changes~~for ~~during~~conversion ~~2014~~options embedded in ~~the~~convertible ~~Company's~~instruments ~~significant~~in ~~accounting~~accordance ~~policies~~with ASC 815 Derivatives and Hedging Activities. Applicable GAAP requires companies to ~~those~~bifurcate ~~previously~~conversion ~~disclosed~~options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the ~~2013~~economic ~~Form~~characteristics 10and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-Kmeasured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable GAAP.

Recent Accounting Standards

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

In 7August 2014, the FASB issued a new accounting standard which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim reporting period. If substantial doubt exists, additional disclosure is required. This new standard will be effective for the Company for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the condensed consolidated financial statements.

consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.

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):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Net loss from continuing operations	$	(2,548	)	$	(2,961	)	$	(4,861	)	$	(6,411	)
Net income (loss) from discontinued operations	—			(69		)	—			87
Net loss	$	(2,548	)	$	(3,030	)	(4,861		)	(6,324		)
Weighted-average shares of common stock outstanding – basic and diluted	41,893			39,124			41,877			32,964
Basic and diluted net income (loss) per share:
Continuing operations	$	(0.06	)	$	(0.08	)	$	(0.12	)	$	(0.19	)
Discontinued operations	—			—			—			—
Net loss	$	(0.06	)	$	(0.08	)	$	(0.12	)	$	(0.19	)

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

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2014	2013	2014	2013
Unvested restricted stock awards	463	1,962	502	2,145
Stock options	—	38	—	69
Stock warrants	—	—	—	—
Total anti-dilutive securities	463	2,000	502	2,214

Stock options and warrants that were not "in the money" at June 30, 2014 and 2013 were 4,378,000 and 2,622,000, respectively.

3. CUSTOMER CONCENTRATION

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

	Three Months Ended			~~Six Months Ended~~			Nine Months Ended
	June 30,			June 30,
	September 30,						September 30,
	2014		~~2013~~	~~2014~~2013		~~2013~~	2014			2013
Microsoft Corporation	57%		42%	55%		41%
Net loss from continuing operations	$	(1,807	)	$	(3,587	)	$	(6,669	)	$	(9,999	)
Symantec Corporation	—%		22%	13%		24%
Net income (loss) from discontinued operations	—			(34		)	—			53
Verizon Communications	13%		—%	11%		—%
Net loss	$	(1,807	)	$	(3,621	)	(6,669		)	(9,946		)
Hewlett-Packard Company	—%		10%	—%		10%
Weighted-average shares of common stock outstanding – basic and diluted	41,891			40,684			41,980			35,566
Basic and diluted net income (loss) per share:
Continuing operations	$	(0.04	)	$	(0.09	)	$	(0.16	)	$	(0.28	)
Discontinued operations	—			—			—			—
Net loss	$	(0.04	)	$	(0.09	)	$	(0.16	)	$	(0.28	)

The following table presents the ~~concentration~~unvested ofrestricted ~~accounts~~stock ~~receivable~~awards asand "in the money" stock options and stock warrants that were excluded from the calculation of ~~June~~diluted net loss per share for the three and nine months ended September 30, 2014 and ~~December 31,~~ 2013 as these securities were anti-dilutive (in thousands).

	June 30, 2014	December 31, 2013
	Nine Months Ended
Microsoft Corporation	29%	25%
	September 30,
Symantec Corporation	25%	40%
	2014		2013
Hewlett-Packard Company	11%	11%
Unvested restricted stock awards	377		1,963
The Vanguard Group	10%	—%
Stock options	1		131
Stock warrants	1,937		—
Total anti-dilutive securities	2,315		2,094

WeStock ~~have~~options ~~outsourced~~and ~~services~~warrants ~~agreements with our significant clients~~ that ~~expire~~were atnot ~~various~~"in ~~dates~~the ~~ranging~~money" ~~through March 2018. Our agreements with Symantec expired on March 31, 2014. Our agreements with Microsoft expire~~ at ~~various dates from~~ September 30, 2014 ~~through June 2015,~~ and ~~can~~2013 bewere ~~terminated with thirty days notice. Certain agreements with Microsoft expired on June 30~~4,100,000 ~~2014~~ and ~~were not renewed. These agreements accounted for 63% of the Microsoft revenue for the six months ended June 30~~2,879,000, ~~2014~~respectively.

3. CUSTOMER CONCENTRATION

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



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

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



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

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

4. BALANCE SHEET COMPONENTS

Prepaids and Other Current Assets

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

	June 30, 2014		December 31, 2013
	September 30, 2014		December 31, 2013
Prepaids and other current assets:
Prepaid expenses	$	~~446~~344	$	623
Deferred professional service costs	254		252
Deferred financing costs	295		—
VAT tax receivable	282		440
Deferred professional service costs	275		252
Other current assets	81		303
VAT tax receivable	281		440
Prepaids and other current assets	$	1,063	$	1,618
Other current assets	92		303
Prepaids and other current assets	$	1,287	$	1,618

Property and Equipment

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

	EstimatedUseful Life	June 30, 2014			December 31, 2013
Property and equipment:
Computer equipment	3 years	$	3,983		$	3,993
Capitalized software and development	2-5 years	13,901			13,208
Furniture and fixtures	5 years	338			309
Leasehold improvements	Lease term	126			123
		18,348			17,633
Accumulated depreciation and amortization		(17,280		)	(17,099		)
Construction in process		—			157
Property and equipment, net		$	1,068		$	691



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

Other Non-current Assets

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

	June 30, 2014		December 31, 2013
	September 30, 2014		December 31, 2013
Other non-current assets:
Credit card reserve deposits and other	$	~~456~~95	$	395
Deferred professional service costs	~~852~~824		445
Other non-current assets	$	~~1,308~~919	$	840

Accounts Payable

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

Other Accrued Liabilities

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

	June 30, 2014		December 31, 2013
	September 30, 2014		December 31, 2013
Other accrued liabilities:
Payable to customers *	$	1,~~158~~344	$	1,~~158~~460
Accrued professional fees	7589		663
Accrued VAT taxes	284		248
VAT taxes payable	270		248
Accrued sales tax	238		229
Settlement liability	—		200
Reseller rebates	—		190
Advances on borrowings **	350		—
Sales reserve	—		117
Other liabilities	~~787~~560		~~977~~787
Other accrued liabilities	$	2,~~892~~263	$	3,665

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

** - On June 25, 2014, the Company received advances from borrowings included in the July 15, 2014 financing transaction as further discussed in Note 5.

Deferred Revenue and Deferred Professional Services Costs:

In April 2013, the Company entered into an arrangement to provide subscription services and perform material modifications to its LMS platform tofor a significant customer. ~~Through~~The ~~June~~Company ~~30,~~received ~~2014,~~acceptance ~~the~~of ~~customer has not accepted~~ the material modifications ~~and~~on isJuly ~~not using the platform and accordingly~~18, ~~no revenue has been recognized under this arrangement through June 30,~~ 2014~~. As~~ ofand ~~June~~began ~~30,~~to ~~2014,~~amortize the ~~Company has recorded~~ deferred ~~revenue~~costs ~~of $2.3 million of which $509,000 is included in current deferred revenue~~ and ~~$1.8~~recognize ~~million is included in noncurrent deferred~~ revenue~~. The~~ ~~Company~~over ~~has also deferred related professional service costs incurred associated with~~ the ~~customization~~remaining ofsubscription ~~the~~period ~~LMS platform~~ of ~~$1.1~~50 ~~million~~months. ~~Deferred professional service costs of $249,000 and $852,000 is included in prepaid and other current assets and other noncurrent assets, respectively, at June 30, 2014.~~

~~The~~ ~~Company received acceptance of the material modifications on January 18, 2014 and will begin to amortize the deferred costs and recognize revenue over the remaining subscription period of 50 months.~~11

As 10of September 30, 2014, the Company has recorded deferred revenue of $4.1 million of which $2.0 million is included in current deferred revenue and $2.1 million is included in noncurrent deferred revenue. The Company has also deferred related professional service costs incurred associated with the customization of the LMS platform of $1.1 million. Deferred professional service costs of $275,000 and $824,000 is included in prepaid and other current assets and other noncurrent assets, respectively, at September 30, 2014.

5. NOTES PAYABLE

Notes payable consist of the following (in thousands):

	June 30, 2014			December 31, 2013
	September 30, 2014			December 31, 2013
Convertible notes, including accrued interest of $53	$	3,143		$	—
Supplemental notes	1,545			—
Discount	(4,457		)	—
Total convertible and supplemental notes	231			—
Comerica term loan	$	—		$	1,800
Comerica revolving line	~~998~~—			1,230
Agility line of credit, net of discount of $10 and $96, respectively	422			404
Agility line of credit, net of discount of $0 and $96, respectively	—			404
Revolving Line of Credit	200			—
Notes payable – insurance	—			207
Total notes payable	~~1,420~~200			3,641

2014 ~~Financing~~Convertible ~~Transaction~~Notes Financing

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

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

The Convertible Notes of $3.01 million will mature on July 15, 2019 and ~~will~~ accrue interest at a fixed rate of 8.0% per annum payable quarterly. Interest accrued from the date of issuance through June 30, 2015 will be ~~paid in kind and~~ added to the principal amount of the Convertible Notes quarterly. During the continuance of an event of default, the Convertible Notes may accrue interest at a default rate of 15% per annum. Subject to stockholder approval of an increase in the number of authorized shares of the Company’s common stock in an amount sufficient to permit full conversion of the Convertible Notes, the Convertible Notes will be convertible into shares of the Company’s common stock at a conversion rate of $0.25 per share. The Convertible Notes also contain provisions that protect the holders thereof against dilution by adjustment of the conversion rate in certain events such as stock dividends, stock splits and other similar events and certain issuances of common stock by the Company at a price per share less than the conversion rate then in effect.

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

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

In ~~connection with the Financing Transaction, the Company issued~~ 12,000,000 Warrants which have an initial 10-year term with an exercise price of $0.08 per share. The Warrants are subject to stockholder approval of an increase in the number of authorized shares of the Company’s common stock in an amount sufficient to permit full exercise of the Warrants into shares of the Company's common stock. The Warrants may also be exercised by way of a cashless exercise. The Warrants also contain provisions that protect the holders thereof against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as stock dividends, stock splits and other similar events and issuances of common stock at a price per share less than the exercise price then in effect.

require 11the approval of the holders of a majority of the outstanding principal amount thereof to, among other things, (i) incur other indebtedness; (ii) create liens; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The Convertible Notes and Supplemental Notes also provide for customary events of default, including nonpayment, breach of covenants, material adverse events, payment defaults of other indebtedness and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Convertible Notes and Supplemental Notes. If the Company is not able to comply with such covenants or if any event of default otherwise occurs, the outstanding note balances could become due and payable immediately. On November 6, 2014, we received a notice of default and acceleration from certain holders of our Convertible Notes and Supplemental Notes. See below under the heading “Events of Default - Convertible Notes, Supplemental Notes and Revolving Notes” for a further discussion of the notices of default and acceleration received under our debt agreements.

In connection with the Financing Transaction, the Company issued 12,360,000 Warrants which have an initial 10-year term with an exercise price of $0.08 per share. The Warrants are subject to stockholder approval of an increase in the number of authorized shares of the Company’s common stock in an amount sufficient to permit full exercise of the Warrants into shares of the Company's common stock. The Warrants may also be exercised by way of a cashless exercise. The Warrants also contain provisions that protect the holders thereof against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as stock dividends, stock splits and other similar events and issuances of common stock at a price per share less than the exercise price then in effect. As such, the Company is required to record the warrants which do not have fixed settlement provisions as liabilities and mark to market at the end of each reporting period.

September 2014 Revolving Line of Credit Note

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

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

Comerica Bank Credit Facility

On June 14, 2012, the Company entered into a Loan and Security Agreement with Comerica Bank (the "Comerica Credit Facility"). The maximum amount of credit available to the Company under the Comerica Credit Facility at inception was $5 million, comprised of a $3 million term loan facility ("Term Loan") and a $2 million revolving line of credit ("Revolving Line"), which included a $500,000 sub-facility for letters of credit and certain credit card services. The outstanding amount under the Term Loan was repaid by the Company in June 2014, and as of June 30, 2014, the outstanding amount of the Term Loan was zero. Amounts borrowed under the Revolving Line became due on December 14, 2013, which was subsequently extended to May 1, 2014. As of June 30, 2014, there was $1.0 million outstanding under the Revolving Line. The outstanding amount under the Revolving Line was repaid by the Company on July 15, 2014 and the Comerica Credit Facility was terminated.

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

Agility Capital Credit Facility

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

Events of Default

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

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

Notes Payable – Insurance

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

6. ~~COMMITMENTS AND CONTINGENCIES~~RESTRUCTURING

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

~~Rent~~In ~~expense~~connection ~~under~~with ~~operating~~Mr. ~~lease~~Massaro’s ~~agreements~~separation ~~for~~from ~~continuing~~the ~~operations~~Company, ~~during~~ the ~~six~~Company ~~months~~and ~~ended~~Mr. ~~June 30,~~Massaro ~~2014~~entered into a Settlement Agreement and ~~2013~~General ~~was~~Release. Pursuant ~~$277~~to the agreement,~~000~~ ~~and~~Mr. Massaro is entitled to a severance payment in accordance with his employment contract of $~~260~~221,~~000~~250, ~~respectively~~which is equal to nine (9) months base salary, payable in accordance with the Company’s normal payroll schedule. As of September 30, 2014, $175,866 of this amount remained outstanding.

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

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

7. COMMITMENTS AND CONTINGENCIES

Litigation

On February 8, 2013, the Company's former Chief Executive Officer, Michael Silton, filed a demand for arbitration and complaint with the American Arbitration Association, alleging breach of contract and other causes of action relating to the termination of Mr. Silton's employment with the Company in October 2012. Mr. Silton sought full payment of severance benefits in the amount of approximately $1.0 million, plus compensation for unused vacation, related penalties and punitive damages. On March 21, 2013, the Company filed a responsive pleading in the arbitration proceedings. On May 15, 2013, the American Arbitration Association appointed an arbitrator. Thereafter, Mr. Silton withdrew his arbitration claim and on May 22, 2013, filed a complaint against the Company in the Santa Clara Superior Court. The allegations and causes of action were the same as the complaint filed with the American Arbitration Association. On July 5, 2013, the Company filed an answer to Mr. Silton's complaint and a cross-complaint against Mr. Silton. On or about August 1, 2013, Mr. Silton filed an answer to the cross-complaint. Between July and December 2013, the parties served and responded to written discovery requests and produced documents. In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a confidential settlement agreement. Pursuant to the settlement agreement, and in exchange for a release of claims, Mr. Silton received a payment from the Company's insurer and 1,000,000 shares of the Company's common stock, which were issued during the three months ended March 31, 2014. A portion of the payment and the shares of common stock was paid to Mr. Silton's legal

1214

termination of Mr. Silton's employment with the Company in October 2012. Mr. Silton sought full payment of severance benefits in the amount of approximately $1.0 million, plus compensation for unused vacation, related penalties and punitive damages. On March 21, 2013, the Company filed a responsive pleading in the arbitration proceedings. On May 15, 2013, the American Arbitration Association appointed an arbitrator. Thereafter, Mr. Silton withdrew his arbitration claim and on May 22, 2013, filed a complaint against the Company in the Santa Clara Superior Court. The allegations and causes of action were the same as the complaint filed with the American Arbitration Association. On July 5, 2013, the Company filed an answer to Mr. Silton's complaint and a cross-complaint against Mr. Silton. On or about August 1, 2013, Mr. Silton filed an answer to the cross-complaint. Between July and December 2013, the parties served and responded to written discovery requests and produced documents. In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a confidential settlement agreement. Pursuant to the settlement agreement, and in exchange for a release of claims, Mr. Silton received a payment from the Company's insurer and 1,000,000 shares of the Company's common stock, which were issued during the three months ended March 31, 2014. A portion of the payment and the shares of common stock was paid to Mr. Silton's legal counsel. After effectuating the terms of the settlement, the case was formally dismissed on March 17, 2014. In connection with the settlement agreement, the Company recorded a charge of $200,000 in the year ended December 31, 2013.

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

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

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

78. FAIR VALUE MEASUREMENTS

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

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

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

1315

	Level 1		Level 2		Level 3
June 30, 2014
September 30, 2014
Liabilities:
Common stock warrant liability (2)	$	—	$	—	$	761,446
Derivative liability conversion option	$	—	$	—	$	952
December 31, 2013
Assets:
Money market funds (1)	$	1,641	$	—	$	—
Liabilities:
Common stock warrant liability (2)	$	—	$	—	$	93

____________


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

(2)

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

The Company uses the Black-Scholes model to value ~~our~~the common stock warrant liability and the derivative liability conversion option. The following are the assumptions used to measure the warrant liability at ~~June~~September 30, 2014 and 2013 and at date of issuance, which were determined in a manner consistent with that described for stock option awards as set forth in Note 8:

	June 30, 2014	June 30, 2013
	September 30, 2014			At Issuance	September 30, 2013
Number of shares underlying the Warrants	1,795,000	1,578,000
	2011 Warrants	2013 Warrants	2014 Warrants	2014 Warrants	2011 Warrants
Remaining contractual life in years	2.00 - 6.33	3.00
Number of shares underlying the Warrants	1,578,000	217,000	12,360,000	12,360,000	1,578,000
Volatility	107% to 116%	79%
Exercise price	$1.05 - $1.40	$0.45	$0.08	$0.08	$1.05 - $1.40
Risk-free interest rate	0.47% to 2.13%	0.66%
Remaining contractual life in years	1.75	6.08	9.8	10.00	2.75
Expected dividend yield	—%	—%
Volatility	144.30%	108.25%	107.35%	107.35%	85%
Risk-free interest rate	0.58%	2.00%	2.64%	2.57%	0.63%
Expected dividend yield	—%	—%	—%	—%	—%
Closing price of common stock	$0.12	$0.12	$0.12	$0.10 - $0.19

The ~~amounts~~following ~~reported~~are asthe ~~cash~~assumptions ~~and~~used ~~cash~~to ~~equivalents,~~measure ~~accounts~~the ~~receivable,~~derivative ~~accounts~~liability ~~payable~~conversion ~~and~~option ~~accrued~~with ~~liabilities~~respect to the convertible notes payable at ~~June~~September 30, 2014 and ~~December 31,~~at ~~2013~~date ~~approximate~~of ~~fair value due to their short-term maturities.~~issuance:

8. STOCKHOLDERS' EQUITY



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

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

9. STOCKHOLDERS' EQUITY

Treasury Stock

~~During~~ the six months ended June 30, 2014, we had restricted stock awards that vested. We are required to withhold income taxes at statutory rates based on the closing market value of the vested shares on the date of vesting. Accordingly, we offer employees the ability to have vested shares withheld by us in an amount equal to the amount of taxes to be withheld. We purchased 20,304 shares during the six months ended June 30, 2014 with a cost of approximately $5,000 from employees to cover federal and state taxes due. 16

During the ~~six~~nine months ended ~~June~~ September 30, 2014, wethe ~~issued~~Company ~~1,000,000~~had ~~shares~~restricted ~~from~~stock ~~treasury~~awards ~~pursuant~~that vested. The Company is required to ~~the~~withhold ~~settlement~~income ~~agreement~~taxes ~~with~~at ~~our~~statutory ~~former~~rates ~~CEO. The~~based ~~weighted~~on ~~cost~~the closing market value of ~~shares~~the ~~issued~~vested ~~from~~shares ~~treasury~~on ~~was~~the ~~approximately~~date $1of vesting.3 Accordingly, ~~million~~the ofCompany ~~which~~offers ~~$200,000~~employees ~~was~~the ~~recorded~~ability asto ahave ~~reduction~~vested ofshares ~~other~~withheld ~~accrued~~in ~~liabilities~~an ~~and~~amount equal to the ~~remaining~~amount $1of taxes to be withheld.1 ~~million~~The ~~was~~Company ~~recorded~~purchased as23,057 shares during the nine months ended September 30, 2014 with a ~~reduction~~cost of ~~additional~~approximately ~~paid-in~~$5,000 ~~capital~~from employees to cover federal and state taxes due.

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

Stock Compensation

WeThe ~~expense~~Company expenses stock-based compensation to the same expense categories in which the respective award grantee’s salary expense is reported. The table below reflects stock-based compensation expense for the ~~six~~three and nine months ended ~~June~~September 30, 2014 and 2013 (in thousands):

	Three Months Ended				~~Six~~Nine Months Ended
	June 30,				June 30,
	September 30,				September 30,
	2014		2013		2014		2013
Stock-based compensation expense included in:
Cost of services	$	1915	$	1624	$	4055	$	3357
Sales and marketing	1417		315		3754		~~121~~136
Technology and development	42		5559		3335		98157
General and administrative	5510		75126		~~137~~147		~~876~~1,002
	$	9244	$	~~149~~224	$	~~247~~291	$	1,~~128~~352

At ~~June~~September 30, 2014, approximately $~~899~~834,000 of stock-based compensation expense relating to unvested awards had not been amortized and will be expensed in future periods through 2016. Under current grants that are unvested and outstanding, approximately $~~155~~30,000 will be expensed in the remainder of 2014 as stock-based compensation, subject to true-up adjustments for forfeitures and vestings during the year.

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



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

	Six Months Ended
	June 30,
	2014		2013
Expected life in years	4.39		3.93
Volatility	86.51	%	74.03	%
Risk-free interest rate	1.53	%	0.45	%
Dividend rate	—	%	—	%
Forfeiture Rates:
Options	21.89	%	22.70	%
Restricted stock	—	%	15.04	%

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

~~Expected~~A ~~life~~summary of ~~our~~activity ~~option~~under ~~grants is estimated based on our analysis of our actual historical option exercises and cancellations. Expected stock price volatility is based on~~ the ~~historical~~2003 ~~volatility~~Stock ~~from~~Incentive ~~traded~~Plan ~~shares of our stock over~~ (the ~~most~~"2003 ~~recent~~Plan") ~~period~~and of2012 ~~time~~Equity ~~equal~~Inducement toPlan (the ~~expected~~"2012 ~~term~~Plan") offor the ~~options.~~nine ~~The~~months ~~risk-free~~ended ~~interest~~September 30, ~~rate~~2014 is ~~based~~as onfollows ~~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.~~thousands):

A ~~summary of activity under our 2003 Stock Incentive Plan (the "2003 Plan") and 2012 Equity Inducement Plan (the "2012 Plan") for the six months ended June 30, 2014 is as follows (in thousands):~~17

			Options Outstanding
	Availablefor Grant		Number ofOptions		WeightedAverageExercisePrice		Weighted Average Remaining Contractual Term
Balance at December 31, 2013	1,534		2,698		$	0.67	8.7 years
Authorized	1,660		—
Options granted	(4060	)	4060		0.2522
Restricted stock awards granted	(100	)	—
Options exercised	—		—
Options canceled	~~426~~1,409		(~~426~~1,409	)	0.6660
Restricted stock awards forfeited	—315		—
Balance at June 30, 2014	3,480		2,312		$	0.67	8.1 years
Balance at September 30, 2014	4,758		1,349		$	0.73	6.8 years
Exercisable at June 30, 2014			884		$	0.94	6.9 years
Exercisable at September 30, 2014			706		$	0.99	5.1 years

In accordance with the 2003 Plan, the number of shares authorized for grant under the 2003 Plan automatically increases on the first trading date of January by an amount equal to the lesser of 4% of ~~our~~the outstanding common stock at the previous December 31 or 2,000,000 shares. Shares outstanding at December 31, 2013 were 41,495,000 and the additional shares authorized amounted to 1,660,000 under the 2003 Plan.

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

	Number ofShares		Weighted AverageGrant Price
Balance of nonvested shares at December 31, 2013	582		$	0.69
Granted	100		0.25
Vested	(~~259~~311	)	0.4951
Forfeited	—(315	)	—0.69
Balance of nonvested shares at June 30, 2014	423		$	0.71
Balance of nonvested shares at September 30, 2014	56		$	0.89

The total grant date fair value of the nonvested restricted stock awards was $~~300~~50,000 as of ~~June~~September 30, 2014.

10. SUBSEQUENT 15EVENTS

9. SUBSEQUENT EVENTS

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


ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under Part I Item 1A – “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the SEC on April 1, 2014, that may cause our, or our industry’s, actual results, levels 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.

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

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


•	our ability to raise additional equity or debt financing,

• our ability to restructure our debt and accounts payable,


•	our ability to execute our business strategy,


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


•	the possibility of the discontinuation of some client relationships,


•	market acceptance of our solutions and pricing options,


•	our ability to acquire new clients and increase demand,


•	our ability to control costs,


•	general market conditions,

• the ~~macro-economic~~high ~~environment~~degree ~~and~~of ~~its~~uncertainty ~~impact~~around onwhether ~~our~~or ~~business~~not aswe ~~our~~can ~~clients~~successfully ~~are~~restructure ~~reducing their overall marketing spending and~~ our ~~clients’ customers are reducing their purchase of services contracts~~business,

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


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


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


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


•	potential competition in the marketplace,


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


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


•	the financial condition of our clients’ businesses,


•	the protection of our intellectual property,


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


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


•	and other factors as detailed in in Part I Item 1A - “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the SEC on April 1, 2014.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We assume no obligation to update such forward-looking statements publicly for any reason even if new information becomes available in the future, except as may be required by law.

Overview

Rainmaker Systems, Inc. and its subsidiaries ("Rainmaker", "we", "our", or "the "Company") is focused on ~~serving~~the ~~large~~development ~~business~~and ~~enterprises~~marketing toof ~~help~~a ~~them~~platform ~~increase~~for ~~sales~~the tomanagement ~~small~~of ~~and~~outside ~~medium~~training ~~sized~~for ~~businesses ("SMB")~~profit. ~~The~~In ~~Company's~~addition, ~~services~~we ~~include~~generate sales from lead generation services, and SMB sales and contract renewals ~~and the management of outside training for profit~~.

WeOur ~~have~~ViewCentral ~~developed~~SaaS platform provides an ~~integrated~~end-to-end solution, for the ~~Rainmaker~~management ~~Revenue~~and ~~Delivery~~delivery ~~PlatformSM~~of training and certification programs, ~~that~~or ~~combines~~training-as-a-business, ~~specialized~~for ~~sales~~corporations. ~~and~~The ~~marketing~~ViewCentral ~~services~~Learning ~~with~~Management ~~our~~System ~~proprietary,~~("LMS") ~~renewals~~platform ~~software~~is ~~and~~a ~~business~~SaaS, ~~analytics. Our~~cloud ~~services~~based, ~~include~~on-demand, ~~marketing~~training ~~strategy~~management ~~development~~system, ~~personalized~~ ~~renewals~~available or24x7 ~~subscription~~with ~~e-commerce~~no ~~and~~software ~~microsite~~installation. ~~creation~~This ~~and~~self-service ~~hosting~~platform is highly configurable, ~~inbound~~so ~~and~~our ~~outbound~~customers ~~e-mail,~~utilize ~~direct~~only ~~mail,~~the ~~chat,~~modules ~~and~~they ~~high-end~~need, ~~global~~branded ~~call~~as ~~center~~they ~~services~~choose. Designed specifically to automate

~~Our~~ ViewCentral SaaS platform provides an end-to-end solution for the management and delivery of training and certification programs, or training-as-a-business, for corporations. The ViewCentral Learning Management System platform is a SaaS, cloud based, on-demand, training management system, available 24x7 with no software installation. This self-service platform is highly 19

time-consuming 16manual administration and to maximize training participation, the ViewCentral suite contains tools for before, during and after course delivery.

~~configurable~~We are headquartered in Campbell, soCalifornia, ~~our~~in ~~customers~~the ~~utilize~~heart ~~only~~of the ~~modules~~Silicon ~~they~~Valley. Our ~~need,~~global ~~branded~~clients asconsist ~~they~~primarily ~~choose.~~of ~~Designed~~large ~~specifically~~enterprises tooperating ~~automate~~in ~~time~~a range of industries. Our strategy for long-~~consuming~~term ~~manual~~success ~~administration~~of ~~and~~the business is to ~~maximize~~maintain ~~training~~and ~~participation,~~improve ~~the~~our ~~ViewCentral~~position ~~suite~~as ~~contains~~a ~~tools~~leading ~~for~~LMS ~~before~~provider. This will involve ongoing investment in our LMS platform to meet market demands, ~~during~~as well as building the sales and ~~after~~marketing ~~course~~infrastructure ~~delivery.~~to support growth.

We are headquartered in the Silicon Valley in Campbell, California, and have additional operations outside of 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 a range of industries, including hardware, software, software-as- a-service and telecommunications, selling into their SMB market.

Critical Accounting Policies and Estimates

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

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

With the establishment of our Canadian foreign subsidiary and the subsequent purchase of Canadian based assets in 2007, we adopted a policy for recording foreign currency transactions and translation in accordance with FASB ASC 830, Foreign Currency Matters. For our Canadian subsidiary, the functional currency has been determined to be the local currency, and therefore, assets and liabilities are translated at period-end exchange rates, and statement of operations items are translated at an average exchange rate prevailing during the period. Such translation adjustments are recorded in accumulated comprehensive loss, a component of stockholders’ equity, and in the consolidated statements of operations and comprehensive loss. In January of 2009, we established our Rainmaker Europe subsidiary in the United Kingdom. We adopted the policy mentioned above for recording foreign currency transactions and translations for this subsidiary as the functional currency has been determined to be the local currency (Great Britain Pound) for the UK-based subsidiary. For continuing operations, gains and losses from foreign currency denominated transactions are included in interest and other expense, net, in the consolidated statements of operations.

~~Management~~The ~~believes~~Company ~~there~~evaluates ~~have~~and ~~been~~accounts nofor ~~significant~~conversion ~~changes~~options ~~during~~embedded ~~the~~in ~~six~~convertible ~~months~~instruments ~~ended~~in ~~June 30,~~accordance ~~2014~~with ASC 815 Derivatives and Hedging Activities. Applicable GAAP requires companies to ~~the~~bifurcate ~~items~~conversion ~~that~~options wefrom ~~disclosed~~their host instruments and account for them as ~~our~~free ~~critical~~standing ~~accounting~~derivative ~~policies~~financial ~~and~~instruments ~~estimates~~according to certain criteria. The criteria include circumstances in ~~Management’s~~which ~~Discussion~~(a) the economic characteristics and ~~Analysis~~risks of ~~Financial~~the ~~Condition~~embedded derivative instrument are not clearly and ~~Results~~closely related to the economic characteristics and risks of ~~Operations~~the inhost ~~our~~contract, ~~Annual~~(b) ~~Report~~the onhybrid ~~Form~~instrument ~~10-K~~that ~~for~~embodies both the ~~fiscal~~embedded ~~year~~derivative ~~ended~~instrument ~~December 31,~~and ~~2013,~~the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as ~~filed~~they occur and (c) a separate instrument with the ~~SEC~~same onterms ~~April~~as 1the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, ~~2014~~as that term is described under applicable GAAP.

Management believes there have been no significant changes during the nine months ended September 30, 2014 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the SEC on April 1, 2014.

Results of Operations

The following table sets forth for the periods given selected financial data as a percentage of our net revenue. The table and discussion below should be read in connection with the financial statements and the notes thereto which appear elsewhere in this report as well as with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013.

1720

	Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Net revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services	9497.54		6772.73		8588.93		6768.38
Gross margin	52.56	%	3227.37	%	1411.17	%	3231.72	%
Operating expenses:
Sales and marketing	2823.16		1821.08		2524.07		1617.29
Technology and development	2641.93		2829.36		2427.05		2526.47
General and administrative	2337.61		3750.45		2528.92		50.6
Depreciation and amortization	2.7		9.3		2.3		9.0
Restructuring	19.4		—		4.0		—
Total operating expenses	81.3	%	93.0	%	77.2	%	101.2	%
Depreciation and amortization	6.2		9.5		3.1		9.2
Operating loss	(75.8	)	(60.7	)	(63.1	)	(68.5	)
Total operating expenses	127.6	%	111.4	%	87.5	%	104.4	%
Gain due to change in fair value of warrant liability	—		0.2		(0.2	)	(2.3	)
Operating loss	(125.0	)	(83.7	)	(75.8	)	(73.2	)
Interest and other expense, net	5.4		1.1		3.7		1.6
Gain due to change in fair value of warrant liability and derivative liability	(67.3	)	1.6		(14.0	)	(1.1	)
Loss before income tax expense	(81.2	)%	(62.0	)%	(66.6	)%	(67.8	)%
Loss on issuance of convertible notes payable	25.7		—		5.3		—
Income tax expense	0.2		0.5		0.5		0.6
Interest and other expense, net	17.1		1.4		6.4		1.5
Net loss from continuing operations	(81.4	)%	(62.5	)%	(67.1	)%	(68.4	)%
Loss before income tax expense	(100.5	)%	(86.7	)%	(73.5	)%	(73.6	)%
Income from discontinued operations, net of tax	—		(1.5	)	—		0.9
Income tax expense	(4.6	)	(0.5	)	(0.6	)	0.3
Net loss	(81.4	)%	(64.0	)%	(67.1	)%	(67.5	)%
Net loss from continuing operations	(95.9	)%	(86.2	)%	(72.9	)%	(73.9	)%
Foreign currency translation adjustments	(0.8	)	(1.8	)	(0.5	)	(1.8	)
Income from discontinued operations, net of tax	—		(0.8	)	—		0.4
Comprehensive loss	(82.2	)%	(65.8	)%	(67.6	)%	(69.3	)%
Net loss	(95.9	)%	(87.0	)%	(72.9	)%	(73.5	)%
Foreign currency translation adjustments	0.5		2.0		(0.3	)	(0.6	)
Comprehensive loss	(95.4	)%	(85.0	)%	(73.2	)%	(74.1	)%

Comparison of Three Months Ended ~~June~~September 30, 2014 and 2013

Net Revenue. Net revenue decreased $12.63 million, or 3455%, to $3.1.9 million in the three months ended ~~June~~September 30, 2014, as compared to $4.72 million for the three months ended ~~June~~September 30, 2013. This was primarily due to the elimination of ~~non-strategic~~GrowCommerce ~~client~~revenue ~~programs and the loss~~ of ~~clients through acquisition or contract termination or expiration totaling~~ $21.26 million, ~~lower~~with ~~revenue due to~~ the expiration of the Symantec contracts asin ofthe ~~March~~first ~~31,~~quarter ~~2014~~ of ~~$1.0~~2014, ~~million~~a ~~and~~net ~~lower~~decline ~~revenue~~in ~~related to~~ the ~~ViewCentral~~Global ~~business~~Commerce ofServices revenue $~~154~~627,000 ~~offset~~due byto ~~growth~~the ~~from~~loss ~~existing and new customers~~ of ~~$1.7 million. Microsoft~~ contracts ~~representing~~with ~~$1.1~~Microsoft, ~~million~~and ofa ~~net~~decrease in revenue ~~for~~related to the ~~three~~ViewCentral ~~months~~business ~~ended~~of ~~June 30~~$94, ~~2014 expired on June 30, 2014~~000.

Cost of Services and Gross Margin. Cost of services decreased $~~240~~1.2 million,~~000,~~ or 839%, to $31.08 million in the three months ended ~~June~~September 30, 2014, as compared to $3.20 million in the 2013 comparative period. This was primarily due to lower revenue as described above. Our gross margin percentages were 53% and 3228%, respectively, in the three months ended ~~June~~September 30, 2014 and 2013. The erosion in gross margin is due to declines in our higher margin GrowCommerce business with the ~~the~~ expiration of the Symantec contracts and ~~decrease~~decreases in the Global Commerce Services and ViewCentral ~~business~~businesses.

Sales and Marketing Expenses. Sales and marketing expenses ~~increased~~decreased $27460,000, or 351%, to $~~879~~445,000 in the three months ended ~~June~~September 30, 2014, as compared to $~~852~~905,000 in the 2013 comparative period. The ~~increase~~decrease was primarily attributable to ~~higher~~lower ~~compensation~~sales ~~expense~~payroll and related expenses of $58332,000 and ana ~~increase~~drop in ~~lead~~marketing ~~development~~program ~~activities~~spending of $39130,000, ~~offset~~both byof ~~lower~~which ~~variable~~were ~~compensation~~the ~~expense~~result of ~~$72,000.~~the continuing de-emphasis of the Global Commerce Services business.

Technology and Development Expenses. Technology and development expenses decreased $~~498~~453,000, or 37%, to $~~842~~778,000 during the three months ended ~~June~~September 30, 2014, as compared to $1.32 million in the 2013 comparative period. The decrease was primarily attributable to a decrease in ~~compensation~~employee ~~expense~~expenses of $~~492~~329,000, lower ~~recruiting~~outside consulting fees of $5186,000, ~~lower~~a ~~stock~~drop ~~compensation~~in ~~expense~~IT/telecoms expenses of $5123,000 and lower ~~maintenance~~allocated ~~expense~~overheads of $5817,000.

General and Administrative Expenses. General and administrative expenses decreased $1.04 million, or 5867%, to $~~739~~699,000 during the three months ended ~~June~~September 30, 2014, as compared to $12.81 million in the 2013 comparative period. ~~The decrease was primarily due to lower compensation expense of~~ $91420,000 ~~, lower variable compensation expense~~ of ~~$116,000,~~the ~~lower~~decrease ~~audit~~was ~~and~~the ~~legal~~result ~~fees~~ of ~~$589,000,~~a ~~lower~~one-time ~~investor relations cost of $95,000, lower board compensation expense of $89,000 and the~~ charge ~~recorded~~ in ~~the~~Q3 ~~three months ended June 30,~~ 2013 for the ~~closure~~overstatement of ~~the~~credit ~~Austin~~card receivables. Audit, ~~Texas~~legal, ~~facility~~investor ~~of $150~~relations,~~000~~ ~~offset~~and byboard ancompensation ~~increase in bank~~ fees ~~related~~declined ~~to default fees on notes payable of~~ $35377,000, and ~~higher~~payroll ~~software~~and ~~expense~~benefits ofexpenses fell $33558,000.

~~Depreciation and Amortization Expenses~~Restructuring. ~~Depreciation~~Restructuring ~~and amortization~~ expenses ~~decreased $355,000, or 81%, to $84,000~~ for the three months ended ~~June~~September 30, 2014, asconsisted ~~compared~~of to $~~439~~346,000 in ~~the~~executive ~~2013~~severance ~~comparative~~charges ~~period.~~and ~~The~~$19,000 ~~decrease~~ in ~~depreciation~~facility ~~and~~lease ~~amortization~~early ~~expense~~termination ~~was~~costs ~~due to a lower asset base~~ from the ~~impairment~~closing ~~charge~~of ~~on long-lived assets taken in~~ the ~~year~~Godalming ~~ended~~(UK) ~~December 31, 2013 of $2~~office.~~3 million.~~

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

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

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



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

	Three Months Ended June 30,						Change
	2014			2013
Interest expense, net	$	162		$	54		$	108
Currency translation loss	(3		)	(1		)	(2		)
Other	11			—			11
Total	$	170		$	53		$	117

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

~~Income~~Loss ~~Tax~~from ~~Expense. Income~~Discontinued ~~tax expense was $6~~Operations,~~000~~ ~~for~~Net ~~the~~of ~~three~~Tax. Loss ~~months~~from ~~ended~~discontinued ~~June 30,~~operations ~~2014 as compared to $25,000~~ for the three months ended ~~June~~September 30, 2013~~. Our~~ ~~income~~of ~~tax~~$34,000 ~~expense~~was ~~for~~attributable ~~the~~to ~~three~~an ~~months~~adjustment ~~ended~~to ~~June 30,~~the ~~2014~~sales ~~was~~price ~~based~~pursuant onto ~~our~~the ~~estimate~~stock ofpurchase ~~taxable~~agreement ~~income~~ for the ~~full~~sale ~~year ending December 31, 2014, and primarily consists~~ of ~~estimates~~the ofCompany's ~~foreign~~Manila ~~taxes~~operations ~~and~~in ~~domestic~~December ~~gross margin taxes for certain states~~2012.

~~Loss~~Comparison ~~from Discontinued Operations, Net~~ of ~~Tax. Loss~~Nine ~~from~~Months ~~discontinued~~Ended ~~operations for the three months ended June~~September 30, ~~2013~~2014 ofand ~~$69,000~~2013 ~~is attributable to an adjustment to the sales price pursuant to the stock purchase agreement for the sale of the Company's Manila operations in December 2012.~~

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

~~Net~~Cost ~~Revenue~~of Services and Gross Margin. ~~Net~~Cost ~~revenue~~of services decreased $2.1.3 million, or 2313%, to $78.31 million in the ~~six~~nine months ended ~~June~~September 30, 2014, as compared to $9.43 million for the ~~six~~nine months ended ~~June~~September 30, 2013. Our ~~primarily~~gross ~~due~~margin topercentages ~~the~~were ~~elimination~~12% ~~of non-strategic client programs~~ and ~~the loss of clients through acquisition or contract termination or expiration totaling $4.9 million~~31%, ~~lower GrowCommerce platform volume of $825~~respectively,~~000~~ ~~and~~in ~~lower revenue related to~~ the ~~ViewCentral~~nine ~~business~~months ofended ~~$368~~September 30,~~000~~ ~~offset~~2014 ~~by growth from existing~~ and ~~new customers of $3~~2013.9 ~~million. Microsoft~~The ~~contracts~~erosion ~~representing~~in ~~$2.8~~gross ~~million~~margin ofis ~~net~~due ~~revenue~~to ~~for~~declines ~~the~~in ~~six~~our ~~months~~higher ~~ended~~margin ~~June~~GrowCommerce ~~30,~~business ~~2014~~and ~~expired~~ViewCentral onbusiness ~~June~~and ~~30,~~lower ~~2014. Symantec~~margin ~~contracts~~on ~~representing $925,000 of net revenue in~~ the ~~six~~Global ~~months~~Commerce ~~ended~~Services ~~June 30, 2014 expired on March 31, 2014~~business.

~~Cost~~Sales ~~of Services~~ and ~~Gross~~Marketing ~~Margin~~Expenses. ~~Cost~~Sales ofand ~~services~~marketing expenses decreased $82162,000, or 17%, to $6.2.3 million in the ~~six~~nine months ended ~~June~~September 30, 2014, as compared to $62.34 million ~~for~~in the ~~six months ended June 30,~~ 2013~~. Our~~ ~~gross~~comparative ~~margin percentages were 14% and 33%, respectively, in the six months ended June 30, 2014 and 2013~~period. The ~~erosion~~change inwas ~~gross~~primarily ~~margin~~attributable ~~is due~~ to ~~declines~~a decrease in ~~our~~sales ~~higher margin GrowCommerce business~~ and ~~ViewCentral~~marketing ~~business~~staff ~~and~~compensation ~~lower margin on the telesales business~~expenses.

~~Sales~~Technology and ~~Marketing~~Development Expenses. ~~Sales~~Technology and ~~marketing~~development expenses ~~increased~~decreased $~~298~~1.1 million,~~000,~~ or 2030%, to $12.85 million induring the ~~six~~nine months ended ~~June~~September 30, 2014, as compared to $13.56 million in the 2013 comparative period. The ~~change~~decrease was primarily attributable to ana ~~increase~~decrease in ~~sales and marketing staff~~ compensation expense of $~~289~~840,000 and ~~higher~~a ~~outside~~decrease ~~services~~in ~~for~~consulting ~~public relations~~ and ~~marketing~~temporary ~~services~~service ofcharges ~~$80,000 offset by lower stock compensation expense~~ of $84225,000 ~~and lower recruiting fees of $72,000~~.

~~Technology~~General and ~~Development~~Administrative Expenses. ~~Technology~~General and ~~development~~administrative expenses decreased $~~641~~4.3 million,~~000,~~ or 2762%, to $12.76 million during the ~~six~~nine months ended ~~June~~September 30, 2014, as compared to $26.49 million in the 2013 comparative period. The decrease was primarily ~~attributable~~due to anon-recurring ~~decrease~~expenses recorded in ~~compensation~~the ~~expense~~nine months ended September 30, 2013 of $~~847~~1.8 million comprised of $345,000 ~~and~~for ~~lower~~relocation ~~stock~~of ~~compensation~~the ~~expense~~finance function from the Austin, Texas facility to our Campbell, California facility, a charge of $65150,000 ~~offset~~to byclose ~~higher~~the ~~consulting~~Austin facility, a $280,000 impairment charge against vendor deposits, a $420,000 write-off of credit card receivables, and ~~temporary~~a ~~services~~charge of $96582,000 ~~and~~related ~~higher~~to ~~software~~stock compensation expense for restricted stock awards which were fully vested upon grant and acceleration of vesting of restricted stock awards for a former CEO. In addition, in the nine months ended September 30, 2014, employee and related expenses excluding severance dropped $531.1 million, and audit legal, investor relations and board fees fell $1.5 million compared to the 2013 comparative period. Offsetting these decreases were asset impairment charges of $130,000.

~~General and Administrative Expenses~~Restructuring. ~~General~~Restructuring ~~and administrative~~ expenses ~~decreased~~for ~~$2.9 million, or 60%, to $1.9 million during~~ the ~~six~~nine months ended ~~June~~September 30, 2014, asconsisted ~~compared to $4.8 million in the 2013 comparative period. The decrease was primarily due to non-recurring expenses recorded in the six months ended June 30, 2013~~ of $~~1.4 million comprised of $345~~346,000 ~~for~~in ~~relocation~~executive ofseverance ~~the~~charges ~~finance~~and ~~function from the Austin, Texas facility to our Campbell, California facility, a charge of~~ $~~150~~19,000 toin ~~close the Austin~~ facility, ~~$280,000~~lease ~~impairment~~early ~~charge~~termination ~~against~~costs ~~vendor~~from ~~deposits~~the ~~and~~closing ~~$582,000 related to stock compensation expense for restricted stock awards which were fully vested upon grant and acceleration~~ of ~~vesting of restricted stock awards for a former CFO. In~~ the ~~six~~Godalming ~~months~~(UK) ~~ended June 30, 2014, we recorded lower legal and audit expense of $1~~office.0 million, and lower variable compensation expense of $228,000, lower board compensation expense of $128,000, lower investor relations expense of $88,000 and lower stock compensation expense of $157,000.

~~Depreciation~~ and Amortization Expenses. Depreciation and amortization expenses decreased $677,000, or 80%, to $168,000 for the six months ended June 30, 2014, as compared to $845,000 in the 2013 comparative period. The decrease in depreciation and amortization expense was due to a lower asset base from the impairment charge on long-lived assets taken in the year ended December 31, 2013 of $2.3 million. 22

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

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



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

	Six Months Ended June 30,				Change
	2014		2013
Interest expense, net	$	241	$	109	$	132
Currency translation loss	5		1		4
Other	22		36		(14		)
Total	$	268	$	146	$	122

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

Income ~~Tax~~from ~~Expense~~Discontinued Operations, Net of Tax. Income ~~tax~~from ~~expense~~discontinued ~~was~~operations ~~$33,000~~ for the ~~six~~nine months ended ~~June~~September 30, ~~2014~~2013 asof ~~compared to~~ $5553,000 ~~for~~was ~~the~~a ~~six~~result ~~months~~of ~~ended~~the ~~June 30,~~wind ~~2013. Our~~down ~~income~~of ~~tax~~a ~~expense~~contract ~~for~~that ~~the~~was ~~six~~assigned ~~months~~to ~~ended~~Shore ~~June 30~~Solutions, ~~2014~~Inc. ~~was~~as ~~based~~part onof ~~our~~the ~~estimate~~sale of ~~taxable~~our ~~income~~Manila ~~for~~operations ~~the~~in ~~full year ending~~ December ~~31,~~ ~~2014,~~2012 ~~and~~offset ~~primarily~~by ~~consists~~an ofadjustment ~~estimates~~to ofthe ~~foreign~~sales ~~taxes~~price ~~and~~pursuant ~~domestic~~to ~~gross~~the ~~margin~~stock ~~taxes~~purchase agreement for ~~certain~~that ~~states~~sale.

Income from Discontinued Operations, Net of Tax. Income from discontinued operations for the six months ended June 30, 2013 of $87,000 is a result of the winddown of a contract that was assigned to Shore Solutions, Inc. as part of the sale of our Manila operations in December 2012 offset by an adjustment to the sales price pursuant to the stock purchase agreement for that sale.

Liquidity and Sources of Capital

Cash used in operating activities for the ~~six~~nine months ended ~~June~~September 30, 2014 was $~~128~~2.4 million,~~000,~~ as compared to cash used in operating activities of $3.2.9 million in the ~~six~~nine months ended ~~June~~September 30, 2013. Cash used in operating activities in the ~~six~~nine months ended ~~June~~September 30, 2014 was primarily the result of the net loss of $46.97 million, augmented by a warrant liability fair value adjustment of $1.3 million. The combination of these two items was offset by non-cash expenses for depreciation of property and asset impairment of $~~168~~345,000, debt discount amortization of $291,000, stock-based compensation expenses of $~~247~~291,000 and changes in operating assets and liabilities that provided cash of $4.2 million as a result of collecting receivables and extending accounts payable. Also added back to net income for the purpose of calculating cash used in operating activities was a $483,000 loss on the issuance of convertible debt.

Cash used in operating activities for the ~~six~~nine months ended ~~June~~September 30, 2013 was $3.2.9 million, primarily as a result of the net loss from continuing operations of $69.39 million augmented by a warrant liability fair value adjustment of $148,000; offset by non-cash expenses for depreciation of property of $~~845~~1.2 million,~~000~~ ~~and~~ stock-based compensation expenses of $1.14 million, a charge for impairment related to vendor deposits of $280,000, a provision for allowances of credit card receivables of $420,000, changes in operating assets and liabilities that provided cash of $13.19 million, primarily as a result of ~~the reduction of accounts receivable and~~ managing working capital, and cash provided by discontinued operations of $8753,000.

Cash used in investing activities was $~~540~~543,000 in the ~~six~~nine months ended ~~June~~September 30, 2014, as compared to cash used in investing activities of $~~859,000~~1.6 million in the ~~six~~nine months ended ~~June~~September 30, 2013. Cash used in investing activities in the ~~six~~nine months ended ~~June~~September 30, 2014 was a result of capital expenditures of $~~540~~543,000. Cash used in investing activities in the ~~six~~nine months ended ~~June~~September 30, 2013 was primarily the result of capital expenditures of $~~873,000~~1.6 ~~and an increase in restricted cash of $14,000 related to misdirected cash receipts to be refunded~~million.

Cash used in financing activities was approximately $~~2.4~~510,000 ~~million~~ in the ~~six~~nine months ended ~~June~~September 30, 2014, as compared to cash provided by financing activities of $4.62 million in the ~~six~~nine months ended ~~June~~September 30, 2013. Cash used in financing activities in the ~~six~~nine months ended ~~June~~September 30, 2014 was primarily a result of repayment of borrowings of $23.0 million under our Term Loan and Revolving Line with Comerica Bank, $~~103~~550,000 under our line of credit with Agility Capital II, LLC, ~~and~~ $208,000 under the insurance note payable to First Insurance Funding Corp, and the funding of a restricted cash account of $58,000 to secure a standby letter of credit with Comerica Bank. ~~Cash~~Offsetting ~~provided~~these byoutflows ~~financing activities in the six months ended June 30, 2013~~ was ~~primarily~~gross ~~the result of net~~ proceeds of $53.51 million from the ~~sale~~issuance of ~~common~~the ~~stock~~Convertible Notes, ~~repayment of borrowings of~~ $~~987~~200,000 ~~under~~from ~~our~~the ~~Term Loan and~~ Revolving Line ~~with~~of ~~Comerica~~Credit ~~Bank~~Notes, and ~~purchases of~~ $~~111~~50,000 ~~of treasury stock~~ from ~~employees for shares withheld for income tax payable on restricted stock awards vested during~~ the ~~six~~Agility ~~months~~Capital ~~ended June 30, 2013, offset by borrowings of $200,000 under our Revolving Line with Comerica Bank~~loan.

AtCash ~~June 30,~~provided ~~2014,~~by ~~the~~financing ~~Company~~activities ~~had~~in athe ~~net~~nine ~~working~~months ~~capital~~ended ~~deficit of $19.3 million. Our principal source of liquidity as of June~~September 30, ~~2014~~2013 ~~consisted~~ of $~~568,000~~4.2 ofmillion ~~cash~~was ~~and~~primarily ~~cash~~the ~~equivalents~~result ~~and $1.8 million~~ of net ~~accounts~~proceeds ~~receivable. Notes payable due as~~ of ~~June 30, 2014 was~~ $15.45 million, offrom ~~which~~the ~~$1.0~~sale ~~million~~of ~~was~~common ~~due~~stock, toplus ~~Comerica~~borrowings ~~Bank~~of ~~and~~ $~~432~~200,000 ~~was~~under ~~due~~our toRevolving ~~Agility~~Line ~~Capital~~with ~~II, LLC. On July 15, 2014, the Company raised $2.6 million in debt financing and used a portion of the net proceeds from the financing to repay its outstanding indebtedness owing to~~ Comerica Bank ~~and Agility Capital II~~, ~~LLC. See~~offset ~~below~~by ~~under~~repayment ~~"Credit Arrangements" for further discussion~~ of ~~our~~borrowings ~~debt agreements. Our accounts payable balance increased from $13.0 million as~~ of ~~December 31, 2013 to~~ $151.64 million asunder ofour ~~June 30,~~Term ~~2014. $12.9~~Loan ~~million~~and ofRevolving ~~the~~Line ~~June 30,~~with ~~2014~~Comerica ~~accounts~~Bank ~~payable balance is related to a merchant account of a customer.~~

In order to meet our operating requirements, we will need to raise additional capital from outside third parties or from the sale of assets and restructure our obligations. Additionally, we are pursuing a plan to achieve profitable operations through a 23

and 20purchases of $132,000 of treasury stock from employees for shares withheld for income tax payable on restricted stock awards vested during the nine months ended September 30, 2013.

~~combination~~At ofSeptember 30, ~~increased~~2014, ~~sales~~the ~~and~~Company ~~decreased~~had ~~expenses~~a net working capital deficit of $19.2 million. ~~There~~Our ~~can~~principal besource noof ~~assurance~~liquidity ~~that~~as weof ~~will~~September 30, be2014 ~~successful~~consisted inof ~~obtaining~~$170,100 ~~third~~of ~~party~~cash ~~capital,~~and ~~selling~~cash ~~assets~~equivalents orand ~~restructuring~~$1.3 ~~our~~million ~~obligations~~of net accounts receivable. WeConvertible doand ~~not~~Supplemental ~~have~~Notes ~~adequate~~payable ~~cash~~as orof ~~financial~~September 30, ~~resources~~2014 towas ~~operate~~$4.7 ~~for~~million, ~~the~~plus ~~next~~another ~~twelve~~$200,000 ~~months~~payable ~~without~~under ~~raising~~the Revolving ~~significant~~Line ~~additional~~of ~~capital,~~Credit ~~which~~Notes. See ~~raises~~Note ~~substantial~~5 ~~doubt~~to ~~about~~the ~~our~~Financial ~~ability~~Statements tofor ~~continue~~further asdiscussion aof ~~going~~our ~~concern~~debt agreements.

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

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

Credit Arrangements

On July 15, 2014, the Company completed an initial closing of the Financing Transaction for the sale of 2,550,000 units, representing gross proceeds to the Company of $2.6,550,000 ~~million~~ and net proceeds of approximately $2.3,275,000 ~~million~~ after deducting fees and ~~estimated~~ expenses payable by the Company. On August 12, 2014, the Company completed a secondary closing of the Financing Transaction for the sale of 450,000 units, representing gross proceeds to the Company of $450,000 and net proceeds of approximately $415,000. On September 9, 2014, the Company completed a third closing of the Financing Transaction for the sale of 90,000 units, representing gross proceeds of $90,000 and net proceeds of $83,700. The Company used a portion of the net proceeds from the Financing Transaction to repay its outstanding indebtedness owing to Comerica Bank and Agility Capital II, LLC and ~~intends~~used ~~to use~~ the balance of the net proceeds for general corporate purposes, including working capital.

The Convertible Notes of $3.01 million will mature on July 15, 2019 and ~~will~~ accrue interest at a fixed rate of 8.0% per annum payable quarterly. Interest accrued from the date of issuance through June 30, 2015 will be paid in kind and added to the principal amount of the Convertible Notes quarterly. During the continuance of an event of default, the Convertible Notes may accrue interest at a default rate of 15% per annum. Subject to stockholder approval of an increase in the number of authorized shares of the Company’s common stock in an amount sufficient to permit full conversion of the Convertible Notes, the Convertible Notes will be convertible into shares of the Company’s common stock at a conversion rate of $0.25 per share. The Convertible Notes also contain provisions that protect the holders thereof against dilution by adjustment of the conversion rate in certain events such as stock dividends, stock splits and other similar events and certain issuances of common stock by the Company at a price per share less than the conversion rate then in effect.

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

~~The~~ Convertible Notes and Supplemental Notes are secured by substantially all of the Company’s consolidated assets. The Convertible Notes and Supplemental Notes contain covenants that will, subject to limited exceptions, require the approval of the holders of a majority of the outstanding principal amount thereof to, among other things, (i) incur other indebtedness; (ii) create liens; (iii) pay cash dividends; and (iv) merge or consolidate with another company. Additionally, the Purchase Agreement requires the Company to implement certain changes in its senior management. The Convertible Notes and Supplemental Notes also provide for customary events of default, including nonpayment, breach of covenants, material adverse events, payment defaults of other indebtedness and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Convertible Notes and Supplemental Notes. If we are not able to comply with such covenants or if any event of default otherwise occurs, our outstanding note balances could become due and payable immediately.24

InThe ~~connnection~~Convertible ~~with~~Notes and Supplemental Notes are secured by a first lien on substantially all of the ~~Financing~~Company’s ~~Transaction~~consolidated assets. The Convertible Notes and Supplemental Notes contain covenants that will, subject to limited exceptions, require the ~~Company~~approval ~~issued~~of 12the holders of a majority of the outstanding principal amount thereof to,~~000~~ among other things,~~000~~ ~~Warrants~~(i) ~~which~~incur ~~have~~other anindebtedness; ~~initial~~(ii) ~~10-year~~create ~~term~~liens; (iii) pay cash dividends; and (iv) merge or consolidate with another company. ~~Subject~~The toConvertible ~~stockholder~~Notes ~~approval~~and ofSupplemental anNotes ~~increase~~also inprovide ~~the~~for ~~number~~customary events of ~~authorized~~default, ~~shares~~including nonpayment, breach of ~~the~~covenants, ~~Company’s~~material ~~common~~adverse ~~stock~~events, inpayment andefaults ~~amount~~of ~~sufficient~~other toindebtedness ~~permit~~and ~~full~~certain ~~exercise~~events of ~~the Warrants~~bankruptcy, ~~the~~insolvency ~~Warrants~~and ~~will~~reorganization bethat ~~exercisable~~may ~~into~~result ~~shares~~in acceleration of outstanding amounts under the ~~Company’s~~Convertible ~~common~~Notes ~~stock~~and atSupplemental anNotes. ~~initial~~If ~~exercise~~we ~~price~~are not able to comply with such covenants or if any event of ~~$0.08~~default ~~per~~otherwise ~~share~~occurs, our outstanding note balances could become due and payable immediately. ~~The~~See ~~Warrants~~below ~~may~~for ~~also~~a bediscussion ~~exercised~~of notices of default and acceleration received by ~~way~~the Company from holders of athe ~~cashless~~Convertible ~~exercise. The~~Notes and the Supplemental Notes.

In 21connection with the Financing Transaction, the Company issued 12,360,000 Warrants which have an initial 10-year term with an exercise price of $0.08 per share. The Warrants are subject to stockholder approval of an increase in the number of authorized shares of the Company’s common stock in an amount sufficient to permit full exercise of the Warrants into shares of the Company's common stock. The Warrants may also be exercised by way of a cashless exercise. The Warrants also contain provisions that protect the holders thereof against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as stock dividends, stock splits and other similar events and issuances of common stock at a price per share less than the exercise price then in effect.

~~Warrants~~On ~~also~~September ~~contain~~2, ~~provisions~~2014, ~~that~~the ~~protect~~Company obtained $200,000 under Revolving Line of Credit Notes from two investors in the ~~holders~~Financing ~~thereof~~Transaction. The ~~against~~Revolving ~~dilution~~Line of Credit Notes are secured by ~~adjustment~~a second lien on substantially all of the ~~exercise~~Company's ~~price~~consolidated ~~and~~assets. Outstanding ~~the~~principal ~~number~~accrues ofinterest ~~shares~~at ~~issuable~~fixed ~~thereunder~~rate inof ~~certain~~5% ~~events~~per ~~such~~annum, aspayable ~~stock~~quarterly ~~dividends~~starting December 31, ~~stock~~2014. During ~~splits~~the ~~and~~continuance ~~other~~of ~~similar~~an ~~events~~event ~~and~~of ~~issuances~~default, the Revolving Line of ~~common~~Credit ~~stock~~Notes may accrue interest at a ~~price~~default rate of 7% per ~~share~~annum. Each ~~less~~advance ~~than~~must ~~the~~be ~~exercise~~paid ~~price~~within ~~then~~30 indays ~~effect~~of the date of such advance. The Company borrowed the full $200,000 under the Revolving Line of Credit Notes on September 2, 2014 and this amount remained outstanding as of September 30, 2014.

On ~~June~~November 146, ~~2012~~2014, the Company ~~entered~~received ~~into~~ a ~~Loan~~notice ~~and Security Agreement with Comerica Bank (the "Comerica Credit Facility"). The maximum amount~~ of ~~credit~~default ~~available~~from toinvestors ~~the~~holding ~~Company under~~ the ~~Comerica Credit Facility at inception was $5 million, comprised of a $3 million term loan facility ("Term Loan") and a $2 million revolving line of credit ("~~Revolving Line~~"),~~ ~~which included a $500,000 sub-facility for letters~~ of ~~credit~~Credit ~~and certain credit card services~~Notes. The ~~outstanding~~notice ~~amount~~of ~~under~~default ~~the~~stated ~~Term~~that ~~Loan~~an ~~was~~event ~~repaid~~of bydefault ~~the~~had ~~Company~~occurred ~~in June 2014, and~~ as ofa ~~June~~result ~~30, 2014, the outstanding amount~~ of the ~~Term~~Company’s ~~Loan~~failure ~~was~~to ~~zero. Amounts~~repay ~~borrowed~~principal ~~under~~when ~~the Revolving Line became~~ due on ~~December~~October 142, ~~2013, which was subsequently extended to May 1,~~ 2014~~. As of June 30~~, ~~2014,~~and ~~there~~declared ~~was~~all ~~$1.0~~principal ~~million~~and ~~outstanding~~accrued ~~under~~interest ~~the Revolving Line. The~~ outstanding ~~amount~~ under the Revolving Line ~~was~~of ~~repaid~~Credit byNotes ~~the~~to ~~Company~~be onimmediately ~~July~~due ~~15, 2014~~ and ~~the Comerica Credit Facility was terminated~~payable. ~~However,~~At ~~Comerica~~November ~~continues~~6, to2014 ~~maintain~~accrued ainterest ~~cash-secured~~on ~~letter of credit in~~ the ~~face~~Revolving ~~amount~~Line of ~~$61,000~~Credit ~~issued~~Notes towas ~~our landlord for our leased headquarters in Campbell~~$2, ~~California~~176.

On ~~October~~November 306, ~~2013~~2014, the Company ~~closed~~also received a ~~Loan~~notice ~~Agreement~~of ~~(the~~default ~~"Agility~~from ~~Loan~~investors ~~Agreement") with Agility Capital II, LLC~~ (the “~~Agility~~Majority Investors”), ~~providing~~holding ~~for~~$1.8 amillion ~~revolving line~~ of ~~credit~~the ofoutstanding upprincipal toamount ~~$500,000,~~of ~~which~~the ~~amount~~Company’s ~~could~~Convertible beNotes ~~increased~~and to $~~650~~900,000 ~~under~~of ~~certain~~the ~~conditions~~outstanding (principal amount of the ~~“Maximum~~Company’s ~~Revolving~~Supplemental ~~Line”)~~Notes. The ~~Agility~~notice ~~Loan~~of ~~Agreement~~default ~~became~~stated ~~due~~that onan ~~December~~event ~~14,~~of ~~2013,~~default ~~commensurate~~had ~~with~~occurred under the ~~Comerica~~Convertible ~~Credit~~Notes ~~Facility,~~and ~~which~~Supplemental ~~was~~Notes ~~subsequently~~as ~~extended~~a toresult ~~May 1, 2014, commensurate with the extension~~ of the ~~scheduled~~Company’s ~~maturity~~failure ~~date~~to ofrepay the ~~Comerica~~above-referenced Revolving Line~~. As~~ of ~~June 30,~~Credit ~~2014,~~Notes ~~there~~when ~~was $432~~due,~~000~~ ~~outstanding~~and ~~under~~declared ~~the~~all ~~Agility~~principal ~~Loan~~and ~~Agreement. The~~accrued interest outstanding ~~amount~~ under the ~~Agility~~Convertible ~~Loan~~Notes ~~Agreement~~and ~~was~~Supplemental ~~repaid~~Notes held by the ~~Company~~Majority onInvestors ~~July~~to ~~15,~~be ~~2014,~~immediately due and ~~the Agility Loan Agreement was terminated~~payable.

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

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

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

Off-Balance Sheet Arrangements

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

Potential Impact of Inflation

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

Recent Accounting Standards

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


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

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ITEM 4.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of ~~June~~September 30, 2014, our management, including our principal executive officer and principal financial officer, has conducted an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act of 1934, as amended. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of ~~June~~September 30, 2014.

Change in Internal Control over Financial Reporting

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

PART II.—OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

On February 8, 2013, the Company's former Chief Executive Officer, Michael Silton, filed a demand for arbitration and complaint with the American Arbitration Association, alleging breach of contract and other causes of action relating to the termination of Mr. Silton's employment with the Company in October 2012. Mr. Silton sought full payment of severance benefits in the amount of approximately $1.0 million, plus compensation for unused vacation, related penalties and punitive damages. On March 21, 2013, the Company filed a responsive pleading in the arbitration proceedings. On May 15, 2013, the American Arbitration Association appointed an arbitrator. Thereafter, Mr. Silton withdrew his arbitration claim and on May 22, 2013, filed a complaint against the Company in the Santa Clara Superior Court. The allegations and causes of action are the same as the complaint filed with the American Arbitration Association. On July 5, 2013, the Company filed an answer to Mr. Silton's complaint and a cross-complaint against Mr. Silton. On or about August 1, 2013, Mr. Silton filed an answer to the cross-complaint. Between July and December 2013, the parties served and responded to written discovery requests and produced documents. In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a confidential settlement agreement. Pursuant to the settlement agreement, and in exchange for a release of claims, Mr. Silton received a payment from the Company's insurer and 1,000,000 shares of the Company's common stock, which were issued during the three months ended March 31, 2014. A portion of the payment and the shares of common stock was paid to Mr. Silton's legal counsel. After effectuating the terms of the settlement, the case was formally dismissed on March 17, 2014. In connection with the settlement agreement, the Company recorded a charge of $200,000 in the year ended December 31, 2013.

March 21, 2013, the Company filed a responsive pleading in the arbitration proceedings. On May 15, 2013, the American Arbitration Association appointed an arbitrator. Thereafter, Mr. Silton withdrew his arbitration claim and on May 22, 2013, filed a complaint against the Company in the Santa Clara Superior Court. The allegations and causes of action are the same as the complaint filed with the American Arbitration Association. On July 5, 2013, the Company filed an answer to Mr. Silton's complaint and a cross-complaint against Mr. Silton. On or about August 1, 2013, Mr. Silton filed an answer to the cross-complaint. Between July and December 2013, the parties served and responded to written discovery requests and produced documents. In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a confidential settlement agreement. Pursuant to the settlement agreement, and in exchange for a release of claims, Mr. Silton received a payment from the Company's insurer and 1,000,000 shares of the Company's common stock, which were issued during the three months ended March 31, 2014. A portion of the payment and the shares of common stock was paid to Mr. Silton's legal counsel. After effectuating the terms of the settlement, the case was formally dismissed on March 17, 2014. In connection with the settlement agreement, the Company recorded a charge of $200,000 in the year ended December 31, 2013.

See Part I Item 1A— “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the SEC on April 1, 2014, for additional discussion of the litigation and regulatory risks facing our Company.


ITEM 1A.	RISK FACTORS

Not applicable for smaller reporting companies.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The table below presents share repurchase activity for the three months ended ~~June~~September 30, 2014. The shares were repurchased by us in connection with satisfaction of tax withholding obligations on vested restricted stock.

Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)	Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs
April 1, 2014 - April 30, 2014	—	—	N/A	N/A
July 1, 2014 - July 31, 2014	—	—	N/A	N/A
May 1, 2014 - May 31, 2014	6,857	$0.32	N/A	N/A
August 1, 2014 - August 31, 2014	2,965	$0.14	N/A	N/A
June 1, 2014 - June 30, 2014	823	$0.15	N/A	N/A
September 1, 2014 - September 30, 2014	688	$0.11	N/A	N/A
Total	73,~~680~~653	$0.3013	N/A	N/A

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

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


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

As previously disclosed, on February 27, 2014, Comerica Bank issued a notice of default as the amounts outstanding under the Revolving Line were past due. The notice of default also stated that Comerica Bank would not take any action to enforce its rights and remedies under the Comerica Credit Facility but reserved the right to do so in the future. As previously disclosed, on March 19, 2014, the Company and Comerica Bank entered into a forbearance agreement pursuant to which Comerica Bank agreed to extend the scheduled maturity date of the Revolving Line until May 1, 2014. In addition, under the terms of the forbearance agreement, among other things, the amounts outstanding under the Term Loan would become due on May 1, 2014, coterminous with the Revolving Line. On May 12, 2014, Comerica Bank issued a notice of default as the amounts outstanding under the Comerica Credit Facility were past due and the Company did not satisfactorily address a material accounts payable owed to a customer. The notice of default also stated that Comerica Bank would not take any action to enforce its rights and remedies under the Comerica Credit Facility but reserved the right to do so in the future. Due to the notice of default, pursuant to the Comerica Credit Facility, effective May 12, 2014, the applicable margin for the Revolving Line and the Term Loan was increased to five percent (5%). The outstanding amount under the Term Loan was repaid by the Company in June 2014 ~~and as of June 30, 2014, there was $1~~.~~0 million outstanding under the Revolving Line.~~ The outstanding amount under the Revolving Line was repaid by the Company on July 15, 2014 and the Comerica Credit Facility was terminated. However, Comerica continues to maintain a cash-secured letter of credit in the face amount of $61,000 issued to our landlord for our leased headquarters in Campbell, California.

The Agility Loan Agreement became due on December 14, 2013, commensurate with the Comerica Credit Facility. As previously disclosed, on February 28, 2014, Agility issued a notice of default due to the notice of default issued by Comerica Bank, as discussed above. Such default was subsequently cured as a result of the extension of the maturity date to May 1, 2014, commensurate with the extension of the scheduled maturity date of the Comerica Revolving Line. On May 12, 2014, Agility issued a notice of default as the amounts outstanding under the Agility Loan Agreement were past due. The notice of default also stated that Agility would not take any action to enforce its rights and remedies under the Agility Loan Agreement, but reserved the right to do so in the future. As ~~of June 30, 2014, there was $432,000 outstanding under the Agility Loan Agreement.~~ The outstanding amount under the Agility Loan Agreement was repaid by the Company on July 15, 2014, and the Agility Loan Agreement was terminated.

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

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


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.	OTHER INFORMATION

AsOn ~~previously~~November ~~disclosed~~17, in2014, ~~our~~the ~~Current~~Company ~~Report~~received ona ~~Form~~notification ~~8-K~~of ~~filed~~disposition ~~with~~of collateral from the ~~SEC~~collateral onagent ~~July~~for ~~21,~~the ~~2014~~holders ~~and~~of inthe ~~Note~~Company’s 5Convertible toNotes ~~the~~and ~~condensed~~Supplemental ~~consolidated~~Notes ~~financial~~notifying ~~statements~~the ~~contained~~Company inthat ~~this~~a ~~Quarterly~~foreclosure ~~Report~~sale onof ~~Form~~all ~~10-Q,~~or onsubstantially ~~July~~all ~~15,~~of ~~2014,~~the weCompany’s ~~entered~~assets ~~into~~would atake ~~Purchase~~place ~~Agreement~~on ~~with~~December ~~certain~~4, ~~investors~~2014. If ~~pursuant~~the toMajority ~~which~~Investors weand ~~agreed~~collateral agent elect to ~~issue~~proceed ~~units~~with ~~each~~the ~~consisting~~foreclosure sale of ~~(i)~~the aCompany’s ~~secured~~assets, ~~convertible~~upon ~~promissory~~completion ~~note~~of insuch sale the ~~face~~Company ~~amount~~would ofno ~~$1.00,~~longer ~~(ii)~~be aable ~~supplemental~~to ~~secured~~continue ~~promissory~~as ~~note~~a ingoing ~~the~~concern ~~face~~and ~~amount~~would ofimmediately $0cease operations.50 ~~and~~The ~~(iii)~~Majority ~~warrants~~Investors have represented to ~~purchase~~the upCompany tothat ~~four~~in ~~shares~~the event of a foreclosure sale in which the Majority Investors acquire the Company’s ~~common~~assets, ~~stock~~their ~~(collectively,~~intent would be to continue operating the ~~“Financing~~ViewCentral ~~Transaction”)~~business in a separate legal entity that continues existing contractual agreements with the Company’s ViewCentral customers.

On July 15, 2014, we completed an initial closing of the Financing Transaction for the sale of 2,550,000 units, representing gross proceeds to us of $2,550,000 and net proceeds of approximately $2,275,000 after deducting fees and estimated expenses payable by us. On August 12, 2014, we completed a secondary closing of the Financing Transaction for the sale of 450,000 units, representing gross proceeds to us of $450,000 and net proceeds of approximately $415,000. We used a portion of the net proceeds from the Financing Transaction to repay our outstanding indebtedness owing to Comerica Bank and Agility Capital II, LLC and intend to use the balance of the net proceeds for general corporate purposes, including working capital. 32

The securities issued pursuant to the Financing Transaction were not registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of certain states, and were issued in reliance on the exemptions provided by Section 4(2) of the Securities Act and Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws

ITEM 6. EXHIBITS


(a)	Exhibits

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

10.1†	Settlement and Release Agreement dated as of May 21, 2014 between the Company and Symantec Corporation
10.1	Executive Employment Agreement dated September 8, 2014 between Rainmaker Systems, Inc. and Bryant Tolles
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
†	Confidential treatment has been requested from the Securities and Exchange Commission for certain portions of the referenced exhibit.

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SIGNATURES

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

		RAINMAKER SYSTEMS, INC.
Dated:	~~August~~November 1419, 2014	/s/ ~~Bradford~~Bryant ~~Peppard~~Tolles, III
		Bradford Peppard
		Bryant Tolles, III
		Chief Financial Officer

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Filing Compare · RAINMAKER SYSTEMS INC