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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 June 30, 2021

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 July 23, 2021, 97,875,744 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

17

Item 3. Quantitative and Qualitative Disclosures About Market Risk

25

Item 4. Controls and Procedures

25

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

26

Item 1A. Risk Factors

26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 3. Defaults Upon Senior Securities

26

Item 4. Mine Safety Disclosures

26

Item 5. Other Information

26

Item 6. Exhibits

27

Glossary of Terms

28

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)

    

June 30, 2021

    

December 31, 2020

Assets

Current assets:

Cash and cash equivalents

$

32,464

$

34,006

Accounts receivable, net

34,596

38,890

Prepaid expenses and other

7,403

9,275

Total current assets

74,463

82,171

Property and equipment, net

24,583

29,948

ROU assets

25,290

29,798

Contract acquisition costs

675

872

Goodwill

6,334

6,334

Other assets

4,184

3,490

Total assets

$

135,529

$

152,613

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

2,246

$

1,204

Accrued expenses

2,568

3,217

Accrued compensation and benefits

16,129

18,342

Revolver

15,000

15,000

Operating lease liabilities

10,008

10,797

Other current liabilities

1,015

1,209

Total current liabilities

46,966

49,769

Operating lease liabilities, net of current portion

21,408

25,975

Other long-term liabilities

1,742

1,593

Total liabilities

70,116

77,337

Commitments and contingencies (Note 9)

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; 97,959 shares issued and 97,838 shares outstanding as of June 30, 2021; 97,248 shares issued and 97,127 shares outstanding as of December 31, 2020

10

10

Treasury stock

(441)

(441)

Additional paid-in capital

383,403

379,696

Accumulated deficit

(318,533)

(304,607)

Accumulated other comprehensive income

974

618

Total stockholders' equity

65,413

75,276

Total liabilities and stockholders' equity

$

135,529

$

152,613

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 June 30,

For the Six Months Ended June 30,

    

2021

    

2020

    

2021

    

2020

Net revenue

$

46,307

$

47,638

$

91,330

$

97,752

Cost of revenue

35,395

34,645

69,462

70,205

Gross profit

10,912

12,993

21,868

27,547

Operating expenses:

Sales and marketing

4,059

6,142

8,089

13,410

Research and development

1,181

1,516

2,341

2,697

General and administrative

10,624

10,619

22,814

21,307

Restructuring and other related costs

54

236

974

703

Total operating expenses

15,918

18,513

34,218

38,117

Loss from operations

(5,006)

(5,520)

(12,350)

(10,570)

Interest and other (expense) income, net

(364)

324

(1,524)

(550)

Loss before provision for income taxes

(5,370)

(5,196)

(13,874)

(11,120)

Provision for income tax benefit (expense)

279

(161)

(52)

(179)

Net loss

$

(5,091)

$

(5,357)

$

(13,926)

$

(11,299)

Net loss per common share:

Basic and diluted

$

(0.05)

$

(0.06)

$

(0.14)

$

(0.12)

Weighted-average common shares outstanding:

Basic and diluted

97,601

95,369

97,424

95,169

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 June 30,

For the Six Months Ended June 30,

    

2021

    

2020

    

2021

    

2020

Net loss

$

(5,091)

$

(5,357)

$

(13,926)

$

(11,299)

Other comprehensive income (loss):

Foreign currency translation adjustments

31

(547)

356

(49)

Other comprehensive income (loss):

31

(547)

356

(49)

Comprehensive loss

$

(5,060)

$

(5,904)

$

(13,570)

$

(11,348)

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, 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

Net loss

(5,091)

(5,091)

Other comprehensive income

31

31

Stock-based compensation

1,085

1,085

Issuance of common stock, RSUs

485

Proceeds from the exercise of stock options

4

4

4

Balance at June 30, 2021

97,959

$

10

(121)

$

(441)

$

383,403

$

(318,533)

$

974

$

65,413

Accumulated

Additional

Other

Common Stock

Treasury Shares/Stock

Paid-in

Accumulated-

Comprehensive

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Deficit

    

Income

    

Total

Balance at January 1, 2020

94,972

$

9

(121)

$

(441)

$

374,525

$

(286,066)

$

410

$

88,437

Net loss

(5,942)

(5,942)

Other comprehensive income

498

498

Stock-based compensation

1,066

1,066

Issuance of common stock, RSUs

178

1

(1)

Proceeds from the exercise of stock options and ESPP

112

76

76

Balance at March 31, 2020

95,262

10

(121)

(441)

375,666

(292,008)

908

84,135

Net loss

(5,357)

(5,357)

Other comprehensive loss

(547)

(547)

Stock-based compensation

1,278

1,278

Issuance of common stock, RSUs

438

Balance at June 30, 2020

95,700

$

10

(121)

$

(441)

$

376,944

$

(297,365)

$

361

$

79,509

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 Six Months Ended June 30,

    

2021

    

2020

Cash flows from operating activities:

Net loss

$

(13,926)

$

(11,299)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization

7,299

6,819

Amortization of contract acquisition costs

314

515

Amortization of ROU assets

4,745

4,690

Stock-based compensation

3,549

2,320

Restructuring and other related costs

935

645

Other

353

35

Net changes in operating assets and liabilities:

Accounts receivable, net

4,160

1,704

Prepaid expenses and other assets

551

1,299

Contract acquisition costs

(117)

(129)

Accounts payable

1,061

(2,452)

Accrued compensation and benefits

(2,948)

(1,431)

Operating lease liabilities

(5,532)

(4,385)

Accrued expenses

(653)

(823)

Other liabilities

286

(578)

Net cash provided by (used in) operating activities

77

(3,070)

Cash flows from investing activities:

Purchases of property and equipment

(2,092)

(2,596)

Net cash used in investing activities

(2,092)

(2,596)

Cash flows from financing activities:

Repayment on finance lease obligations

(315)

(481)

Proceeds from Revolver

27,000

Repayment of Revolver

(7,000)

Proceeds from issuance of common stock

136

76

Net cash (used in) provided by financing activities

(179)

19,595

Effect of exchange rate changes on cash and cash equivalents and restricted cash

626

(68)

Net change in cash and cash equivalents and restricted cash

(1,568)

13,861

Cash and cash equivalents and restricted cash, beginning of period

36,326

29,383

Cash and cash equivalents and restricted cash, end of period

$

34,758

$

43,244

Supplemental disclosures of cash flow information:

Cash paid for interest

$

210

$

226

Supplemental disclosures of non-cash activities:

Purchases of property and equipment accrued in accounts payable and accrued expenses

$

7

$

71

ROU assets obtained in exchange for new lease liabilities

$

618

$

204

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, 2020 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, 2020 filed with the SEC on February 24, 2021. 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, 2020, 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 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, which could cause estimates and judgments to require adjustment. Actual results and outcomes may differ from our estimates.

8

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, 2020.

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 "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 June 30, 2021 and December 31, 2020.

The Company did not have any other financial instruments or debt measured at fair value as of June 30, 2021 and December 31, 2020. There were no transfers between levels during the six months ended June 30, 2021 and 2020.

Government Assistance

During 2020, ServiceSource received various grants from the Singapore government, including the Job Support Scheme, which assists enterprises in retaining their local employees during the COVID-19 pandemic. ServiceSource received and recognized income of $1.3 million related to these grants during the year ended December 31, 2020, $0.1 million during the three and six months ended June 30, 2021, and is expected to receive an additional $0.1 million through August 2021. There are no conditions to repay the grants. Government grants are recognized in the Company’s Consolidated Statements of Operations during the same period that the expenses related to the grant are incurred if there is reasonable assurance the grant will be received, and the Company has complied with the conditions attached to the grant.

New Accounting Standards Adopted

Income Taxes

In December 2019, the FASB issued an ASU that simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard effective January 1, 2021 and the effects of this standard were applied prospectively to eligible costs incurred on or after January 1, 2021. The adoption of this standard did not have a material impact on the Consolidated Financial Statements.

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 will adopt this standard effective January 1, 2023.

9

Note 3 — Debt

Revolving Line of Credit

In July 2018, ServiceSource, together with its wholly owned subsidiary, ServiceSource Delaware, Inc., entered into the 2018 Credit Agreement, providing for a $40.0 million revolving line of credit allowing each borrower to borrow against its domestic receivables as defined in the 2018 Credit Agreement. The Revolver in the 2018 Credit Agreement was scheduled to mature in July 2021 and was repaid in full in connection with the Company’s entry into the 2021 Credit Agreement. The Revolver under the 2018 Credit Agreement bore interest at a variable rate per annum based on the greater of the prime rate, the Federal Funds rate plus 0.50% or the one-month LIBOR rate plus 1.00%, plus, in each case, a margin of 1.00% for base rate borrowings or 2.00% for Eurodollar borrowings.

As of June 30, 2021, the Company had $15.0 million of borrowings under the Revolver through a one-month Eurodollar borrowing at an effective interest rate of 2.10% maturing July 2021. An additional $9.6 million was available for borrowing under the Revolver as of June 30, 2021. The Eurodollar 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 Eurodollar borrowing.

The obligations under the 2018 Credit Agreement were 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 2018 Credit Agreement had financial covenants which the Company was in compliance with as of June 30, 2021 and December 31, 2020.

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. 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.

During July 2021, the Company borrowed $3.5 million under the Revolver through a one-month BSBY borrowing at an effective interest rate of 2.32% maturing August 2021. Proceeds from the Revolver are used for working capital and general corporate purposes.

Interest Expense

Interest expense related to the amortization of debt issuance costs and interest expense associated with the Company’s debt obligation was $0.1 million and $0.2 million for the three months ended June 30, 2021 and 2020, respectively, and $0.2 million and $0.3 million for the six months ended June 30, 2021 and 2020, respectively.

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 May 2030. 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 balance sheet.

During 2021, the Company entered into a sublease agreement through the end of the original lease term with a third-party for two floors of its Manila office space and extended its lease for a portion of its Yokohama office space through May 2024.

10

Supplemental income statement information related to leases was as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

    

2021

    

2020

    

2021

    

2020

(in thousands)

Operating lease cost

$

2,853

$

2,924

$

5,794

$

6,031

Finance lease cost:

Amortization of leased assets

107

163

266

351

Interest on lease liabilities

7

25

18

56

Total finance lease cost

114

188

284

407

Sublease income

(1,287)

(895)

(2,385)

(1,787)

Net lease cost

$

1,680

$

2,217

$

3,693

$

4,651

Supplemental balance sheet information related to leases was as follows:

    

June 30, 2021

    

December 31, 2020

(in thousands)

Operating leases:

ROU assets

$

25,290

$

29,798

Operating lease liabilities

$

10,008

$

10,797

Operating lease liabilities, net of current portion

21,408

25,975

Total operating lease liabilities

$

31,416

$

36,772

Finance leases:

Property and equipment

$

2,870

$

2,880

Accumulated depreciation

(2,226)

(1,963)

Property and equipment, net

$

644

$

917

Other current liabilities

$

356

$

608

Other long-term liabilities

63

Total finance lease liabilities

$

356

$

671

Lease term and discount rate information was as follows:

For the Six Months Ended June 30,

    

2021

2020

Weighted-average remaining lease term (in years):

Operating lease

5.7

5.8

Finance lease

0.5

1.4

Weighted-average discount rate:

Operating lease

6.2

%

6.4

%

Finance lease

6.5

%

7.5

%

11

Maturities of lease liabilities were as follows as of June 30, 2021:

    

Operating Leases

    

Operating Sublease

    

Finance Leases

    

Total

(in thousands)

Remainder of 2021

$

6,291

$

(2,460)

$

300

$

4,131

2022

9,412

(2,538)

64

6,938

2023

4,447

(623)

3,824

2024

3,042

3,042

2025

2,991

2,991

Thereafter

11,344

11,344

Total lease payments

37,527

(5,621)

364

32,270

Less: interest

(6,111)

(8)

(6,119)

Total

$

31,416

$

(5,621)

$

356

$

26,151

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 June 30,

For the Six Months Ended June 30,

    

2021

    

2020

    

2021

    

2020

(in thousands)

Selling services

$

45,609

$

46,545

$

89,937

$

95,718

Professional services

698

1,093

1,393

2,034

Total revenue

$

46,307

$

47,638

$

91,330

$

97,752

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 June 30,

For the Six Months Ended June 30,

    

2021

    

2020

    

2021

    

2020

(in thousands)

NALA

$

25,515

$

27,558

$

50,849

$

56,031

EMEA

13,318

12,846

26,087

26,853

APJ

7,474

7,234

14,394

14,868

Total revenue

$

46,307

$

47,638

$

91,330

$

97,752

Revenue by Contract Pricing

For the Three Months Ended June 30,

For the Six Months Ended June 30,

    

2021

    

2020

    

2021

    

2020

(in thousands)

Variable consideration

$

34,138

$

33,813

$

67,349

$

70,179

Fixed consideration

12,169

13,825

23,981

27,573

Total revenue

$

46,307

$

47,638

$

91,330

$

97,752

Contract Balances

As of June 30, 2021, contract assets and liabilities were $0.0 million and $0.5 million, respectively. As of December 31, 2020, contract assets and liabilities were $0.5 million and $0.4 million, respectively.

12

Transaction Price Allocated to Remaining Performance Obligations

As of June 30, 2021, assuming none of the Company’s current contracts with fixed consideration are renewed, the Company estimates receiving approximately $32.9 million in future selling services fixed consideration and approximately $0.4 million in professional services fixed consideration.

Contract Acquisition Costs

As of June 30, 2021 and December 31, 2020, capitalized contract acquisition costs were $0.7 million and $0.9 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 June 30, 2021 and 2020, respectively, and $0.3 million and $0.5 million for the six months ended June 30, 2021 and 2020, respectively.

Impairment recognized on contract costs was insignificant for the three and six months ended June 30, 2021 and 2020.

Note 6 — Stock-Based Compensation

ESPP

The Company previously offered an ESPP until its expiration in February 2021.

2021 PSU Awards

During March 2021, 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 2021 and a rTSR modifier based on the Company’s rTSR for fiscal years 2021, 2022, and 2023 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 $1.2 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.

Additionally, certain of the Company’s senior leaders elected to receive a portion of their annual cash corporate incentive plan in PSUs. The Company granted the PSUs under the 2020 Plan during March 2021. The number of shares ultimately received depends on the Company’s achievement of specified revenue, Adjusted EBITDA, and free cash flow performance goals for fiscal year 2021. The aggregate target number of shares subject to these awards is 0.4 million. The awards were valued using the Company’s closing stock price on the grant date and had an aggregate grant date fair value of $0.6 million. The number of shares ultimately received related to these awards ranges from 0% to 200% of the participant’s target award and will vest on the first 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 targets.

13

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 June 30,

For the Six Months Ended June 30,

    

2021

    

2020

    

2021

    

2020

(in thousands)

Cost of revenue

$

288

$

90

$

418

$

135

Sales and marketing

168

444

359

821

Research and development

17

1

32

19

General and administrative

601

740

2,740

1,345

Total stock-based compensation

$

1,074

$

1,275

$

3,549

$

2,320

The above table does not include capitalized stock-based compensation related to internal-use software that was insignificant for the three and six months ended June 30, 2021 and 2020.

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, 2020

3,030

$

2.09

$

1,372

Exercised

(272)

$

1.18

Expired and/or forfeited

(751)

$

2.03

Outstanding as of June 30, 2021

2,007

$

2.24

6.59

$

383

Exercisable as of June 30, 2021

1,777

$

2.38

6.40

$

281

As of June 30, 2021, there was $0.1 million of unrecognized compensation expense related to previously granted stock options, which is expected to be recognized over a weighted-average period of 1.2 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, 2020

7,015

$

1.55

Granted

2,557

$

1.53

Vested

(611)

$

2.47

Forfeited

(1,134)

$

1.63

Non-vested as of June 30, 2021

7,827

$

1.46

As of June 30, 2021, 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 1.5 million and 5.2 million shares for the three months ended June 30, 2021 and 2020, respectively, and 1.4 million and 4.3 million shares for the six months ended June 30, 2021 and 2020, respectively, because their effect would have been anti-dilutive.

14

Note 7 — Restructuring and Other Related Costs

The Company has undergone restructuring efforts to better align its cost structure with its business and market conditions. These restructuring efforts include severance and other employee costs, lease and other contract termination costs and asset impairments. Severance and other employee costs include severance payments, related employee benefits, stock-based compensation related to the accelerated vesting of certain equity awards and employee-related legal fees. Lease and other contract termination costs include charges related to lease consolidation and abandonment of spaces no longer utilized and the cancellation of certain contracts with outside vendors. Asset impairments include charges related to leasehold improvements and furniture in spaces vacated or no longer in use. The restructuring plans and future cash outlays are recorded in "Accrued expenses," "Accrued compensation," and "Other long-term liabilities" in the Consolidated Balance Sheet as of December 31, 2020. There are no future restructuring plans and future cash outlays as of June 30, 2021.

During 2020, the Company announced a restructuring effort to align with its virtual-first operating model and reduce the operating cost structure resulting in a reduction of headcount and office lease costs. The Company recognized charges related to this restructuring effort of $0.1 million and $1.0 million for the three and six months ended June 30, 2021, respectively. The Company does not expect to incur additional charges related to this restructuring effort as of June 30, 2021.

The following table presents a reconciliation of the beginning and ending fair value liability balance related to the 2020 restructuring effort:

Severance and Other

Lease Termination

    

Employee Costs

    

Costs

    

Total

(in thousands)

Balance as of January 1, 2020

$

$

$

Restructuring and other related costs

780

59

839

Cash paid

(442)

(442)

Balance as of December 31, 2020

338

59

397

Restructuring and other related costs

897

77

974

Cash paid

(1,235)

(136)

(1,371)

Balance as of June 30, 2021

$

$

$

Note 8 — 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., Ireland, and Singapore because those losses are offset by a full valuation allowance. The tax years 2012 through 2020 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 June 30, 2021 and December 31, 2020, 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 and six months ended June 30, 2021 and 2020, interest and penalties recognized were insignificant.

15

Note 9 — 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 in "Other assets" in the Consolidated Balance Sheets.

Non-cancelable Service Contract Commitments

Future minimum payments under non-cancelable service contract commitments were as follows:

    

June 30, 2021

(in thousands)

Remainder of 2021

$

6,095

2022

10,266

2023

8,183

2024

828

Thereafter

Total

$

25,372

16

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 impact and duration of the COVID-19 pandemic, as well as those discussed in the sections of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 24, 2021 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

With the global outbreak of COVID-19 and the declaration of a pandemic by the World Health Organization on March 11, 2020, we created a dedicated crisis team to proactively implement our business continuity plans. By March 19, 2020, more than 95% of our employees had moved from an in-office to a work-from-home environment and as of 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 will continue to primarily work from their home offices and our facilities will be 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.

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 June 30, 2021, we had total available liquidity of $42.1 million consisting of cash on hand and availability under our Revolver. See "Liquidity and Capital Resources" for additional information.

17

There was no material adverse impact on the results of operations for the three and six months ended June 30, 2021 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.

During 2020, ServiceSource received various grants from the Singapore government, including the Job Support Scheme, which assists enterprises in retaining their local employees during the COVID-19 pandemic. ServiceSource received $1.3 million related to these grants during the year ended December 31, 2020, $0.1 million during the three and six months ended June 30, 2021, and is expected to receive an additional $0.1 million through August 2021.

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, 2020 for additional information.

Key Financial Results For the Three Months Ended June 30, 2021

GAAP revenue was $46.3 million compared with $47.6 million reported for the same period in 2020.
GAAP net loss was $5.1 million or $0.05 per diluted share, compared with GAAP net loss of $5.4 million or $0.06 per diluted share reported for the same period in 2020.
Adjusted EBITDA, a non-GAAP financial measure, was negative $0.2 million compared with negative $0.4 million reported for the same period in 2020. See “Non-GAAP Financial Measurements” below for a reconciliation of Adjusted EBITDA from net loss.
Ended the quarter with $34.8 million of cash and cash equivalents and restricted cash and $15.0 million of borrowings under the Company’s $40.0 million Revolver.

Results of Operations

For the Three Months Ended June 30, 2021 Compared to the Same Period Ended June 30, 2020

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 June 30,

2021

2020

% of Net

% of Net

    

Amount

    

Revenue

    

Amount

    

Revenue

    

$ Change

    

% Change

(in thousands)

(in thousands)

(in thousands)

Net revenue

$

46,307

100

%

$

47,638

100

%

$

(1,331)

(3)

%

Cost of revenue

35,395

76

%

34,645

73

%

750

2

%

Gross profit

$

10,912

24

%

$

12,993

27

%

$

(2,081)

(16)

%

Net revenue decreased 1.3 million, or 3%, for the three months ended June 30, 2021 compared to the same period in 2020, primarily due to client churn and lower bookings.

18

Cost of revenue increased $0.8 million, or 2%, for the three months ended June 30, 2021 compared to the same period in 2020, primarily due to the following:

$0.9 million increase in employee related costs primarily associated with higher commissions;
$0.6 million increase in depreciation and amortization expense; and
$0.1 million increase in information technology costs; partially offset by
$1.0 million decrease in facility costs primarily related to transitioning to a virtual-first operating model and sublease income.

Operating Expenses

For the Three Months Ended June 30,

2021

2020

    

    

% of Net

    

% of Net

    

Amount

    

Revenue

    

Amount

    

Revenue

    

$ Change

    

% Change

(in thousands)