UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2022

or

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to

Commission file number 001-35108

SERVICESOURCE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	81-0578975
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
707 17th Street, 25th Floor
Denver, Colorado	80202
(Address of principal executive offices)	(Zip Code)

(720) 889-8500

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.0001 Par Value	SREV	The Nasdaq Stock Market LLC

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 ☒   No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

 Yes ☒   No  ☐

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

Large accelerated filer	☐	Accelerated Filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ☐    No  ☒

As of May 5, 2022, 99,938,408 shares of common stock of ServiceSource International, Inc. were outstanding.

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)	3
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Comprehensive Loss	5
Consolidated Statements of Stockholders’ Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	21
Item 4. Controls and Procedures	21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	22
Item 1A. Risk Factors	22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3. Defaults Upon Senior Securities	27
Item 4. Mine Safety Disclosures	27
Item 5. Other Information	27
Item 6. Exhibits	29
Glossary of Terms	30

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

ServiceSource International, Inc.

Consolidated Balance Sheets

(in thousands, except per share and par value amounts)

(unaudited)

	March 31, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	29,518	$	28,507
Accounts receivable, net		37,938		43,571
Prepaid expenses and other		7,858		8,995
Total current assets		75,314		81,073
Property and equipment, net		15,898		18,721
ROU assets		23,110		23,043
Contract acquisition costs		497		558
Goodwill		6,334		6,334
Other assets		2,717		2,719
Total assets	$	123,870	$	132,448
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	1,612	$	832
Accrued expenses		3,299		4,152
Accrued compensation and benefits		13,955		19,999
Revolver		10,000		10,000
Operating lease liabilities		7,740		8,614
Other current liabilities		648		793
Total current liabilities		37,254		44,390
Operating lease liabilities, net of current portion		20,481		19,869
Other long-term liabilities		1,180		1,155
Total liabilities		58,915		65,414
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.0001 par value; 20,000 shares authorized and none issued and outstanding		—		—
Common stock, $0.0001 par value; 1,000,000 shares authorized; 100,059 shares issued and 99,938 shares outstanding as of March 31, 2022; 99,233 shares issued and 99,112 shares outstanding as of December 31, 2021		10		10
Treasury stock		(441)		(441)
Additional paid-in capital		388,213		385,827
Accumulated deficit		(323,710)		(319,328)
Accumulated other comprehensive income		883		966
Total stockholders' equity		64,955		67,034
Total liabilities and stockholders' equity	$	123,870	$	132,448

The accompanying notes are an integral part of these Consolidated Financial Statements

3

ServiceSource International, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

	For the Three Months Ended March 31,
	2022		2021
Net revenue	$	48,893	$	45,023
Cost of revenue		35,745		34,067
Gross profit		13,148		10,956
Operating expenses:
Sales and marketing		3,996		4,030
Research and development		1,386		1,160
General and administrative		11,321		12,190
Restructuring and other related costs		—		920
Total operating expenses		16,703		18,300
Loss from operations		(3,555)		(7,344)
Interest and other expense, net		(178)		(1,160)
Loss before provision for income taxes		(3,733)		(8,504)
Provision for income tax expense		(649)		(331)
Net loss	$	(4,382)	$	(8,835)
Net loss per common share:
Basic and diluted	$	(0.04)	$	(0.09)
Weighted-average common shares outstanding:
Basic and diluted		99,398		97,234

The accompanying notes are an integral part of these Consolidated Financial Statements.

4

ServiceSource International, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

	For the Three Months Ended March 31,
	2022		2021
Net loss	$	(4,382)	$	(8,835)
Other comprehensive (loss) income:
Foreign currency translation adjustments		(83)		325
Other comprehensive (loss) income:		(83)		325
Comprehensive loss	$	(4,465)	$	(8,510)

The accompanying notes are an integral part of these Consolidated Financial Statements.

5

ServiceSource International, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

											Accumulated
							Additional				Other
	Common Stock			Treasury Shares/Stock			Paid-in		Accumulated-		Comprehensive
	Shares	Amount		Shares	Amount		Capital		Deficit		Income		Total
Balance at January 1, 2022	99,233	$	10	(121)	$	(441)	$	385,827	$	(319,328)	$	966	$	67,034
Net loss	—		—	—		—		—		(4,382)		—		(4,382)
Other comprehensive loss	—		—	—		—		—		—		(83)		(83)
Stock-based compensation	—		—	—		—		2,633		—		—		2,633
Issuance of common stock, RSUs and PSUs	826		—	—		—		—		—		—		—
Net cash paid for payroll taxes on RSU releases	—		—	—		—		(247)		—		—		(247)
Balance at March 31, 2022	100,059	$	10	(121)	$	(441)	$	388,213	$	(323,710)	$	883	$	64,955

											Accumulated
							Additional				Other
	Common Stock			Treasury Shares/Stock			Paid-in		Accumulated-		Comprehensive
	Shares	Amount		Shares	Amount		Capital		Deficit		Income		Total
Balance at January 1, 2021	97,248	$	10	(121)	$	(441)	$	379,696	$	(304,607)	$	618	$	75,276
Net loss	—		—	—		—		—		(8,835)		—		(8,835)
Other comprehensive income	—		—	—		—		—		—		325		325
Stock-based compensation	—		—	—		—		2,486		—		—		2,486
Issuance of common stock, RSUs	73		—	—		—		—		—		—		—
Proceeds from the exercise of stock options and ESPP	149		—	—		—		132		—		—		132
Balance at March 31, 2021	97,470	$	10	(121)	$	(441)	$	382,314	$	(313,442)	$	943	$	69,384

The accompanying notes are an integral part of these Consolidated Financial Statements.

6

ServiceSource International, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	For the Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net loss	$	(4,382)	$	(8,835)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		3,522		3,657
Amortization of contract acquisition costs		90		167
Amortization of ROU assets		2,051		2,391
Stock-based compensation		2,620		2,475
Restructuring and other related costs		—		902
Other		15		265
Net changes in operating assets and liabilities:
Accounts receivable, net		5,557		4,131
Prepaid expenses and other assets		1,088		(2,099)
Contract acquisition costs		(31)		(51)
Accounts payable		808		3,952
Accrued compensation and benefits		(5,913)		(3,673)
Operating lease liabilities		(2,359)		(2,738)
Accrued expenses		(828)		(511)
Other liabilities		(59)		504
Net cash provided by operating activities		2,179		537
Cash flows from investing activities:
Purchases of property and equipment		(741)		(1,019)
Net cash used in investing activities		(741)		(1,019)
Cash flows from financing activities:
Repayment on finance lease obligations		(52)		(161)
Proceeds from Revolver		10,000		—
Repayment of Revolver		(10,000)		—
Proceeds from issuance of common stock		—		132
Payments related to minimum tax withholdings on RSU releases		(247)		—
Net cash used in financing activities		(299)		(29)
Effect of exchange rate changes on cash and cash equivalents and restricted cash		(128)		650
Net change in cash and cash equivalents and restricted cash		1,011		139
Cash and cash equivalents and restricted cash, beginning of period		30,801		36,326
Cash and cash equivalents and restricted cash, end of period	$	31,812	$	36,465
Supplemental disclosures of cash flow information:
Cash paid for interest	$	87	$	105
Supplemental disclosures of non-cash activities:
Purchases of property and equipment accrued in accounts payable and accrued expenses	$	2	$	9
ROU assets obtained in exchange for new lease liabilities	$	2,334	$	618

The accompanying notes are an integral part of these Consolidated Financial Statements.

7

ServiceSource International, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Note 1 — The Company

ServiceSource is a leading provider of BPaaS solutions that enable the transformation of go-to-market organizations and functions for global technology clients. We design, deploy, and operate a suite of innovative solutions and complex processes that support and augment our clients’ B2B customer acquisition, engagement, expansion, and retention activities. Our clients - ranging from Fortune 500 technology titans to high-growth disruptors and innovators - rely on our holistic customer engagement methodology and process excellence, global scale and delivery footprint, and data analytics and business insights to deliver trusted business outcomes that have a meaningful and material positive impact to their long-term revenue and profitability objectives. Through our unique integration of people, process, and technology - leveraged against our more than 20 years of experience and domain expertise in the cloud, software, hardware, medical device and diagnostic equipment, and industrial IoT sectors - we effect and transact billions of dollars of B2B commerce in more than 175 countries on our clients’ behalf annually.

“ServiceSource,” “the Company,” “we,” “us,” or “our,” as used herein, refer to ServiceSource International, Inc. and its wholly owned subsidiaries, unless the context indicates otherwise.

For a summary of commonly used industry terms and abbreviations used in this quarterly report on Form 10-Q, see the Glossary of Terms.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim Consolidated Financial Statements include the accounts of ServiceSource International, Inc. and its wholly owned subsidiaries and have been prepared in accordance with GAAP and with the instructions to Form 10-Q and Article 8 of Regulation S-X for interim financial information. All intercompany balances and transactions have been eliminated in consolidation. These financial statements do not include all the information required by GAAP for annual financial statements. The unaudited Consolidated Balance Sheet as of December 31, 2021 has been derived from the Company’s audited annual Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 23, 2022. In the opinion of management, these Consolidated Financial Statements reflect all adjustments, including normal recurring adjustments, management considers necessary for a fair presentation of the Company’s financial position, operating results, and cash flows for the interim periods presented. These Consolidated Financial Statements and accompanying notes should be read in conjunction with our audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2021, included in our annual report on Form 10-K. Interim results are not necessarily indicative of results for the entire year.

Use of Estimates

The preparation of the Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amount of net revenue and expenses during the reporting period.

The Company bases its estimates and judgments on historical experience and on various assumptions that it believes are reasonable under the circumstances. The Company has considered the effects of the COVID-19 pandemic and Russia’s invasion of Ukraine in determining its estimates. However, future events are difficult to predict and subject to change, especially with the risks and uncertainties related to the impact of the COVID-19 pandemic and Russia’s invasion of

8

Ukraine, which could cause estimates and judgments to require adjustment. Actual results and outcomes may differ from our estimates.

Cash Equivalents and Restricted Cash

The Company follows a three-tier fair value hierarchy, which is described in detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Cash equivalents consist of highly liquid investments with original maturities of three months or less at the time of purchase and are classified as a Level 1 investment.

Restricted cash consists of cash in money market accounts that are used to secure letters of credit in connection with two of our leased facilities. Restricted cash is recorded within “Prepaid expenses and other” and "Other assets" in the Consolidated Balance Sheets and is classified as a Level 1 investment. The Company had restricted cash of $2.3 million as of March 31, 2022 and December 31, 2021.

The Company did not have any other financial instruments or debt measured at fair value as of March 31, 2022 and December 31, 2021. There were no transfers between levels during the three months ended March 31, 2022 and 2021.

New Accounting Standards Issued but Not Yet Adopted

Financial Instruments - Credit Losses

In June 2016, the FASB issued an ASU that amends the measurement of credit losses on financial instruments and requires measurement and recognition of expected versus incurred credit losses for financial assets held. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2022, with early adoption permitted. This standard will apply to the Company’s accounts receivable and contract assets. Based on our current analysis, the Company does not expect the adoption to have a material impact on the Consolidated Financial Statements as credit losses from trade receivables have historically been insignificant. The Company expects to adopt this standard effective January 1, 2023.

Note 3 — Debt

Revolving Line of Credit

In July 2021, ServiceSource, together with its wholly owned subsidiary, ServiceSource Delaware, Inc., entered into the 2021 Credit Agreement, which provides for a $35.0 million revolving line of credit allowing each borrower to borrow against its receivables subject to the terms and conditions set forth in the 2021 Credit Agreement. At the Company’s request and subject to customary conditions, the aggregate commitments under the 2021 Credit Agreement may be increased up to an additional $10.0 million, for a total maximum commitment amount of $45.0 million. The Revolver in the 2021 Credit Agreement matures in July 2024 and bears interest at a rate equal to BSBY plus 2.00% to 2.50% per annum or, at our election, an alternate base rate plus 1.00% to 1.50% per annum.

As of March 31, 2022, the Company had $10.0 million of borrowings under the Revolver in the 2021 Credit Agreement through a six-month BSBY borrowing at an effective interest rate of 3.04% maturing August 2022. An additional $14.6 million was available for borrowing under the Revolver as of March 31, 2022. The BSBY borrowings may be extended upon maturity, converted into a base rate borrowing upon maturity or require an incremental payment if the borrowing base decreases below the current amount outstanding during the term of the BSBY borrowing.

The obligations under the 2021 Credit Agreement are secured by substantially all assets of ServiceSource and certain of its subsidiaries, including pledges of equity in certain of the Company’s subsidiaries. The 2021 Credit Agreement has financial covenants that the Company was in compliance with as of March 31, 2022.

9

Interest Expense

Unamortized debt issuance costs related to the 2021 Revolver were $0.1 million as of March 31, 2022 and December 31, 2021.

Interest expense related to the amortization of debt issuance costs and interest expense associated with the Company’s debt obligation was $0.1 million for the three months ended March 31, 2022 and 2021.

Note 4 — Leases

The Company has operating leases for office space and finance leases for certain equipment under non-cancelable agreements with various expiration dates through December 2032. Certain office leases include the option to extend the term between one to seven years and certain office leases include the option to terminate the lease upon written notice within one year after lease commencement. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets.

Supplemental income statement information related to leases was as follows:

	For the Three Months Ended March 31,
	2022		2021
	(in thousands)
Operating lease cost	$	2,458	$	2,941
Finance lease cost:
Amortization of leased assets		53		159
Interest on lease liabilities		1		11
Total finance lease cost		54		170
Sublease income		(887)		(1,098)
Net lease cost	$	1,625	$	2,013

Supplemental balance sheet information related to leases was as follows:

	March 31, 2022		December 31, 2021
	(in thousands)
Operating leases:
ROU assets	$	23,110	$	23,043
Operating lease liabilities	$	7,740	$	8,614
Operating lease liabilities, net of current portion		20,481		19,869
Total operating lease liabilities	$	28,221	$	28,483
Finance leases:
Property and equipment	$	2,852	$	2,861
Accumulated depreciation		(2,442)		(2,397)
Property and equipment, net	$	410	$	464
Other current liabilities	$	11	$	63
Other long-term liabilities		—		—
Total finance lease liabilities	$	11	$	63

10

Lease term and discount rate information was as follows:

	For the Three Months Ended March 31,
	2022			2021
Weighted-average remaining lease term (in years):
Operating lease		5.6		5.6
Finance lease		0.2		0.8
Weighted-average discount rate:
Operating lease		5.9	%	6.2	%
Finance lease		6.5	%	6.5	%

Maturities of lease liabilities were as follows as of March 31, 2022:

	Operating Leases		Operating Sublease		Finance Leases		Total
	(in thousands)
Remainder of 2022	$	7,548	$	(2,646)	$	11	$	4,913
2023		5,738		(1,399)		—		4,339
2024		4,376		—		—		4,376
2025		4,016		—		—		4,016
2026		3,300		—		—		3,300
Thereafter		8,398		—		—		8,398
Total lease payments		33,376		(4,045)		11		29,342
Less: interest		(5,155)		—		—		(5,155)
Total(1)	$	28,221	$	(4,045)	$	11	$	24,187

(1) In March 2022 the Company entered into a ten-year lease agreement in Nashville, Tennessee with future undiscounted lease payments, net of tenant improvement reimbursements, totaling $10.1 million. This lease had not yet commenced, and is not included in the lease liabilities, as of March 31, 2022.

Note 5 — Revenue Recognition

The following tables present the disaggregation of revenue from contracts with our clients:

Revenue by Performance Obligation

	For the Three Months Ended March 31,
	2022		2021
	(in thousands)
Selling services	$	48,281	$	44,328
Professional services		612		695
Total revenue	$	48,893	$	45,023

11

Revenue by Geography

Revenue for each geography generally reflects commissions earned from sales of service contracts managed from revenue delivery centers in that geography and subscription sales and professional services to deploy the Company’s solutions. Predominantly all the service contracts sold and managed by the revenue delivery centers relate to end customers located in the same geography. All NALA revenue represents revenue generated within the U.S.

	For the Three Months Ended March 31,
	2022		2021
	(in thousands)
NALA	$	25,325	$	25,334
EMEA		15,776		12,769
APJ		7,792		6,920
Total revenue	$	48,893	$	45,023

Revenue by Contract Pricing

	For the Three Months Ended March 31,
	2022		2021
	(in thousands)
Variable consideration	$	32,321	$	33,211
Fixed consideration		16,572		11,812
Total revenue	$	48,893	$	45,023

Contract Balances

As of March 31, 2022 and December 31, 2021, contract liabilities were $0.4 million and $0.5 million, respectively.

Transaction Price Allocated to Remaining Performance Obligations

As of March 31, 2022, assuming none of the Company’s current contracts with fixed consideration are renewed, the Company estimates receiving approximately $33.8 million in future selling services fixed consideration and approximately $0.4 million in professional services fixed consideration, the majority to be received within one year.

Contract Acquisition Costs

As of March 31, 2022 and December 31, 2021, capitalized contract acquisition costs were $0.5 million and $0.6 million, respectively. The Company recorded amortization expense related to capitalized contract acquisition costs of $0.1 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively.

Note 6 — Stock-Based Compensation

2022 PSU Awards

During March 2022, the Company granted PSUs under the 2020 Plan to certain executives in which the number of shares ultimately received depends on the Company’s achievement of two performance goals for fiscal year 2022 and a rTSR modifier based on the Company’s rTSR for fiscal years 2022, 2023, and 2024 compared to a peer group. The aggregate target number of shares subject to these awards is 0.8 million. The awards were valued on the grant date using a Monte Carlo simulation for the rTSR modifier and using the Company’s closing stock price for the performance metrics for an aggregate grant date fair value of $1.1 million. The number of shares ultimately received related to these awards will range from 0% to 173% of the participant’s target award and will vest on the third anniversary of the grant date. The Company’s expense will be recognized over the service period and adjusted based on estimated achievement of the performance goals.

12

Stock-Based Compensation Expense

The following table presents stock-based compensation expense as allocated within the Company’s Consolidated Statements of Operations:

	For the Three Months Ended March 31,
	2022		2021
	(in thousands)
Cost of revenue	$	138	$	130
Sales and marketing		346		191
Research and development		24		15
General and administrative		2,112		2,139
Total stock-based compensation	$	2,620	$	2,475

The above table does not include capitalized stock-based compensation related to internal-use software that was insignificant for the three months ended March 31, 2022 and 2021.

Stock Awards

A summary of the Company’s stock option activity and related information was as follows:

					Weighted-
			Weighted-		Average
			Average		Remaining
			Exercise		Contractual
	Shares		Price		Life (Years)		Intrinsic Value
	(in thousands)						(in thousands)
Outstanding as of December 31, 2021		1,876	$	2.18			$	16
Expired and/or forfeited		(17)	$	4.42
Outstanding as of March 31, 2022		1,859	$	2.16		5.91	$	210
Exercisable as of March 31, 2022		1,771	$	2.22		5.84	$	179

As of March 31, 2022, there was $0.02 million of unrecognized compensation expense related to previously granted stock options, which is expected to be recognized over a weighted-average period of 0.6 years.

A summary of the Company’s RSU and PSU activity and related information was as follows:

			Weighted-
			Average Grant
	Units		Date Fair Value
	(in thousands)
Non-vested as of December 31, 2021		8,231	$	1.49
Granted		2,165	$	1.43
Vested(1)		(1,006)	$	1.65
Forfeited		(271)	$	1.46
Non-vested as of March 31, 2022		9,119	$	1.46

(1) 826 shares of common stock were issued for RSUs and PSUs vested and the remaining 180 shares were withheld for taxes.

As of March 31, 2022, there was $6.1 million of unrecognized compensation expense related to previously granted RSUs and PSUs, which is expected to be recognized over a weighted-average period of 1.7 years.

Potential shares of common stock that are not included in the determination of diluted net loss per share because they are anti-dilutive for the periods presented consist of stock options and unvested RSUs and PSUs. The Company excluded from diluted earnings per share the weighted-average common share equivalents related to 4.0 million and 1.2

13

million shares for the three months ended March 31, 2022 and 2021, respectively, because their effect would have been anti-dilutive.

Note 7 — Income Taxes

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The Company computes its quarterly income tax provision by using a forecasted annual effective tax rate and adjusts for any discrete items arising during the quarter. The primary difference between the effective tax rate and the federal statutory tax rate relates to the valuation allowances on the Company’s net operating losses and foreign tax rate differences. The "Provision for income tax expense" in the Consolidated Statements of Operations primarily consists of income and withholding taxes for foreign and state jurisdictions where the Company has profitable operations, as well as valuation allowance adjustments for certain U.S. tax jurisdictions. No tax benefit was provided for losses incurred in the U.S. and Ireland because those losses are offset by a full valuation allowance. The tax years 2017 through 2021 generally remain subject to examination by federal, state, and foreign tax authorities.

The gross amount of the Company’s unrecognized tax benefits was $1.0 million as of March 31, 2022 and December 31, 2021, none of which, if recognized, would affect the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the three months ended March 31, 2022 and 2021 interest and penalties recognized were insignificant.

Note 8 — Commitments and Contingencies

Letters of Credit

In connection with two of our leased facilities, the Company is required to maintain two letters of credit totaling $2.3 million. The letters of credit are secured by $2.3 million of cash in money market accounts, which are classified as restricted cash within “Prepaid expenses and other” and "Other assets" in the Consolidated Balance Sheets.

Non-cancelable Service Contract Commitments

The Company enters into various purchase obligations in the ordinary course of business, generally short-term in nature. Those that are binding primarily relate to non-cancelable service contract commitments. There have not been any significant changes in these commitments since what was disclosed in the last annual report.

Note 9 — Subsequent Event

On May 6, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Concentrix Corporation, a Delaware corporation (“Acquirer”), and Concentrix Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of the Acquirer (“Acquisition Sub”). Pursuant to the Merger Agreement, and subject to the terms and conditions set forth therein, Acquisition Sub will merge with and into the Company, which we refer to as the “Merger”, with the Company continuing as the surviving corporation in the Merger and a wholly-owned subsidiary of the Acquirer.

In the event the Merger is completed, except as otherwise provided in the Merger Agreement, each share of our common stock issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive $1.50 per share in cash, without interest (the “Merger Consideration”).

Consummation of the Merger is subject to customary closing conditions, including, among other things, the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of our common stock (“Requisite Stockholder Approval”). 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following MD&A should be read in conjunction with our unaudited Consolidated Financial Statements and notes thereto which appear elsewhere in this quarterly report on Form 10-Q.

This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements may appear throughout this report. These forward-looking statements are generally identified by the words “believe,” “project,” "target," "forecast," “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and variations of such words or similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those identified elsewhere in this report, including the risks and uncertainties related to the consummation of the Merger, the impact and duration of the COVID-19 pandemic and fluctuations in general economic conditions including impacts from Russia's invasion of Ukraine, as well as those discussed in the sections of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 23, 2022 entitled “Forward Looking Statements” and “Risk Factors” and in our other filings with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise, except as required by applicable law.

Overview

ServiceSource is a leading provider of BPaaS solutions that enable the transformation of go-to-market organizations and functions for global technology clients. We design, deploy, and operate a suite of innovative solutions and complex processes that support and augment our clients’ B2B customer acquisition, engagement, expansion, and retention activities. Our clients - ranging from Fortune 500 technology titans to high-growth disruptors and innovators - rely on our holistic customer engagement methodology and process excellence, global scale and delivery footprint, and data analytics and business insights to deliver trusted business outcomes that have a meaningful and material positive impact to their long-term revenue and profitability objectives. Through our unique integration of people, process, and technology - leveraged against our more than 20 years of experience and domain expertise in the cloud, software, hardware, medical device and diagnostic equipment, and industrial IoT sectors - we effect and transact billions of dollars of B2B commerce in more than 175 countries on our clients’ behalf annually.

“ServiceSource,” “the Company,” “we,” “us,” or “our,” as used herein, refer to ServiceSource International, Inc. and its wholly owned subsidiaries, unless the context indicates otherwise.

For a summary of commonly used industry terms and abbreviations used in this Form 10-Q, see the Glossary of Terms.

Impact of the COVID-19 Pandemic

On March 11, 2020, we created a dedicated crisis team to proactively implement our business continuity plans in response to COVID-19. By April 1, 2020, we transitioned to a 100% virtual operating model. As a result of this successful work-from-home implementation, we have shifted to a virtual-first operating model whereby our employees primarily work from their home offices and our facilities are used for collaboration, innovation, and connection. Additionally, this model includes virtual sourcing, hiring, and onboarding for new employees as well as a process for driving performance and culture in a virtual environment. As a result of the implementation of these business continuity measures, we have not experienced material disruptions in our operations from COVID-19.

We believe we have sufficient liquidity on hand to continue business operations even during periods of volatility such as those experienced since early 2020. As of March 31, 2022, we had total available liquidity of $44.2 million consisting of cash on hand and borrowing availability under our Revolver. See "Liquidity and Capital Resources" for additional information.

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There was no material adverse impact on the results of operations for the three months ended March 31, 2022 as a result of the COVID-19 pandemic. We expect to continue to invest capital to allow our employees to function in our virtual, work-from-home operating model. However, we are benefiting and will continue to benefit from decreases in certain costs related to our facilities and reduced travel and entertainment costs.

The situation surrounding COVID-19 remains fluid and the potential for a negative impact on our financial condition and results of operations increases the longer the virus impacts the economic activity in the U.S. and globally. See “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2021 for additional information.

Key Financial Results For the Three Months Ended March 31, 2022

● GAAP revenue was $48.9 million compared with $45.0 million reported for the same period in 2021.

● GAAP net loss was $4.4 million or $0.04 per diluted share, compared with GAAP net loss of $8.8 million or $0.09 per diluted share reported for the same period in 2021.

● Adjusted EBITDA, a non-GAAP financial measure, was $2.6 million compared with negative $0.2 million reported for the same period in 2021. See “Non-GAAP Financial Measurements” below for a reconciliation of Adjusted EBITDA from GAAP net loss.

● Cash, cash equivalents, and restricted cash of $31.8 million and borrowings under the Revolver of $10.0 million as of March 31, 2022.

Results of Operations

For the Three Months Ended March 31, 2022 Compared to the Same Period Ended March 31, 2021

Net Revenue, Cost of Revenue and Gross Profit

Net revenue is primarily attributable to commissions we earn from the sale of renewals of maintenance, support and subscription agreements on behalf of our clients. We also generate revenues from selling professional services.

Cost of revenue includes employee compensation, technology costs, including those related to the delivery of our cloud-based technologies, and allocated overhead expenses which consist of depreciation, amortization of internally developed software, facility and technology costs.

	For the Three Months Ended March 31,
	2022					2021
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			$ Change		% Change
	(in thousands)					(in thousands)					(in thousands)
Net revenue	$	48,893		100	%	$	45,023		100	%	$	3,870	9	%
Cost of revenue		35,745		73	%		34,067		76	%		1,678	5	%
Gross profit	$	13,148		27	%	$	10,956		24	%	$	2,192	20	%

Net revenue increased $3.9 million, or 9%, for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to increased bookings and lower client churn.

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Cost of revenue increased $1.7 million, or 5%, for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to the following:

● $1.7 million increase in employee related costs primarily due to increased compensation expense associated with an increase in headcount and higher revenue attainment; and

● $0.5 million increase in amortization expense related to internally developed software; partially offset by

● $0.5 million decrease in facility costs primarily related to the expiration of various office space leases in connection with transitioning to a virtual-first operating model.

Operating Expenses

	For the Three Months Ended March 31,
	2022					2021
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			$ Change		% Change
	(in thousands)					(in thousands)					(in thousands)
Operating expenses:
Sales and marketing	$	3,996		8	%	$	4,030		9	%	$	(34)	(1)	%
Research and development		1,386		3	%		1,160		3	%		226	19	%
General and administrative		11,321		23	%		12,190		27	%		(869)	(7)	%
Restructuring and other related costs		—		—	%		920		2	%		(920)	(100)	%
Total operating expenses	$	16,703		34	%	$	18,300		41	%	$	(1,597)	(9)	%

Sales and Marketing

Sales and marketing expenses primarily consist of employee compensation expense and sales commissions paid to our sales and marketing employees, amortization of contract acquisition costs, marketing programs and events, and allocated overhead expenses, which consist of depreciation, amortization of internally developed software, and facility and technology costs.

Sales and marketing expenses remained flat for the three months ended March 31, 2022 compared to the same period in 2021.

Research and Development

Research and development expenses primarily consist of employee compensation expense, third-party consultant costs and allocated overhead expenses, which consist of amortization of internally developed software, facility and technology costs.

Research and development expenses increased $0.2 million, or 19%, for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to a reduction in third-party capitalizable software development costs.

General and Administrative

General and administrative expenses primarily consist of employee compensation expense for our executive, finance, human resources, and legal functions and expenses for professional fees for accounting, tax and legal services, as well as allocated overhead expenses, which consist of depreciation, amortization of internally developed software, facility and technology costs.

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General and administrative expenses decreased $0.9 million, or 7%, for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to the following:

● $0.6 million decrease in employee related costs associated with a reduction in headcount; and

● $0.6 million decrease in depreciation expense primarily related to the expiration of various office space leases in connection with transitioning to a virtual-first operating model; partially offset by

● $0.3 million increase in facility costs.

Restructuring and Other Related Costs

Restructuring and other related costs consist primarily of employees’ severance payments and related employee benefits, related legal fees and charges related to lease termination costs.

Restructuring and other related costs decreased $0.9 million, or 100% for the three months ended March 31, 2022 compared to the same period in 2021, due to completion of the restructuring efforts resulting in a reduction of headcount and office lease costs during the three months ended March 31, 2021. The Company did not incur any charges related to this restructuring effort during the three months ended March 31, 2022 and does not expect to incur additional charges related to this restructuring effort.

Interest and Other Expense, Net

Interest and other expense, net consists of interest expense associated with our Revolver, imputed interest from finance lease payments, interest income earned on our cash and cash equivalents, amortization of debt issuance costs and foreign exchange gains and losses.

	For the Three Months Ended March 31,
	2022					2021
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			$ Change		% Change
	(in thousands)					(in thousands)					(in thousands)
Interest expense	$	(107)		—	%	$	(158)		—	%	$	51	32	%
Other expense, net	$	(71)		—	%	$	(1,002)		(2)	%	$	931	93	%

Interest expense decreased $0.1 million, or 32%, for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to lower borrowings on the Revolver.

Other expense, net decreased $0.9 million, or 93%, for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to foreign currency fluctuations.

Provision for Income Tax

	For the Three Months Ended March 31,
	2022					2021
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			$ Change		% Change
	(in thousands)					(in thousands)					(in thousands)
Provision for income tax expense	$	(649)		(1)	%	$	(331)		(1)	%	$	(318)	(96)	%

Provision for income tax expense increased $0.3 million, or 96%, for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to an increase in profitable operations in certain foreign jurisdictions.

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Liquidity and Capital Resources

Our primary operating cash requirements include the payment of compensation and related employee costs and costs for our facilities and information technology infrastructure. Historically, we have financed our operations from cash provided by our operating activities. We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs over the next twelve months.

We have considered the effects of the COVID-19 pandemic, including customer purchasing and renewal decisions, in our assessment of the sufficiency of our liquidity and capital resources. We will continue to monitor our financial position to the extent that pandemic-related challenges continue.

As of March 31, 2022, we had cash and cash equivalents of $29.5 million, which primarily consist of demand deposits and money market mutual funds. Included in cash and cash equivalents was $6.4 million held by our foreign subsidiaries used to satisfy their operating requirements. We consider the undistributed earnings of ServiceSource Europe Ltd. and ServiceSource International Singapore Pte. Ltd. permanently reinvested in foreign operations and have not provided for U.S. income taxes on such earnings. As of March 31, 2022, the Company had no unremitted earnings from our foreign subsidiaries.

In July 2021, ServiceSource, together with its wholly owned subsidiary, ServiceSource Delaware, Inc., entered into the 2021 Credit Agreement, which provides for a $35.0 million revolving line of credit allowing each borrower to borrow against its receivables as defined in the 2021 Credit Agreement. At the Company’s request and subject to customary conditions, the aggregate commitments under the 2021 Credit Agreement may be increased up to an additional $10.0 million, for a total maximum commitment amount of $45.0 million. The Revolver in the 2021 Credit Agreement matures in July 2024 and bears interest at a rate equal to BSBY plus 2.00% to 2.50% per annum or, at our election, an alternate base rate plus 1.00% to 1.50% per annum.  

As of March 31, 2022, the Company had $10.0 million of borrowings under the Revolver through a six-month BSBY borrowing at an effective interest rate of 3.04% maturing August 2022. An additional $14.6 million was available for borrowing under the Revolver as of March 31, 2022. The BSBY borrowings may be extended upon maturity, converted into a base rate borrowing upon maturity or require an incremental payment if the borrowing base decreases below the current amount outstanding during the term of the BSBY borrowing. Proceeds from the Revolver are used for working capital and general corporate purposes.

The obligations under the 2021 Credit Agreement are secured by substantially all the assets of ServiceSource and certain of its subsidiaries, including pledges of equity in certain of the Company’s subsidiaries. The 2021 Credit Agreement has financial covenants, which the Company was in compliance with as of March 31, 2022.

Letters of Credit and Restricted Cash

In connection with two of our leased facilities, the Company is required to maintain two letters of credit totaling $2.3 million. The letters of credit are secured by $2.3 million of cash in money market accounts, which are classified as restricted cash within “Prepaid expenses and other” and "Other assets" in the Consolidated Balance Sheets.

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Cash Flows

The following table presents a summary of our cash flows:

	For the Three Months Ended March 31,
	2022		2021
	(in thousands)
Net cash provided by operating activities	$	2,179	$	537
Net cash used in investing activities		(741)		(1,019)
Net cash used in financing activities		(299)		(29)
Effect of exchange rate changes on cash and cash equivalents and restricted cash		(128)		650
Net change in cash and cash equivalents and restricted cash	$	1,011	$	139

Depreciation and amortization expense were comprised of the following:

	For the Three Months Ended March 31,
	2022		2021
	(in thousands)
Internally developed software amortization	$	2,596	$	2,192
Property and equipment depreciation		926		1,465
Total depreciation and amortization	$	3,522	$	3,657

Operating Activities

Net cash provided by operating activities increased $1.6 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily as a result of improved cash collections from our clients and lower cash payments made related to costs previously accrued for during the current period compared to the prior period.

Investing Activities

Net cash used in investing activities decreased $0.3 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, due to decreased cash outflows from purchases of property and equipment during the current period compared to the prior period.

Financing Activities

Net cash used in financing activities increased $0.3 million for the three months ended March 31, 2022 compared to t