ServiceSource International 10Q 2021 Q3 Quarterly report

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 September 30, 2021


☐	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 October 28, 2021, 99,067,482 shares of common stock of ServiceSource International, Inc. were outstanding.

Table of Contents

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		26
Item 4. Controls and Procedures		26
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		27
Item 6. Exhibits		27
Glossary of Terms		28

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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)


	September 30, 2021		December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	30,170	$	34,006
Accounts receivable, net		35,464		38,890
Prepaid expenses and other		8,599		9,275
Total current assets		74,233		82,171

Property and equipment, net		21,540		29,948
ROU assets		22,706		29,798
Contract acquisition costs		604		872
Goodwill		6,334		6,334
Other assets		4,109		3,490
Total assets	$	129,526	$	152,613

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	3,003	$	1,204
Accrued expenses		3,203		3,217
Accrued compensation and benefits		19,147		18,342
Revolver		10,000		15,000
Operating lease liabilities		9,503		10,797
Other current liabilities		973		1,209
Total current liabilities		45,829		49,769

Operating lease liabilities, net of current portion		18,931		25,975
Other long-term liabilities		1,893		1,593
Total liabilities		66,653		77,337

Commitments and contingencies (Note 9)

Stockholders' equity:
Preferred stock, $0.0001 par value; 20,000 shares authorized and NaN issued and outstanding		—		—
Common stock, $0.0001 par value; 1,000,000 shares authorized; 99,162 shares issued and 99,041 shares outstanding as of September 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		384,337		379,696
Accumulated deficit		(321,924)		(304,607)
Accumulated other comprehensive income		891		618
Total stockholders' equity		62,873		75,276
Total liabilities and stockholders' equity	$	129,526	$	152,613

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

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ServiceSource International, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Net revenue	$	48,578	$	45,790	$	139,908	$	143,542
Cost of revenue		35,030		33,210		104,492		103,415
Gross profit		13,548		12,580		35,416		40,127
Operating expenses:
Sales and marketing		4,174		5,638		12,263		19,048
Research and development		1,338		1,489		3,679		4,186
General and administrative		10,801		10,537		33,615		31,844
Restructuring and other related costs		—		—		974		703
Total operating expenses		16,313		17,664		50,531		55,781
Loss from operations		(2,765)		(5,084)		(15,115)		(15,654)
Interest and other expense, net		(267)		(500)		(1,791)		(1,050)
Loss before provision for income taxes		(3,032)		(5,584)		(16,906)		(16,704)
Provision for income tax (expense) benefit		(359)		6		(411)		(173)
Net loss	$	(3,391)	$	(5,578)	$	(17,317)	$	(16,877)
Net loss per common share:
Basic and diluted	$	(0.03)	$	(0.06)	$	(0.18)	$	(0.18)
Weighted-average common shares outstanding:
Basic and diluted		98,253		95,963		97,703		95,437

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

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ServiceSource International, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Net loss	$	(3,391)	$	(5,578)	$	(17,317)	$	(16,877)
Other comprehensive (loss) income:
Foreign currency translation adjustments		(83)		102		273		53
Other comprehensive (loss) income:		(83)		102		273		53
Comprehensive loss	$	(3,474)	$	(5,476)	$	(17,044)	$	(16,824)

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

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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
Net loss	—		—	—		—		—		(3,391)		—		(3,391)
Other comprehensive loss	—		—	—		—		—		—		(83)		(83)
Stock-based compensation	—		—	—		—		1,109		—		—		1,109
Issuance of common stock, RSUs	1,200		—	—		—		—		—		—		—
Proceeds from the exercise of stock options	3		—	—		—		3		—		—		3
Net cash paid for payroll taxes on RSU releases	—		—	—		—		(178)		—		—		(178)
Balance at September 30, 2021	99,162	$	10	(121)	$	(441)	$	384,337	$	(321,924)	$	891	$	62,873


											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
Net loss	—		—	—		—		—		(5,578)		—		(5,578)
Other comprehensive income	—		—	—		—		—		—		102		102
Stock-based compensation	—		—	—		—		1,282		—		—		1,282
Issuance of common stock, RSUs	877		—	—		—		—		—		—		—
Proceeds from the exercise of stock options and ESPP	107		—	—		—		83		—		—		83
Balance at September 30, 2020	96,684	$	10	(121)	$	(441)	$	378,309	$	(302,943)	$	463	$	75,398

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

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ServiceSource International, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	For the Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net loss	$	(17,317)	$	(16,877)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		10,969		10,331
Amortization of contract acquisition costs		434		798
Amortization of ROU assets		7,046		7,255
Stock-based compensation		4,649		3,586
Restructuring and other related costs		935		633
Other		364		54
Net changes in operating assets and liabilities:
Accounts receivable, net		3,193		8,544
Prepaid expenses and other assets		(553)		1,226
Contract acquisition costs		(167)		(195)
Accounts payable		1,810		(3,597)
Accrued compensation and benefits		185		317
Operating lease liabilities		(8,154)		(7,299)
Accrued expenses		(6)		(831)
Other liabilities		573		(1,081)
Net cash provided by operating activities		3,961		2,864
Cash flows from investing activities:
Purchases of property and equipment		(2,682)		(5,124)
Net cash used in investing activities		(2,682)		(5,124)
Cash flows from financing activities:
Repayment on finance lease obligations		(485)		(730)
Debt issuance costs		(97)		—
Proceeds from Revolver		13,500		27,000
Repayment of Revolver		(18,500)		(12,000)
Proceeds from issuance of common stock		139		159
Payments related to minimum tax withholdings on RSU releases		(178)		—
Net cash (used in) provided by financing activities		(5,621)		14,429
Effect of exchange rate changes on cash and cash equivalents and restricted cash		480		(52)
Net change in cash and cash equivalents and restricted cash		(3,862)		12,117
Cash and cash equivalents and restricted cash, beginning of period		36,326		29,383
Cash and cash equivalents and restricted cash, end of period	$	32,464	$	41,500
Supplemental disclosures of cash flow information:
Cash paid for interest	$	288	$	408
Supplemental disclosures of non-cash activities:
Purchases of property and equipment accrued in accounts payable and accrued expenses	$	25	$	203
ROU assets obtained in exchange for new lease liabilities	$	618	$	2,271

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

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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.

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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 2 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 September 30, 2021 and December 31, 2020.

The Company did 0t have any other financial instruments or debt measured at fair value as of September 30, 2021 and December 31, 2020. There were 0 transfers between levels during the nine months ended September 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. The Company received and recognized income related to the grants of approximately $0.2 million and $0.5 million for the three months ended September 30, 2021 and 2020, respectively, and $0.3 million and $0.9 million for the nine months ended September 30, 2021 and 2020, respectively. There are no conditions to repay the grants. The Company does not expect to receive additional support related to these 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.

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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.

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 September 30, 2021, the Company had $10.0 million of borrowings under the Revolver in the 2021 Credit Agreement through a three-month BSBY borrowing at an effective interest rate of 2.42% maturing November 2021. An additional $12.2 million was available for borrowing under the Revolver as of September 30, 2021. 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 September 30, 2021.

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 for the three months ended September 30, 2021 and 2020 and $0.3 million and $0.4 million for the nine months ended September 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 extended its agreement to sublease 1 floor of office space at one of its locations in Manila, Philippines to a third-party through the end of the original lease term in September 2023, entered into an agreement to sublease 2 floors of office space at a second location in Manila, Philippines to a third-party through the end of the original lease term in December 2021, and extended its lease for reduced office space at its location in Yokohama, Japan through May 2024.

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Supplemental income statement information related to leases was as follows:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020

	(in thousands)
Operating lease cost	$	2,780	$	3,090	$	8,574	$	9,121

Finance lease cost:
Amortization of leased assets		98		213		364		564
Interest on lease liabilities		4		19		22		75
Total finance lease cost		102		232		386		639

Sublease income		(1,259)		(905)		(3,644)		(2,692)
Net lease cost	$	1,623	$	2,417	$	5,316	$	7,068

Supplemental balance sheet information related to leases was as follows:


	September 30, 2021		December 31, 2020

	(in thousands)
Operating leases:
ROU assets	$	22,706	$	29,798

Operating lease liabilities	$	9,503	$	10,797
Operating lease liabilities, net of current portion		18,931		25,975
Total operating lease liabilities	$	28,434	$	36,772

Finance leases:
Property and equipment	$	2,861	$	2,880
Accumulated depreciation		(2,318)		(1,963)
Property and equipment, net	$	543	$	917

Other current liabilities	$	186	$	608
Other long-term liabilities		0		63
Total finance lease liabilities	$	186	$	671

Lease term and discount rate information was as follows:


	For the Nine Months Ended September 30,
	2021			2020
Weighted-average remaining lease term (in years):
Operating lease		5.7		5.7
Finance lease		0.3		1.2
Weighted-average discount rate:
Operating lease		6.2	%	6.2	%
Finance lease		6.5	%	7.0	%

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


	Operating Leases		Operating Sublease		Finance Leases		Total

	(in thousands)
Remainder of 2021	$	3,119	$	(1,292)	$	125	$	1,952
2022		9,329		(3,588)		64		5,805
2023		4,390		(1,410)		0		2,980
2024		3,000		0		0		3,000
2025		2,950		0		0		2,950
Thereafter		11,222		0		0		11,222
Total lease payments		34,010		(6,290)		189		27,909
Less: interest		(5,576)		—		(3)		(5,579)
Total	$	28,434	$	(6,290)	$	186	$	22,330

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 September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020

	(in thousands)
Selling services	$	47,746	$	44,840	$	137,683	$	140,558
Professional services		832		950		2,225		2,984
Total revenue	$	48,578	$	45,790	$	139,908	$	143,542

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 September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020

	(in thousands)
NALA	$	27,215	$	27,204	$	78,064	$	83,235
EMEA		13,529		11,984		39,616		38,837
APJ		7,834		6,602		22,228		21,470
Total revenue	$	48,578	$	45,790	$	139,908	$	143,542

Revenue by Contract Pricing


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020

	(in thousands)
Variable consideration	$	34,499	$	33,188	$	101,848	$	103,367
Fixed consideration		14,079		12,602		38,060		40,175
Total revenue	$	48,578	$	45,790	$	139,908	$	143,542

Contract Balances

As of September 30, 2021, contract assets and liabilities were $0.0 million and $0.6 million, respectively. As of December 31, 2020, contract assets and liabilities were $0.5 million and $0.4 million, respectively.

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Transaction Price Allocated to Remaining Performance Obligations

As of September 30, 2021, assuming none of the Company’s current contracts with fixed consideration are renewed, the Company estimates receiving approximately $38.8 million in future selling services fixed consideration and approximately $0.4 million in professional services fixed consideration.

Contract Acquisition Costs

As of September 30, 2021 and December 31, 2020, capitalized contract acquisition costs were $0.6 million and $0.9 million, respectively. The Company recorded amortization expense related to capitalized contract acquisition costs of $0.1 million and $0.3 million for the three months ended September 30, 2021 and 2020, respectively, and $0.4 million and $0.8 million for the nine months ended September 30, 2021 and 2020, respectively.

Impairment recognized on contract costs was insignificant for the three and nine months ended September 30, 2021.

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 2 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.

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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 September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020

	(in thousands)
Cost of revenue	$	245	$	110	$	663	$	245
Sales and marketing		141		200		500		1,021
Research and development		2		14		34		33
General and administrative		712		942		3,452		2,287
Total stock-based compensation	$	1,100	$	1,266	$	4,649	$	3,586

The above table does not include capitalized stock-based compensation related to internal-use software that was insignificant for the three and nine months ended September 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		(275)	$	1.18
Expired and/or forfeited		(808)	$	2.02
Outstanding as of September 30, 2021		1,947	$	2.25		6.19	$	283
Exercisable as of September 30, 2021		1,843	$	2.31		6.10	$	245

As of September 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 1.1 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		4,791	$	1.52
Vested⁽¹⁾		(1,882)	$	1.65
Forfeited		(1,439)	$	1.61
Non-vested as of September 30, 2021		8,485	$	1.50

(1)

1,758 shares of common stock were issued for RSUs and PSUs vested and the remaining 124 shares were withheld for taxes.

As of September 30, 2021, there was $8.0 million of unrecognized compensation expense related to previously granted RSUs and PSUs, which is expected to be recognized over a weighted-average period of 1.9 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 3.2

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million shares for the three months ended September 30, 2021 and 2020, respectively, and 1.3 million and 4.1 million shares for the nine months ended September 30, 2021 and 2020, respectively, because their effect would have been anti-dilutive.

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 September 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 $1.0 million for the nine months ended September 30, 2021. The Company does 0t expect to incur additional charges related to this restructuring effort as of September 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	$	0	$	0	$	0
Restructuring and other related costs		780		59		839
Cash paid		(442)		0		(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 September 30, 2021	$	0	$	0	$	0

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 September 30, 2021 and December 31, 2020, NaN 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 nine months ended September 30, 2021 and 2020, interest and penalties recognized were insignificant.

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Note 9 — Commitments and Contingencies

Letters of Credit

In connection with 2 of our leased facilities, the Company is required to maintain 2 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:


	September 30, 2021
	(in thousands)
Remainder of 2021	$	3,669
2022		10,220
2023		8,183
2024		828
Thereafter		0
Total	$	22,900

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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 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

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 September 30, 2021, we had total available liquidity of $42.4 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 and nine months ended September 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.

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 September 30, 2021

●

GAAP revenue was $48.6 million compared with $45.8 million reported for the same period in 2020.

●

GAAP net loss was $3.4 million or $0.03 per diluted share, compared with GAAP net loss of $5.6 million or $0.06 per diluted share reported for the same period in 2020.

●

Adjusted EBITDA, a non-GAAP financial measure, was positive $2.0 million compared with negative $0.2 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 $32.5 million of cash and cash equivalents and restricted cash and $10.0 million of borrowings under the Company’s $35.0 million Revolver.

Results of Operations

For the Three Months Ended September 30, 2021 Compared to the Same Period Ended September 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 September 30,
	2021					2020
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			$ Change		% Change
	(in thousands)					(in thousands)					(in thousands)
Net revenue	$	48,578		100	%	$	45,790		100	%	$	2,788	6	%
Cost of revenue		35,030		72	%		33,210		73	%		1,820	5	%
Gross profit	$	13,548		28	%	$	12,580		27	%	$	968	8	%

Net revenue increased $2.8 million, or 6%, for the three months ended September 30, 2021 compared to the same period in 2020, primarily due to increased bookings and lower client churn.

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Cost of revenue increased $1.8 million, or 5%, for the three months ended September 30, 2021 compared to the same period in 2020, primarily due to the following:

●

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

●

$0.6 million increase in depreciation and amortization expense; and

●

$0.5 million increase in information technology costs; partially offset by

●

$1.1 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 September 30,
	2021					2020
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			$ Change		% Change
	(in thousands)					(in thousands)					(in thousands)
Operating expenses:
Sales and marketing	$	4,174		9	%	$	5,638		12	%	$	(1,464)	(26)	%
Research and development		1,338		3	%		1,489		3	%		(151)	(10)	%
General and administrative		10,801		22	%		10,537		23	%		264	3	%
Total operating expenses	$	16,313		34	%	$	17,664		39	%	$	(1,351)	(8)	%

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 decreased $1.5 million, or 26%, for the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $0.8 million decrease in employee related costs associated with a reduction in headcount and a $0.7 million decrease in information technology and facility costs related to transitioning to a virtual-first operating model.

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 decreased $0.2 million, or 10%, for the three months ended September 30, 2021 compared to the same period in 2020, primarily due to $0.2 million decrease in information technology costs and a $0.2 million decrease in professional fees, partially offset by a $0.3 million increase in employee related costs primarily due to increased compensation expense associated with higher revenue attainment.

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 increased $0.3 million or 3%, for the three months ended September 30, 2021 compared to the same period in 2020, primarily due to the following:

●

$1.2 million increase in information technology and facility costs; and

●

$0.9 million increase in employee related costs primarily due to increased compensation expense associated with higher revenue attainment; partially offset by

●

$0.9 million decrease in employee related costs associated with a reduction in headcount;

●

$0.5 million decrease in depreciation and amortization expense; and

●

$0.5 million decrease in professional fees.

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 September 30,
	2021					2020
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			$ Change		% Change
	(in thousands)					(in thousands)					(in thousands)
Interest expense	$	(97)		—	%	$	(161)		—	%	$	64	(40)	%
Other expense, net	$	(170)		—	%	$	(339)		(1)	%	$	169	(50)	%

Interest expense decreased $0.1 million, or 40%, for the three months ended September 30, 2021 compared to the same period in 2020, primarily due to the timing of borrowings on the Revolver.

Other expense, net decreased $0.2 million, or 50%, for the three months ended September 30, 2021 compared to the same period in 2020, primarily due to foreign currency fluctuations.

Provision for Income Tax


	For the Three Months Ended September 30,
	2021					2020
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			$ Change		% Change
	(in thousands)					(in thousands)					(in thousands)
Provision for income tax (expense) benefit	$	(359)		(0)	%	$	6		—	%	$	(365)	*	%

* Not considered meaningful.

Provision for income tax (expense) benefit resulted primarily from profitable jurisdictions where no valuation allowance has been provided. Provision for income tax increased $0.4 million for the three months ended September 30, 2021 compared to the same period in 2020, primarily due to an increase in profitable operations in certain foreign jurisdictions.

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For the Nine Months Ended September 30, 2021 Compared to the Same Period Ended September 30, 2020

Net Revenue, Cost of Revenue and Gross Profit


	For the Nine Months Ended September 30,
	2021					2020
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			$ Change		% Change
	(in thousands)					(in thousands)					(in thousands)
Net revenue	$	139,908		100	%	$	143,542		100	%	$	(3,634)	(3)	%
Cost of revenue		104,492		75	%		103,415		72	%		1,077	1	%
Gross profit	$	35,416		25	%	$	40,127		28	%	$	(4,711)	(12)	%

Net revenue decreased $3.6 million, or 3%, for the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to client churn and lower bookings.

Cost of revenue increased $1.1 million, or 1%, for the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to the following:

●

$1.9 million increase in depreciation and amortization expense;

●

$1.4 million increase in employee related costs primarily due to increased compensation expense associated with higher revenue attainment; and

●

$0.7 million increase in information technology costs; partially offset by

●

$2.9 million decrease in facility costs primarily related to transitioning to a virtual-first operating model and sublease income.

Operating Expenses


	For the Nine Months Ended September 30,
	2021					2020
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			$ Change		% Change
	(in thousands)					(in thousands)					(in thousands)
Operating expenses:
Sales and marketing	$	12,263		9	%	$	19,048		13	%	$	(6,785)	(36)	%
Research and development		3,679		3	%		4,186		3	%		(507)	(12)	%
General and administrative		33,615		24	%		31,844		22	%		1,771	6	%
Restructuring and other related costs		974		1	%		703		—	%		271	39	%
Total operating expenses	$	50,531		36	%	$	55,781		39	%	$	(5,250)	(9)	%

Sales and Marketing

Sales and marketing expenses decreased $6.8 million, or 36%, for the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $4.4 million decrease in employee related costs primarily associated with a reduction in headcount, lower bookings and lower travel and entertainment expenditures, a $2.2 million decrease in information technology and facility costs related to transitioning to a virtual-first operating model, and a $0.2 million decrease in marketing cost.

Research and Development

Research and development expenses decreased $0.5 million, or 12%, for the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $0.6 million decrease in information technology costs and a $0.4 million decrease in professional fees, partially offset by a $0.3 million increase in employee related costs primarily

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due to increased compensation expense associated with higher revenue attainment and a $0.3 million reduction in third-party capitalizable software development costs.

General and Administrative

General and administrative expenses increased $1.8 million, or 6%, for the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to the following:

●

$3.0 million increase in information technology and facility costs; and

●

$1.2 million increase in stock-based compensation costs; partially offset by

●

$1.2 million decrease in depreciation and amortization expense;

●

$0.7 million decrease in employee related costs primarily associated with a reduction in headcount; and

●

$0.5 million decrease in professional fees.

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 increased $0.3 million, or 39%, for the nine months ended September 30, 2021 compared to the same period in 2020, due to timing of headcount reductions related to the 2019 and 2020 restructuring efforts resulting in a reduction of headcount and office lease costs compared to the nine months ended September 30, 2020.

Interest and Other Expense, Net


	For the Nine Months Ended September 30,
	2021					2020
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			$ Change		% Change
	(in thousands)					(in thousands)					(in thousands)
Interest expense	$	(362)		—	%		(477)		—	%	$	115	(24)	%
Other expense, net	$	(1,429)		(1)	%		(573)		—	%	$	(856)	149	%

Interest expense decreased $0.1 million, or 24%, for the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to the timing of borrowings on the Revolver.

Other expense, net increased $0.9 million, or 149%, for the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to foreign currency fluctuations.

Provision for Income Tax


	For the Nine Months Ended September 30,
	2021					2020
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			$ Change		% Change
	(in thousands)					(in thousands)					(in thousands)
Provision for income tax expense	$	(411)		(0)	%	$	(173)		—	%	$	(238)	138	%

Provision for income tax expense for the nine months ended September 30, 2021 resulted primarily from profitable jurisdictions where no valuation allowance has been provided. Provision for income tax increased $0.2 million for the nine months ended September 30, 2021 compared to the same period in 2020, 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 September 30, 2021, we had cash and cash equivalents of $30.2 million, which primarily consist of demand deposits and money market mutual funds. Included in cash and cash equivalents was $6.2 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 September 30, 2021, 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 September 30, 2021, the Company had $10.0 million of borrowings under the Revolver through a three-month BSBY borrowing at an effective interest rate of 2.42% maturing November 2021. An additional $12.2 million was available for borrowing under the Revolver as of September 30, 2021. 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 September 30, 2021.

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 in "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 Nine Months Ended September 30,
	2021		2020

	(in thousands)
Net cash provided by operating activities	$	3,961	$	2,864
Net cash used in investing activities		(2,682)		(5,124)
Net cash (used in) provided by financing activities		(5,621)		14,429
Effect of exchange rate changes on cash and cash equivalents and restricted cash		480		(52)
Net change in cash and cash equivalents and restricted cash	$	(3,862)	$	12,117

Depreciation and amortization expense were comprised of the following:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020

	(in thousands)
Internally developed software amortization	$	2,407	$	1,983	$	6,895	$	5,597
Property and equipment depreciation		1,263		1,529		4,074		4,734
Total depreciation and amortization	$	3,670	$	3,512	$	10,969	$	10,331

Operating Activities

Net cash provided by operating activities increased $1.1 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, 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 $2.4 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, due to decreased cash outflows from purchases of property and equipment during the current period compared to the prior period.

Financing Activities

Net cash provided by financing activities decreased $20.1 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily due to $5.0 million in net cash outflows from repayments on the Revolver during the current period compared to $15.0 million in net cash inflows from borrowings on the Revolver during the prior period.

Off-Balance Sheet Arrangements

As of September 30, 2021, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. The Company’s significant accounting policies and estimates are described in "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2020. These policies were followed in preparing the Consolidated Financial Statements for the three and nine months ended September 30, 2021 and are consistent with the year ended December 31, 2020.

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Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 2 - "Summary of Significant Accounting Policies" to the Consolidated Financial Statements.

Non-GAAP Financial Measurements

ServiceSource believes net income (loss), as defined by GAAP, is the most appropriate financial measure of our operating performance; however, ServiceSource considers Adjusted EBITDA to be a useful supplemental, non-GAAP financial measure of our operating performance. We believe Adjusted EBITDA can assist investors in understanding and assessing our operating performance on a consistent basis, as it removes the impact of the Company’s capital structure and other non-cash or non-recurring items from operating results and provides an additional tool to compare ServiceSource’s financial results with other companies in the industry, many of which present similar non-GAAP financial measures.

EBITDA consists of net income (loss) plus provision for income tax expense (benefit), interest and other expense (income), net, and depreciation and amortization. Adjusted EBITDA consists of EBITDA plus stock-based compensation, restructuring and other related costs, and amortization of contract acquisition costs related to the initial adoption of ASC 606.

This non-GAAP measure should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP.

The following table presents the reconciliation of "Net loss" to Adjusted EBITDA:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020

	(in thousands)
Net loss	$	(3,391)	$	(5,578)	$	(17,317)	$	(16,877)
Provision for income tax expense (benefit)		359		(6)		411		173
Interest and other expense, net		267		500		1,791		1,050
Depreciation and amortization		3,670		3,512		10,969		10,331
EBITDA		905		(1,572)		(4,146)		(5,323)
Stock-based compensation		1,100		1,266		4,649		3,586
Restructuring and other related costs		—		—		974		703
Amortization of contract acquisition asset costs - ASC 606 initial adoption		43		134		195		514
Adjusted EBITDA	$	2,048	$	(172)	$	1,672	$	(520)

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies as defined by Item 10(f)(1) of Regulation S-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on management’s evaluation, our CEO and CFO concluded that our disclosure controls and procedures are designed to, and are effective to, provide at a reasonable assurance level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

We continue to monitor the design and operating effectiveness of our internal controls for any effect resulting from the COVID-19 pandemic. There has not been any change in our internal control over financial reporting during the quarter covered by this report that materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

For a summary of factors which could affect results and cause results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf, see “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2020. There have been no material changes to the risk factors as disclosed in our annual report on Form 10-K for the year ended December 31, 2020.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

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Item 5. Other Information

None.

Item 6. Exhibits


Exhibit Number		Description of Document
10.1		Loan and Security Agreement, dated as of July 23, 2021, among ServiceSource International, Inc. and ServiceSource Delaware, Inc., as Borrowers, and Bank of America, N.A., as Lender. (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on July 28, 2021).
31.1*		Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.SCH*		Inline XBRL Taxonomy Extension Schema Document.
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*		Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set.

*	Filed herewith.

**	Furnished herewith.

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GLOSSARY OF TERMS

The following abbreviations or acronyms used in this Form 10-Q are defined below:


Abbreviations or acronyms	��	Definition
2020 Plan		2020 Equity Incentive Plan
APJ		Asia Pacific-Japan
ASC 606		Accounting Standards Codification Topic 606, Revenue from Contracts with Customers
ASC 740		Accounting Standards Codification Topic 740, Income Taxes
ASU		Accounting Standards Update
B2B		Business-to-business
BPaaS		Business Process-as-a-Service
BSBY		Bloomberg Short-Term Bank Yield Index Rate
CEO		Chief Executive Officer
CFO		Chief Financial Officer
COVID-19		Coronavirus disease 2019
2018 Credit Agreement		Revolving Loan Credit Agreement, dated as of July 30, 2018, among ServiceSource International, Inc. and ServiceSource Delaware, Inc., as the Borrowers, and Compass Bank, as Lender
2021 Credit Agreement		Loan and Security Agreement, dated as of July 23, 2021, among ServiceSource International, Inc. and ServiceSource Delaware, Inc., as the Borrowers, and Bank of America, N.A., as Lender
EMEA		Europe, Middle East and Africa
ESPP		2011 Employee Stock Purchase Plan
FASB		Financial Accounting Standards Board
GAAP		United States Generally Accepted Accounting Principles
IoT		Internet of things
MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations
NALA		North America and Latin America
PSU		Performance-based restricted stock unit
Revolver		Senior secured revolving line of credit pursuant to the 2018 Credit Agreement or 2021 Credit Agreement, as applicable
ROU		Right-of-use
RSU		Restricted stock unit
rTSR		Relative total stockholder return
SEC		Securities and Exchange Commission
U.S.		United States

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SIGNATURE

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


		SERVICESOURCE INTERNATIONAL, INC.
		(Registrant)

Date:	November 2, 2021	By:	/s/ CHAD W. LYNE
			Chad W. Lyne
			Chief Financial Officer
			(Principal Financial and Accounting Officer)

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ServiceSource International (SREV) 10-Q2021 Q3 Quarterly report

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