ServiceSource International 10Q 2022 Q1 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 March 31, 2022


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

For the transition period from to

Commission file number 001-35108

SERVICESOURCE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


Delaware		81-0578975
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

707 17th Street, 25th Floor
Denver, Colorado		80202
(Address of principal executive offices)		(Zip Code)

(720) 889-8500

(Registrant’s telephone number, including area code)

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


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

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

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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


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

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

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

Yes ☐ No ☒

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

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TABLE OF CONTENTS


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

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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)


	March 31, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	29,518	$	28,507
Accounts receivable, net		37,938		43,571
Prepaid expenses and other		7,858		8,995
Total current assets		75,314		81,073

Property and equipment, net		15,898		18,721
ROU assets		23,110		23,043
Contract acquisition costs		497		558
Goodwill		6,334		6,334
Other assets		2,717		2,719
Total assets	$	123,870	$	132,448

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	1,612	$	832
Accrued expenses		3,299		4,152
Accrued compensation and benefits		13,955		19,999
Revolver		10,000		10,000
Operating lease liabilities		7,740		8,614
Other current liabilities		648		793
Total current liabilities		37,254		44,390

Operating lease liabilities, net of current portion		20,481		19,869
Other long-term liabilities		1,180		1,155
Total liabilities		58,915		65,414

Commitments and contingencies (Note 8)

Stockholders' equity:
Preferred stock, $0.0001 par value; 20,000 shares authorized and NaN issued and outstanding		—		—
Common stock, $0.0001 par value; 1,000,000 shares authorized; 100,059 shares issued and 99,938 shares outstanding as of March 31, 2022; 99,233 shares issued and 99,112 shares outstanding as of December 31, 2021		10		10
Treasury stock		(441)		(441)
Additional paid-in capital		388,213		385,827
Accumulated deficit		(323,710)		(319,328)
Accumulated other comprehensive income		883		966
Total stockholders' equity		64,955		67,034
Total liabilities and stockholders' equity	$	123,870	$	132,448

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

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ServiceSource International, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)


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

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

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ServiceSource International, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


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

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

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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, 2022	99,233	$	10	(121)	$	(441)	$	385,827	$	(319,328)	$	966	$	67,034
Net loss	—		—	—		—		—		(4,382)		—		(4,382)
Other comprehensive loss	—		—	—		—		—		—		(83)		(83)
Stock-based compensation	—		—	—		—		2,633		—		—		2,633
Issuance of common stock, RSUs and PSUs	826		—	—		—		—		—		—		—
Net cash paid for payroll taxes on RSU releases	—		—	—		—		(247)		—		—		(247)
Balance at March 31, 2022	100,059	$	10	(121)	$	(441)	$	388,213	$	(323,710)	$	883	$	64,955


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

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

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ServiceSource International, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


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

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

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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, 2021 has been derived from the Company’s audited annual Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 23, 2022. In the opinion of management, these Consolidated Financial Statements reflect all adjustments, including normal recurring adjustments, management considers necessary for a fair presentation of the Company’s financial position, operating results, and cash flows for the interim periods presented. These Consolidated Financial Statements and accompanying notes should be read in conjunction with our audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2021, included in our annual report on Form 10-K. Interim results are not necessarily indicative of results for the entire year.

Use of Estimates

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

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

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

Cash Equivalents and Restricted Cash

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

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

Restricted cash consists of cash in money market accounts that are used to secure letters of credit in connection with 2 of our leased facilities. Restricted cash is recorded within “Prepaid expenses and other” and "Other assets" in the Consolidated Balance Sheets and is classified as a Level 1 investment. The Company had restricted cash of $2.3 million as of March 31, 2022 and December 31, 2021.

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

New Accounting Standards Issued but Not Yet Adopted

Financial Instruments - Credit Losses

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

Note 3 — Debt

Revolving Line of Credit

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

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

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

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Interest Expense

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

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

Note 4 — Leases

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

Supplemental income statement information related to leases was as follows:


	For the Three Months Ended March 31,
	2022		2021

	(in thousands)
Operating lease cost	$	2,458	$	2,941

Finance lease cost:
Amortization of leased assets		53		159
Interest on lease liabilities		1		11
Total finance lease cost		54		170

Sublease income		(887)		(1,098)
Net lease cost	$	1,625	$	2,013

Supplemental balance sheet information related to leases was as follows:


	March 31, 2022		December 31, 2021

	(in thousands)
Operating leases:
ROU assets	$	23,110	$	23,043

Operating lease liabilities	$	7,740	$	8,614
Operating lease liabilities, net of current portion		20,481		19,869
Total operating lease liabilities	$	28,221	$	28,483

Finance leases:
Property and equipment	$	2,852	$	2,861
Accumulated depreciation		(2,442)		(2,397)
Property and equipment, net	$	410	$	464

Other current liabilities	$	11	$	63
Other long-term liabilities		0		0
Total finance lease liabilities	$	11	$	63

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Lease term and discount rate information was as follows:


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

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


	Operating Leases		Operating Sublease		Finance Leases		Total

	(in thousands)
Remainder of 2022	$	7,548	$	(2,646)	$	11	$	4,913
2023		5,738		(1,399)		0		4,339
2024		4,376		0		0		4,376
2025		4,016		0		0		4,016
2026		3,300		0		0		3,300
Thereafter		8,398		0		0		8,398
Total lease payments		33,376		(4,045)		11		29,342
Less: interest		(5,155)		0		0		(5,155)
Total⁽¹⁾	$	28,221	$	(4,045)	$	11	$	24,187

(1)

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

Note 5 — Revenue Recognition

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

Revenue by Performance Obligation


	For the Three Months Ended March 31,
	2022		2021

	(in thousands)
Selling services	$	48,281	$	44,328
Professional services		612		695
Total revenue	$	48,893	$	45,023

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Revenue by Geography

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


	For the Three Months Ended March 31,
	2022		2021

	(in thousands)
NALA	$	25,325	$	25,334
EMEA		15,776		12,769
APJ		7,792		6,920
Total revenue	$	48,893	$	45,023

Revenue by Contract Pricing


	For the Three Months Ended March 31,
	2022		2021

	(in thousands)
Variable consideration	$	32,321	$	33,211
Fixed consideration		16,572		11,812
Total revenue	$	48,893	$	45,023

Contract Balances

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

Transaction Price Allocated to Remaining Performance Obligations

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

Contract Acquisition Costs

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

Note 6 — Stock-Based Compensation

2022 PSU Awards

During March 2022, the Company granted PSUs under the 2020 Plan to certain executives in which the number of shares ultimately received depends on the Company’s achievement of 2 performance goals for fiscal year 2022 and a rTSR modifier based on the Company’s rTSR for fiscal years 2022, 2023, and 2024 compared to a peer group. The aggregate target number of shares subject to these awards is 0.8 million. The awards were valued on the grant date using a Monte Carlo simulation for the rTSR modifier and using the Company’s closing stock price for the performance metrics for an aggregate grant date fair value of $1.1 million. The number of shares ultimately received related to these awards will range from 0% to 173% of the participant’s target award and will vest on the third anniversary of the grant date. The Company’s expense will be recognized over the service period and adjusted based on estimated achievement of the performance goals.

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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 March 31,
	2022		2021

	(in thousands)
Cost of revenue	$	138	$	130
Sales and marketing		346		191
Research and development		24		15
General and administrative		2,112		2,139
Total stock-based compensation	$	2,620	$	2,475

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

Stock Awards

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


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

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

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


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

(1)

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

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

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

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

Note 7 — Income Taxes

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

The gross amount of the Company’s unrecognized tax benefits was $1.0 million as of March 31, 2022 and December 31, 2021, 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 months ended March 31, 2022 and 2021 interest and penalties recognized were insignificant.

Note 8 — 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 within “Prepaid expenses and other” and "Other assets" in the Consolidated Balance Sheets.

Non-cancelable Service Contract Commitments

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

Note 9 — Subsequent Event

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

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

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

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

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

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

Overview

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

Impact of the COVID-19 Pandemic

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

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

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

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

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

●

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

●

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

●

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

●

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

Results of Operations

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

Net Revenue, Cost of Revenue and Gross Profit

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

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


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

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

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

●

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

●

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

●

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

Operating Expenses


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

Sales and Marketing

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

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

Research and Development

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

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

General and Administrative

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

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

●

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

●

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

●

$0.3 million increase in facility costs.

Restructuring and Other Related Costs

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

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

Interest and Other Expense, Net

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


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

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

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

Provision for Income Tax


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

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

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Liquidity and Capital Resources

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

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

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

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

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

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

Letters of Credit and Restricted Cash

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

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Cash Flows

The following table presents a summary of our cash flows:


	For the Three Months Ended March 31,
	2022		2021

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

Depreciation and amortization expense were comprised of the following:


	For the Three Months Ended March 31,
	2022		2021

	(in thousands)
Internally developed software amortization	$	2,596	$	2,192
Property and equipment depreciation		926		1,465
Total depreciation and amortization	$	3,522	$	3,657

Operating Activities

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

Investing Activities

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

Financing Activities

Net cash used in financing activities increased $0.3 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to payments related to minimum tax withholdings on RSU releases.

Off-Balance Sheet Arrangements

As of March 31, 2022, 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, 2021. These policies were followed in preparing the Consolidated Financial Statements for the three months ended March 31, 2022 and are consistent with the year ended December 31, 2021.

Recent Accounting Pronouncements

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

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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 March 31,
	2022		2021

	(in thousands)
Net loss	$	(4,382)	$	(8,835)
Provision for income tax expense		649		331
Interest and other expense, net		178		1,160
Depreciation and amortization		3,522		3,657
EBITDA		(33)		(3,687)
Stock-based compensation		2,620		2,475
Restructuring and other related costs		—		920
Amortization of contract acquisition asset costs - ASC 606 initial adoption		15		84
Adjusted EBITDA	$	2,602	$	(208)

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

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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, 2021. Except as set forth below, 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, 2021.

Risks Related to Our Business

Global economic, political and social conditions may harm our ability to do business, increase our costs, and negatively affect our stock price.

Worldwide economic conditions remain uncertain due to various global disruptions, including geopolitical events, such as war, the threat of war (including collateral damage from cyberwarfare), or terrorist activity; natural disasters; power shortages or outages; major public health issues, including pandemics; and significant local, national, or global events capturing the attention of a large part of the population, which could prevent or hinder our ability to do business, increase our costs, and negatively affect our stock price. Adverse consequences resulting from the United States and China trade negotiations, Russia’s recent invasion of Ukraine and the subsequent economic sanctions imposed by the U.S., NATO and other countries, and various other market issues may have broader implications on economies outside the region, including increased instability in the worldwide financial markets and economy, increases in inflation, and enhanced volatility in foreign currency exchange rates. These uncertainties may cause our clients or potential clients to delay or reduce spending, which could negatively impact our revenue and operating results and make it difficult for us to accurately plan future business activities.

Risks Related to the Proposed Merger

The consummation of the Merger is subject to approval of our stockholders as well as the satisfaction of other closing conditions, some or all of which may not be satisfied or waived in a timely manner or at all.

In May 2022, we entered into the Merger Agreement with the Acquirer and Acquisition Sub. Consummation of the Merger is subject to customary closing conditions, including (i) receipt of the Requisite Stockholder Approval, (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the expiration of applicable waiting periods or clearance of the Merger, as applicable, under the antitrust and foreign investment laws of certain other jurisdictions, (iii) absence of any law or order issued by certain governmental authorities of competent jurisdiction, prohibiting the Merger, and (iv) the absence of a material adverse effect on the Company.

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We intend to pursue the satisfaction or waiver, as applicable, of each condition to the consummation of the Merger, including the receipt of the Requisite Stockholder Approval. However, no assurance can be given that such conditions to the consummation of the Merger will be satisfied or waived in a timely manner, or at all. We also cannot provide any assurance regarding whether the Company will have to comply with any terms or conditions imposed by third parties in order to satisfy or waive the conditions to the consummation of the Merger. Similarly, we cannot provide any assurance that the Acquirer will be able to comply with its obligation to consummate the Merger. Many of the conditions to the consummation of the Merger are not within our control, and we cannot predict if or when these conditions will be satisfied or waived.

The failure to satisfy or obtain waiver of conditions to the consummation of the Merger in a timely manner could delay the consummation of the Merger and exacerbate the risks and uncertainties associated with the announcement and pendency of the Merger, which are discussed below under the headings “The announcement of the Merger Agreement and pendency of the Merger could negatively impact our business, financial condition and results of operations” and “While the Merger remains pending, we will be required to comply with various interim operating covenants that may constrain our business operations and to take certain actions that may divert our management’s focus from our ongoing business.”

In addition, if all of the conditions to the consummation of the Merger are not satisfied or waived, we may be unable to consummate the Merger at all. The risks and uncertainties associated with a failure to consummate the Merger are discussed below under the heading “Failure to consummate the Merger could adversely affect our stock price, business, financial condition and results of operation.”

Future litigation challenging the Merger could prevent the Merger from occurring or adversely affect our business, financial condition or results of operations.

In connection with the announcement of the Merger Agreement, as is common in the context of mergers and acquisitions of publicly-traded companies, the Company (along with its directors and officers) may attract lawsuits seeking to enjoin us from proceeding with or consummating the Merger, or seeking to have the Merger rescinded after its consummation. One of the conditions to the consummation of the Merger is the absence of any order issued by certain governmental authorities of competent jurisdiction prohibiting the Merger. If any future plaintiffs are successful in obtaining an injunction or other order prohibiting the Merger, we may be unable to consummate the Merger. The risks and uncertainties associated with a failure to consummate the Merger are discussed below under the heading “Failure to consummate the Merger could adversely affect our stock price, business, financial condition and results of operation.”

In addition, responding to any litigation targeting the Merger, even those without merit, will cause us to incur legal costs and expenses, which may negatively impact our financial condition. Responding to lawsuits may also divert the time and attention of our management away from our ongoing business operations and adversely affect our business and results of operations.

Failure to consummate the Merger could adversely affect our stock price, business, financial condition and results of operations.

As noted above, the various conditions to the consummation of the Merger may not be satisfied or waived in a timely manner, or at all. Some of these conditions are not within our control. We cannot provide assurance that any of the conditions to the consummation of the Merger will be satisfied or waived. Pursuant to the Merger Agreement, the Merger will not be consummated until all of the conditions are satisfied or waived.

In addition, either the Company or the Acquirer may terminate the Merger Agreement in certain circumstances, including if (i) the Merger has not been consummated by November 1, 2022, (ii) any of certain governmental authorities of competent jurisdiction has issued a final non-appealable law or order prohibiting the Merger, (iii) the Requisite Stockholder Approval is not obtained at the stockholders’ meeting duly convened therefor, or (iv) the other party materially breaches, and does not cure, any of its representations or covenants in the Merger Agreement that would cause the related condition to such party’s obligation to consummate the Merger to not be satisfied, in each case subject

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to the terms and conditions set forth in the Merger Agreement. The terms and conditions, and other circumstances under which the Merger Agreement may be terminated in accordance with its terms are described in more detail in the Merger Agreement, which is attached as Exhibit 2.1 to the Current Report on Form 8-K we filed with the SEC on May 9, 2022.

If the Merger is not consummated for any reason, holders of our common stock will not receive the Merger Consideration for their shares in connection with the Merger. Instead, our common stock will continue to be listed and traded on the Nasdaq and registered under the Exchange Act, and we will continue to file periodic reports with the SEC on account of our common stock. In addition, we would be subject to a number of risks and uncertainties, including but not limited to:

●

the completion of the Merger on the anticipated terms and timing, including obtaining required stockholder and regulatory approvals, and the satisfaction of other conditions to the completion of the acquisition;

●

potential litigation relating to the Merger that could be instituted against the Company or its directors or officers, including the effects of any outcomes related thereto;

●

the risk that disruptions from the Merger will harm the Company’s business, including current plans and operations;

●

the ability of the Company to retain and hire key personnel;

●

potential adverse reactions or changes to business relationships resulting from the announcement or completion of the Merger;

●

continued availability of capital and financing and rating agency actions;

●

legislative, regulatory and economic developments;

●

potential business uncertainty, including changes to existing business relationships, during the pendency of the Merger that could affect the Company’s financial performance;

●

certain restrictions during the pendency of the Merger that may impact the Company’s ability to pursue certain business opportunities or strategic transactions;

●

unpredictability and severity of catastrophic events, including but not limited to acts of terrorism, outbreaks of war or hostilities or the COVID-19 pandemic, as well as management’s response to any of the aforementioned factors;

●

the possibility that the Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; and

●

the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger, including in circumstances requiring the Company to pay a termination fee or reimburse the Acquirer’s expenses.

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If the Merger is not consummated, the risk and uncertainties described above may materialize and adversely affect our business, financial condition or results of operations.

If the Merger Agreement is terminated, under certain conditions, we may be obligated to reimburse the Acquirer for its expenses and / or pay the Acquirer a substantial termination fee, which could require us to incur additional debt or reduce the amount of cash we have available to fund our operations.

Subject to the terms and conditions set forth in the Merger Agreement, if the Merger Agreement is terminated because the Requisite Stockholder Approval is not obtained, the Company will have to reimburse the Acquirer for it expenses incurred in connection with the Merger, in an amount not to exceed $1.5 million.

If the Company’s board of directors (the “Board”) (i) withdraws or changes its recommendation that our stockholders approve and adopt the Merger Agreement in a manner adverse to the Acquirer or Acquisition Sub, (ii) fails to include its recommendation in the proxy statement filed by the Company to solicit proxies in connection with the Merger, (iii) approves or recommends a competing acquisition proposal, or (iv) fails to recommend against a competing acquisition proposal under certain circumstances, then the Acquirer will have the right to terminate the Merger Agreement (before the Requisite Stockholder Approval is received) and receive a termination fee in the amount of $5.73 million (the “Termination Fee”) from the Company, subject to the terms and conditions set forth in the Merger Agreement.

In addition, subject to the terms and conditions set forth in the Merger Agreement, the Company would be required to pay the Acquirer the Termination Fee if prior to receiving the Requisite Stockholder Approval the Company terminates the Merger Agreement, and with the authorization of the Board, it enters into an Alternative Acquisition Agreement with respect to a Superior Proposal (as each term is defined in the Merger Agreement).

The Company would also be required to pay the Acquirer the Termination Fee, subject to the terms and conditions set forth in the Merger Agreement, if (i) a third party makes a Competing Proposal (as defined in the Merger Agreement) to the Company or its stockholders, (ii) the Merger Agreement is subsequently terminated by either the Company or the Acquirer because the Company did not obtain the Requisite Stockholder Approval or by the Acquirer because the Company knowingly and intentionally breached any covenant or agreement under the Merger Agreement, which breach would give rise to the failure of any conditions to the Company’s obligations to effect the Merger, and any such Competing Proposal was not withdrawn at least five business days prior to the event that gave rise to such termination, and (iii) within twelve months of such termination, the Company consummates a transaction involving a Competing Proposal or enters into an Alternative Acquisition Agreement providing for the consummation of a Competing Proposal (which is subsequently consummated).

If the Company is required to pay the Termination Fee, the Company may be required to incur additional debt or use funds that it would otherwise have been able to use for general corporate expenses, capital expenditures or for other purposes.

The announcement of the Merger Agreement and pendency of the Merger could negatively impact our business, financial condition and results of operations.

Our business could experience material disruptions due to the announcement of our entry into the Merger Agreement and during the pendency of the Merger. Our current and prospective employees, including certain key personnel, may experience uncertainty regarding their future roles with the Company or desire different employment in anticipation of the consummation of the Merger. As a result, we may not be able to retain such employees, find adequate replacements for any employees we are unable to retain, or otherwise recruit new employees to join the Company. The uncertainty caused by the pendency of the Merger could also negatively impact our employees’ performance. If the announcement or pendency of the Merger causes us to lose and be unable to replace our employees, impairs our ability to attract new employees, or negatively affects the performance of our employees, our business, financial condition and results of operations could suffer.

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In addition, third parties, including our lenders, vendors and customers, may experience uncertainty regarding our business relationships due to the announcement of our entry into the Merger Agreement and during the pendency of the Merger. As a result, such third parties may seek to terminate or renegotiate our existing business relationships in connection with the potential Merger. Such disruptions to our business relationships could negatively impact our business, financial condition and results of operations.

The announcement of the Merger Agreement may also cause regulators to apply additional scrutiny to our business, potentially increasing our regulatory burden, including costs of compliance. If we are required to expend additional employee time or other resources to address such additional scrutiny or increased regulatory burden, our business, financial condition and results of operations could be negatively impacted.

While the Merger remains pending, we will be required to comply with various interim operating covenants that may constrain our business operations and to take certain actions that may divert our management’s focus from our ongoing business.

Pursuant to the Merger Agreement, following the execution of the Merger Agreement and until the earlier to occur of (i) the consummation of the Merger or (ii) the termination of the Merger Agreement (the “Interim Operating Period”), we agreed to use reasonable best efforts to conduct our business in the ordinary course of business and to not engage in certain types of actions, subject to certain terms, limitations and exceptions. In particular, among other things, we agreed to refrain from taking certain actions without the Acquirer's consent, including (i) making acquisitions, (ii) incurring indebtedness above a certain threshold, (iii) granting equity awards other than as specified in the Merger Agreement, (iv) entering into, amending or terminating certain material contracts, and (v) declaring or paying dividends to stockholders, in each case subject to the terms, limitations and exceptions set forth in the Merger Agreement. Complying with these obligations could limit our ability to operate our business as previously conducted, to pursue strategic transactions, or to otherwise exploit business opportunities as they arise. Our management will be primarily responsible for ensuring that the Company complies with such obligations during the Interim Operating Period, and this additional responsibility may divert the focus of our management away from our ongoing business operations.

In addition, our management will also need to take certain other actions during the Interim Operating Period in connection with the proposed Merger, including, among other things, convening a meeting of our stockholders for the purpose of considering and voting on the Merger, filing a proxy statement, in both preliminary and definitive form, in connection with our solicitation of proxies from our stockholders for such meeting, using reasonable best efforts to obtain all necessary consents and approvals required in connection with the Merger and to satisfy the other conditions to the consummation of the Merger, addressing any litigation brought against the Company in connection with the Merger, and responding to questions we may receive from our stockholders, employees, vendors and other interested stakeholders regarding the Merger. Taking these actions could require our management to expend time and resources, reducing the time and resources our management could otherwise direct towards our ongoing business operations. If our management is unable to expend the necessary time and resources on our business, our results of operations could be negatively impacted.

The Merger Agreement contains provisions that could make it difficult for a third party to make a superior acquisition proposal.

The Merger Agreement contains certain customary restrictions on our ability to solicit proposals from third parties for an acquisition of the Company during the Interim Operating Period. In addition, subject to certain customary “fiduciary out” exceptions, the Board is required to recommend that our stockholders vote in favor of the approval of the Merger, the Merger Agreement and the transactions contemplated thereby.

As discussed in further detail above under the heading “If the Merger Agreement is terminated, under certain conditions, we may be obligated to pay the Acquirer a substantial termination fee, which could require us to incur additional debt or reduce the amount of cash we have available to fund our operations,” we would also be required to pay the Acquirer the Termination Fee under certain conditions in connection with the termination of the Merger Agreement.

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These provisions might discourage an otherwise-interested third party from considering or proposing an acquisition of the Company, including proposals that may be deemed to offer greater value to our stockholders than the Merger Consideration of $1.50 per share. Furthermore, even if a third party elects to propose an acquisition, the requirement that we must pay a termination fee to accept any such proposal may cause that third party to offer a lower price to our stockholders than such third party might otherwise have offered.

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.

Item 5. Other Information

On May 6, 2022, we entered into the Merger Agreement with Acquirer and Acquisition Sub. Pursuant to the Merger Agreement, and subject to the terms and conditions set forth therein, Acquisition Sub will merge with and into the Company, with the Company continuing as the surviving corporation in the Merger and a wholly-owned subsidiary of the Acquirer.

In addition, pursuant to the Merger Agreement, at the Effective Time:

●

each Company stock option, whether or not vested, shall automatically and without any required action on the part of the holder thereof, vest (if unvested) and if not exercised by the holder thereof as of the Effective Time (after notice and a reasonable period to elect the exercise of such Company stock option) be cancelled and, if the exercise price per share is less than the Merger Consideration, be converted into the right to receive an amount in cash, without interest, equal to the product of (i) the excess, if any, of (A) the Merger Consideration over (B) the per-share exercise price for such option, multiplied by (ii) the total number of shares of common stock underlying such option; if the exercise price per share is equal to or greater than the Merger Consideration, such option if not exercised shall be cancelled without any cash payment or other consideration being made in respect thereof;

●

each then-outstanding Company restricted stock unit (“RSU”) will automatically and without any required action on the part of the holder thereof, be assumed by Acquirer and converted into the right to receive an amount of cash, without interest, equal to the product of (i) the total number of shares of common stock underlying such RSU, multiplied by (ii) the Merger Consideration, plus any dividend equivalent amounts accrued with respect to such RSU (the “RSU Consideration”), and each converted RSU held by an individual who is expected to be a continuing employee shall continue to have and be subject to substantially the same terms and conditions as were applicable to such RSU immediately before the Merger, including payment terms and remaining vesting conditions, but with vesting terms adjusted for any right to accelerated vesting that may apply after the Effective Time under the terms of any Company equity plan, equity award agreement, or Company severance plan currently in effect that may be applicable;

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●

each then-outstanding Company performance stock unit (“PSU”) will automatically and without any required action on the part of the holder thereof, be assumed by Acquirer and converted into the right to receive an amount of cash, without interest, equal to the product of (i) the total number of shares of common stock earned under such PSU, with performance measured in accordance with the terms of the applicable governing documents (e.g. based on the attainment of the applicable performance metrics through the date of the Merger) as determined by the board of directors of the Company or a committee thereof after consultation with Acquirer, multiplied by (ii) the Merger Consideration, plus any dividend equivalent amounts accrued with respect to such PSU (the “PSU Consideration”), and each converted PSU held by an individual who is expected to be a continuing employee shall generally continue to have and be subject to substantially the same terms and conditions as were applicable to such PSU immediately before the Merger (aside from terms related to performance vesting that shall no longer apply following the Effective Time), including payment terms and remaining time-vesting conditions, but with vesting terms adjusted for any right to accelerated vesting that may apply after the Effective Time under the terms of any Company equity plan, equity award agreement, or Company severance plan currently in effect that may be applicable; and

●

each RSU and PSU held by an individual (whether an employee, non-employee director, or independent contractor) who is not expected to be a continuing employee shall, automatically and without any required action on the part of the holder thereof, vest (if unvested) and be cancelled and converted into the right to receive an amount in cash, without interest, equal to the RSU Consideration or PSU Consideration, as applicable.

Consummation of the Merger is subject to customary closing conditions, including, among other things, the Requisite Stockholder Approval.

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Item 6. Exhibits


Exhibit Number		Description of Document
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
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
APJ		Asia Pacific-Japan
ASC 606		Accounting Standards Codification Topic 606, Revenue from Contracts with Customers
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
EMEA		Europe, Middle East and Africa
ESPP		2011 Employee Stock Purchase Plan
Exchange Act		Securities Exchange Act of 1934, as amended
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 2021 Credit Agreement
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:	May 10, 2022	By:	/s/ CHAD W. LYNE
			Chad W. Lyne
			Chief Financial Officer
			(Principal Financial and Accounting Officer)

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ServiceSource International (SREV) 10-Q2022 Q1 Quarterly report

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