SERVICESOURCE INTERNATIONAL, INC. 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 fromRussia's invasion ofUkraine , as well as those discussed in the sections of our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onFebruary 23, 2022 entitled "Forward Looking Statements" and "Risk Factors" and in our other filings with theSEC . 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 toServiceSource 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
OnMarch 11, 2020 , we created a dedicated crisis team to proactively implement our business continuity plans in response to COVID-19. ByApril 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 ofMarch 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. 15
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There was no material adverse impact on the results of operations for the three months endedMarch 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 theU.S. and globally. See "Risk Factors" in Part I, Item 1A of our annual report on Form 10-K for the year endedDecember 31, 2021 for additional information.
Key Financial Results For the Three Months Ended
? GAAP revenue was
same period in 2021.
GAAP net loss was
? net loss of
period in 2021.
Adjusted EBITDA, a non-GAAP financial measure, was
? negative
Financial Measurements" below for a reconciliation of Adjusted EBITDA from GAAP
net loss.
? Cash, cash equivalents, and restricted cash of
under the Revolver of
Results of Operations
For the Three Months Ended
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 endedMarch 31, 2022 compared to the same period in 2021, primarily due to increased bookings and lower client churn. 16 Table of Contents
Cost of revenue increased
? compensation expense associated with an increase in headcount and higher
revenue attainment; and
?
software; partially offset by
? 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
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 endedMarch 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 endedMarch 31, 2022 compared to the same period in 2021, primarily due to the following:
?
headcount; and
? expiration of various office space leases in connection with transitioning to a
virtual-first operating model; partially offset by
?
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 endedMarch 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 endedMarch 31, 2021 . The Company did not incur any charges related to this restructuring effort during the three months endedMarch 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
Other expense, net decreased$0.9 million , or 93%, for the three months endedMarch 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 endedMarch 31, 2022 compared to the same period in 2021, primarily due to an increase in profitable operations in certain foreign jurisdictions. 18
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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 ofMarch 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 ofServiceSource Europe Ltd. andServiceSource International Singapore Pte. Ltd. permanently reinvested in foreign operations and have not provided forU.S. income taxes on such earnings. As ofMarch 31, 2022 , the Company had no unremitted earnings from our foreign subsidiaries. InJuly 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 inJuly 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 ofMarch 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% maturingAugust 2022 . An additional$14.6 million was available for borrowing under the Revolver as ofMarch 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 ofMarch 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. 19 Table of Contents
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