On August 23, 2016, the United States District Court for the Middle District of Tennessee granted conditional class certification in a lawsuit originally filed on September 21, 2015 by three3 former senior sales representatives. The lawsuit, Sarah Patton, et al v. ServiceSource Delaware, Inc., asserts a claim under the Fair Labor Standards Act alleging that certain sales account representatives and senior sales representativesnon-exempt employees in our Nashville location were not paid for all hours worked and were not properly paid for overtime hours worked. The complaint also asserts claims under Tennessee state law for breach of contract and unjust enrichment; however, the plaintiffs have not yet filed a motion to certify the state law breachenrichment. A settlement of contract and unjust enrichmentall claims as a class action.was reached. The Company anticipates settlement payments will continue to vigorously defend itself against these claims.be completed by the end of 2019.
The following table summarizes the consolidatedpresents stock-based compensation expense included inas allocated within the condensed consolidated statementsCompany's Consolidated Statements of operations (in thousands):Operations: |
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
| | (in thousands) |
| Cost of revenue | $ | 126 |
| | $ | 194 |
| | $ | 414 |
| | $ | 752 |
|
| Sales and marketing | 518 |
| | 717 |
| | 1,390 |
| | 2,436 |
|
| Research and development | 12 |
| | 24 |
| | 24 |
| | 146 |
|
| General and administrative | 523 |
| | 1,560 |
| | 2,157 |
| | 5,699 |
|
| Total stock-based compensation | $ | 1,179 |
| | $ | 2,495 |
| | $ | 3,985 |
| | $ | 9,033 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Cost of revenue | $ | 385 |
| | $ | 299 |
| | $ | 969 |
| | $ | 1,146 |
|
| Sales and marketing | 982 |
| | 565 |
| | 2,834 |
| | 2,152 |
|
| Research and development | 42 |
| | 106 |
| | 107 |
| | 448 |
|
| General and administrative | 2,074 |
| | 1,276 |
| | 6,486 |
| | 3,695 |
|
| Restructuring and other | 352 |
| | — |
| | 352 |
| | — |
|
| Total stock-based compensation | $ | 3,835 |
| | $ | 2,246 |
| | $ | 10,748 |
| | $ | 7,441 |
|
The above table does not include $0.1 million of capitalized stock-based compensation related to internal-use software duringof $0.02 million and $0.05 million for the three and nine months ended September 30, 20172019 and 2016, respectively,$0.05 million and $0.4$0.3 million for the three and nine months ended September 30, 2018, respectively.
Stock Awards
The following table summarizes information related to stock options: |
| | | | | | | | | | | | |
| | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Life (Years) | | Intrinsic Value |
| | (in thousands) | | | | | | (in thousands) |
| Outstanding as of December 31, 2018 | 7,516 |
| | $ | 3.34 |
| | | | $ | — |
|
| Granted | 576 |
| | $ | 0.95 |
| | | | |
| Expired and/or forfeited | (3,829 | ) | | $ | 4.22 |
| | | | |
| Outstanding as of September 30, 2019 | 4,263 |
| | $ | 2.22 |
| | 8.15 | | $ | — |
|
| Exercisable as of September 30, 2019 | 1,047 |
| | $ | 5.12 |
| | 4.87 | | $ | — |
|
The weighted-average fair value of options granted during the nine months ended September 30, 20172019 and 2016,2018 was $0.47 and $1.75, respectively.
Equity Incentive Plan
Option and restricted As of September 30, 2019, there was $1.6 million of unrecognized compensation expense related to stock activityoptions granted under the 2011 Equity Incentive Plan (the "2011 Plan"), which is expected to be recognized over a weighted-average period of 2.5 years.
The following table summarizes information related to restricted stock units and performance-based restricted stock units: |
| | | | | | |
| | Units | | Weighted-Average Grant Date Fair Value |
| | (in thousands) | | |
| Non-vested as of December 31, 2018 | 5,669 |
| | $ | 3.29 |
|
| Granted | 2,908 |
| | $ | 1.10 |
|
Vested(1) | (1,461 | ) | | $ | 3.78 |
|
| Forfeited | (1,195 | ) | | $ | 3.79 |
|
| Non-vested as of September 30, 2019 | 5,921 |
| | $ | 1.99 |
|
(1) 1,441 thousand shares of common stock were issued for restricted stock units vested and the nine months endedremaining 20 thousand shares were withheld for taxes.
As of September 30, 20172019, there was as follows (shares in thousands):
|
| | | | | | | | | | | | |
| | | | Options Outstanding | | Restricted Stock
Outstanding |
| | Shares and Units
Available
for Grant | | Number
of Shares | | Weighted-
Average
Exercise
Price | | Number
of Shares |
| December 31, 2016 | 10,406 |
| | 7,495 |
| | $ | 4.63 |
| | 4,237 |
|
| Additional shares reserved under the 2011 Equity Incentive Plan | 3,527 |
| | — |
| | — |
| | — |
|
| Granted | (2,973 | ) | | 145 |
| | 3.65 |
| | 2,828 |
|
| PSU Additional Goal Shares Achieved | (242 | ) | | — |
| | — |
| | 242 |
|
| Options exercised/Restricted stock released | — |
| | (14 | ) | | 4.86 |
| | (1,834 | ) |
| RSU shares withheld for taxes | 193 |
| | — |
| | — |
| | — |
|
| Canceled/Forfeited | 1,499 |
| | (922 | ) | | 5.47 |
| | (577 | ) |
| September 30, 2017 | 12,410 |
| | 6,704 |
| | $ | 4.49 |
| | 4,896 |
|
The weighted average grant-date fair value$9.5 million of employee stock options granted during the three months ended September 30, 2017 and 2016 was $1.74 and $2.30 per share, respectively, and $1.90 and $2.03 per share for the nine months ended September 30, 2017 and 2016, respectively. The unamortized grant date fair value of both stock options andunrecognized compensation expense related to non-vested restricted stock awards totaled $18.0 million at September 30, 2017.units and performance-based restricted stock units granted under the 2011 Plan, which is expected to be recognized over a weighted-average period of 2.5 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 weighted stock options, non-vestedunvested restricted stock and shares to be purchased under our 2011 Employee Stock Purchase Plan having an anti-dilutive effect of 7.0Plan. The Company excluded from diluted earnings per share the weighted-average common share equivalents related to 7.9 million and 4.67.3 million shares for the
three months ended September 30, 20172019 and 2016,2018, respectively, and 5.88.4 million and 10.46.7 million shares for the nine months ended September 30, 20172019 and 2016, respectively.2018, respectively, because their effect would have been anti-dilutive.
Note 710 — Income Taxes
The Company is subject to taxation in the United StatesU.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. IncomeThe "Provision for income tax expenseexpense" 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 United Statesthe U.S., Ireland and Singapore because those losses are offset by a full valuation allowance. The tax years 20102011 through 20172019 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 and $0.9 million as of September 30, 20172019 and December 31, 2016,2018, respectively, none of which, if recognized, would affect the Company’s effective tax rate.
Note 8 — Restructuring and Other
In early May 2017, the Company announced a restructuring effort to better align its cost structure with current business and market conditions, including a headcount reduction and the reduction of office space in four locations. The restructuring plan is accounted for in accordance with ASC 420, Exit or Disposal Cost Obligations. The Company recognized restructuringdoes not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company recognizes interest and other charges of $0.5 million and $6.3 million duringpenalties accrued related to unrecognized tax benefits in income tax expense. During the three and nine months ended September 30, 2017, respectively.2019 and 2018, interest and penalties recognized were insignificant.
Note 11 — Restructuring and Other Related Costs
The Company has undergone restructuring efforts to better align its cost structure with our 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 stockseverance payments, related employee benefits, stock-based compensation related to the accelerated vesting of certain equity awards severance payments, related employee benefits 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 Company expects to have restructuring plans and other related expenses through the remainder of 2017, as restructuring activities targeted at reducing the overall cost structure of the business will continue over several quarters. Also, future cash outlays related to these restructuring activities are expected to total $1.3 million. These amounts are reflectedrecorded in Accounts payable, Accrued"Accrued expenses", "Accrued compensation and benefitsbenefits" and Accrued expenses"Other long-term liabilities" in our Consolidated Balance Sheetsas of September 30, 2017.2019 and December 31, 2018.
RestructuringDuring 2019, the Company announced a restructuring effort resulting in a reduction of headcount and other liability activitiesoffice lease costs. The Company recognized charges related to this restructuring effort of $0.6 million and $1.8 million for the periodthree and nine months ended September 30, 2017 is summarized as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Severance and Other Employee Costs | | Lease and Other Contract Termination Costs | | Asset Impairments | | Total |
| Restructuring and other liability at January 1, 2017 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Restructuring and other charges | 3,399 |
| | 1,974 |
| | 886 |
| | 6,259 |
|
| Cash paid | (2,908 | ) | | (830 | ) | | — |
| | (3,738 | ) |
| Non-cash impairment charges | — |
| | — |
| | (886 | ) | | (886 | ) |
| Acceleration of stock-based compensation expense in additional paid-in capital | (352 | ) | | — |
| | — |
| | (352 | ) |
| Restructuring and other liability at September 30, 2017 | $ | 139 |
| | $ | 1,144 |
| | $ | — |
| | $ | 1,283 |
|
The following table presents a reconciliation of the beginning and ending fair value liability balance related to the 2019 restructuring effort: |
| | | | | | | | | | | |
| | Severance and Other Employee Costs | | Lease Termination Costs | | Total |
| | (in thousands) |
| Balance as of January 1, 2019 | $ | — |
| | $ | — |
| | $ | — |
|
| Restructuring and other related costs | 1,713 |
| | 123 |
| | 1,836 |
|
| Cash paid | (1,270 | ) | | (123 | ) | | (1,393 | ) |
| Balance as of September 30, 2019 | $ | 443 |
| | $ | — |
| | $ | 443 |
|
In May 2017, the Company announced a restructuring effort resulting in a headcount reduction and the reduction of office space in 4 locations. The Company recognized charges related to this restructuring effort of $0.2 million for the three and nine months ended September 30, 2018. The Company does not expect to incur additional restructuring charges related to the May 2017 restructuring as of September 30, 2019.
The following table presents a reconciliation of the beginning and ending fair value liability balance related to the May 2017 restructuring effort: |
| | | | | | | | | | | | | | | |
| | Severance and Other Employee Costs | | Lease and Other Contract Termination Costs | | Asset Impairments | | Total |
| | | | | | | | |
| | (in thousands) |
| Balance as of January 1, 2017 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Restructuring and other related costs | 3,483 |
| | 2,939 |
| | 886 |
| | 7,308 |
|
| Cash paid | (3,060 | ) | | (1,185 | ) | | — |
| | (4,245 | ) |
| Change in estimates and non-cash charges | — |
| | — |
| | (886 | ) | | (886 | ) |
| Acceleration of stock-based compensation expense in additional paid-in capital | (352 | ) | | — |
| | — |
| | (352 | ) |
| Balance as of December 31, 2017 | 71 |
| | 1,754 |
| | — |
| | 1,825 |
|
| Restructuring and other related costs | 120 |
| | 89 |
| | — |
| | 209 |
|
| Cash paid | (188 | ) | | (1,133 | ) | | — |
| | (1,321 | ) |
| Change in estimates and non-cash charges | (3 | ) | | 252 |
| | — |
| | 249 |
|
| Balance as of December 31, 2018 | — |
| | 962 |
| | — |
| | 962 |
|
| Cash paid | — |
| | (134 | ) | | — |
| | (134 | ) |
| Change in estimates and non-cash charges | — |
| | (51 | ) | | — |
| | (51 | ) |
| Balance as of September 30, 2019 | $ | — |
| | $ | 777 |
| | $ | — |
| | $ | 777 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our unaudited consolidated financial statementsConsolidated Financial Statements and notes thereto which appear elsewhere in this Quarterly Reportquarterly report on Form 10-Q.
This report, including this MD&A, 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 1934.1934, as amended.Forward looking statements may appear throughout this report. These forward-looking statements are generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,”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 and those discussed in the sections of our Annual Report on Form 10-K entitled “Special Note Regarding Forward“Forward Looking Statements and Industry Data”Statements” and “Risk Factors” and in our other filings with the Securities and Exchange Commission (“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.
All dollar amounts expressed as numbers in this MD&A are in millions unless otherwise noted.
OVERVIEWOverview
ServiceSource International, Inc. is a global leader in outsourced, performance-based customer success and revenue growth solutions. Through our people, processes and technology, we find, convert, grow and retain revenue on behalf of our clients—clients — some of the world’s leading business-to-business companies—companies — in more than 3545 languages. Our solutions help our clients strengthen their customer relationships, drive improved customer adoption, expansion and retention and minimize churn. Our technology platform and best-practice business processes combined with our highly-trained, client-focused revenue delivery professionals and data from over 1520 years of operating experience enable us to provide our clients greater value for our customer success services than attained by our clients’clients' in-house customer success teams.
“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.
BasisKey Financial Results for the Three Months Ended September 30, 2019
GAAP revenue was $53.4 million compared with $57.2 million reported for the same period in 2018.
GAAP net loss was $4.4 million or $0.05 per diluted share, compared with GAAP net loss of Presentation$6.6 million or $0.07 per diluted share reported for the same period in 2018.
Adjusted EBITDA was $1.1 million compared with Adjusted EBITDA of $3.1 million reported for the same period in 2018. See “Non-GAAP Financial Measurements” below for a reconciliation of Adjusted EBITDA from "Net loss."
Ended the quarter with $25.4 million of cash and cash equivalents and restricted cash and no borrowings under the Company’s $40.0 million revolving line of credit.
Results of Operations
For the Three Months Ended September 30, 2019 Compared to the Same Period Ended September 30, 2018
Net Revenue, Cost of Revenue and Gross Profit
Substantially all of our netNet 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 generally invoicealso generate revenues from selling professional services. Historically, we earned a small percentage of our clients for our services in arrears on a monthly basis for sales commissions, and on a quarterly basis for certain performance sales commissions; accordingly, we typically have no deferred revenue related to these services. We do not set the price, terms or scope of services in the service contracts with end customers and do not have any obligations related to the underlying service contracts between our clients and their end customers.
We also earntotal revenue from the sale of subscriptions to our cloud-based applications. To date, subscription revenue has been a small percentage of total revenue. We expect revenues generated from subscriptions of Renew OnDemand to continue declining for the remainder of 2017. Subscription fees are accounted for separately from commissions, and they are billed in advance over a monthly, quarterly or annual basis. Subscription revenue is recognized ratably over the related subscription term.
We have generated a significant portion of our revenue from a limited number of clients. Our top ten customers accounted for 67% and 65% of our net revenue for the nine months ended September 30, 2017 and 2016, respectively.
The lossCost of revenue from any of our top clients for any reason, including the failure to renew our contracts, termination of some or all of our services, a change of relationship with any of our key clients or their acquisition, can cause a significant decrease in our revenue.
Our business is geographically diversified. Through the first three quarters of 2017, 64% of our net revenue was earned in North America and Latin America (“NALA”), 24% in Europe, Middle East and Africa (“EMEA”) and 12% in Asia Pacific Japan (“APJ”). Net revenue for a particular geography generally reflects commissions earned from sales of service contracts managed from our revenue delivery centers in that geography. Predominantly all of the service contracts sold and managed by our revenue delivery centers relate to end customers located in the same geography. In addition, our Kuala Lumpur, Manila and Sofia locations are revenue delivery centers where we have centralized, for our worldwide operations, the key contract renewal processes that do not require regional expertise, such as client data management and quoting.
Cost of Revenue and Gross Profit
Our cost of revenue expenses includeincludes employee compensation, technology costs, including those related to the delivery of our cloud-based technologies and allocated overhead costs.
Compensation expense includes salary, bonus, benefits |
| | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | | |
| | 2019 | | 2018 | | | | |
| | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | $ Change | | % Change |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Net revenue | $ | 53,395 |
| | 100 | % | | $ | 57,173 |
| | 100 | % | | $ | (3,778 | ) | | (7 | )% |
| Cost of revenue | 37,871 |
| | 71 | % | | 39,949 |
| | 70 | % | | (2,078 | ) | | (5 | )% |
| Gross profit | $ | 15,524 |
| | 29 | % | | $ | 17,224 |
| | 30 | % | | $ | (1,700 | ) | | (10 | )% |
Net revenue decreased $3.8 million, or 7%, for the three months ended September 30, 2019 compared to the same period in 2018, primarily due to client churn and stock-based compensationlower bookings.
Cost of revenue decreased $2.1 million, or 5%, for our dedicated service sales teams. Our allocated overhead includes costs for facilities, information technology and depreciation, including amortization of internal-use software associated with our service revenue technology platform and cloud applications. Allocated costs for facilities consist of rent, maintenance and compensation of personnelthe three months ended September 30, 2019 compared to the same period in our facilities departments. Our allocated costs for information technology include2018, primarily due to a decrease in employee related costs associated with third-party data centers where we maintain our data servers, compensation of our information technology personnellower revenue attainment, reduction in headcount and the cost of supportlower travel and maintenance contracts associated with computer hardware and software. To the extent our client base or business with our existing client base expands, we may need to hire additional service sales personnel and invest in infrastructure to support such growth. Our cost of revenue may fluctuate significantly and increase or decrease on an absolute basis and as a percentage of revenue in the near term, including for the reasons discussed under, “Factors Affecting Our Performance—Implementation Cycle” in our 2016 Annual Report on Form 10-K.entertainment expenditures.
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | | |
| | 2019 | | 2018 | | | | |
| | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | $ Change | | % Change |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Operating expenses: | | | | | | | | | | | |
| Sales and marketing | $ | 7,499 |
| | 14 | % | | $ | 8,622 |
| | 15 | % | | $ | (1,123 | ) | | (13 | )% |
| Research and development | 1,165 |
| | 2 | % | | 1,395 |
| | 2 | % | | (230 | ) | | (16 | )% |
| General and administrative | 10,129 |
| | 19 | % | | 12,907 |
| | 23 | % | | (2,778 | ) | | (22 | )% |
| Restructuring and other related costs | 630 |
| | 1 | % | | — |
| | — | % | | 630 |
| | 100 | % |
| Total operating expenses | $ | 19,423 |
| | 36 | % | | $ | 22,924 |
| | 40 | % | | $ | (3,501 | ) | | (15 | )% |
Sales and Marketing. Marketing
Sales and marketing expenses are a significant component of our operating costs andprimarily consist primarily of compensation expenses and sales commissions for our sales and marketing staff, amortization of contract acquisition costs, allocated expenses and marketing programs and events. We sell our solutions through our global sales organization, which is organized across
Sales and marketing expenses decreased $1.1 million, or 13%, for the three geographic regions: NALA, EMEAmonths ended September 30, 2019 compared to the same period in 2018, primarily due to a decrease in employee related costs associated with reduction in headcount, lower revenue attainment and APJ. Our commission plans provide that payment of commissions to our sales representatives is contingent on their continued employment,lower travel and we recognize expense over a period that is generally between the contract signing date and twelve to fourteen months following the execution of the applicable contract. When commissions are paid upon contract signing and are not contingent on future payments and continued employment, we consider that portion of the commission to be earned and therefore expensed at contract signing.entertainment expenditures.
Research and Development. Development
Research and development expenses primarily consist primarily of employee compensation expense, allocated costs and the cost of third-party service providers. We focus our research
Research and development efforts on developing new products and applications related to our technology platform. We capitalize certain expenditures relatedexpenses decreased $0.2 million, or 16%, for the three months ended September 30, 2019 compared to the development and enhancement of internal-use software relatedsame period in 2018, primarily due to oura decrease in information technology platform.costs.
General and Administrative. Administrative
General and administrative expenses primarily consist primarily of employee compensation expense for our executive, human resources, finance and legal functions and related expenses for professional fees for accounting, tax and legal services, as well as allocated expenses, which consistsconsist of depreciation, amortization of internally developed software, facilitiesfacility and technology costs.
General and administrative expenses decreased $2.8 million, or 22%, for the three months ended September 30, 2019 compared to the same period in 2018, primarily due to the following:
$2.5 million decrease in legal reserves;
$0.8 million decrease in employee related costs primarily due to changes in executive management, lower travel and entertainment expenditures and lower recruiting costs; and
$0.3 million decrease in professional fees; partially offset by
$0.7 million increase in information technology support costs.
Restructuring and Other.Other Related Costs
Restructuring and other expensesrelated costs primarily consist primarily of employees’ severance, payments,other employee costs and lease termination costs.
Restructuring and other related employee benefits, stock compensationcosts increased $0.6 million for the three months ended September 30, 2019 compared to the same period in 2018, due to costs incurred related to the accelerated vesting of certain equity awards, related legal fees, asset impairment chargesrestructuring effort to better align our cost structure with current business and charges related to leasesmarket conditions, resulting in a headcount reduction in our sales, marketing and research and development teams and reduction in office lease costs.
Other Expenses
Interest and other contract termination costs.
Interest Expense and Other, Net and Gain (Loss) on Cost Basis Equity Investment
Interest expense. Interest expense, net primarily consists of amortization of debt issuance costs, interest expense associated with our convertiblethe Company's debt imputed interest from capital lease payments,obligations, accretion of the Company's debt discount, and amortization of debt issuance costs. We recognize accretion of debt discount and amortization of interest costs using the effective interest method. We expect our interest expense to increase slightly for the remainder of 2017 from accretion of debt discount, amortization of deferred financing costs and contractual interest costs as a result of our August 2013 issuance of $150.0 million aggregate principal amount of convertible notes due August 2018.
Other, net. Other, net consists primarily of foreign exchange gains and losses and the interest income earned on our cash and cash equivalents and marketable securities, investments. We expect other income to vary depending on the movement in foreign currency exchange ratesimputed interest from our finance lease payments and the related impact on our foreign exchange gain (loss)gains and losses. |
| | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | | |
| | 2019 | | 2018 | | | | |
| | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | $ Change | | % Change |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Interest expense | $ | (91 | ) | | — | % | | $ | (1,173 | ) | | (2 | )% | | $ | 1,082 |
| | (92 | )% |
| Other (expense) income, net | $ | (328 | ) | | (1 | )% | | $ | 115 |
| | — | % | | $ | (443 | ) | | * |
|
* Not considered meaningful.
Interest expense decreased $1.1 million, or 92%, for the return of interest on our investments.
Gain (loss) on cost basis equity investment. In 2013, we made an equity investment in a private company for $4.5 million, which represented less than 5% of the outstanding equity of that company. Based on unfavorable growth trends and declining financial performance of this private company, we determined this investment was fully impaired and recorded a $2.3 million and $2.2 million impairment charge in the third and fourth quarters of 2016, respectively. During the quarterthree months ended September 30, 2017,2019 compared to the same period in 2018, primarily due to the maturity and payoff of our $150.0 million convertible notes in August 2018.
Other (expense) income, net decreased $0.4 million for the three months ended September 30, 2019 compared to the same period in 2018, primarily due to foreign currency fluctuations.
Provision for Income Tax (Expense) Benefit |
| | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | | |
| | 2019 | | 2018 | | | | |
| | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | $ Change | | % Change |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Provision for income tax (expense) benefit | $ | (119 | ) | | — | % | | $ | 133 |
| | — | % | | $ | (252 | ) | | * |
* 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 (expense) benefit increased $0.3 million for the three months ended September 30, 2019 compared to the same period in 2018, due to a increase in profitable operations in certain foreign jurisdictions.
For the Nine Months Ended September 30, 2019 Compared to the Same Period Ended September 30, 2018
Net Revenue, Cost of Revenue and Gross Profit |
| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | | | |
| | 2019 | | 2018 | | | | |
| | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | $ Change | | % Change |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Net revenue | $ | 161,264 |
| | 100 | % | | $ | 176,869 |
| | 100 | % | | $ | (15,605 | ) | | (9 | )% |
| Cost of revenue | 115,696 |
| | 72 | % | | 124,136 |
| | 70 | % | | (8,440 | ) | | (7 | )% |
| Gross profit | $ | 45,568 |
| | 28 | % | | $ | 52,733 |
| | 30 | % | | $ | (7,165 | ) | | (14 | )% |
Net revenue decreased $15.6 million, or 9%, for the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to client churn and lower bookings.
Cost of revenue decreased $8.4 million, or 7%, for the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to the following:
$5.9 million decrease in employee related costs driven by lower revenue attainment, reduction in headcount and lower travel and entertainment expenditures;
$4.1 million decrease in depreciation and amortization expense primarily due to internally developed software fully amortized as of July 2018; and
$0.6 million decrease in professional service fees; partially offset by
$2.1 million increase in information technology support and facilities costs.
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | | | |
| | 2019 | | 2018 | | | | |
| | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | $ Change | | % Change |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Operating expenses: | | | | | | | | | | | |
| Sales and marketing | $ | 22,934 |
| | 14 | % | | $ | 27,112 |
| | 15 | % | | $ | (4,178 | ) | | (15 | )% |
| Research and development | 3,702 |
| | 2 | % | | 4,691 |
| | 3 | % | | (989 | ) | | (21 | )% |
| General and administrative | 32,081 |
| | 20 | % | | 38,953 |
| | 22 | % | | (6,872 | ) | | (18 | )% |
| Restructuring and other related costs | 1,836 |
| | 1 | % | | 209 |
| | — | % | | 1,627 |
| | * |
| Total operating expenses | $ | 60,553 |
| | 38 | % | | $ | 70,965 |
| | 40 | % | | $ | (10,412 | ) | | (15 | )% |
* Not considered meaningful.
Sales and Marketing
Sales and marketing expenses decreased $4.2 million, or 15%, for the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to a decrease in employee related costs driven by lower revenue attainment, reduction in headcount and lower travel and entertainment expenditures.
Research and Development
Research and development expenses decreased $1.0 million, or 21%, for the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to a decrease in employee related costs driven by our restructuring effort to better align our cost structure with current business and market conditions as well as a decrease in bonus expense due to lower revenue attainment.
General and Administrative
General and administrative expenses decreased $6.9 million, or 18%, for the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to the following:
$5.4 million decrease in employee related costs primarily due to changes in executive management, decrease in bonus expense due to lower revenue attainment and decreases in temporary labor, recruiting costs and travel and entertainment expenditures;
$2.5 million decrease in legal reserves; and
$1.2 million decrease in professional service fees; partially offset by
$1.5 million increase in information technology support costs; and
$0.8 million increase in depreciation and amortization expense.
Restructuring and Other Related Costs
Restructuring and other related costs increased $1.6 million for the nine months ended September 30, 2019 compared to the same period in 2018, due to costs incurred related to the restructuring effort to better align our cost structure with current business and market conditions, resulting in a headcount reduction in our sales, marketing and research and development teams and reduction in office lease costs.
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | | | |
| | 2019 | | 2018 | | | | |
| | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | $ Change | | % Change |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Interest expense | $ | (303 | ) | | — | % | | $ | (7,301 | ) | | (4 | )% | | $ | 6,998 |
| | (96 | )% |
| Other (expense) income, net | $ | (664 | ) | | — | % | | $ | 621 |
| | — | % | | $ | (1,285 | ) | | * |
|
| Impairment loss on investment securities | $ | — |
| | — | % | | $ | (1,958 | ) | | (1 | )% | | $ | 1,958 |
| | (100 | )% |
* Not considered meaningful.
Interest expense decreased $7.0 million, or 96%, for the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to the maturity and payoff of our $150.0 million convertible notes in August 2018.
Other (expense) income, net decreased $1.3 million for the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to a decrease in interest income earned on our short-term investments and foreign currency fluctuations.
During 2018, we sold thisdetermined to liquidate the majority of our investment securities to have sufficient cash on hand to repay our $150.0 million convertible notes due August 1, 2018. Based on our decision to sell these investment securities, we determined an other-than-temporary impairment occurred as of March 31, 2018. Consequently, a $2.0 million impairment loss was recorded in our Consolidated Statements of Operations for $2.1nine months ended September 30, 2018.
Provision for Income Tax Expense |
| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | | | |
| | 2019 | | 2018 | | | | |
| | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | $ Change | | % Change |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Provision for income tax expense | $ | (239 | ) | | — | % | | $ | (294 | ) | | — | % | | $ | 55 |
| | (19 | )% |
Provision for income tax expense resulted primarily from profitable jurisdictions where no valuation allowance has been provided. Provision for income tax expense decreased $0.1 million, or 19% for the nine months ended September 30, 2019 compared to the same period in 2018, due to a decrease in profitable operations in certain foreign jurisdictions.
Liquidity and Capital Resources
Our primary operating cash requirements include the payment of compensation and related costs and costs for our facilities and information technology infrastructure. Historically, we have financed our operations from cash provided by our operating activities and cash proceeds from the exercise of stock options and our employee stock purchase plan. We believe our existing cash and cash equivalents and available funds from our senior secured revolving line of credit (the “Revolver”) will be sufficient to meet our working capital and capital expenditure needs over the next twelve months.
As of September 30, 2019, we had cash and cash equivalents of $23.1 million, which primarily consisted of demand deposits and money market mutual funds. Included in cash and recordedcash equivalents was $7.1 million held by our foreign subsidiaries used to satisfy their operating requirements. We consider the proceedsundistributed 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, 2019, we had no unremitted earnings from our foreign subsidiaries.
During July 2018, we entered into a $40.0 million Revolver that allows us to borrow against our domestic receivables as defined in the credit agreement. The Revolver matures July 2021 and bears interest at a variable rate per annum based on the greater of the prime rate, the Federal Funds rate plus 0.50% or the one-month LIBOR rate plus 1.00%, plus, in each case, a margin of 1.00% for base rate borrowings or 2.00% for Eurodollar borrowings. Proceeds from the Revolver are used for working capital and general corporate purposes.
As of September 30, 2019, we did not have any borrowings outstanding under the Revolver. Obligations under the credit agreement are secured by substantially all assets of the borrowers and certain of their subsidiaries, including pledges of equity in certain of our subsidiaries. The Revolver has covenants with which we are in compliance as of September 30, 2019 and December 31, 2018.
Letter of Credit and Restricted Cash
In connection with two of our leased facilities, we are 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 our Consolidated Balance Sheets.
Cash Flows
The following table presents a summary of our cash flows:
|
| | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2019 | | 2018 |
| | | | |
| | (in thousands) |
| Net cash provided by operating activities | $ | 7,238 |
| | $ | 5,285 |
|
| Net cash (used in) provided by investing activities | (9,243 | ) | | 125,196 |
|
| Net cash used in financing activities | (462 | ) | | (118,477 | ) |
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | 125 |
| | 134 |
|
| Net change in cash and cash equivalents and restricted cash | $ | (2,342 | ) | | $ | 12,138 |
|
Our total depreciation and amortization expense was comprised of the following: |
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
| | (in thousands) |
| Purchased intangible asset amortization | $ | — |
| | $ | — |
| | $ | — |
| | $ | 85 |
|
| Internally developed software amortization | 1,524 |
| | 1,680 |
| | 4,190 |
| | 7,556 |
|
| Property and equipment depreciation | 1,640 |
| | 1,974 |
| | 5,968 |
| | 5,757 |
|
| Total depreciation and amortization | $ | 3,164 |
| | $ | 3,654 |
| | $ | 10,158 |
| | $ | 13,398 |
|
Operating Activities
Net cash provided by operating activities increased $2.0 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily as a gain.result of improved cash collections from customers during the current period compared to the prior period andlower cash payments made during the current period compared to the prior period related to operating costs previously accrued for; offset by a decrease in Adjusted EBITDA.
Investing Activities
Net cash provided by investing activities decreased $134.4 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily as a result of a decrease in cash inflows from the sale and maturity of our short-term investments during 2018, offset by a decrease in cash outflows related to the acquisition of property and equipment during the nine months ended September 30, 2019.
Financing Activities
Net cash used in financing activities decreased $118.0 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily as a result of the maturity and payoff of our $150.0 million convertible notes in August 2018, offset by proceeds from our Revolver.
Off-Balance Sheet Arrangements
As of September 30, 2019 we did not have any off balance sheet arrangements.
Income Tax Provision (Benefit)Contractual Obligations and Commitments
We accountOur contractual obligations primarily consist of obligations under operating and finance leases for income taxes using an assetoffice space and liability method, which requires the recognition of taxes payable or refundable for the current yearcertain equipment and deferred tax assets and liabilities for the expectednon-cancelable service contracts.
The following table summarizes future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basispayments of our taxable subsidiaries’ assets and liabilities usingcontractual obligations as of September 30, 2019: |
| | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 year | | 1- 3 years | | 4- 5 years | | More than 5 years |
| | | | | | | | | | |
| | (in thousands) |
| Finance lease obligations | $ | 1,855 |
| | $ | 962 |
| | $ | 893 |
| | $ | — |
| | $ | — |
|
| Operating lease obligations | 43,879 |
| | 8,020 |
| | 18,845 |
| | 5,049 |
| | 11,965 |
|
| Operating sublease income | (8,970 | ) | | (2,535 | ) | | (5,301 | ) | | (1,134 | ) | | — |
|
| Service contracts | 35,043 |
| | 8,427 |
| | 24,557 |
| | 2,059 |
| | — |
|
| Restructuring and other related costs | 1,220 |
| | 688 |
| | 491 |
| | 41 |
| | — |
|
Total(1) | $ | 73,027 |
| | $ | 15,562 |
| | $ | 39,485 |
| | $ | 6,015 |
| | $ | 11,965 |
|
(1) Excluded from the enacted tax rates in effect fortable is the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
We evaluate our ability to realize the tax benefits associated with deferred tax assets on a jurisdictional basis. This evaluation utilizes the framework contained in ASC 740, Income Taxes, wherein management analyzes all positive and negative evidence available at the balance sheet date to determine whether all or some portion of our deferred tax assets will not be realized. Under this guidance, a valuation allowance must be established for deferred tax assets when it is more likely than not (a probability level of more than 50 percent) that they will not be realized. In assessing the realization of our deferred tax assets, we consider all available evidence, both positive and negative, and place significant emphasis on guidance contained in ASC 740, which states that “a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.”
We account for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. We record an income tax liability if any,we recorded for the difference between the benefit recognized and measured and the tax position taken or expected to be taken on our tax returns. To the extent that the assessment of such tax positions change, the change in estimate is recorded in the period in which the determination is made. The reserves are adjusted in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
Results of Operations
The following table sets forth our operating results as a percentage of net revenue:
|
| | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (as % of net revenue) |
| Net revenue | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| Cost of revenue | 70 | % | | 65 | % | | 70 | % | | 67 | % |
| Gross profit | 30 | % | | 35 | % | | 30 | % | | 33 | % |
| Operating expenses: | | | | | | | |
| Sales and marketing | 13 | % | | 14 | % | | 14 | % | | 17 | % |
| Research and development | 2 | % | | 3 | % | | 3 | % | | 3 | % |
| General and administrative | 22 | % | | 23 | % | | 23 | % | | 21 | % |
| Restructuring and other | 1 | % | | — | % | | 4 | % | | — | % |
| Total operating expenses | 38 | % | | 40 | % | | 44 | % | | 41 | % |
| Loss from operations | (8 | )% | | (5 | )% | | (14 | )% | | (8 | )% |
Three and Nine Months Ended September 30, 2017 and 2016.
Net Revenue, Cost of Revenue and Gross Profit
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | % Change | | 2017 | | 2016 | | Change | | % Change |
| | (in thousands) | | | | (in thousands) | | |
| Net Revenue | $ | 58,132 |
| | $ | 62,514 |
| | $ | (4,382 | ) | | (7 | )% | | $ | 173,103 |
| | $ | 184,233 |
| | $ | (11,130 | ) | | (6 | )% |
| Cost of Revenue | 40,803 |
| | 40,789 |
| | 14 |
| | — | % | | 121,729 |
| | 122,568 |
| | (839 | ) | | (1 | )% |
| Gross Profit | $ | 17,329 |
| | $ | 21,725 |
| | $ | (4,396 | ) | | (20 | )% | | $ | 51,374 |
| | $ | 61,665 |
| | $ | (10,291 | ) | | (17 | )% |
| | | | | | | | | | | | | | | | |
Net revenue decreased $4.4 million, or 7%, for the third quarter of 2017 compared to the third quarter of 2016. The overall decrease was due to contractions and lower production with certain existing customers that was not offset by production related to expansions and new business in the third quarter of 2017.
Our cost of revenue in the third quarter of 2017 was consistent with the third quarter of 2016 as a result of a $0.9 million decrease in employee related costs as a result of shifting headcount to lower cost offices and locations, all related to our continuous efforts to better align employee costs with revenue, a decrease of $0.5 million in temporary labor and consulting costs, $0.2 million decrease in recruitment costs, $0.4 million decrease in information technology, offset by a $1.2 million increase in depreciation and amortization costs and $0.8 million of overhead allocations.
Gross profit in the third quarter of 2017 decreased by $4.4 million, or 20%, compared to the same period in 2016 which is consistent with the decrease in revenue.
Net revenue decreased $11.1 million, or 6%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The overall decrease was due to contractions and lower production with certain existing customers that was not offset by production related to expansions and new business.
The $0.8 million, or 1%, decrease in our cost of revenue in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 reflects a $2.6 million decrease in employee related costs as a result of shifting headcount to lower cost offices and locations, all related to our continuous efforts to better align employee costs with revenue, a decrease of $1.5 million in temporary labor and consulting costs, $0.6 million decrease in recruitment costs, $0.9 million decrease in information technology costs, offset by a $2.6 million increase in depreciation and amortization costs and $2.1 million of overhead allocations.
Gross profit in the nine months ended September 30, 2017 decreased by $10.3 million, or 17%, compared to the same period in 2016, which is in line with the decrease in revenue.
Operating Expenses
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | % Change | | 2017 | | 2016 | | Change | | % Change |
| | (in thousands) | | | | (in thousands) | | |
| Operating expenses: | | | | | | | | | | | | | | | |
| Sales and marketing | $ | 7,829 |
| | $ | 8,847 |
| | $ | (1,018 | ) | | (12 | )% | | $ | 24,790 |
| | $ | 30,626 |
| | $ | (5,836 | ) | | (19 | )% |
| Research and development | 1,048 |
| | 1,952 |
| | (904 | ) | | (46 | )% | | 4,534 |
| | 6,132 |
| | (1,598 | ) | | (26 | )% |
| General and administrative | 12,543 |
| | 14,638 |
| | (2,095 | ) | | (14 | )% | | 40,029 |
| | 38,233 |
| | 1,796 |
| | 5 | % |
| Restructuring and other | 545 |
| | — |
| | 545 |
| | 100 | % | | 6,259 |
| | — |
| | 6,259 |
| | 100 | % |
| Total operating expenses | $ | 21,965 |
| | $ | 25,437 |
| | $ | (3,472 | ) | | (14 | )% | | $ | 75,612 |
| | $ | 74,991 |
| | $ | 621 |
| | 1 | % |
| Includes stock-based compensation of: | | | | | | | | | | | | | | | |
| Sales and marketing | $ | 982 |
| | $ | 565 |
| | $ | 417 |
| | | | $ | 2,834 |
| | $ | 2,152 |
| | $ | 682 |
| | |
| Research and development | 42 |
| | 106 |
| | (64 | ) | | | | 107 |
| | 448 |
| | (341 | ) | | |
| General and administrative | 2,074 |
| | 1,276 |
| | 798 |
| | | | 6,486 |
| | 3,695 |
| | 2,791 |
| | |
| Restructuring and other | 352 |
| | — |
| | 352 |
| | | | 352 |
| | — |
| | 352 |
| | |
| Total stock-based compensation | $ | 3,450 |
| | $ | 1,947 |
| | $ | 1,503 |
| | | | $ | 9,779 |
| | $ | 6,295 |
| | $ | 3,484 |
| | |
Sales and marketing expenses
The $1.0 million, or 12%, decrease in sales and marketing expenses in the third quarter of 2017 compared to the third quarter of 2016 resulted from a $0.7 million decrease in employee related costs, a $0.4 million decrease in travel costs and $0.1 million in overhead allocations, offset by a $0.2 million increase in marketing programs.
The $5.8 million, or 19%, decrease in sales and marketing expenses in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 resulted from a $4.5 million decrease in employee related costs, a $1.3 million decrease in travel costs, a $0.1 million decrease in temporary labor and consulting costs, a $0.1 million decrease in recruitment expense and $0.3 million of overhead allocation. These decreases were offset by a $0.6 million increase in marketing programs costs.
Research and development expenses
The $0.9 million, or 46%, decrease in research and development expense in the third quarter of 2017 compared to the third quarter of 2016 was primarily due to a $0.6 million decrease in employee related costs associated with decrease in headcount and a $0.2 million decrease in temporary labor and $0.1 million decrease in overhead allocations.
Internal-use software development capitalization decreased $0.4 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily due to decreased development efforts related to our Renew OnDemand platform.
The $1.6 million, or 26%, decrease in research and development expense in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily due to $1.5 million decrease in employee related costs associated with a decrease in headcount, a $0.1 million decrease in travel costs and a $0.1 million decrease in rent and facility expense. These decreases were offset by a $0.1 million increase in information technology costs.
Internal-use software development capitalization increased by $0.1 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to continued development efforts related to our internal managed services platforms.
General and administrative expenses
The $2.1 million, or 14%, decrease in general and administrative expense in the third quarter of 2017 compared to the third quarter of 2016 reflected a $1.0 million decrease in employee related costs, a $0.5 million decrease in temporary labor and consulting costs, a $0.2 decrease in rent and facility costs, a $0.3 decrease in travel costs, a $0.7 million decrease in overhead allocations and a $1.5 million decrease due to a non-recurring legal reserve recorded in the third quarter of 2016. Offsetting these decreases was a $0.4 million increase in marketing programs, a $0.3 million increase in recruitment costs, $0.3 million increase in information technology costs and a $1.1 million increase in depreciation and amortization costs.
The $1.8 million, or 5%, increase in general and administrative expense in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 reflected a $1.3 million increase in employee related costs, $0.9 million increase in recruitment costs, a $0.8 increase in information technology, a $2.9 million increase in depreciation expense and a $0.4 million increase in marketing costs. Offsetting these increases was a $0.8 million decrease in travel costs, $0.4 million decrease in temporary labor and consulting fees, $1.5 million decrease related to a non-recurring legal reserve recorded in the third quarter of 2016 and a $1.9 million decrease in overhead allocations.
Restructuring and other expenses
The $0.5 million and $6.3 million increase in restructuring and other in the three and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016 was related to our recognition of restructuring and other charges during the second and third quarter of 2017. During the second quarter we announced an effort to better align our cost structure with current revenue levels.
Interest Expense and Other, Net and (Gain) Loss on Cost Basis Equity Investment
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | % Change | | 2017 | | 2016 | | Change | | % Change |
| | (in thousands) | | | | (in thousands) | | |
| Interest expense | $ | 2,965 |
| | $ | 2,792 |
| | $ | 173 |
| | 6 | % | | $ | 8,672 |
| | $ | 8,191 |
| | $ | 481 |
| | 6 | % |
| Other, net | (126 | ) | | (501 | ) | | (375 | ) | | (75 | )% | | (1,117 | ) | | (2,692 | ) | | (1,575 | ) | | (59 | )% |
| (Gain) loss on cost basis equity investment | (2,100 | ) | | 2,300 |
| | (4,400 | ) | | 191 | % | | (2,100 | ) | | 2,300 |
| | (4,400 | ) | | 191 | % |
Interest expense increased by $0.2 million, or 6%, in the third quarter of 2017 compared to the third quarter of 2016 and was due to the increased accretion of debt discount under the effective interest method related to the convertible notes issued in August 2013.
Other, net decreased by $0.4 million, or 75%, in the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily due to foreign currency fluctuations.
Interest expense increased by $0.5 million, or 6%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 and was due to the increased accretion of debt discount under the effective interest method related to the convertible notes issued in August 2013.
Other, net decreased by $1.6 million, or 59%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to foreign currency fluctuations.
(Gain) loss on cost basis equity investment of $2.1 million in the three and nine months ended September 30, 2017 is related to the sale of our equity investment in a private company which was originally purchased for $4.5 million we made in 2013. Based on unfavorable growth trends and declining financial performance of this private company, we determined this investment was fully impaired and recorded a $2.3 million and $2.2 million impairment charge in the third and fourth quarters of 2016, respectively.
Income Tax (Benefit) Provision |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | % Change | | 2017 | | 2016 | | Change | | % Change |
| | (in thousands) | | | | (in thousands) | | |
| Income tax (benefit) provision | $ | (180 | ) | | $ | 968 |
| | $ | (1,148 | ) | | * | | $ | 227 |
| | $ | 2,505 |
| | $ | (2,278 | ) | | * |
*Not considered meaningful.
For the third quarter of 2017, we recorded an income tax benefit of approximately $0.2 million. The tax benefit resulted primarily from a taxable loss in a foreign affiliate. Income tax expense decreased in the third quarter of 2017 by $1.1 million compared to the third quarter of 2016 primarily due to state valuation allowance recorded in 2016.
For the nine months ended September 30, 2017, we recorded income tax expense of approximately $0.2 million. This amount primarily represents anticipated taxes in jurisdictions where we have profitable operations, including certain U.S. states and foreign jurisdictions. Income tax expense decreased in the third quarter of 2017 by $2.3 million compared to the third quarter of 2016 primarily due to certain state deferred tax assets.
As of September 30, 2017, we have recorded a full valuation allowance on2019, our state deferredliability for unrecognized tax assets. No benefitbenefits was provided for losses incurred in U.S. and Singapore because those losses are offset by a full valuation allowance.
Liquidity and Capital Resources
At September 30, 2017, we had cash, cash equivalents and short-term investments of $179.8 million, which primarily consisted of demand deposits, money market mutual funds, corporate bonds and United States government obligations held by well-capitalized financial institutions. In addition, at September 30, 2017, we had cash and cash equivalents of $6.5 million held outside$1.0 million. A reasonable estimate of the U.S. by our foreign subsidiaries that was generated by such subsidiariesamounts and which is used to satisfy their current operating requirements. We consider the undistributed earningsperiods of our foreign subsidiaries torelated future payments cannot be indefinitely reinvested in foreign operations and we do not have current plans to repatriate these earnings to fund our U.S. operations as we have sufficient cash, cash equivalents and short-term investments heldmade at this time.
The contractual commitment amounts in the United States.
Our primary operating cash requirements include thetable above are associated with agreements that are enforceable and legally binding, which specify significant terms, included payment of compensation andterms, related costs, working capital requirements related to accounts receivable and accounts payable, as well as costs for our facilities and information technology infrastructure. Historically, we have financed our operations principally from cash provided by our operating activities, proceeds from stock offeringsservices and the exercise of stock options. We believe our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months.
In August 2013, we issued $150 million aggregate principal amount of 1.50% convertible notes due August 1, 2018 (the “Notes”) and concurrently entered into convertible notes hedges and separate warrant transactions. The Notes will mature on August 1, 2018, unless converted earlier. Upon conversion, the Notes will be settled in cash, shares of our stock, or any combination thereof, at our option. We received proceeds of $145.1 million from the issuanceapproximate timing of the convertible notes, net of associated fees, received $21.8 million from the issuance of the warrants and paid $31.4 million for the note hedges. The Notes weretransaction. Obligations under contracts that we may cancel without a significant penalty are not subject to conversion or repurchase at September 30, 2017 and are classified as a current liability on our condensed consolidated balance sheet. We believe we will have sufficient cash and liquid short-term investments to repay the Note at maturity.
Letter of Credit and Restricted Cash
In connection with one of our leased facilities, the Company is required to maintain a $1.2 million letter of credit. The letter of credit is secured by $1.2 million of a money market account which is classified as Other assets, net in our condensed consolidated balance sheet as of September 30, 2017.
Summary Cash Flows
The following table sets forth a summary of our cash flows (in thousands):
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| | 2017 | | 2016 |
| Net cash provided by operating activities | $ | 6,516 |
| | $ | 9,706 |
|
| Net cash used in investing activities | (13,707 | ) | | (23,887 | ) |
| Net cash provided by (used in) financing activities | 275 |
| | (4,777 | ) |
| Net decrease in cash and cash equivalents, net of impact of exchange rate changes on cash | (8,107 | ) | | (20,639 | ) |
Operating Activities
Net cash provided by operating activities was $6.5 million during the nine months ended September 30, 2017. Net loss during the period was $29.9 million adjusted by non-cash charges of $17.2 million for depreciation and amortization, $7.0 million of amortization of debt discount and issuance costs, $0.2 million for deferred income taxes, $10.4 million for stock-based compensation, $2.5 million for restructuring and other costs and a $2.1 million gain on the sale of our cost basis equity investment. Cash provided by operations as a result of the changes in our working capital include a $12.3 million decrease in accounts receivable, net. Uses of cash were related to a $2.4 million decrease in deferred revenue, a $0.8 million decrease in accounts payable, a $0.8 million decrease in accrued expenses, $1.0 million decrease in accrued taxes, $4.7 million decrease in accrued compensation and benefits and a $1.4 million decrease in other liabilities.
Net cash provided by operating activities was $9.7 million during the nine months ended September 30, 2016. Net loss during the period was $23.6 million adjusted by non-cash charges of $11.6 million for depreciation and amortization, $6.5 million of amortization of debt discount and issuance costs, $1.7 million for deferred income taxes, $7.4 million for stock-based compensation and a $2.3 million loss on our cost basis equity investment. Cash provided by operations as a result of the changes in our working capital include a $2.8 million decrease in accounts receivable, net, a $0.4 million increase in accounts payable and a $1.7 million increase in accrued expenses. Uses of cash were related to a $0.8 million decrease in deferred revenue and a $1.5 million decrease in accrued compensation and benefits
Investing Activities
During the nine months ended September 30, 2017, cash used in investing activities was principally related to the proceeds from the sale of cost basis equity investment of $2.1 million, net purchase, sale and maturities of short-term investments of $2.0 million and property and equipment additions of $13.8 million. Property and equipment additions include $9.8 million of capitalized internal-use software development cost.
During the nine months ended September 30, 2016, cash used in investing activities was principally related to the net purchase, sale and maturities of short-term investments of $2.7 million and property and equipment additions of $21.2 million. Property and equipment additions include $9.7 million of capitalized internal-use software development cost.
Financing Activities
Cash provided by financing activities of $0.3 millionincluded in the nine months ended September 30, 2017 primarily resulted from the exercise of common stock options and the purchase of common stock under our employee stock purchase plan of $1.1 million offset by the minimum tax withholding requirement of $0.7 million.
Cash used in financing activities of $4.8 million in the nine months ended September 30, 2016 primarily resulted from the $8.9 million repurchase of common stock offset by the exercise of common stock options and the purchase of common stock under our employee stock purchase plan of $5.0 million.
Off-Balance Sheet Arrangements
We do not have any relationships with other entities or financial partnerships such as entities often referred to as structured finance or special-purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Contractual Obligations and Commitments
There have been no material changes in our contractual obligations and commercial commitments other than in the ordinary course of business since the end of fiscal 2016.above table.
Critical Accounting Policies and Estimates
Management has determined that our most criticalThe preparation of financial statements in conformity with accounting principles generally accepted in the U.S. ("GAAP") requires management to use judgment in the application of accounting policies, are those related to revenue recognition, stock-based compensation, goodwillincluding making estimates and intangible assets and income taxes. There have been no material changes in our criticalassumptions. The Company's significant accounting policies and estimates during the nine months ended September 30, 2017 as compared to the critical accounting policies and estimates disclosedare described in “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations–Operations - Critical Accounting Policies and Estimates” ofEstimates" in our Annual Report on Form 10-K for the year ended December 31, 2016 as filed2018. These policies were followed in preparing the Consolidated Financial Statements for the three and nine months ended September 30, 2019 and are consistent with the SEC on March 6, 2017.year ended December 31, 2018, except for the new accounting policies related to the adoption and application of Accounting Standards Codification Topic 842, Lease Accounting (“ASC 842") as of January 1, 2019.
Recent Accounting Pronouncements
The information contained inFor a discussion of recent accounting pronouncements, see Note 12 - "Summary of Significant Accounting Policies" to our condensed consolidated financial statements in Item 1 under the heading, “Recent Accounting Pronouncements,” is incorporated by reference into this Item 2.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 (benefit) expense, interest and other expense, net and depreciation and amortization. Adjusted EBITDA consists of EBITDA plus non-cash stock-based compensation, amortization of contract acquisition costs related to the initial adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606"), restructuring and other related costs, impairment loss on investment securities and litigation reserve.
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 calculation of Adjusted EBITDA reconciled from “Net loss”: |
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
| | (in thousands) |
| Net loss | $ | (4,437 | ) | | $ | (6,625 | ) | | $ | (16,191 | ) | | $ | (27,164 | ) |
| Provision for income tax expense (benefit) | 119 |
| | (133 | ) | | 239 |
| | 294 |
|
| Interest and other expense, net | 419 |
| | 1,058 |
| | 967 |
| | 6,680 |
|
| Depreciation and amortization | 3,164 |
| | 3,654 |
| | 10,158 |
| | 13,398 |
|
| EBITDA | (735 | ) | | (2,046 | ) | | (4,827 | ) | | (6,792 | ) |
| Stock-based compensation | 1,179 |
| | 2,495 |
| | 3,985 |
| | 9,033 |
|
| Amortization of contract acquisition asset costs - ASC 606 initial adoption | 277 |
| | 367 |
| | 789 |
| | 1,213 |
|
| Restructuring and other related costs | 630 |
| | — |
| | 1,836 |
| | 209 |
|
| Impairment loss on investment securities | — |
| | — |
| | — |
| | 1,958 |
|
| Litigation reserve | (256 | ) | | 2,250 |
| | (256 | ) | | 2,250 |
|
| Adjusted EBITDA | $ | 1,095 |
| | $ | 3,066 |
| | $ | 1,527 |
| | $ | 7,871 |
|
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We believe that thereThere have been no significant changes in our market risk exposures associated with foreign currency risk, inflation risk and interest rate risk for the nine months ended September 30, 2017,2019, as compared with those discussed in our Annual Reportannual report on Form 10-K for the fiscal year ended December 31, 2016.2018.
The effective interest rate on our Revolver was 6.00% as of September 30, 2019. As of September 30, 2019, we did not have any borrowings outstanding on the Revolver, therefore a 1% increase in the effective interest rate would not increase interest expense. We may incur additional expense in future periods if we borrow on the Revolver.
Item 4.Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”).
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 chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable 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 chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.
(b)Changes in Internal Control Over Financial Reporting
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
For a discussion of legal proceedings in which we are involved, see Note 57 - Commitments and Contingencies" to our condensed consolidated financial statements appearing elsewherethe Consolidated Financial Statements in this Quarterly Report on Form 10-Q.Item 1.
Item 1A.Risk Factors
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, are further described under the captionsee “Risk Factors” in Part I,1, Item 1A of our 2016 Annual Reportannual report on Form 10-K.10-K for the year ended December 31, 2018. There have been no material changes in the nature of these factors since December 31, 2016.2018.
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
None.
Item 6.Exhibits
|
| | |
Exhibit Number | | Description of Document |
| | | |
| 10.1* | | |
| | |
| 10.2* | | |
| | |
| 31.1* | | |
| | |
| 31.2* | | |
| | |
| 32.1* | | |
| | |
| 32.2* | | |
| | | |
101101.SCH* | Interactive data files (XBRL) pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (ii) the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2017 and 2016, (iii) the Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 and (v) the Notes to Condensed Consolidated Financial Statements.
| XBRL Taxonomy Extension Schema Document. |
| | |
| 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
| 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
| 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. |
| | |
| 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. |
* Filed or Furnished herewith.
SIGNATURES
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 8, 2017October 29, 2019 | By: | /s/ ROBERT N. PINKERTONRICHARD G. WALKER |
| | | | Robert N. PinkertonRichard G. Walker
Chief Financial Officer (Principal Financial and Accounting Officer) |