SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31 2017
or
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission file number 001-35108
SERVICESOURCE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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Delaware | 81-0578975 | ||
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
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707 17th Street, | | | |
Denver, | Colorado | | 80202 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each | Trading Symbol | Name of each exchange on which |
Common Stock, $0.0001 Par Value | SREV | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 definition of “large accelerated filer, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No
☒The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant computed by reference to the closing price at which the common stock was sold onas of June 30, 2017,2021, the last business day of the registrant’sRegistrant’s most recently completed second fiscal quarter, as reported on the NASDAQ Global Market, was $291,566,216.approximately $107.3 million. Shares of common stock held by each executive officer, director and holder of 5%10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status does not reflect a determination that such persons are affiliates of the registrant for any other purpose.
As of February 23, 2018,17, 2022, there were approximately 90,425,23299,112,032 shares of the registrant’s common stock outstanding.
Portions of the registrant’s definitive Proxy Statementproxy statement for its 2018 Annual Meeting2022 annual meeting of Stockholdersstockholders are incorporated by reference in Part III of this Annual Reportannual report on Form 10-K. Such Proxy Statementproxy statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statementproxy statement is not deemed to be filed as part of this Form 10-K.
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This reportAnnual Report on Form 10-K (this “annual 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 annual 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. We describeFactors that could cause or contribute to such differences include, but are not limited to, those identified elsewhere in this annual report, including the risks and uncertainties that could cause actual resultsrelated to the impact and events to differ materiallyduration of the COVID-19 pandemic in “Risk Factors” (Part I, Item 1.A. of this Form 10-K), “Quantitative and Qualitative Disclosures about Market Risk” (Part II, Item 7.A. of this Form 10-K) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part II, Item 7 of this Form 10-K). WeExcept 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.
“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 annual report, see the Glossary of Terms.
ITEM 1.BUSINESS
About ServiceSource International, Inc.
ServiceSource is a leading provider of BPaaS solutions that enable the transformation of go-to-market organizations and functions for global leader in outsourced, performance-basedtechnology clients. We design, deploy, and operate a suite of innovative solutions and complex processes that support and augment our clients’ B2B customer successacquisition, 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 growth solutions.and profitability objectives. Through our unique integration of people, processesprocess 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 groweffect and retain revenue on behalftransact billions of our clients—somedollars of the world’s leading business-to-business companies —B2B commerce in more than 175 countries on our clients’ behalf annually.
Our services are delivered globally by approximately 2,900 professionals speaking 45 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 nearly 20 years of operating experience enable us to provide our clients greater value for our customer success services than attained by our clients' in-house customer success teams.
Our Market Opportunity
Our clients operate in rapidly changing and 2015, respectively. For summarized financial informationdynamic environments where they face increasing pressure to gain market share, expand globally, accelerate revenue growth, and streamline operating expenses. In an era of more intense competition, rapid technology disruption, and lower customer switching costs, the most successful B2B companies are recognizing the imperative of a customer-centric mindset. Enabling and delivering a superior customer experience is mission-critical for these companies, yet many lack the appropriate internal resources and capabilities required for longstanding success. Increasingly, they are seeking strategic partners and thought leaders who possess the requisite expertise and proven competencies to enhance the loyalty and lifetime value of their customers by geographic area, see "Notesaccelerating their go-to-market transformation strategies. Against this market opportunity backdrop, we believe ServiceSource is uniquely positioned and competitively differentiated to benefit from the Consolidated Financial Statements, Note 12
● | Consumerization of B2B commerce. In today’s hyper-connected digital economy, individuals have become accustomed to engaging with B2C brands through channels and interactions that are efficient, effective and effortless. These individuals are bringing their consumer expectations into the workplace, fundamentally reshaping how companies market, sell to and engage |
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with their business customers. The majority of business buyers expect their B2B customer experiences to mirror their B2C encounters and are willing to award a greater share of wallet and higher loyalty to vendors who can meet these raised expectations. While factors such as price, quality and feature functionality remain important considerations, leading B2B companies recognize that durable competitive advantage is increasingly based on facilitating interactions that are proactive, predictive and personalized across all touchpoints of the customer journey. We believe more companies are turning to external specialists like ServiceSource to structure, deploy and operate integrated solutions and processes that can holistically address and serve the unique and heightened demands of this emerging consumerization trend. |
● | Deployment of customer-centric models that disrupt legacy go-to-market channels. Technology companies have relied for decades on a variety of third-party intermediaries to reach their mid-market customers. For many companies, 50% - 75% or more of their revenue has historically been attributed to indirect channels, including distributors, resellers, system integrators, and managed service providers, among others. These legacy routes to market are rapidly losing relevance due to the consumerization of IT, the growth of as-a-service offerings, the proliferation of cloud delivery and distribution models, and the rapid adoption of subscription and consumption-based billing plans. In light of these shifts and driven by a growing desire for greater customer insight and intimacy, more companies are deprioritizing investments away from these indirect channels, while assigning more focus to direct-to-consumer pathways. We believe these organizations are looking to strategic thought leaders such as ServiceSource who can help them reimagine their go-to-market strategies, accelerate their channel transformation initiatives, and design and manage new customer-centric operating models that will enable them to grow closer to their customers. |
● | Emergence of customer experience as a competitive differentiator. Increased global competition, lower barriers to entry and shortened product lifecycles are prompting technology companies to reassess their competitive advantage and reevaluate their core competencies. While areas such as intellectual property, engineering, research and development, and product development still remain core, successful forward-thinking organizations realize and appreciate the positive impact of a well-orchestrated customer experience on their revenue and profitability objectives. While these companies are attempting to allocate greater resources to build internal customer-facing capacity in areas including demand generation and conversion, account management, and customer success management, they are often encumbered by pre-existing organizational dynamics, departmental silos, and corporate inertia. We believe more companies will increasingly seek to partner with differentiated BPaaS providers like ServiceSource who can help them to more rapidly scale their customer experience initiatives with a value-driven and outcomes-based business case. Our clients choose us to help them drive greater customer engagement, trust, and loyalty given our integrated solution suite, demonstrable track record, proven process improvement methodology, global scale and infrastructure, and data expertise and insights. |
Our Solutions
Our strategy is to drive client success by bringing the world’s greatest brands closer to their customers through people-powered, digitally-enabled solutions and data-driven insights. We are pioneers in the CJX® market and believe our solution scope, process expertise and global operating scale position us as a category leader. Our unified CJX® solution suite spans the pre- and post-sale B2B customer journey and is deployed through a holistic model that enables our clients to more efficiently and effectively identify, land, adopt, expand and renew their customers and end-users.
The ServiceSource CJX® solution suite has been built on three primary solution pillars, encompassing digital sales, customer success, renewals, and inside sales throughchannel management, all underpinned by enabling competencies centered around our solutions.
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Digital sales. Through our digital sales solution, we help our clients accelerate their acquisition and expansion efforts across both net-new and installed-base customer accounts. Our core motions of demand qualification, demand conversion, and account management are deployeddesigned to drive higher quality leads, improved pipeline hygiene, greater marketing and sales funnel velocity, better sales conversion rates, higher net expansion rates, and increased consumption for our clients’ products and services.
● | Demand qualification. We serve as a seamless extension to our clients’ advertising, marketing, and digital demand generation activities. Through proactive customer interaction and leveraged with our data analytics expertise, our business development reps digitally engage with marketing-generated leads to evaluate and score their budget, authority, need, and timing to progress them through the funnel into sales-qualified and sales-accepted leads. |
● | Demand conversion. We serve as a high velocity augmentation to our clients’ inside sales teams, allowing for enhanced coverage and increased conversion of their sales pipeline. Our sales development reps are extensively trained on our clients’ products, services, and features, and are experts at value- and persona-based selling. Through omnichannel media - including voice, chat, email, video, and social - our teams nurture leads, educate prospects, and conduct sales demos to convert qualified opportunities into confirmed orders and closed bookings for our clients. |
● | Account management. We serve as a natural complement to our clients’ installed-based account management sales motions. Our highly-skilled digital sales professionals develop, formulate, and implement account-based sales plans to identify and execute expansion selling opportunities, driving high margin incremental revenue for our clients through higher cloud consumption levels, upsell and cross-sell rates, multi-year conversions, and service and support attach rates. |
Customer success and renewals. Through our customer success and renewals solution, we are an extensionintegrated component of our clients’ brands. Through direct interaction with our clients' end users, our revenue delivery professionals follow a sales processcustomer experience strategies and engagement efforts. Our core motions of onboarding, adoption, and renewals management are uniquely tailored specificallyand customized to improve end-customerthe satisfaction, referenceability, loyalty, retention generate additional sales where needed, and meet our clients’ business objectives. Our solution is designed to optimize recurring revenue, provide customer success and enablement services, and maximize inside sales capabilities across different business-to-business revenue models, distribution models and segments, including hardware, software, Software-as-a-Service, industrial systems, information and media, as well as technology-enabled healthcare and life sciences. Our global revenue delivery centers, located in Bulgaria, Ireland, Japan, Malaysia, the Philippines, Singapore, the United Kingdom and the United States enable us to provide our solutions to our clients in 45 languages.
● | Onboarding. Our onboarding experts engage and communicate with our clients’ new customers to ensure they are positioned for success from the first day of their relationship. We confirm subscriptions were successfully activated, downloads were successfully installed, assets and entitlements were successfully provisioned, and payments and credits were successfully applied. Where required, we further triage and support the coordination of our clients’ technical support and professional services resources to drive higher initial customer satisfaction and issue resolution outcomes. |
● | Adoption. Our adoption specialists are thoroughly trained and well-versed in the full range of features and functionality of our clients’ products, services and solutions. Leveraging telemetry from a variety of data feeds complemented with proactive |
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real-time customer interaction, we ensure that our clients’ customers are appropriately educated, informed and empowered on how they can best achieve faster speed-to-value and return-on-investment for their subscription or purchase. |
● | Renewals management. Our renewals representatives are equipped with our industry-leading high-performance sales methodology and complemented by best-in-class technology and processes to manage revenue that may be at risk of loss for our clients. Our systems and global teams cleanse, validate, enhance and supplement our clients’ CRM and ERP data in order to proactively configure, price, quote and sell customer contracts that are nearing expiration or cancellation. Through extensive integration with our clients’ internal systems, teams and processes, we deliver performance outcomes that allow our clients to recognize lower customer churn and attrition, enhanced contract renewal rates, and higher revenue retention metrics. |
Channel management. Through our channel management solution, we support the opportunities we manage through a dedicated, trained team completely focused on quoting, data entry and bookings processing combined with an in-depth understandingfull lifecycle management of our clients’ product SKUs, pricingindirect channels and systems. In addition, we provide rigorous quality control through a dedicated quote audit teamroutes to market. Our core motions of partner recruitment, partner onboarding and analytics dashboardsenablement, and partner success management are designed to monitor accuracy, throughputincrease partner mindshare, productivity, and cycle times.
● | Partner onboarding. Our partner onboarding specialists are dedicated to onboarding new distributors, value-added resellers, resellers, system integrators, managed service providers, agents and related third parties to our clients’ channel partner programs. Through early engagement, proactive outreach, and onboarding assistance, we ensure that our clients’ new partners are best positioned to more effectively market, sell and support our clients’ offerings in their respective regions and territories. |
● | Partner enablement. Our partner enablement specialists are thoroughly trained in the program design, tiering levels and criteria, and incentives available to partners through our clients’ channel programs. Through engagement, intervention, and training, we promote greater program awareness, understanding, and focus for partners, equipping them to achieve better outcomes with our clients. |
● | Partner success management. Our partner success managers support our clients’ partners in developing and formulating quarterly and annual performance objectives, analyzing and forecasting sales and renewals pipelines, and identifying and resolving barriers to their success. Through ongoing engagement and interaction with our clients’ indirect partners, we proactively manage the relationships to ensure higher levels of success for our clients, the partners, and their mutual customers. |
Our CJX® solution suite is provided to our clients primarily through a unique outcomes-based, pay-for-performance model that ensures optimal alignment to their customers, which drives improvedbusiness growth priorities, return-on-investment mandates and customer loyalty. In addition, we use our technology platform to provide predictive analytics to identify our clients’ at-risk customers as well as to provide segmentation and analysis to assist in minimizing or avoiding churn.
Our engagementrelationship with our clients begins in the pre-sales process and continues through their lifecycle.
● | Sales performance analysis. We typically begin engagements with our prospective clients by conducting a SPA. Through our SPA process, we conduct in-depth executive interviews and data analysis to understand a client’s unique challenges and desired business outcomes, evaluate and benchmark its performance against those outcomes, analyze opportunities for improvement using proprietary analytical models, and deliver expertise and recommendations to drive an enhanced customer experience, improved operational KPIs, and targeted financial gains. |
● | Business case, pricing and contract structuring. We use our reservoir of data, benchmarks, and best practices to estimate the critical components of the business case, to calculate our ability to improve our clients’ performance based on our extensive |
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track record of execution for similar engagements, to scope and design an optimal delivery model, and to derive an appropriate value-based pricing structure and contractual arrangement. |
● | Data integration, implementation and launch. Once we have entered into a contract with a client, we deploy our professional services to rapidly integrate our tools and platforms with our clients’ systems, while our data and ops services teams ensure that high velocity data feeds are appropriately configured, mapped, loaded, enabled, and enhanced. Our talent acquisition teams launch a highly selective recruiting and onboarding process, while our learning and development teams build and deliver a robust training curriculum and certification program. |
● | Performance and execution. Following the implementation and ramp of an engagement, we leverage our reporting platform, data reservoir, and performance optimization tools to continuously monitor, measure, analyze, benchmark, and enhance the performance of our teams to ensure we are positioned to deliver against the business case and exceed our clients’ expectations. |
● | Client benchmarking and continuous improvement. Our extensive platform and the accumulation of more than 20 years of experience serve as the foundation for benchmarking our clients’ performance against internal parity rates, industry peers, and previous performance periods. We generally conduct monthly and quarterly business review meetings and host frequent executive steering reviews with our clients to assess our results, identify potential process gaps, determine opportunities for continuous improvement, and make recommendations that we believe will allow our clients and us to achieve higher levels of performance and efficiencies. |
Markets We generally conduct quarterly business review meetings and annual partnership reviews with our clients to review performance, identify potential weaknesses in their processes and determine opportunities for improvement and make recommendations that we believe will allow our clients and us to achieve higher levels of performance and efficiencies.
We target our solutions exclusively to business-to-businessB2B technology companies within a range of industries including computer hardware, software, Software-as-a-Service, telecommunications, healthcare, life sciences, media and industrial systems. In 2017, we managed approximately $11.0 billion of Opportunity Under Management for our clients. Opportunity Under Management is an operational metric that represents our estimate of the value of all end customer service contracts thatfocus on chosen market segments where we have deep domain expertise, proven competencies and best practices, robust executive relationships, and the opportunityability to sell on behalfleverage existing client references and advocacy.
● | Cloud and SaaS. In this segment, we serve companies who provide their solutions via public, private, or hybrid cloud delivery models, including SaaS, PaaS, and IaaS vendors. Within this market, customers and end-users typically purchase from our clients through a recurring subscription or a consumption-based utility billing model. IDC, a market research firm, estimates the total global market for cloud software was approximately $231 billion in 2021 with a forecasted 18% compound annual growth rate through 2024. |
● | Software. Our clients in this segment include companies who primarily provide their software in an on-premise environment, where our clients’ customers and end-users typically pay for a defined number of licenses or subscribers, as well as related software support, maintenance and service contracts. We have developed extensive expertise in a variety of software sub-sectors, supporting vendors of application and system software, collaboration software, CRM software, cyber-security software, open source operating system software, and virtualization software, among others. IDC estimates the total global market for software license and maintenance was approximately $281 billion in 2021, while the software subscription market was approximately $292 billion in 2021 with a forecasted 18% compound annual growth rate through 2024. |
● | Hardware. In this segment, we serve companies who provide IT hardware and related assets, including data center systems (servers, storage, gateways, and arrays), networking and communications equipment (switches, routers, access points, and appliances), and computing equipment and peripherals (workstations, PCs, thin-clients, and imaging devices), among others. Within this segment, our services are primarily directed at selling, renewing, and extending hardware maintenance and support contracts on our clients’ behalf. IDC estimates the total global market for hardware maintenance and support was approximately $64 billion in 2021 with a forecasted 3% compound annual growth rate through 2024. |
● | Medical device and diagnostic equipment. Our clients in this segment include companies who provide products, software and services to the healthcare and medical field, including vendors of radiology and diagnostic imaging equipment, surgical and laboratory instruments, and healthcare IT software, among others. Fortune Business Insights, a market research firm, estimates the total global medical device market was approximately $455 billion in 2021 with a forecasted 5% compound annual growth rate through 2028. |
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● | Industrial IoT. In this segment, we serve companies who provide hardware, sensors, software and related services to monitor and automate smart and connected devices for manufacturing environments, process control applications, and energy and utility customers, among others. Grand View Research, a market research firm, estimates the total global market for industrial IoT applications was approximately $264 billion in 2021 with a forecasted 23% compound annual growth rate through 2028. |
Our Clients
We seek to build long-term, durable relationships with leading companies and high-growth innovators within each of our target markets, where our strategy, solutions, and capabilities provide a compelling client value proposition and opportunity for us to drive enduring client success and trusted business outcomes. We typically enter into contracts with our clients overwith average terms ranging from one to three years. Our client contracts are generally comprised of a designated periodmaster services agreement, which is a framework agreement that defines broad governing terms, supplemented by one or multiple order forms or statements of time. Opportunity Under Management is not a measurework that outline detailed terms, conditions, pricing, description of services and definition of scope. While most of our expected revenue. Ascontracts may be terminated for convenience with relatively short notice, often subject to the payment of an early termination fee by the client, our top 10 client relationships range in duration from 5 to 15 years, with an average tenure of approximately 11 years.
During the year ended December 31, 2017, we managed approximately 168 engagements across 54 clients.
Competition and Our research and development expenses were $5.7 million, $8.3 million and $16.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. In addition, we capitalized certain expenditures related to the development and enhancement of internal-use software during 2017, 2016 and 2015.
The market for outsourced customer successour BPaaS services and revenue growth solutionsCJX® solution suite is dynamic and evolving. Historically, B2B companies have managed their service renewals through internal personnelcustomer acquisition, engagement, expansion, and retention efforts internally and have relied upon a variety of third-party technologies including spreadsheets, internally developed software and customized versions of traditional business intelligence tools and end-customer relationship management or- including enterprise resource planning software, customer relationship management software, customer success management software, business intelligence software, channel management software, customer experience management software, and sales enablement software - from vendors such as Adobe, Gainsight, Gong, Medallia, Oracle, Corporation, SAP, AG, salesforce.com, inc. and NetSuite, Inc.Totango, to enable their in-house teams and workflows. Some companies have made further investments in this area using firms such as AccentureBain & Company, Deloitte Digital and McKinsey & Company for technologycustomer experience design and digital transformation consulting and education services focused on service renewals.for their go-to-market organizations. These internally-developedinternally developed solutions represent the primary alternative to our integrated approach of combining people, processes and technology to provide a purpose-built, end-to-end optimized outsourced customer success and revenue growth solutions.
We believe we are the only company of scale operatingexclusively focused on serving the unique requirements of B2B technology companies with a solution suite that addresses the entirety of the customer journey experience continuum. Within the broader BPaaS market, at the intersection of three key customer-success vectors:
We believe our principal competitive strengths and differentiators include:include our:
● | 20+ year track record of innovation and market leadership; |
● | B2B technology industry domain expertise; |
● | ability to drive client success and value; |
● | scope and completeness of our solution; |
● | robust global delivery footprint and infrastructure; |
● | extensive geographic and language coverage model; |
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● | outcomes-based, pay-for-performance pricing; |
● | data-driven insights, best practices and benchmarks; |
● | speed and agility; |
● | experience and quality of our leadership team; |
● | reputation and referenceable client base; and |
● | size and financial stability of our operations. |
Although we currently have few direct competitors that offer integrated solutions at our scale, we expect competition and competitive pressure, from both new and existing competitors, to increase in the future.
Human Capital
We believe our people are our greatest asset and central to the success of ServiceSource and our clients. Through our core values of trust, caring, collaboration, and dedication, we direct our efforts and invest extensive resources to ensure we attract, hire, develop, incentivize, promote, and retain a world-class workforce. We are committed to building a culture that inspires success for our people and fostering a workplace environment that promotes trust, diversity, and inclusion while providing multiple avenues for continuous personal and professional development.
As of December 31, 2021, we had approximately 2,900 employees worldwide, of which nearly all were full-time, with 71% located outside of the U.S. Our employees are not covered by collective bargaining agreements. We believe we have good relations with our employees, as demonstrated by our average employee tenure of 3.5 years and an employee net promoter score that improved by approximately 11 points in 2021.
In 2021, we brought greater focus and Board governance to our Human Capital strategies by expanding the Compensation Committee’s responsibilities to include periodically reviewing and reporting to the Board, as appropriate, on (i) the Company’s talent management strategies, such as the Company’s recruitment, development, promotion, and retention programs, (ii) diversity and inclusion within the Company, and (iii) employee engagement and Company culture. In order to more accurately reflect the committee’s expanded responsibilities, we renamed our Compensation Committee the Compensation and Human Resources Committee.
Employee health and well-being. We believe a loyal and productive workforce requires a holistic approach to caring for the whole self. We provide a variety of programs and benefits to support the physical, mental, emotional, and spiritual health and well-being of our employees.
We are committed to the health and safety of our employees. To keep our employees safe during the COVID-19 pandemic, we created a dedicated crisis team to proactively implement business continuity plans and quickly transitioned to a 100% work-from-home model. As a result of this successful work-from-home implementation, we have shifted to a virtual-first operating model whereby our employees will continue to primarily work from their home offices and our facilities will be used for collaboration, innovation, and connection. Additionally, this model includes virtual sourcing, hiring, and onboarding for new employees as well as a process for driving performance and culture in a virtual environment.
Inclusion and diversity. We believe high-performing organizations are defined by policies and practices that encourage and celebrate an inclusive and diverse workforce. We have adopted metrics that measure the racial, ethnic, and gender diversity of our organization and practices to ensure our organization is representative of the communities we serve. We are committed to equal pay for equal work, and continually monitor and analyze our compensation programs for equality.
We have further advanced our gender equality initiative with women representing nearly half of our total employee base and more than one-third of our leadership ranks.
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Benefits. We offer a complete set of benefits for our employees, including competitive base salaries, annual cash bonuses and an equity incentive program, as well as comprehensive health benefits, retirement plans, and a generous time off policy. For our U.S.-based employees, we offer 12 weeks of paid parental leave, providing important support for our employees as they strive to care for, bond with and welcome new family members and integrate family life with work life. In addition, every employee receives a day of birthday time off, to enable that employee to celebrate on a day during the month of their birth.
Community engagement and involvement. We are active and involved members in the communities in which our employees live and work, and we promote a culture of volunteering and giving back. Every employee globally receives eight hours of paid volunteer time off annually, which encourages our employees to serve the communities in which we live and work. Through our paid volunteer time off program, our employees collectively volunteered more than 5,000 hours supporting a variety of charitable causes and organizations in their communities during 2021.
Training, development, and performance. In July 2020, we launched CJX® University, a world-class learning and development platform designed to help employees grow and develop in their careers. Since launch, our employees have logged more than 17,000 training hours. Additionally, we hold bi-annual unrated performance reviews, designed to encourage employees to have conversations with their managers relating to their areas of strength and growth opportunities and allowing for a plan for future career progression and development.
Our Intellectual Property
We believe our ability to innovate is a key driver of value for our clients and our business. The solutions we provide to our clients often include a variety of proprietary tools, technologies, processes, methodologies, and expertise which comprise our intellectual property. In addition, our intellectual property includes patents, trademarks, and copyrights, as well as various trade secrets, which we believe provide us with a competitive advantage in the marketplace. We protect our intellectual property by leveraging U.S. and foreign patent, trademark, copyright, and trade secret laws, in addition to entering into non-competition, confidentiality, non-disclosure, and related intellectual property protection agreements with our clients, employees, contractors and suppliers.
Partnerships and Alliances
We enter into partnerships and alliances with companies that can enhance our solutions, differentiate our capabilities, advance our technologies and tools, and complement our sales and marketing activities. These relationships include strategic go-to-market alliances, joint-selling agreements, “white-labeled” technology integrations and business transformation and consulting partners.
Additional Information
Our predecessor company was founded in 1999 and we were formed as a Delaware limited liability company in 2002 and converted to a Delaware corporation in 2011. Additional information about us is available on our website at
http://www.servicesource.com. The information on our website is not incorporated into this annual report by reference and is not a part of this Form 10-K. We make available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC. In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. From time to time, we may use our website as a channel of distribution of material information about our company. Financial and other important information regarding our business is routinely posted on and accessible at http://ir.servicesource.com.
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ITEM 1A.RISK FACTORS
Investing in our common stock involves risk. Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations, cash flows and the trading price of our common stock. You should carefully consider the risks described below and the other information in this Annual Report on Form 10-K.
Risks Related to Our Business and Industry
Our business and growth depend substantially on clients renewing their agreements with us and expanding their use of our solution for additional available markets. Any decline in our client renewals, termination of ongoing engagements or failure to expand their relationships with us could harm our future operating results.
In order for us to improve our operating results and grow, it is important that our clients renew their agreements with us when the initial contract term expires and that we expand our client relationships to add new market opportunities and the related revenue management opportunity. Our clients may elect not to renew their contracts with us after the expiration of their initial terms have expiredterm, which typically vary between one and two years, or may elect to otherwise terminate our services, and we cannot assure you that our clients will renew service contracts with us at the same or higher level of service, if at all, or provide us with the opportunity to manage additional revenue management opportunities. Although our renewal rates have been historically higher than those achieved by our clients prior to their usinguse of our solution, some clients have still elected not to renew their agreements with us. Our clients’ renewal rates may decline or fluctuate as a result of a number of factors, many of which are beyond our control, including their satisfaction or dissatisfaction with our solution and results, our pricing, mergers and acquisitions affecting our clients or their end customers, the effects of economic conditions or reductions in our clients’ or their end customers’ spending levels. If our clients do not renew their agreements with us, renew on less favorable terms, terminate their services with us or fail to contract with us for additional Opportunity Under Management,services, our revenue may decline and our operating results may be adversely affected.
Our revenue will decline if there is a decrease in the overall demand for our clients’ products and services.
A majority of our revenue is based on a pay-for-performance model, which means that we are paid a commission based on the service contracts we sell on behalf of our clients. If a particular client’s products or services fail to appeal to its end customers, our revenue will decline for our work with that client. In addition, if end customer demand decreases for other reasons, such as negative news regarding our clients or their products, unfavorable economic conditions, shifts in strategy by our clients away from promoting the service contracts we sell in favor of selling their other products or services to their end customers, or if end customers experience financial constraints and terminate or fail to renew the service contracts we sell, we may experience a decrease in our revenue as the demand for our clients’ service contracts declines. Similarly, if our clients come under economic pressure, they may be more likely to terminate their contracts with us or seek to restructure those contracts,contracts.
The ongoing COVID-19 pandemic may have a material adverse effect on our business, financial position, results of operations and/or cash flows.
COVID-19 has had, and for clients whose contracts are up for renewal, theycontinues to have, a significant impact around the world, prompting governments and businesses to take unprecedented measures in response. Such measures have included restrictions on travel and business operations, temporary closures of businesses, and quarantine and shelter-in-place orders. The COVID-19 pandemic has at times significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets.
The Company continues to monitor the situation and take appropriate actions in accordance with the recommendations and requirements of relevant authorities. The extent to which the COVID-19 pandemic may seek to renew those contracts on less favorable terms. If one of our clients is under economic pressure due to decreasing customer demand, negative news, or other issues that impact the demand for their product or services, ourCompany’s operational and financial performance remains uncertain and will depend on many factors outside the Company’s control, including the timing, extent, trajectory and duration of the pandemic, the emergence of new variants, the development, availability, distribution and effectiveness of vaccines and treatments, the imposition of protective public safety measures, and the impact of the pandemic on the global economy.
To the extent the COVID-19 pandemic adversely affects the Company’s business, could sufferresults of operations, financial condition and westock price, it may experience a significant decreasealso have the effect of heightening many of the other risks described in our revenue.this Part I, Item 1A of this Form 10-K.
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If our bookings rates fallperformance falls short of our estimates, our client relationships will be at risk, our revenue will suffer and our ability to grow and achieve broader market acceptance of our solution could be harmed.
A majority of our business depends on driving new or renewal revenue is directly tiedfor our clients, and we then receive a commission on the new or renewal revenue that we generate on our clients’ behalf. In some cases, our commission rates vary depending on our performance —for example, if we overperform compared to our bookings, or closure, rates. Bookings rates representestimates then we may receive a higher commission. In addition, our clients rely on us to accurately forecast our performance, especially because we drive revenue on their behalf. These forecasts are based upon the percentage of the Opportunity Under Management delivereddata our clients provide to us, byand are subject to significant business, economic and competitive uncertainties and are based on assumptions and estimates that may not prove to be accurate. In addition, these forecasted expectations are based upon historical trends and data that may not be true in subsequent periods. If our clients that we renew, "close," or "book" on behalf of our clients. If the bookings rateperformance for a particular client is lower than anticipated, then our revenue for that client will also be lower than projected. If bookings rates fallour performance falls short of expectations across a broad range of clients, or if they fallour performance falls below expectations for a particularly large client, then the impact on our revenue and our overall business will be significant. In the event bookings rates areour performance is lower than expected for a given client, our margins will suffer because we will have already incurred a certain level of costs in both personnel and infrastructure to support the engagement. This risk is compounded by the fact that many of our client relationships can be terminated by the client if we fail to meet certain specified sales targets, including bookings rates, over a sustained period of time. If bookings rates fallour performance falls to a level at which our revenue and client contracts are at risk, then our financial performance will decline and we will be severely compromised in our ability to retainmay have difficulty attracting and attractretaining new clients. Increasing our client base and achieving broader market acceptance of our solution depends, to a large extent, on how effectively our solution increases our clients' service sales. As a result, poor performance with respect to our bookings rates, in addition to causing our revenue, margins and earnings to suffer, will likely damage our client relationships and overall reputation, and prevent us from effectively developing and maintaining awareness of our brand or achieving widespread acceptance of our solution, in which case we could fail to grow our business and our revenue, margins and earnings would suffer.
We depend on a limited number of clients for a significant portion of our revenue, and the loss of business from one or more of our key clients could adversely affect our results of operations.
Our top ten clients accounted for 66%82% of our revenue for the year ended December 31, 2017,2021, and threefour clients each represented over 10% of our revenue during this period. A relatively small number of clients may continue to account for a significant portion of our revenue for the foreseeable future. The loss of revenue from any of our significant 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 the acquisition of one of our significant clients, may cause a significant decrease in our revenue.
If we cannot efficiently implement our offering for clients, we may be delayed in generating revenue, fail to generate revenue and/or incur significant costs.
In general, our client engagements are complex and we must undertake lengthy and significant work to implement our offerings. Changes in our go-to-market and technology strategies also will increase costs and create implementation risks for us. We generally incur sales and marketing expenses related to the commissions owed to our sales representatives and make upfront investments in technology and personnel to support the engagements one to three months before we begin selling end customer contracts on behalf of our clients. Each client’s situation may be different, and unanticipated difficulties and delays may arise as a result of our failure, or that of our client, to meet implementation responsibilities. If the client implementation process is not executed successfully or if execution is delayed, we could incur significant costs without yet generating revenue, and our relationships with some of our clients and operating results may be adversely impacted.
Because competition for our target employees is intense, we may be unable to attract and retain the highly skilled employees we need to support our planned growth.
To continue to execute on our growth plan, we must attract and retain highly qualified employees in the international markets in which we have operations. Competition for these personnel is intense, especially for highly educated, qualified sales representatives with multiple language skills. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled key employees with appropriate qualifications. Our shift to a virtual-first operating model may increase the difficulty in hiring and retaining these highly skilled key employees. If we are unable to hire and retain these highly skilled workers, our company’s culture could be negatively influenced and potentially lead to increased employee attrition and loss of key personnel. In addition, hiring and retaining highly skilled key employees could become more difficult in the future if COVID-19 vaccine mandates become required. We may incur significant costs to attract and retain highly skilled key employees, and we may lose new employees to our competitors or other companies before we realize the benefit of our investment in recruiting and training them. If we fail to attract new highly skilled key employees, or fail to retain and motivate our most successful employees, our business and future growth prospects could be harmed.
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If our security measures are breached or fail, resulting in unauthorized access to client data, our solution is relatively undeveloped and may not grow.
Our solution involves the marketstorage and transmission of the proprietary information and protected data that we receive from our clients. We rely on proprietary and commercially available systems, software, tools and monitoring, as well as other processes, to provide security for processing, transmission and storage of such information. Despite the implementation of these security measures, our solutionsystems may not develop as we anticipate and our business will not grow.
Our client contracts generally provide that we will indemnify our clients for data privacy breaches caused by our acts or enhanced technologies doomissions and the acts and omissions of our service providers. If a data privacy breach occurs, we could face contractual damages, damages and fees arising from our indemnification obligations, penalties for violation of applicable laws or regulations, possible lawsuits by affected individuals and significant remediation costs and efforts to prevent future occurrences. Insurance may not work as intended,be able to cover these costs in full, in particular if the damages are not responsivelarge. In addition, whether there is an actual or a perceived breach of our security, the market perception of the effectiveness of our security measures could be harmed significantly and we could lose current or potential clients.
We may be liable to user preferencesour clients or industrythird parties if we make errors in providing our solution or regulatory changes, are not appropriately timed with market opportunity, or do not enhancefail to properly safeguard our managed service offerings,clients’ confidential information.
The solution we offer is complex, and we may lose existingmake errors from time to time. These may include human errors made in the course of managing the sales process for our clients as we interact with their end customers, or errors arising from our technology solution as it interacts with our clients’ systems and potential clientsthe disparate data contained on such systems. For example, our employees enter codes to classify their interactions with our clients’ end customers, and incorrect code entry could result in our clients’ end customer not receiving the service or relatedsolution they requested, which in turn could lead to customer dissatisfaction or termination causing our client relationships to suffer and our revenue opportunities,and our clients’ revenue to decline. The costs incurred in which case our resultscorrecting any material errors may be substantial. Any claims based on errors could subject us to exposure for damages, significant legal defense costs, adverse publicity and reputational harm, regardless of operations may suffer.
We conduct operations in a number of countries and are subject to risks of international operations.
Outside of the U.S., we conduct operations in Bulgaria, Ireland, Japan, Malaysia, the Philippines, Singapore and the United Kingdom. In 2017,2021, approximately 37%45% of our revenue was related to operations located outside of the U.S. In addition, 66%71% of our employees are located in offices outside of the U.S. Our employees and clients in a particular country or region in the world may be impacted as a result of a variety of factors, including: geopolitical events, such as war, the threat of war, or terrorist activity; natural disasters (such as drought, flooding, wildfires, increased storm severity, and sea level rise), which may become more common as a result of climate change; power shortages or outages, major public health issues, including pandemics (such as the COVID-19 pandemic); and significant local, national or global events capturing the attention of a large part of the population. If any of these, or any other factors, disrupt a country or region where we have a significant workforce our business could be materially adversely affected.
We expect to continue our international growth, with international revenue accounting for an increased portion of total revenue in the future. Our international operations involve risks that differ from or are in addition to those faced by our U.S. operations. These risks include different employment laws and rules and related social and cultural factors; different regulatory and compliance requirements, including in the areas of privacy and data protection, anti-bribery and anti-corruption, trade sanctions, marketing and sales and other barriers to conducting business; cultural and language differences; diverse or less stable political, operating and economic environments and market fluctuations; and civil disturbances or other catastrophic events that reduceaffect business activity.activity (including the ongoing COVID-19 pandemic). If we are not able to efficiently adapt to or effectively manage our business in markets outside of the U.S., our business prospects and operating results could be materially and adversely affected. Although we have business continuity plans in place for our operations, an extended period of civil unrest that halts or significantly impedes operations could have a material adverse effect on our business.
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Laws or public perception may eliminate or restrict our ability to use revenue delivery centers not located in the United States,U.S., which could have a material adverse impact on our business and results of operations.
The issue of companies outsourcing services to organizations operating in other countries is a politically sensitive topic and has been under heightened scrutiny in many countries, including the United States.U.S. We provide our outsourced customer success and revenue growthBPaaS solutions in several non-U.S. locations, including the Philippines and Malaysia, and our growth strategy includes increasing reliance on these “offshore” revenue delivery centers. Many organizations and public figures in the United StatesU.S. have publicly expressed concern about a perceived association between offshore outsourcing providers and the loss of jobs in the United States,U.S., and the topic of offshore outsourcing has recently received a great deal of negative attention from the U.S. executive branch. Because of negative public perception about offshore outsourcing, measures aimed at limiting or restricting offshore outsourcing by United StatesU.S. companies are periodically considered in the U.S. Congress. Current or prospective clients may elect to perform such services themselves or may be discouraged from transferring these services from onshore to offshore providers to avoid negative perceptions that may be associated with using an offshore provider. Any slowdown or reversal of existing industry trends towards offshore outsourcing, including due to the enactment of any legislation restricting offshore outsourcing by U.S. companies, would harm our ability to provide certain of our services to our clients at a competitive and cost-effective price point and would have a material adverse effect on our business and results of operations.
Changes in the legal and regulatory environment that affect our operations, including laws and regulations relating to the handling of personal data, data security and cross-border data flows, may impede the adoption of our services, disrupt our business or result in increased costs, legal claims, or fines against us.
We are subject to a wide variety of laws and regulations in the United StatesU.S. and the other jurisdictions in which we operate, and changes in the level of government regulation of our business have the potential to materially alter our business practices with resultant increases in costs and decreases in profitability. Depending on the jurisdiction, those changes may come about through new legislation, the issuance of new regulations or changes in the interpretation of existing laws and regulations by a court, regulatory body or governmental official. Sometimes those changes have both prospective and retroactive effect, which is particularly true when a change is made through reinterpretation of laws or regulations that have been in effect for some time.
Our international operations and global client base reliesrely increasingly on the movement of data across national boundaries. Legal requirements relating to the collection, storage, handling and transfer of personal data continue to evolve, and additional regulation in those areas, some of it potentially difficult and costly for us to accommodate, is frequently proposed and occasionally adopted. Laws in many countries and jurisdictions, particularly in the European Union, United Kingdom, and Canada, govern the requirements related to how we store, transfer or otherwise process the private data provided to us by our clients. For example, in the European Union, the GDPR imposes substantial requirements regarding the handling of personal data. The GDPR, as well as other data privacy, cyber security and data localization laws and regulations, has changed in recent years and is likely to continue to evolve in the future. Although we have implemented measures designed to comply with the laws and regulations applicable to our business, our ongoing efforts to comply with the GDPR and other changes in laws and regulations (such as the California Consumer Privacy Act that became effective in January 2020) may entail substantial expenses and divert resources from other initiatives. These changes have in the past increased, and may continue to increase, our cost of providing our services, could limit us from offering solutions in certain jurisdictions, could adversely affect our sales cycles, and could impact our new technology innovation. In addition, the centralized nature of our information systems at the data and operations centers that we use requires the routine flow of data relating to our clients and their respective end customers across national borders, both with respect to the jurisdictions within which we have operations and the jurisdictions in which we provide services to our clients. If this flow of data becomes subject to new or different restrictions, our ability to serve our clients and their respective end customers could be seriously impaired for an extended period of time.
We also have entered into various model contracts and related contractual provisions to enable these data flows. For any jurisdictions in which these measures are not recognized or otherwise not compliant with the laws of the countries in which we process data, or where more stringent data privacy laws are enacted irrespective of international treaty arrangements or other existing compliance mechanisms, we could face increased compliance expenses and face penalties for violating such laws or be excluded from those markets altogether, in which case our operations could be materially damaged.
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Consolidation in the technology sector could harm our business in the event that our clients are acquired and their contracts are canceled.
Consolidation among technology companies in our target market has been robust in recent years, and this trend poses a risk for us. Acquisitions of our clients could lead to cancellation of our contracts with those end customers by the acquiring companies and could reduce the number of our existing and potential clients. For example, in January 2010, Oracle acquired our then-largest client, Sun Microsystems, as well as several of our smaller clients. Oracle elected to terminate our service contracts with each client because Oracle conducted its service revenue management internally. We have seen this trend continue through the years. If mergers and acquisitions take place within our customerclient base, some of the acquiring companies may terminate, renegotiate and/or elect not to renew our contracts with the companies they acquire, which would reduce our revenue. In addition, acquisitions in our customerclient base may adversely impact our revenue even if the contract is not terminated. The sales we make on behalf of our customersclients are processed through our customers’clients’ billing and quoting platforms. If our customersclients are acquired or merge with another company and as a result, their billing platforms or the procedures for processing closed sales are changed or slowed down, we will be unable to close our sales and our closure rate will fall, and therefore our revenue and our ability to keep our customers,clients, could suffer.
We enter into long-term, commission-based contracts with our clients, and our failure to correctly price these contracts may negatively affect our profitability.
We enter into long-term contracts with our clients that are priced based on multiple factors determined in large part by the performance analysis we conduct for our clients. These factors include opportunity size, anticipated booking rates and expected commission rates at various levels of sales performance. Some of these factors require forward-looking assumptions that may prove incorrect. If our assumptions are inaccurate, or if we otherwise fail to correctly price our client contracts, particularly those with lengthy contract terms, then our revenue, profitability and overall business operations may suffer. Further, if we fail to anticipate any unexpected increase in our cost of providing services, including the costs for employees, office space, technology, and other costs of providing services, as a result of inflation or technology,otherwise, we could be exposed to risks associated with cost overruns related to our required performance under our contracts, which could have a negative effect on our margins and earnings.
A substantial portion of our business consists of supporting our clients’ channel partners in the sale of service contracts. If those channel partners become unreceptive to our solution, our business could be harmed.
Many of our clients, including some of our largest clients, sell service contracts through their channel partners and engage our solution to help those channel partners become more effective at selling service contract renewals. In this context, the ultimate buyers of the service contracts are end customers of those channel partners, who then receive the actual services from our clients. In the event our clients’ channel partners become unreceptive to our involvement in the renewals process, those channel partners could discourage our current or future clients from engaging our solution to support channel sales. This risk is compounded by the fact that large channel partners may have relationships with more than one of our clients or prospects, in which case the negative reaction of one or more of those large channel partners could impact multiple client relationships. Accordingly, with respect to those clients and prospective clients who sell service contracts through channel partners, any significant resistance to our solution by their channel partners could harm our ability to attract or retain clients, which would damage our overall business operations.
We face long sales cycles to secure new client contracts, making it difficult to predict the timing of specific new client relationships.
We face a variable selling cycle to secure new client agreements, typically spanning a number of months and requiring our effort to obtain and analyze our prospect’s business through the service performance analysis, for which we are not paid. We recently have also experienced a lengthening of our sales cycles reflecting the hiring of a number of new sales personnel in the past eighteen months who are new to selling our solution as well as slower decision making by a few end customers as well as other end customers considering renewals of large, multi-year contracts. This has adversely affected the conversion rates of new client contracts. Moreover, even if we succeed in developing a relationship with a potential new client, the scope of the potential subscription or service revenue management engagement frequently changes over the course of the business discussions and, for a variety of reasons, our sales discussions may fail to result in new client acquisitions. Consequently, we have only a limited ability to predict the timing and size of specific new client relationships.
The length of time it takes our newly hired sales representatives and global account managers to become productive could adversely impact our success rate, the execution of our overall business plan and our costs.
It can take twelve months or longer before our internal sales representatives and global account managers are fully trained and productive in selling our solution to prospective clients. This long ramp period, which could be further increased by our shift to a virtual-first operating model, presents a number of operational challenges as the cost of recruiting, hiring and carrying new sales representatives and global account managers cannot be offset by the revenue such new sales representatives produce until after they
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complete their long ramp periods. Further, givenGiven the length of the ramp period, we often cannot determine if a sales representative or global account manager will succeed until he or she has been employed for a year or more. If we cannot reliably develop our sales representatives and global account managers to a productive level, or if we lose productive representatives and account managers in whom we have heavily invested, our future growth rates and revenue will suffer.
Our revenue and earnings are affected by foreign currency exchange rate fluctuations.
Our results of our revenue was generated outside of the United States, as comparedoperations and cash flows are subject to 35% of our revenue in 2016. As a result of our continued focus on international markets, we expect that revenue derived from international sources will continuefluctuations due to represent a significant portion of our total revenue.
The planned exit of the United Kingdom from the European Union could adversely affect our business.
In January 2020, the United Kingdom fromformally left the European Union, knownan action referred to as Brexit, could have significant implications forBrexit. Several political, legal, regulatory, and economic factors which are currently unknown will influence Brexit’s impact on our business. We have a revenue delivery center in Liverpool, United Kingdom, and Brexit has, and could continue to, create uncertainty in our employee base relating to immigration and other cross-border matters. Brexit could lead to economic and legal uncertainty, including significant volatility in currency exchange rates, reduced customer demand for our services, and increasingly divergent laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. In addition, Brexit could cause a shift or increase in data privacy regulations for data transfers between the United Kingdom and European Union. Any of these effects of Brexit, among others, could adversely affect our operations in the United Kingdom and our financial results.
Claims by others that we infringe or violate their intellectual property could force us to incur significant costs and require us to change the way we conduct our business.
Our services or solutions could infringe the intellectual property rights of others, impacting our ability to deploy our services or solutions with our clients. From time to time, we receive letters from other parties alleging, or inquiring about, possible breaches of their intellectual property rights. These claims could require us to cease activities, incur expensive licensing costs, or engage in costly litigation, each of which could adversely affect our business and results of operations.
In addition, we may incorporate open source software into our technology solution. The terms of many open source licenses have not been interpreted by United StatesU.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our commercialization of any of our solutions that may include open source software. As a result, we will be required to analyze and monitor our use of open source software closely. As a result of the use of open source software, we could be required to seek licenses from third parties in order to develop such future products, re-engineer our products, discontinue sales of our solutions or release our software code under the terms of an open source license to the public. Given the nature of open source software, there is also a risk that third parties may assert copyright and other intellectual property infringement claims against us based on any use of such open source software. These claims could result in significant expense to us, which could harm our business.
Interruption of operations at our data centers and revenue delivery centers could have a materially adverse effect on our business.
If we experience a temporary or permanent interruption in our operations at one or more of our data or revenue delivery centers, through natural disaster (such as drought, flooding, wildfires, increased storm severity, and sea level rise), which may become more common as a result of climate change, pandemics or other public health emergencies (including the ongoing COVID-19 pandemic), casualty, operating malfunction, cyberattack, sabotage or other causes, we may be unable to provide the services we are contractually obligated to deliver. Failure to provide contracted services could result in contractual damages or clients’ termination or renegotiation of their contracts. Although we maintain disaster recovery and business continuity plans and precautions designed to protect our company and our clients from events that could interrupt our delivery of services, there is no guarantee that such plans and precautions will be effective or that any interruption will not be prolonged. Any prolonged interruption in our ability to provide services to our
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clients for whom our plans and precautions fail to adequately protect us could have a material adverse effect on our business, results of operation and financial condition.
We are dependent on the continued participation and level of service of our third-party platform provider. Any failure or disruption in this service could materially and adversely affect our ability to manage our business effectively.
We rely on salesforce.com to provide the platform supporting many of our technologies and Amazon Web Services ("AWS")AWS to support a significant portion of our data storage. If salesforce.com or AWS stops supporting our technologies or if they fail to provide a platform that consistently and adequately supports our solution, including as a result of errors or failures in their systems or events beyond their control, or refuse to provide this platformtheir platforms on terms acceptable to us or at all and we are not able to find suitable alternatives, our business may be materially and adversely affected.
We may be subject to state, local and foreign taxes that could harm our business.
We operate revenue delivery centers in multiple locations. Some of the jurisdictions in which we operate, such as Ireland, Malaysia, and the Philippines, give us the benefit of either relatively low tax rates, tax holidays or government grants, in each case, that are dependent on how we operate or how many jobs we create and employees we retain. We plan on utilizing such tax incentives in the future, as opportunities are made available to us. Any failure on our part to operate in conformity with applicable requirements to remain qualified for any such tax incentives or grants may result in an increase in our taxes. In addition, jurisdictions may choose to increase rates at any time due to economic or other factors. Any such rate increases may harm our results of operations.
We may lose sales or incur significant costs should various tax jurisdictions impose taxes on either a broader range of services or services that we have performed in the past. We may be subject to audits of the taxing authorities in the jurisdictions where we do business that would require us to incur costs in responding to such audits. Imposition of such taxes on our services could result in substantial unplanned costs, would effectively increase the cost of such services to our clients and may adversely affect our ability to retain existing clients or to gain new clients in the areas in which such taxes are imposed.
We may incur material restructuring charges.
We continually evaluate ways to reduce our operating expenses and adapt to changing industry and market conditions through new restructuring opportunities, including more effective utilization of our assets, workforce and operating facilities. We have recorded restructuring charges in the past and we may incur material restructuring charges in the future. The risk that we incur material restructuring charges may be heightened during economic downturns or with expanded global operations.
We have incurred indebtedness in connection with our business and may in the future incur additional indebtedness in the future.
In July 2021, we entered into a $35.0 million Revolver that could limit cash flowallows us to borrow against our domestic receivables as defined in the 2021 Credit Agreement. As of February 23, 2022, we had $10.0 million of borrowings under the Revolver through a six-month BSBY borrowing at an effective interest rate of 3.04% maturing in August 2022. An additional $18.0 million was available for our operations, limit our ability to borrow additional funds and,borrowing under the Revolver as of February 23, 2022. The BSBY borrowings may be extended upon maturity, converted into a base rate borrowing upon maturity or require an incremental payment if we were unable to repay our debt when due, would have a material adverse effect on our business, resultsthe Company's borrowing base decreases below the current amount outstanding during the term of operations, cash flows and financial condition.
If we are unable to secure additional borrowing options in the future, it may have an adverse effect on our business.
The Revolver matures in July 2024, and we are subject to the risks normally associated with debt obligations, including the risk that we will be unable to refinance our indebtedness, or that the terms of such refinancing will not be as favorable as the terms of our indebtedness.
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Covenants in our 2021 Credit Agreement currently impose, and future financing agreements may impose, significant operating and financial accounting standards or practicesrestrictions.
Our current 2021 Credit Agreement contains restrictions, and future financing agreements may cause adverse, unexpected financial reporting fluctuations and affect our reported operating results.
Our financial condition and results and may affect our reporting of transactions that were completed before a changeoperations could suffer if there is announced. Changes to those rules or the questioningan impairment of current practices may adversely affect our reported financial results or the way we conduct our business. For example, in May 2014, the FASB issued an accounting standards update on a comprehensive new revenue recognition standard that will supersede the majority of existing revenue recognition guidance. goodwill.
We have concluded that the adoption of this new standard will not have a material impact on our Consolidated Financial Statements. However, under the new standard, we will beare required to use significant judgment and make estimates for all future revenue contracts, including identifying performance obligations in our contracts, estimatingtest goodwill annually or more frequently if certain circumstances change that would more-likely-than-not indicate the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation, determining when performance obligations have been satisfied, identifying the costs to acquire and fulfill client contracts and determine the contract period and/or client life over which to expense these costs.
If we were to experience an ownership change, we could be limited in our ability to use NOLs arising prior to the ownership change to offset future taxable income. In addition, our ability to use NOLs to reduce future tax payments may be limited if our taxable income does not reach sufficient levels.
As of December 31, 2021, we had federal net operating losses of $325.4 million. If we were to experience an “ownership change,” as determined under Section 382 of the IRC, our ability to offset taxable income arising after the ownership change with net operating losses arising prior to the ownership change would be limited, possibly substantially. In addition, our ability to use our net operating losses is dependent on our ability to generate taxable income, and the net operating losses could expire before we generate sufficient taxable income to make use of our company or its assets. This concentration of ownership could limit the ability of other stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.
General Risk Factors
Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our certificate of incorporation, bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:
● | authorizing blank check preferred stock, which could be issued by our board of directors without stockholder approval, with voting, liquidation, dividend and other rights superior to our common stock; |
● | limiting the liability of, and providing indemnification to, our directors and officers; |
● | limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting; |
● | requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors; |
● | controlling the procedures for the conduct and scheduling of stockholder meetings; |
● | providing the board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings; |
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● | limiting the determination of the number of directors on our board and the filling of vacancies or newly created seats on the board to our board of directors then in office; and |
● | providing that directors may be removed by stockholders only for cause. |
These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which limits the ability of stockholders owning in excess of 15% of our outstanding common stock to merge or combine with us.
Any provision of our certificate of incorporation, by lawsbylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
Under the Nasdaq Marketplace Rules our common stock must maintain a minimum price of $1.00 per share for continued inclusion on the Nasdaq Global Select Market.
Our stock price was previously below $1.00 on certain dates during December 2021, and we cannot guarantee that our stock price will remain at or above $1.00 per share. If the price of our stock were to close below $1.00 per share for 30 consecutive business days, our stock could become subject to delisting, and we may seek stockholder approval for a reverse stock split, which in turn could produce adverse effects and may not result in a long-term or permanent increase in the price of our common stock.
If our common stock is delisted, trading of the stock will most likely take place on an over-the-counter market established for unlisted securities. An investor is likely to find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our common stock on an over-the-counter market, and many investors may not buy or sell our common stock due to difficulty in accessing over-the-counter markets, or due to policies preventing them from trading in securities not listed on a national exchange or other reasons. For these reasons and others, delisting would adversely affect the liquidity, trading volume and price of our common stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results of operations by limiting our ability to attract and retain qualified executives and employees and limiting our ability to raise capital.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock dependscould depend in part on the research and reports that securities or industry analysts publish about us or our business.business, which in part depends on our market capitalization. If any of theseanalysts downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price could also likely decline. If analysts cease coverage of us, the trading price and trading volume of our stock could be negatively impacted. If analysts downgradeAs of December 31, 2021, the Company is not aware of any active analyst coverage.
Because we currently do not intend to pay dividends, stockholders will benefit from an investment in our common stock or publish unfavorable research about our business, our stock price would also likely decline.
We are leveraged financially, which could adversely affect our abilitycurrently intend to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfyretain our future growth, business needs and development plans.
Our business or the conversion of the notes could be used to satisfy short positions, or anticipated conversion of the notes into sharesvalue of our common stock could depressbe negatively affected as a result of actions by activist stockholders.
Our company values constructive input from investors and regularly engages in dialogue with stockholders regarding strategy and performance. Our board of directors and management team are committed to acting in the best interests of all of our
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stockholders. There is no assurance that the actions taken by our board of directors and management in seeking to maintain constructive engagement with stockholders will be successful.
Activist stockholders who disagree with the composition of our board of directors, our strategy, or the way our company is managed may seek to effect change through various strategies that range from private engagement to publicity campaigns, proxy contests, efforts to force transactions not supported by our board of directors, and litigation. Responding to some of these actions can be costly and time-consuming, may disrupt our operations and divert the attention of our board of directors, management, and employees. Such activities could interfere with our ability to execute our strategic plan and to attract and retain qualified executive leadership and could cause concern to our current or potential clients. The perceived uncertainty as to our future direction resulting from activist strategies could also affect the market price and volatility of our common stock.
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
ITEM 2.PROPERTIES
The table below presentsCompany leases the location, sizeoffice space that houses its corporate headquarters located in Denver, Colorado. The Company also leases additional office space for its U.S. offices in California and principal function of our leased global facilities. We believe our facilities are adequate to meet business operation needs forTennessee, and international offices in Bulgaria, Ireland, Japan, Malaysia, Philippines, Singapore and the foreseeable future.
ITEM 3.LEGAL PROCEEDINGS
The Companyinformation required by this item is subjectincorporated by reference from the information contained in “Note 11 — Commitments and Contingencies” in Notes to various legal proceedings and claims arisingthe Consolidated Financial Statements in the ordinary course of our business, including the cases discussed below. Although the results of litigation and claims cannot be predicted with certainty, the Company is currently not aware of any litigation or threats of litigation in which the final outcome could have a material adverse effect on our business, operating results, financial position, or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies. As of December 31, 2017, we accrued a $1.5 million reserve relating to our potential liability for currently pending disputes, presented in "Accrued Expenses" in our Consolidated Balance Sheets.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the NASDAQ GlobalThe Nasdaq Stock Market LLC under the symbol “SREV.” The following tables present the high and low prices of our common stock as reported on the NASDAQ Global Market during the periods presented:
Quarter Ended in 2017 | High | Low | |||||
First Quarter | $ | 6.05 | $ | 3.55 | |||
Second Quarter | $ | 4.00 | $ | 2.82 | |||
Third Quarter | $ | 4.00 | $ | 3.14 | |||
Fourth Quarter | $ | 3.66 | $ | 2.61 | |||
Quarter Ended in 2016 | High | Low | |||||
First Quarter | $ | 4.62 | $ | 3.35 | |||
Second Quarter | $ | 4.54 | $ | 3.52 | |||
Third Quarter | $ | 5.31 | $ | 3.89 | |||
Fourth Quarter | $ | 6.25 | $ | 4.40 |
Holders
As of February 23, 2018,January 31, 2022, there were 6551 holders of record of our common stock. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held by banks, brokers and other financial institutions.
Dividends
We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.
ITEM 6.[RESERVED.]
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ServiceSource | Morgan Stanley Technology Index | NASDAQ Composite Index | ||||
12/31/2012 | $100.00 | $100.00 | $100.00 | |||
12/31/2013 | $143.25 | $131.78 | $138.32 | |||
12/31/2014 | $80.00 | $147.98 | $156.85 | |||
12/31/2015 | $78.80 | $157.98 | $165.84 | |||
12/31/2016 | $97.09 | $177.47 | $178.28 | |||
12/31/2017 | $52.82 | $247.40 | $228.63 |
For the Year Ended December 31, | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(in thousands, except per share amounts) | |||||||||||||||||||
Net revenue | $ | 239,127 | $ | 252,887 | $ | 252,203 | $ | 272,180 | $ | 272,482 | |||||||||
Cost of revenue(1) | 163,709 | 165,069 | 171,369 | 194,009 | 162,449 | ||||||||||||||
Gross profit | 75,418 | 87,818 | 80,834 | 78,171 | 110,033 | ||||||||||||||
Operating expenses: | |||||||||||||||||||
Sales and marketing(1) | 33,001 | 41,972 | 44,086 | 59,988 | 58,826 | ||||||||||||||
Research and development(1) | 5,729 | 8,344 | 16,480 | 25,802 | 23,855 | ||||||||||||||
General and administrative(1) | 53,087 | 52,995 | 46,299 | 47,808 | 44,913 | ||||||||||||||
Restructuring and other (1) | 7,308 | — | 3,662 | 3,314 | — | ||||||||||||||
Goodwill and other intangible asset impairment | — | — | — | 25,108 | — | ||||||||||||||
Total operating expenses | 99,125 | 103,311 | 110,527 | 162,020 | 127,594 | ||||||||||||||
Loss from operations | (23,707 | ) | (15,493 | ) | (29,693 | ) | (83,849 | ) | (17,561 | ) | |||||||||
Interest expense and other, net | (9,886 | ) | (8,704 | ) | (9,316 | ) | (11,008 | ) | (4,420 | ) | |||||||||
Impairment loss on cost basis equity investment | — | (4,500 | ) | — | — | — | |||||||||||||
Gain on sale of cost basis equity investment | 2,100 | — | — | — | — | ||||||||||||||
Loss before income taxes | (31,493 | ) | (28,697 | ) | (39,009 | ) | (94,857 | ) | (21,981 | ) | |||||||||
Provision for income tax benefit (expense) | 1,647 | (3,429 | ) | (1,584 | ) | (482 | ) | (1,051 | ) | ||||||||||
Net loss | $ | (29,846 | ) | $ | (32,126 | ) | $ | (40,593 | ) | $ | (95,339 | ) | $ | (23,032 | ) | ||||
Net loss per common share: | |||||||||||||||||||
Basic and diluted | $ | (0.33 | ) | $ | (0.37 | ) | $ | (0.48 | ) | $ | (1.15 | ) | $ | (0.29 | ) | ||||
Weighted-average common shares outstanding: | |||||||||||||||||||
Basic and diluted | 89,234 | 86,318 | 85,417 | 82,872 | 78,408 |
For the Year Ended December 31, | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(in thousands) | |||||||||||||||||||
Cost of revenue | $ | 1,335 | $ | 1,484 | $ | 2,666 | $ | 3,995 | $ | 3,303 | |||||||||
Sales and marketing | 3,774 | 3,004 | 3,393 | 6,193 | 9,831 | ||||||||||||||
Research and development | 149 | 586 | 1,299 | 2,800 | 2,414 | ||||||||||||||
General and administrative | 8,425 | 5,678 | 6,029 | 7,911 | 8,072 | ||||||||||||||
Restructuring and other | 352 | — | 2,579 | — | — | ||||||||||||||
Total stock-based compensation | $ | 14,035 | $ | 10,752 | $ | 15,966 | $ | 20,899 | $ | 23,620 |
As of December 31, | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(in thousands) | |||||||||||||||||||
Consolidated Balance Sheet Data: | |||||||||||||||||||
Cash, cash equivalents and short-term investments | $ | 188,570 | $ | 185,573 | $ | 208,712 | $ | 215,382 | $ | 275,133 | |||||||||
Working capital(2) | $ | 72,538 | $ | 218,585 | $ | 236,431 | $ | 249,590 | $ | 315,185 | |||||||||
Total assets | $ | 295,372 | $ | 306,090 | $ | 317,564 | $ | 337,120 | $ | 396,561 | |||||||||
Other long-term liabilities | $ | 4,603 | $ | 6,495 | $ | 4,311 | $ | 4,660 | $ | 5,566 | |||||||||
Convertible notes, net | $ | 144,167 | $ | 134,775 | $ | 126,051 | $ | 118,004 | $ | 110,530 | |||||||||
Total stockholders' equity | $ | 112,109 | $ | 126,936 | $ | 147,975 | $ | 169,347 | $ | 238,935 |
ITEM 7.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”)&A should be read in conjunction with our annual Consolidated Financial Statements and notes thereto appearing elsewhere in this annual report on Form 10-K.
Overview
ServiceSource International, Inc. is a leading provider of BPaaS solutions that enable the transformation of go-to-market organizations and functions for global leader in outsourced, performance-basedtechnology clients. We design, deploy, and operate a suite of innovative solutions and complex processes that support and augment our clients’ B2B customer successacquisition, 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 growth solutions.and profitability objectives. Through our unique integration of people, processesprocess 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 groweffect and retain revenue on behalftransact billions of our clients—somedollars of the world’s leading business-to-business companies —B2B commerce in more than 45 languages. Our solutions help175 countries on 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 withclients’ behalf annually.
Factors Affecting our highly-trained, client-focused revenue delivery professionals and data from nearly 20 years of operating experience enable us to provide our clients greater value for our customer success services than attained by our clients' in-house customer success teams.
We estimate the value of our end customer contracts based on a combination of factors, including the value of end customer contracts made available to us by our clients in past periods, the minimum value of end customer contracts that our clients are required to give us the opportunity to sell pursuant to the terms of our contracts with them, periodic internal business reviews of our expectations as to the value of end customer contracts that will be made available to us by our clients, the value of end customer contracts included in the service performance analysis that we conduct with our clients during the sales process the value of the customer relationships we manage, the bookings we deliver under our Inside Sales solution, and collaborative discussions with our clients assessing their expectations as to the value of service contracts that they make available to us for sale. Although the minimum value of end customer contracts that our clients are required to give us represents a portion of our estimated Opportunity Under Management,generate a significant portion of our revenue from a limited number of clients. The loss of revenue from any of our top clients for any reason, including the Opportunity Under Managementfailure to renew our contracts, termination of some or all of our services, or a change of relationship with any of our key clients or their acquisition, may cause a significant decrease in our revenue.
Our business is estimated based ongeographically diversified. During 2021, 55% of our net revenue was earned in NALA, 30% in EMEA and 15% in APJ, compared to 57% in NALA, 28% in EMEA and 15% in APJ during 2020. All of NALA’s revenue represents revenue generated within the other factors described above. As our experience with our business, our clients and their contracts has grown, we have continually refined the process, improved the assumptions and expanded the data related to our calculation of Opportunity Under Management. When estimating Opportunity Under Management, we rely on our assumptions described above, which may prove incorrect. These assumptions are inherently subject to significant business and economic uncertainties and contingencies, many of which are beyond our control. Our estimates therefore may prove inaccurate, and the actual value of end customer contracts delivered to us inU.S. Net revenue for a given period to differparticular geography generally reflects commissions earned from our estimate of Opportunity Under Management. These business and economic uncertainties and contingencies include:
Sales Cycle.
We sell our integrated solution through our sales organization. At the beginning of the sales process, our quota-carrying sales representatives contact prospective clients and educate them about our offerings. Educating prospective clients about the benefits of our solutions can take time, as many of these prospects have not historically relied upon integrated solutions like ours for service revenue management, nor have they typically put out a formal request for proposal or otherwise made a decision to focus on this area. As part of our sales process, our solutions design team performs a service performance analysis of our prospect’s service revenue. This includes an analysis of best practices and benchmarks the prospect’s service revenue against industry peers. Through this process, which typically takes several weeks, we are able to assess the characteristics and size of the prospect’s service revenue, identify potential areas of performance improvement, and formulate our proposal for managing the prospect’s service revenue. The length of our sales cycle for a new client, inclusive of the service performance analysis process and measured from our first formal discussion with the client until execution of a new client contract, is typicallyImplementation Cycle
. After entering into an engagement with a new client, and, to a lesser extent, after adding an engagement with an existing client, we incur sales and marketing expenses related to the commissions owed to our sales personnel. These commissions are19
operating margins until we begin to achieve anticipated sales levels associated with the new engagements, which is typically two to three quarters after we begin selling contracts on behalf of our clients.
Although we expect new client engagements to contribute to our operating profitability over time, in the initial periods of a client relationship, the near term impact on our near-term profitability can be negatively impacted by slower-than anticipated growth in revenues for these engagements as well as the impact of the upfront costs we incur, the lower initial level of associated service sales team productivity and lack of mature data and technology integration with the client. As a result, an increase in the mix of new clients as a percentage of total clients may initially have a negative impact on our operating results. Similarly, a decline in the ratio of new clients to total clients may positively impact our near-term operating results.
Contract Terms
. A significant portion of our revenue comes from our pay-for-performance model. Under our pay-for-performance model, we earn commissions based on the value of service contracts we sell on behalf of our clients. In some cases, we earn additional performance-based commissions for exceeding pre-determined serviceOur new client contracts typically have an initial term between twoone and fourtwo years. Our contracts generally require our clients to deliver a minimum value of qualifying service revenue contracts for us to renew on their behalf during a specified period. To the extent that our clients do not meet their minimum contractual commitments over a specified period, they may be subject to fees for the shortfall. Our client contracts are cancelable onwith relatively short notice and can be subject in most cases to the payment of an early termination fee by the client. The amount of this fee is based on the length of the remaining term and value of the contract.
Merger and Acquisition Activity.
Our clients, particularly those in the technology sector, participate in an active environment for mergers and acquisitions. Large technology companies have maintained active acquisition programs to increase the breadth and depth of their product and service offerings and small and mid-sized companies have combined to better compete with large technology companies. A number of our clients have merged, purchased other companies or been acquired by other companies. We expect merger and acquisition activity to continue to occur in the future.The impact of these transactions on our business can vary. Acquisitions of other companies by our clients can provide us with the opportunity to pursue additional business to the extent the acquired company is not already one of our clients. Similarly, when a client is acquired, we may be able to use our relationship with the acquired company to build a relationship with the acquirer. In some cases, we have been able to maintain our relationship with an acquired client even where the acquiring company handles its other service contract renewals through internal resources. In other cases, however, acquirers have elected to terminate or not renew our contract with the acquired company.
Seasonality
. We experience a seasonal variance in our revenue which is typically higher in the fourth quarter when many of our clients’ products come up for renewal, and for the third quarter of the year which is typically lower as a result of lower or flat renewal volume corresponding to the timing of ourForeign currency. Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British Pound, Singapore Dollar, Philippine Peso, Bulgarian Lev and Malaysian Ringgit. To date, we have not entered into any foreign currency hedging contracts, but may consider entering into such contracts in the future. We believe our operating activities act as a natural hedge for a portion of our foreign currency exposure because we typically collect revenue and incur costs in the currency in the location in which we provide our solution from our revenue delivery centers. As our international operations grow, we will continue to reassess our approach to managing our risk relating to fluctuations in currency rates. See Item.1A. "Risk Factors" for a description of the risks associated with fluctuations of the foreign currency exchange rate in our foreign operations.
Inflation. We do not believe that inflation had a material effect on our business, financial condition or results of operations as of December 31, 2021 and December 31, 2020. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
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Impact of the COVID-19 Pandemic. With the global outbreak of COVID-19 and the declaration of a pandemic by the World Health Organization on March 11, 2020, we created a dedicated crisis team to proactively implement our business continuity plans. By March 19, 2020, more than 95% of our employees had moved from an in-office to a work-from-home environment and as of April 1, 2020, we transitioned to a 100% virtual operating model. As a result of this successful work-from-home implementation, we have shifted to a virtual-first operating model whereby our employees will continue to primarily work from their home offices and our facilities will be used for collaboration, innovation, and connection. Additionally, this model includes virtual sourcing, hiring, and onboarding for new employees as well as a process for driving performance and culture in a virtual environment. As a result of the implementation of these business continuity measures, we have not experienced material disruptions in our operations.
We believe we have sufficient liquidity on hand to continue business operations even during periods of volatility such as those experienced since early 2020. As of December 31, 2021, we had total available liquidity of $46.5 million consisting of cash on hand and borrowing availability under our Revolver. See "Liquidity and Capital Resources" for additional information.
There was no material adverse impact on the results of operations for the years ended December 31, 2021 and 2020 as a result of the COVID-19 pandemic. We expect to continue to invest capital to allow our employees to function in our virtual, work-from-home operating model. However, we are benefiting and will continue to benefit from decreases in certain costs related to our facilities and reduced travel and entertainment costs.
During 2020, ServiceSource received various grants from the Singapore government, including the Job Support Scheme, which assists enterprises in retaining their local employees during the COVID-19 pandemic. The Company received and recognized income related to the grants of approximately $0.3 million and $1.3 million from the grant during the years ended December 31, 2021 and 2020, respectively. The Company does not expect to receive additional income related to these grants.
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 Part I, Item 1A - “Risk Factors” for additional information.
Basis of Presentation
Net Revenue
The majority of our net revenue is attributable to commissions we earn from the sale of renewals of maintenance, support and subscription agreements on behalf of our clients. We generally invoice our clients for our selling 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.commissions. 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.
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 expenseexpenses. Employee compensation includes salary, bonus, commissions, benefits, and stock-based compensation for our dedicated service sales teams. Our allocatedAllocated overhead includes costs for facilities, information technology andexpenses include depreciation, including amortization of internal-use software associated with our serviceselling services revenue technology platform and cloud applications.applications, and costs for facilities and information technology. Allocated costsoverhead expenses for facilities consist of rent, maintenance, and compensation of personnel in our facilities departments. Our allocated costsoverhead expenses for information technology include costs associated with third-party data centers where we maintain our data servers, compensation of our information technology personnel and the cost of support 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—ImplementationPerformance-Implementation Cycle.” In 2017, we saw cost
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Operating Expenses
Sales and Marketing.
Sales and marketing expenses are a significant componentprimarily consist of our operating costs and consist primarily ofemployee compensation expensesexpense and sales commissions forpaid to our sales and marketing staff, allocated expenses andemployees, amortization of contract acquisition costs, marketing programs and events.events and allocated overhead expenses which consist of depreciation, amortization of internally developed software, and facility and technology costs. We sell our solutions through our global sales organization, which is organized across three geographic regions: NALA, EMEA and APJ. Our commission plans generally provide that paymentmultiple payments of commissions to our sales representatives based in part on the execution of a client contract and then on a percentage of revenue recorded during the first one to two years of the contract term. Commissions paid as a percentage of recorded revenue is contingent on theirthe sales representatives’ continued employment,employment. We generally capitalize the amounts payable for obtaining a contract and we recognize expense over a period that is generally between the contract signing date and twelveamortize ratably 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. We currently expect sales and marketing expensesexpense over the contract term for new clients or five years for long-standing client relationships. Revenue based commissions are generally expensed to increase in 2018 over 2017 due to increased headcountsales and related employee expenses.
Research and Development.
Research and development expenses primarily consist primarily of employee compensation expense, allocatedthird-party consultant costs and the costallocated overhead expenses which consist of third-party service providers.depreciation, amortization of internally developed software, and facility and technology costs. We focus our research and development efforts on developing new products and applications related to our technology platform. We capitalize certain expenditures related to the development and enhancement of internal-use software related to our technology platform. We expect research and development spending to increase in 2018 compared to 2017 due to incremental costs of moving our clients to a single technology platform.
General and 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 overhead expenses, which consistsconsist of depreciation, amortization of internally developed software, facilitiesfacility and technology costs. We expect our general and administrative expenses to increase in 2018 due to increases in facility costs and investment in additional information technology.
Restructuring and Other.
Restructuring and other expensesrelated costs primarily consist primarily of employees’ severance payments and related employee benefits, stock compensation related to the accelerated vesting of certain equity awards, related legal fees asset impairment charges and charges related to leaseslease termination costs.
During 2020, the Company announced a restructuring effort to align with its virtual-first operating model and other contract terminationreduce the operating cost structure resulting in a reduction of headcount and office lease costs. TheAs of December 31, 2021, the Company expectsdoes not expect to incur additional restructuring charges in the first half of 2018 related to the relocation and decommissioning of our current San Francisco office space. Future cash outlays related tothis restructuring activities are expected to total approximately $1.8 million. These amounts are reported in “Accounts payable, Accrued compensation and benefits and Accrued expenses” in our Consolidated Balance Sheet
Interest Expense and Other Expense, Net
Interest and Impairment of Cost Basis Equity Investment
Provision for Income Tax Benefit (Expense)
We account for income taxes using an asset and liability method, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basis of our taxable subsidiaries’ assets and liabilities using the enacted tax rates in effect for 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.
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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 notmore-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, 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.
Key Financial Results of Operations
For the Year Ended December 31, | ||||||||
2017 | 2016 | 2015 | ||||||
Net revenue | 100 | % | 100 | % | 100 | % | ||
Cost of revenue | 68 | % | 65 | % | 68 | % | ||
Gross profit | 32 | % | 35 | % | 32 | % | ||
Operating expenses: | ||||||||
Sales and marketing | 14 | % | 17 | % | 17 | % | ||
Research and development | 2 | % | 3 | % | 7 | % | ||
General and administrative | 22 | % | 21 | % | 18 | % | ||
Restructuring and other | 3 | % | — | % | 1 | % | ||
Total operating expenses | 41 | % | 41 | % | 43 | % | ||
Loss from operations | (9 | )% | (6 | )% | (11 | )% |
● | GAAP revenue was $195.7 million, compared with $194.6 million reported for the year ended December 31, 2020. |
● | GAAP net loss was $14.7 million or $0.15 per diluted share, compared with GAAP net loss of $18.5 million or $0.19 per diluted share reported for the year ended December 31, 2020. |
● | Adjusted EBITDA, a non-GAAP financial measure, was $9.8 million compared with $4.3 million reported for the year ended December 31, 2020. See “Non-GAAP Financial Measurements” below for a reconciliation of Adjusted EBITDA from net loss. |
● | Ended the year with $30.8 million of cash and cash equivalents and restricted cash and $10.0 million of borrowings under the Company’s $35.0 million Revolver. |
Results of Operations
For the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2016
Net Revenue, Cost of Revenue and Gross Profit
For the Year Ended December 31, | ||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | $ Change | % Change | |||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||
Net revenue | $ | 239,127 | 100 | % | $ | 252,887 | 100 | % | $ | (13,760 | ) | (5 | )% | |||||||
Cost of revenue | 163,709 | 68 | % | 165,069 | 65 | % | (1,360 | ) | (1 | )% | ||||||||||
Gross profit | $ | 75,418 | 32 | % | $ | 87,818 | 35 | % | $ | (12,400 | ) | (14 | )% |
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | | | | | | ||||||||||||
| | 2021 | | 2020 | | | | | | | ||||||||||
|
| | |
| % of Net | | | |
| % of Net | | | | | | | ||||
|
| Amount |
| Revenue |
| Amount |
| Revenue |
| $ Change |
| % Change | ||||||||
| | (in thousands) | | | | | | (in thousands) | | | | | | (in thousands) | | | | |||
Net revenue | | $ | 195,704 | | | 100 | % | | $ | 194,601 | | | 100 | % | | $ | 1,103 | | 1 | % |
Cost of revenue | | | 140,002 | | | 72 | % | | | 137,041 | | | 70 | % | | | 2,961 | | 2 | % |
Gross profit | | $ | 55,702 | | | 28 | % | | $ | 57,560 | | | 30 | % | | $ | (1,858) | | (3) | % |
Net revenue decreasedincreased by $13.8 million, or 5%, for the year ended December 31, 2017 compared to the same period in 2016, due to contractions and lower production with certain existing clients and the bankruptcy of one of our top 10 clients, partially offset by production related to expansion of business with our existing client base and new business in 2017.
Cost of revenue generating employees, and shifting headcount to lower cost locations, all of which are part of our continuous efforts to better align employee costs with revenue;
● | $3.0 million increase in employee related costs primarily due to increased compensation expense associated with higher revenue attainment; |
● | $2.5 million increase in depreciation and amortization expense; and |
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● | $1.2 million increase in information technology costs; partially offset by |
● | $3.7 million decrease in facility costs primarily related to transitioning to a virtual-first operating model and sublease income. |
Operating Expenses
For the Year Ended December 31, | ||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | $ Change | % Change | |||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||
Sales and marketing | $ | 33,001 | 14 | % | $ | 41,972 | 17 | % | $ | (8,971 | ) | (21 | )% | |||||||
Research and development | 5,729 | 2 | % | 8,344 | 3 | % | (2,615 | ) | (31 | )% | ||||||||||
General and administrative | 53,087 | 22 | % | 52,995 | 21 | % | 92 | — | % | |||||||||||
Restructuring and other | 7,308 | 3 | % | — | — | % | 7,308 | 100 | % | |||||||||||
Total operating expenses | $ | 99,125 | 41 | % | $ | 103,311 | 41 | % | $ | (4,186 | ) | (4 | )% | |||||||
Stock-based compensation included in operating expenses: | ||||||||||||||||||||
Amount | Amount | $ Change | ||||||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||
Sales and marketing | $ | 3,774 | $ | 3,004 | $ | 770 | ||||||||||||||
Research and development | 149 | 586 | (437 | ) | ||||||||||||||||
General and administrative | 8,425 | 5,678 | 2,747 | |||||||||||||||||
Restructuring and other | 352 | — | 352 | |||||||||||||||||
Total stock-based compensation | $ | 12,700 | $ | 9,268 | $ | 3,432 |
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | | | | | | ||||||||||||
| | 2021 | | 2020 | | | | | | | ||||||||||
| | | | | % of Net | | | | | % of Net | | | | | | | ||||
|
| Amount |
| Revenue |
| Amount |
| Revenue |
| $ Change |
| % Change | ||||||||
|
| (in thousands) |
| | |
| | (in thousands) |
| | |
| | (in thousands) |
| | | |||
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Sales and marketing | | $ | 17,056 | | | 9 | % | | $ | 24,999 | | | 13 | % | | $ | (7,943) | | (32) | % |
Research and development | | | 5,183 | | | 3 | % | | | 5,602 | | | 3 | % | | | (419) | | (7) | % |
General and administrative | | | 45,051 | | | 23 | % | | | 41,970 | | | 22 | % | | | 3,081 | | 7 | % |
Restructuring and other related costs | | | 1,071 | | | 1 | % | | | 1,542 | | | 1 | % | | | (471) | | (31) | % |
Total operating expenses | | $ | 68,361 | | | 35 | % | | $ | 74,113 | | | 38 | % | | $ | (5,752) | | (8) | % |
Sales and Marketing
Sales and marketing expense decreased $9.0$7.9 million, or 21%32%, for the year ended December 31, 20172021 compared to the same period in 2016,2020, primarily due to a $4.9 million decrease in employee related costs largely associated with a reduction in headcount, a $2.8 million decrease in information technology and facility costs related to transitioning to a virtual-first operating model, and a $0.2 million decrease in marketing cost.
Research and Development
Research and development expense decreased $0.4 million, or 7%, for the year ended December 31, 2021 compared to the same period in 2020, primarily due to a $0.7 million decrease in information technology and facility costs and a $0.5 million decrease in professional fees, partially offset by a $0.4 million increase in employee related costs primarily due to increased compensation expense associated with higher revenue attainment and a $0.4 million reduction in third-party capitalizable software development costs.
General and Administrative
General and administrative expense increased $3.1 million, or 7%, for the year ended December 31, 2021 compared to the same period in 2020, primarily due to the following:
● | $3.9 million increase in information technology and facility costs; |
● | $1.3 million increase in stock-based compensation costs; and |
● | $0.2 million increase in professional fees; partially offset by |
● | $1.7 million decrease in depreciation and amortization expense; and |
● | $0.6 million decrease in employee related costs primarily associated with a reduction in headcount. |
Restructuring and Other Related Costs
Restructuring and other related costs due to lower headcount resulting from our efforts to better align our cost structure;
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Interest and Other
For the Year Ended December 31, | ||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | $ Change | % Change | |||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||
Interest expense | $ | (11,683 | ) | (5 | )% | $ | (11,030 | ) | (4 | )% | $ | 653 | 6 | % | ||||||
Other, net | $ | 1,797 | 1 | % | $ | 2,326 | 1 | % | $ | (529 | ) | (23 | )% | |||||||
Impairment loss on cost basis equity investment | $ | — | — | % | $ | (4,500 | ) | (2 | )% | $ | 4,500 | (100 | )% | |||||||
Gain on sale on cost basis equity investment | $ | 2,100 | 1 | % | $ | — | — | % | $ | 2,100 | 100 | % |
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | | | | | | ||||||||||||
| | 2021 | | 2020 | | | | | | | ||||||||||
| | | | | % of Net | | | | | % of Net | | | | | | | ||||
|
| Amount |
| Revenue |
| Amount |
| Revenue |
| $ Change |
| % Change | ||||||||
| | (in thousands) | | | | | | (in thousands) | | | | | | (in thousands) | | | | |||
Interest expense | | $ | (471) | | | — | % | | | (608) | | | — | % | | $ | 137 | | 23 | % |
Other expense, net | | $ | (1,313) | | | (1) | % | | | (671) | | | — | % | | $ | (642) | | (96) | % |
Interest expense increased $0.7 million, or 6%, for the year ended December 31, 2017 compared to the same period in 2016 due to the accretion of the debt discount related to our convertible notes issued in August 2013.
For the Year Ended December 31, | |||||||||||||||||||
2017 | 2016 | ||||||||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | $ Change | % Change | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Provision for income tax benefit (expense) | $ | 1,647 | 1 | % | $ | (3,429 | ) | (1 | )% | $ | 5,076 | * |
Other expense, net operating loss provisions as enacted under the Tax Cuts and Jobs Act (H.R.1) during December 2017. Historically, we recorded a deferred income tax expense for indefinite lived deferred tax liabilities, as the Company did not have any indefinite lived deferred tax assets. H.R.1 changed the carryover period for federal net operating losses to indefinite, allowing us to utilize future indefinite lived deferred tax assets in the scheduling of valuation allowance. Our net U.S. deferred tax liability decreased from $2.2 million as of December 31, 2016 to $0.2 million as of December 31, 2017. We also recorded $0.4 million of federal, foreign and state income tax expense. No benefit was otherwise provided for losses incurred in U.S. and Singapore because these losses are offset by a valuation allowance.
For the Year Ended December 31, | ||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | $ Change | % Change | |||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||
Net revenue | $ | 252,887 | 100 | % | $ | 252,203 | 100 | % | $ | 684 | — | % | ||||||||
Cost of revenue | 165,069 | 65 | % | 171,369 | 68 | % | (6,300 | ) | (4 | )% | ||||||||||
Gross profit | $ | 87,818 | 35 | % | $ | 80,834 | 32 | % | $ | 6,984 | 9 | % |
Income Tax Provision
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | | | | | | ||||||||||||
| | 2021 | | 2020 | | | | | | | ||||||||||
| | | | | % of Net | | | | | % of Net | | | | | | | ||||
|
| Amount |
| Revenue |
| Amount |
| Revenue |
| $ Change |
| % Change | ||||||||
| | (in thousands) | | | | | | (in thousands) | | | | | | (in thousands) | | | | |||
Provision for income tax expense | | $ | (278) | | | (0) | % | | $ | (709) | | | — | % | | $ | 431 | | 61 | % |
Provision for income tax expense resulted primarily from profitable jurisdictions where current taxes are required to be provided. Income tax expense decreased $6.3$0.4 million, or 4%,61% for the year ended December 31, 20162021 compared to the same period in 2015,2020, primarily due to the following:
For the Year Ended December 31, | ||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | $ Change | % Change | |||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||
Sales and marketing | $ | 41,972 | 17 | % | $ | 44,086 | 17 | % | $ | (2,114 | ) | (5 | )% | |||||||
Research and development | 8,344 | 3 | % | 16,480 | 7 | % | (8,136 | ) | (49 | )% | ||||||||||
General and administrative | 52,995 | 21 | % | 46,299 | 18 | % | 6,696 | 14 | % | |||||||||||
Restructuring and other | — | — | % | 3,662 | 1 | % | (3,662 | ) | (100 | )% | ||||||||||
Total operating expenses | $ | 103,311 | 41 | % | $ | 110,527 | 43 | % | $ | (7,216 | ) | (7 | )% | |||||||
Stock-based compensation included in operating expenses: | ||||||||||||||||||||
Amount | Amount | $ Change | ||||||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||
Sales and marketing | $ | 3,004 | $ | 3,393 | $ | (389 | ) | |||||||||||||
Research and development | 586 | 1,299 | (713 | ) | ||||||||||||||||
General and administrative | 5,678 | 6,029 | (351 | ) | ||||||||||||||||
Restructuring and other | — | 2,579 | (2,579 | ) | ||||||||||||||||
Total stock-based compensation | $ | 9,268 | $ | 13,300 | $ | (4,032 | ) |
For the Year Ended December 31, | ||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | $ Change | % Change | |||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||
Interest expense | $ | (11,030 | ) | (4 | )% | $ | (10,393 | ) | (4 | )% | $ | 637 | 6 | % | ||||||
Other, net | $ | 2,326 | 1 | % | $ | 1,077 | 0 | % | $ | 1,249 | 116 | % | ||||||||
Impairment loss on cost basis equity investment | $ | (4,500 | ) | (2 | )% | $ | — | 0 | % | $ | (4,500 | ) | 100 | % |
For the Year Ended December 31, | |||||||||||||||||||
2016 | 2015 | ||||||||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | $ Change | % Change | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Provision for income tax benefit (expense) | $ | (3,429 | ) | (1 | )% | $ | (1,584 | ) | (1 | )% | $ | (1,845 | ) | * |
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, proceeds from common stock offerings and cash proceeds from the exercise of stock options and our employee stock purchase plan.activities. We believe our existing cash and cash equivalents and short-term investments 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 December 31, 2017,2021, we had cash, cash equivalents and short-term investments of $188.6 million, which primarily consisted of demand deposits, money market mutual funds, corporate bonds and U.S. government obligations held by well-capitalized financial institutions. Included in cash, cash equivalents and short-term investments was cash and cash equivalents of $7.4$28.5 million, which primarily consist of demand deposits and money market mutual funds. Included in cash and cash equivalents was $6.5 million held by our foreign subsidiaries used to satisfy their operating requirements. The Company considers itsWe consider the undistributed earnings of ServiceSource Europe Ltd. &and ServiceSource International Singapore Pte. Ltd. permanently reinvested in foreign operations and hashave not provided for U.S. income taxes on such earnings. As of December 31, 2017,2021, the Company had no unremitted earnings from itsour foreign subsidiaries.
In August 2013, we issued $150.0July 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 principalcommitments under the 2021 Credit Agreement may be increased up to an additional $10.0 million, for a total maximum commitment amount of 1.50% convertible notes due August 1, 2018 (the "Notes")$45.0 million. The Revolver in the 2021 Credit Agreement matures in July 2024 and concurrently entered into convertible notes hedges and separate warrant transactions. The Notes mature on August 1, 2018, unless converted earlier. Upon conversion, the Notes will be settled in cash, shares of our stock,bears interest at a rate equal to BSBY plus 2.00% to 2.50% per annum or, any combination thereof, at our option. The Notes were not subjectelection, an alternate base rate plus 1.00% to conversion or repurchase1.50% per annum.
As of December 31, 2021, the Company had $10.0 million of borrowings under the Revolver through a three-month BSBY borrowing at an effective interest rate of 2.40% maturing February 2022. An additional $18.0 million was available for borrowing under the Revolver as of December 31, 20172021. The BSBY borrowings may be extended upon maturity, converted into a base rate borrowing upon
25
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 classifiedsecured by substantially all of 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 a current liability on our Consolidated Balance Sheet. We believe we have sufficient cash and liquid short-term investments to repay the Notes upon maturity.
Letters of Credit and Restricted Cash
In connection with onetwo of our leased facilities, the Company is required to maintain a $1.2 million letter of credit. The lettertwo letters of credit istotaling $2.3 million. The letters of credit are secured by $1.2$2.3 million of cash in a money market account,accounts, which isare classified as anrestricted cash in “Prepaid expenses and other” and "Other assets" in ourthe Consolidated Balance Sheets.
Cash Flows
The following table presents a summary of our cash flows:
For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
(in thousands) | |||||||||||
Net cash provided by operating activities | $ | 19,797 | $ | 4,452 | $ | 3,597 | |||||
Net cash used in investing activities | $ | (14,815 | ) | $ | (28,914 | ) | $ | (25,194 | ) | ||
Net cash provided by financing activities | $ | 216 | $ | 937 | $ | 3,347 | |||||
Net increase/(decrease) in cash and cash equivalents, net of the effect of exchange rates on cash and cash equivalents | $ | 3,697 | $ | (24,642 | ) | $ | (18,048 | ) |
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Net cash provided by operating activities | | $ | 3,605 | | $ | 401 |
Net cash used in investing activities | | | (3,932) | | | (7,855) |
Net cash (used in) provided by financing activities | | | (5,743) | | | 14,301 |
Effect of exchange rate changes on cash and cash equivalents and restricted cash | | | 545 | | | 96 |
Net change in cash and cash equivalents and restricted cash | | $ | (5,525) | | $ | 6,943 |
Depreciation and amortization expense waswere comprised of the following:
For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
(in thousands) | |||||||||||
Scout intangible asset amortization | $ | 1,512 | $ | 1,512 | $ | 1,512 | |||||
Internally developed software amortization | 13,298 | 7,634 | 5,025 | ||||||||
Property and equipment depreciation | 7,778 | 7,019 | 7,199 | ||||||||
Depreciation and amortization | 22,588 | 16,165 | 13,736 | ||||||||
Adjustments and other | — | (113 | ) | — | |||||||
Total depreciation and amortization | $ | 22,588 | $ | 16,052 | $ | 13,736 |
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| (in thousands) | |||||
Internally developed software amortization | | $ | 9,388 | | $ | 7,701 |
Property and equipment depreciation | | | 5,279 | | | 6,224 |
Total depreciation and amortization | | $ | 14,667 | | $ | 13,925 |
Operating Activities
Net cash provided by operating activities was $4.5increased $3.2 million forduring the year ended December 31, 2016. Our net loss was $32.1 million, which was impacted by non-cash charges2021 compared to the same period in 2020, primarily as a result of $16.1 millionlower payments for depreciationoperating costs and amortization, $8.7 million of amortization of debt discount and issuance costs, $10.8 million of stock-based compensation and $4.5 million related to an impairment of our cost basis equity investment. Cash provided by operations from changes in our working capital include a $0.9 million increase in accounts payable, a $2.1 million increase in accrued expenses and other liabilitiesincreased revenue, partially offset by cash used in operations from a $7.2 million increase in accounts receivable, net, a $1.6 million decrease in deferred revenue and a $0.7 million increase in prepaid expenses and other current assets.
Investing Activities
Net cash used in investing activities decreased $14.1 million to $14.8$3.9 million during the year ended December 31, 20172021 compared to $28.9 million during the same period in 2016, primarily2020, due to the following activities:
Financing Activities
Net cash used in investingprovided by financing activities increased $3.7 million to $28.9decreased $20.0 million during the year ended December 31, 20162021 compared to $25.2 million during the same period in 2015,2020, primarily due to the following activities:
26
Payments Due | |||||||||||||||||||
Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 years | |||||||||||||||
Obligations under capital leases | $ | 129 | $ | 73 | $ | 56 | $ | — | $ | — | |||||||||
Operating lease obligations | 41,751 | (1) | 11,354 | 25,781 | 4,616 | — | |||||||||||||
Convertible Notes | 150,000 | 150,000 | — | — | — | ||||||||||||||
$ | 191,880 | $ | 161,427 | $ | 25,837 | $ | 4,616 | $ | — |
Critical Accounting Policies and Estimates
General
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”)GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements. Our discussion and analysis of financial condition and results of operations is based on our Consolidated Financial Statements, which have been prepared in accordance with GAAP. Estimates, judgments and assumptions are based on historical experiences that we believe to be reasonable under the circumstances. From time to time, we re-evaluate those estimates and assumptions.
The Company’s significant accounting policies are described in “NotesNotes to the Consolidated Financial Statements, Note"Note 2 -— Summary of Significant Accounting Policies.” These policies were followed in preparing the Consolidated Financial Statements as of and for the year ended December 31, 20172021 and are consistent with the year ended December 31, 2016.
Revenue Recognition
The Company has identified the following as critical accounting policies. These accounting policies have the most significant impact on our financial condition and results of operations and require management’s most difficult, subjective and/or complex estimates.
Significant estimates and early termination fees are recordedjudgments for revenue recognition include: (1) identifying and determining distinct performance obligations in contracts with clients, (2) determining the timing of the satisfaction of performance obligations, (3) estimating the timing and amount of variable consideration in a contract, (4) determining SSP for each performance obligations and the methodology to allocate the total contract consideration to the distinct performance obligations, and (5) determining and measuring variable revenue that has yet to be invoiced as of period when the performance criteria have been met.
Our revenue is comprised of subscriptions feescontracts often include promises to access our Renew OnDemand application which was phased out in 2017, and professionaltransfer services is generated from implementation and project based services. Subscription revenue is recognized ratably over the contract term, commencing when our cloud applications are made availableinvolving multiple selling motions to our clients. Our subscription service arrangements are generally non-cancelable and do not contain refund-type provisions. Professionala client. Determining whether those services are deemed deliveredconsidered distinct and revenue recognized upon the successful completionqualify as a series of implementation projects or when project milestones have been achieved and accepted by the client.
A significant portion of our contracts is based on a pay-for-performance model that provides the Company with commissions and services. Also, we have not been able to reliably determine the stand-alone selling pricesrevenue based on a volume of competitor’s productsclosed bookings each time period and services, andvariable consideration if certain performance targets are achieved during a given period of time (such as a result, we cannot rely on TPE for our deliverables. Therefore, we utilize estimates of BESPexceeding quarterly closure rate thresholds or achieving absolute dollar volume sales targets). Significant judgment is required to determine if this type of variable consideration should be constrained, and to what extent, until the selling pricesrisk of our deliverables. BESPa significant revenue reversal is determined through consultationnot probable.
We also enter into contracts with management, taking intomultiple performance obligations that incorporate fixed consideration, our marketingpay-for-performance commissions and pricing strategies. As these strategies evolve, we may modify our pricing practices in the future, which could result in changes in the estimates usedvariable bonus commissions. Judgment is required to estimate BESP which could change the allocationamount of revenue for our multiple element arrangements.
Stock-Based Compensation
Stock-based compensation expense for our restricted stock unitsRSUs and performance based restricted stock awardsPSUs is determined using the fair value of our common stock on the date of grant and the expense is recognized on a straight-line basis over the vesting period. Performance based restricted stock awardsPSU compensation expense is only recorded if it is probable that the performance conditions will be met.
Impairment of Goodwill
We evaluate goodwill and indefinite-lived intangible assets for possible impairment at least annually or whenever events orif indicators of impairment arise, such as significant changes in circumstanceskey factors including the industry and competitive environment, stock price, actual revenue performance year over year, EBITDA and
27
cash flow generation that would more-likely-than-not indicate that the carrying amount of such assets may not be recoverable.
Income Taxes
We account for income taxes using an asset and liability method, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basis of our taxable subsidiaries’ assets and liabilities using the enacted tax rates in effect for 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 regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets on a jurisdictional basis to determine, based on the weight of available evidence, whether it is more likely than notmore-likely-than-not that some or all of the deferred tax assets will not be realized. Examples of positive and negative evidence include future growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law and prudent and feasible tax planning strategies. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period in which we make such a determination
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, for the difference between the benefit recognized and measured and the tax position taken or expected to be taken on our tax returns. We recognize interest accrued and penalties related to unrecognized tax benefits in the income tax provision. 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.
Recent Accounting Pronouncements
See Notes to the Consolidated Financial Statements “Note 2.2 — Summary of Significant Accounting Policies” in Item 8. Financial Statements and Supplementary Data for a full description of recent accounting pronouncements including the expected dates of adoption and the anticipated impact to our Consolidated Financial Statements.
Non-GAAP Financial Measurements
ServiceSource believes net income (loss), as defined by GAAP, is the most appropriate financial measure of our operating performance; however, ServiceSource considers Adjusted EBITDA to be a useful supplemental, non-GAAP financial measure of our operating performance. We believe Adjusted EBITDA can assist investors in understanding and assessing our operating performance on a consistent basis, as it removes the impact of the Company’s capital structure and other non-cash or non-recurring items from operating results and provides an additional tool to compare ServiceSource’s financial results with other companies in the industry, many of which present similar non-GAAP financial measures.
EBITDA consists of net income (loss) plus provision for income tax expense (benefit), interest and other expense (income), net and depreciation and amortization. Adjusted EBITDA consists of EBITDA plus stock-based compensation, restructuring and other related costs, amortization of contract acquisition costs related to the initial adoption of ASC 606, costs attributable to establishing a litigation reserve, and loss (gain) on disposal of fixed assets and other, net.
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 Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Net loss | | $ | (14,721) | | $ | (18,541) |
Provision for income tax expense | | | 278 | | | 709 |
Interest and other expense, net | | | 1,784 | | | 1,279 |
Depreciation and amortization | | | 14,667 | | | 13,925 |
EBITDA | | | 2,008 | | | (2,628) |
Stock-based compensation | | | 6,127 | | | 4,865 |
Restructuring and other related costs | | | 1,071 | | | 1,542 |
Amortization of contract acquisition asset costs - ASC 606 initial adoption | | | 215 | | | 605 |
Litigation reserve | | | — | | | (74) |
Loss on disposal of fixed assets and other, net | | | 377 | | | — |
Adjusted EBITDA | | $ | 9,798 | | $ | 4,310 |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable to smaller reporting companies as defined by Rule 12b-2 of the Exchange Act.
29
Index to Consolidated Financial Statements
| |
31 | |
32 | |
33 | |
34 | |
35 | |
36 | |
Reports of Independent Registered Public Accounting | 54 |
30
Consolidated Balance Sheets
(in thousands, except per share and par value amounts)
| | | | | | |
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 28,507 | | $ | 34,006 |
Accounts receivable, net | | | 43,571 | | | 38,890 |
Prepaid expenses and other | | | 8,995 | | | 9,275 |
Total current assets | | | 81,073 | | | 82,171 |
| | | | | | |
Property and equipment, net | | | 18,721 | | | 29,948 |
ROU assets | | | 23,043 | | | 29,798 |
Contract acquisition costs | | | 558 | | | 872 |
Goodwill | | | 6,334 | | | 6,334 |
Other assets | | | 2,719 | | | 3,490 |
Total assets | | $ | 132,448 | | $ | 152,613 |
| | | | | | |
Liabilities and Stockholders' Equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 832 | | $ | 1,204 |
Accrued expenses | | | 4,152 | | | 3,217 |
Accrued compensation and benefits | | | 19,999 | | | 18,342 |
Revolver | | | 10,000 | | | 15,000 |
Operating lease liabilities | | | 8,614 | | | 10,797 |
Other current liabilities | | | 793 | | | 1,209 |
Total current liabilities | | | 44,390 | | | 49,769 |
| | | | | | |
Operating lease liabilities, net of current portion | | | 19,869 | | | 25,975 |
Other long-term liabilities | | | 1,155 | | | 1,593 |
Total liabilities | | | 65,414 | | | 77,337 |
| | | | | | |
Commitments and contingencies (Note 11) | | | | | | |
| | | | | | |
Stockholders' equity: | | | | | | |
Preferred stock, $0.0001 par value; 20,000 shares authorized and NaN issued and outstanding | | | — | | | — |
Common stock, $0.0001 par value; 1,000,000 shares authorized; 99,233 shares issued and 99,112 shares outstanding as of December 31, 2021; 97,248 shares issued and 97,127 shares outstanding as of December 31, 2020 | | | 10 | | | 10 |
Treasury stock | | | (441) | | | (441) |
Additional paid-in capital | | | 385,827 | | | 379,696 |
Accumulated deficit | | | (319,328) | | | (304,607) |
Accumulated other comprehensive income | | | 966 | | | 618 |
Total stockholders' equity | | | 67,034 | | | 75,276 |
Total liabilities and stockholders' equity | | $ | 132,448 | | $ | 152,613 |
The accompanying notes are an integral part of these Consolidated Financial Statements
31
ServiceSource International, Inc. (the Company) as
Consolidated Statements of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
(in thousands, except per share amounts)
December 31, | |||||||
2017 | 2016 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 51,389 | $ | 47,692 | |||
Short-term investments | 137,181 | 137,881 | |||||
Accounts receivable, net | 56,516 | 63,289 | |||||
Prepaid expenses and other | 6,112 | 7,607 | |||||
Total current assets | 251,198 | 256,469 | |||||
Property and equipment, net | 34,119 | 38,180 | |||||
Deferred income taxes, net of current portion | 70 | 64 | |||||
Goodwill and intangible assets, net | 6,419 | 7,932 | |||||
Other assets | 3,566 | 3,445 | |||||
Total assets | $ | 295,372 | $ | 306,090 | |||
Liabilities and Stockholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 4,574 | $ | 1,916 | |||
Accrued taxes | 651 | 1,388 | |||||
Accrued compensation and benefits | 19,257 | 21,579 | |||||
Convertible notes, net | 144,167 | — | |||||
Deferred revenue | 1,282 | 4,152 | |||||
Accrued expenses | 6,625 | 5,891 | |||||
Other current liabilities | 2,104 | 2,958 | |||||
Total current liabilities | 178,660 | 37,884 | |||||
Convertible notes, net | — | 134,775 | |||||
Other long-term liabilities | 4,603 | 6,495 | |||||
Total liabilities | 183,263 | 179,154 | |||||
Commitments and contingencies (Note 8) | |||||||
Stockholders’ equity: | |||||||
Preferred stock, $0.001 par value; 20,000 shares authorized and none issued and outstanding | — | — | |||||
Common stock; $0.0001 par value; 1,000,000 shares authorized; 90,380 shares issued and 90,259 shares outstanding as of December 31, 2017; 88,304 shares issued and 88,183 shares outstanding as of December 31, 2016 | 8 | 8 | |||||
Treasury stock | (441 | ) | (441 | ) | |||
Additional paid-in capital | 359,347 | 344,521 | |||||
Accumulated deficit | (246,207 | ) | (216,361 | ) | |||
Accumulated other comprehensive loss | (598 | ) | (791 | ) | |||
Total stockholders’ equity | 112,109 | 126,936 | |||||
Total liabilities and stockholders’ equity | $ | 295,372 | $ | 306,090 |
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Net revenue | | $ | 195,704 | | $ | 194,601 |
Cost of revenue | | | 140,002 | | | 137,041 |
Gross profit | | | 55,702 | | | 57,560 |
Operating expenses: | | | | | | |
Sales and marketing | | | 17,056 | | | 24,999 |
Research and development | | | 5,183 | | | 5,602 |
General and administrative | | | 45,051 | | | 41,970 |
Restructuring and other related costs | | | 1,071 | | | 1,542 |
Total operating expenses | | | 68,361 | | | 74,113 |
Loss from operations | | | (12,659) | | | (16,553) |
Interest and other expense, net | | | (1,784) | | | (1,279) |
Loss before provision for income taxes | | | (14,443) | | | (17,832) |
Provision for income tax expense | | | (278) | | | (709) |
Net loss | | $ | (14,721) | | $ | (18,541) |
Net loss per common share: | | | | | | |
Basic and diluted | | $ | (0.15) | | $ | (0.19) |
Weighted-average common shares outstanding: | | | | | | |
Basic and diluted | | | 98,050 | | | 95,787 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
32
(in thousands, except per share amounts)
For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Net revenue | $ | 239,127 | $ | 252,887 | $ | 252,203 | |||||
Cost of revenue | 163,709 | 165,069 | 171,369 | ||||||||
Gross profit | 75,418 | 87,818 | 80,834 | ||||||||
Operating expenses: | |||||||||||
Sales and marketing | 33,001 | 41,972 | 44,086 | ||||||||
Research and development | 5,729 | 8,344 | 16,480 | ||||||||
General and administrative | 53,087 | 52,995 | 46,299 | ||||||||
Restructuring and other | 7,308 | — | 3,662 | ||||||||
Total operating expenses | 99,125 | 103,311 | 110,527 | ||||||||
Loss from operations | (23,707 | ) | (15,493 | ) | (29,693 | ) | |||||
Interest expense and other, net | (9,886 | ) | (8,704 | ) | (9,316 | ) | |||||
Impairment loss on cost basis equity investment | — | (4,500 | ) | — | |||||||
Gain on sale of cost basis equity investment | 2,100 | — | — | ||||||||
Loss before income taxes | (31,493 | ) | (28,697 | ) | (39,009 | ) | |||||
Provision for income tax benefit (expense) | 1,647 | (3,429 | ) | (1,584 | ) | ||||||
Net loss | $ | (29,846 | ) | $ | (32,126 | ) | $ | (40,593 | ) | ||
Net loss per common share: | |||||||||||
Basic and diluted | $ | (0.33 | ) | $ | (0.37 | ) | $ | (0.48 | ) | ||
Weighted-average common shares outstanding: | |||||||||||
Basic and diluted | 89,234 | 86,318 | 85,417 |
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Net loss | | $ | (14,721) | | $ | (18,541) |
Other comprehensive income: | | | | | | |
Foreign currency translation adjustments | | | 348 | | | 208 |
Other comprehensive income: | | | 348 | | | 208 |
Comprehensive loss | | $ | (14,373) | | $ | (18,333) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
33
(in thousands)
For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Net loss | $ | (29,846 | ) | $ | (32,126 | ) | $ | (40,593 | ) | ||
Other comprehensive income (loss), net of tax: | |||||||||||
Foreign currency translation adjustments | 710 | (1,236 | ) | 12 | |||||||
Unrealized gain (loss) on short-term investments | (517 | ) | 18 | (698 | ) | ||||||
Other comprehensive income (loss), net of tax | 193 | (1,218 | ) | (686 | ) | ||||||
Comprehensive loss, net of tax | $ | (29,653 | ) | $ | (33,344 | ) | $ | (41,279 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | | Additional | | | | | Other | | | | ||
| | Common Stock | | Treasury Shares/Stock | | Paid-in | | Accumulated | | Comprehensive | | | | |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Income |
| Total | ||||||
Balance at December 31, 2019 | | 94,972 | | $ | 9 | | (121) | | $ | (441) | | $ | 374,525 | | $ | (286,066) | | $ | 410 | | $ | 88,437 |
Net loss | | — | | | — | | — | | | — | | | — | | | (18,541) | | | — | | | (18,541) |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | 208 | | | 208 |
Stock-based compensation | | — | | | — | | — | | | — | | | 4,919 | | | — | | | — | | | 4,919 |
Issuance of common stock, RSUs | | 1,845 | | | 1 | | — | | | — | | | (1) | | | — | | | — | | | — |
Proceeds from the exercise of stock options and ESPP | | 431 | | | — | | — | | | — | | | 414 | | | — | | | — | | | 414 |
Net cash paid for payroll taxes on RSU releases | | — | | | — | | — | | | — | | | (161) | | | — | | | — | | | (161) |
Balance at December 31, 2020 | | 97,248 | | | 10 | | (121) | | | (441) | | | 379,696 | | | (304,607) | | | 618 | | | 75,276 |
Net loss | | — | | | — | | — | | | — | | | — | | | (14,721) | | | — | | | (14,721) |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | 348 | | | 348 |
Stock-based compensation | | — | | | — | | — | | | — | | | 6,169 | | | — | | | — | | | 6,169 |
Issuance of common stock, RSUs | | 1,812 | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Proceeds from the exercise of stock options and ESPP | | 173 | | | — | | — | | | — | | | 154 | | | — | | | — | | | 154 |
Net cash paid for payroll taxes on RSU releases | | — | | | — | | — | | | — | | | (192) | | | — | | | — | | | (192) |
Balance at December 31, 2021 | | 99,233 | | $ | 10 | | (121) | | $ | (441) | | $ | 385,827 | | $ | (319,328) | | $ | 966 | | $ | 67,034 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
34
(in thousands)
Common Stock | Treasury Shares/Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
Balance at December 31, 2014 | 83,928 | $ | 8 | (121 | ) | $ | (441 | ) | $ | 312,017 | $ | (143,348 | ) | $ | 1,113 | $ | 169,349 | |||||||||||||
Proceeds from the exercise of stock options and employee stock purchase plan | 1,505 | — | — | — | 5,761 | — | — | 5,761 | ||||||||||||||||||||||
Issuance of common stock, restricted stock units | 1,755 | — | — | — | — | — | — | — | ||||||||||||||||||||||
Net cash paid for payroll taxes on restricted stock unit releases | — | — | — | — | (974 | ) | — | — | (974 | ) | ||||||||||||||||||||
Share repurchases | (295 | ) | — | — | — | (1,212 | ) | — | — | (1,212 | ) | |||||||||||||||||||
Stock-based compensation | — | — | — | — | 13,751 | — | — | 13,751 | ||||||||||||||||||||||
Acceleration of stock-based compensation expense due to restructuring | — | — | — | — | 2,579 | — | — | 2,579 | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (40,593 | ) | — | (40,593 | ) | ||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (686 | ) | (686 | ) | ||||||||||||||||||||
Balance at December 31, 2015 | 86,893 | $ | 8 | (121 | ) | $ | (441 | ) | $ | 331,922 | $ | (183,941 | ) | $ | 427 | $ | 147,975 | |||||||||||||
Cumulative effect of stock compensation standard adoption | — | — | — | — | 294 | (294 | ) | — | — | — | ||||||||||||||||||||
Proceeds from the exercise of stock options and employee stock purchase plan | 2,434 | — | — | — | 10,866 | — | — | 10,866 | ||||||||||||||||||||||
Issuance of common stock, restricted stock units | 1,240 | — | — | — | — | — | — | — | ||||||||||||||||||||||
Net cash paid for payroll taxes on restricted stock unit releases | — | — | — | — | (947 | ) | — | — | (947 | ) | ||||||||||||||||||||
Share repurchases | (2,263 | ) | — | — | — | (8,921 | ) | — | — | (8,921 | ) | |||||||||||||||||||
Stock-based compensation | — | — | — | — | 11,307 | — | — | 11,307 | ||||||||||||||||||||||
Acceleration of stock-based compensation expense due to restructuring | — | — | — | — | — | — | — | — | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (32,126 | ) | — | (32,126 | ) | ||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (1,218 | ) | (1,218 | ) | ||||||||||||||||||||
Balance at December 31, 2016 | 88,304 | $ | 8 | (121 | ) | $ | (441 | ) | $ | 344,521 | $ | (216,361 | ) | $ | (791 | ) | $ | 126,936 | ||||||||||||
Proceeds from the exercise of stock options and employee stock purchase plan | 321 | — | — | — | 1,062 | — | — | 1,062 | ||||||||||||||||||||||
Issuance of common stock, restricted stock units | 1,755 | — | — | — | — | — | — | — | ||||||||||||||||||||||
Net cash paid for payroll taxes on restricted stock unit releases | — | — | — | — | (775 | ) | — | — | (775 | ) | ||||||||||||||||||||
Stock-based compensation | — | — | — | — | 14,187 | — | — | 14,187 | ||||||||||||||||||||||
Acceleration of stock-based compensation expense due to restructuring | — | — | — | — | 352 | — | — | 352 | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (29,846 | ) | — | (29,846 | ) | ||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | 193 | 193 | ||||||||||||||||||||||
Balance at December 31, 2017 | 90,380 | $ | 8 | (121 | ) | $ | (441 | ) | $ | 359,347 | $ | (246,207 | ) | $ | (598 | ) | $ | 112,109 |
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (14,721) | | $ | (18,541) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | | 14,667 | | | 13,925 |
Amortization of contract acquisition costs | | | 541 | | | 1,003 |
Amortization of ROU assets | | | 9,399 | | | 9,841 |
Stock-based compensation | | | 6,127 | | | 4,865 |
Restructuring and other related costs | | | 1,007 | | | 1,460 |
Loss on disposal of fixed assets and other, net | | | 377 | | | — |
Other | | | 51 | | | 71 |
Net changes in operating assets and liabilities: | | | | | | |
Accounts receivable, net | | | (4,983) | | | 3,232 |
Prepaid expenses and other assets | | | 420 | | | (82) |
Contract acquisition costs | | | (229) | | | (266) |
Accounts payable | | | (355) | | | (3,213) |
Accrued compensation and benefits | | | 1,092 | | | (97) |
Operating lease liabilities | | | (10,758) | | | (10,195) |
Accrued expenses | | | 1,193 | | | (107) |
Other liabilities | | | (223) | | | (1,495) |
Net cash provided by operating activities | | | 3,605 | | | 401 |
Cash flows from investing activities: | | | | | | |
Purchases of property and equipment | | | (3,932) | | | (7,855) |
Net cash used in investing activities | | | (3,932) | | | (7,855) |
Cash flows from financing activities: | | | | | | |
Repayment on finance lease obligations | | | (608) | | | (952) |
Debt issuance costs | | | (97) | | | — |
Proceeds from Revolver | | | 13,500 | | | 27,000 |
Repayment of Revolver | | | (18,500) | | | (12,000) |
Proceeds from issuance of common stock | | | 154 | | | 414 |
Payments related to minimum tax withholdings on RSU releases | | | (192) | | | (161) |
Net cash (used in) provided by financing activities | | | (5,743) | | | 14,301 |
Effect of exchange rate changes on cash and cash equivalents and restricted cash | | | 545 | | | 96 |
Net change in cash and cash equivalents and restricted cash | | | (5,525) | | | 6,943 |
Cash and cash equivalents and restricted cash, beginning of period | | | 36,326 | | | 29,383 |
Cash and cash equivalents and restricted cash, end of period | | $ | 30,801 | | $ | 36,326 |
Supplemental disclosures of cash flow information: | | | | | | |
Cash paid for interest | | $ | 386 | | $ | 517 |
Income taxes paid, net | | $ | 690 | | $ | 448 |
Supplemental disclosures of non-cash activities: | | | | | | |
Purchases of property and equipment accrued in accounts payable and accrued expenses | | $ | 23 | | $ | 8 |
ROU assets obtained in exchange for new lease liabilities | | $ | 3,507 | | $ | 2,271 |
| | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
35
For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Cash flows from operating activities: | |||||||||||
Net loss | $ | (29,846 | ) | $ | (32,126 | ) | $ | (40,593 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 22,588 | 16,052 | 13,736 | ||||||||
Amortization of debt discount and issuance costs | 9,392 | 8,724 | 8,048 | ||||||||
Amortization of premium on short-term investments | (12 | ) | 1,091 | (101 | ) | ||||||
Deferred income taxes | (1,999 | ) | 1,924 | 969 | |||||||
Stock-based compensation | 13,683 | 10,752 | 13,387 | ||||||||
Restructuring and other | 3,063 | — | 2,579 | ||||||||
Impairment loss on cost basis equity investment | — | 4,500 | — | ||||||||
Gain on sale of cost basis equity investment | (2,100 | ) | — | — | |||||||
Other | 184 | — | — | ||||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable, net | 9,060 | (7,156 | ) | 12,002 | |||||||
Deferred revenue | (2,872 | ) | (1,589 | ) | (1,204 | ) | |||||
Prepaid expenses and other | 1,670 | (673 | ) | (1,825 | ) | ||||||
Accounts payable | 2,487 | 872 | (1,562 | ) | |||||||
Accrued taxes | (762 | ) | 269 | (539 | ) | ||||||
Accrued compensation and benefits | (2,940 | ) | (119 | ) | 2,706 | ||||||
Accrued expenses | (972 | ) | 1,182 | (3,940 | ) | ||||||
Other liabilities | (827 | ) | 749 | (66 | ) | ||||||
Net cash provided by operating activities | 19,797 | 4,452 | 3,597 | ||||||||
Cash flows from investing activities: | |||||||||||
Acquisition of property and equipment | (17,110 | ) | (26,337 | ) | (11,975 | ) | |||||
Restricted cash | — | — | (1,244 | ) | |||||||
Proceeds from sale of cost basis equity investment | 2,100 | — | — | ||||||||
Purchases of short-term investments | (56,626 | ) | (102,130 | ) | (95,421 | ) | |||||
Sales of short-term investments | 53,315 | 98,028 | 82,351 | ||||||||
Maturities of short-term investments | 3,506 | 1,525 | 1,095 | ||||||||
Net cash used in investing activities | (14,815 | ) | (28,914 | ) | (25,194 | ) | |||||
Cash flows from financing activities: | |||||||||||
Repayment on capital lease obligations | (71 | ) | (131 | ) | (170 | ) | |||||
Repurchase of common stock | — | (8,921 | ) | (1,212 | ) | ||||||
Proceeds from issuance of common stock | 1,062 | 10,866 | 5,703 | ||||||||
Minimum tax withholding on restricted stock unit releases | (775 | ) | (877 | ) | (974 | ) | |||||
Net cash provided by financing activities | 216 | 937 | 3,347 | ||||||||
Net increase (decrease) in cash and cash equivalents | 5,198 | (23,525 | ) | (18,250 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (1,501 | ) | (1,117 | ) | 202 | ||||||
Cash and cash equivalents, beginning of period | 47,692 | 72,334 | 90,382 | ||||||||
Cash and cash equivalents, end of period | $ | 51,389 | $ | 47,692 | $ | 72,334 | |||||
Supplemental disclosures of cash flow information | |||||||||||
Cash paid for interest | $ | 2,255 | $ | 2,260 | $ | 2,286 | |||||
Income taxes paid, net | $ | 1,400 | $ | 1,544 | $ | 854 | |||||
Supplemental disclosure of non-cash activities: | |||||||||||
Acquisition of property and equipment accrued in accounts payable and accrued expenses | $ | 108 | $ | 98 | $ | 111 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — The Company
ServiceSource International, Inc. is a leading provider of BPaaS solutions that enable the transformation of go-to-market organizations and functions for global leader in outsourced, performance-basedtechnology clients. We design, deploy, and operate a suite of innovative solutions and complex processes that support and augment our clients’ B2B customer successacquisition, 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 growth solutions.and profitability objectives. Through our unique integration of people, processesprocess 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 groweffect and retain revenue on behalftransact billions of our clients-somedollars of the world’s leading business-to-business companies -B2B commerce in more than 45 languages. Our solutions help175 countries on 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 nearly 20 years of operating experience enable us to provide our clients greater value for our customer success services than attained by our 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.
For a summary of commonly used industry terms and abbreviations used in quick deployments to address discrete target areasthis annual report on Form 10-K, see the Glossary of our clients’ needs. The Company also earns revenue through its professional services teams, who assist clients with data optimization. The Company’s corporate headquarters is located in Denver, Colorado. The Company has additional U.S. offices in California and Tennessee, and international offices in Bulgaria, Ireland, Japan, Malaysia, Philippines, Singapore and the United Kingdom.
Note 2 — Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying Consolidated Financial Statements include the accounts of ServiceSource International, Inc. and its wholly-owned subsidiaries.wholly owned subsidiaries and have been prepared in accordance with GAAP and with the instructions to Form 10-K. All intercompany balances and transactions have been eliminated in consolidation.
The CEO manages and allocates resources on a company-wide basis as a single segment that is focused on service offerings which integrate data, processes and cloud technologies.
Use of Estimates
The preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”)GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amount of net revenue and expenses during the reporting period.
The Company bases its estimates and judgments on historical experience and on various assumptions that it believes are reasonable under the circumstances. The Company has considered the effects of the COVID-19 pandemic in determining its estimates. However, future events are difficult to predict and subject to change, especially with the risks and uncertainties related to the impact of the COVID-19 pandemic, which could cause estimates and judgments routinelyto require adjustment. Actual results and outcomes may differ from these estimates, and these differences may be material.
Significant Risks and Uncertainties
Financial instruments that potentially subject the Company to concentrationconcentrations of credit risk consist principally of cash and cash equivalents short-term investments,and accounts receivable and the Note Hedges. See "Note 7 – Debt" for additional information.receivable. The Company is also exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates.
Cash is maintained in demand deposit accounts at U.S., European and Asian financial institutions that management believes are credit worthy. Deposits in these institutions may exceed the amount of insurance provided on these deposits.
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Fair Value of Financial Instruments
The Company accounts for certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value guidance establishes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. An asset or liability’s level is based upon the lowest level of input that is significant to the fair value measurement. The guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1:
Quoted prices in active markets for identical assets or liabilities;Level 2: | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; |
Level 3: | Inputs that are generally unobservable and typically reflect management’s estimates or assumptions that market participants would use in pricing the asset or liability. |
The carrying amount of financial instruments including cash and cash equivalents, restricted cash, recorded in other assets, accounts receivable, accounts payable, accrued taxes, accrued expenses and other accruedcurrent liabilities approximate carryingtheir fair value due to their short-term maturities. See "Note 4 – Fair value
Cash Equivalents and Restricted Cash
Cash equivalents consist of Financial Instruments" for additional information onhighly liquid investments with original maturities of three months or less at the convertible note.
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 December 31, 2021 and 2020.
Foreign Currency Translation and Remeasurement
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated to U.S. dollars at exchange rates at the balance sheet date. Net revenue and expenses are translated at monthly average exchange rates. The Company accumulates net translation adjustments in equity as a component of accumulated other comprehensive income (loss).income. For non-U.S. subsidiaries whose functional currency is the U.S. dollar, transactions that are denominated in foreign currencies have beenare remeasured in U.S. dollars, and any resulting gains and losses are reported in "Interest expense“Interest and other net"expense, net” in the Consolidated Statements of Operations. ForForeign currency transaction losses were approximately $1.0 million and $0.9 million for the years ended December 31, 2017, 2016,2021 and 2015, we recorded foreign currency transaction (gains) losses of approximately $1.1 million, $0.5 million and ($0.9) million,2020, respectively.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are derived from services performed for clients located primarily in the U.S., Europe and Asia. The Company attempts to mitigate the credit risk in its trade receivables through its ongoing credit evaluation process and historical collection experience.
Accounts receivable are stated at their carrying values net of an allowance for doubtful accounts.accounts, if applicable. The Company evaluates the ongoing collectability of its accounts receivable based on a number of factors such as the credit quality of its clients, the age of accounts receivable balances, collections experience, current economic conditions and other factors that may affect a client’s ability to pay. In circumstances where the Company is aware of a specific client’s inability to meet its financial obligations to the Company, a specific allowance for doubtful accounts is estimated and recorded, which reduces the recognized receivable to the estimated amount that management believes will ultimately be collected. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered.
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For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Balance, beginning of year | $ | — | $ | 137 | $ | 37 | |||||
Charged to expense | — | 392 | 137 | ||||||||
Recoveries | — | (529 | ) | (37 | ) | ||||||
Balance, end of year | $ | — | $ | — | $ | 137 |
Property and Equipment
The Company records property and equipment at cost, less accumulated depreciation and amortization. Depreciation is recorded using the straight-line method over the estimated useful liveslife for owned assets as follows: seven yearseach asset class. Depreciation for office furniture and equipment, three to five years for network equipment, two to three years for computer hardware and three to seven years for software. Leaseholdleasehold improvements are amortized on ais recorded using the straight-line basismethod over the lesser of the related lease term or the estimated useful life or life of the related assets, ranging from three to fifteen years.
When assets are disposed, the cost and related accumulated depreciation and amortization are removed from their respective accountswritten-off and any gain or loss on sale or disposal is reported in "General“General and administrative expense"administrative” expense in the Consolidated StatementStatements of Operations.
Lease Asset Retirement Obligations
The fair value of a liability for an asset retirement obligation (“ARO”)ARO is recognized in the period in which it is incurred. The Company’s AROs are associated with leasehold improvements at our international office locations, which, at the end of a lease, are contractually obligated to be removed. Our AROs were approximately $1.0 million and $1.2$1.5 million as of December 31, 20172021 and 2016,2020, respectively. Approximately $0.5 million of liabilities were settled as of December 31, 2021. Accretion expense was insignificant for the years ended December 31, 2017, 20162021 and 2015.
Capitalized Internal-Use Software
Expenditures related to software developed or obtained for internal use are capitalized and amortized over a period of two to fiveseven years on a straight-line basis. The Company capitalizes direct external costs associated with developing or obtaining internal-use software. In addition, the Company also capitalizes certain payroll and payroll-related costs for employees or professional fees for consultants who are directly associated with the development of such applications. Costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred and are recorded in "Research“Research and development"development” expenses in the Consolidated Statements of Operations. Capitalized costs related to internal-use software under development are treated as construction-in-progress until the program, feature or functionality is ready for its intended use, at which time amortization commences.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair market value of net identifiable assets of acquired businesses. The Company evaluates goodwill and indefinite-lived intangible assets for possible impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company does not have intangible assets with indefinite useful lives other than goodwill.
Impairment of Long-Lived Assets Including Intangible Assets
The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate the carrying amount of the long-lived asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If the long-lived asset is impaired, an impairment is recognized for the amount by which the carrying value of the asset exceeds its fair value. NoNaN impairment was recorded for the years ended December 31, 2017, 2016,2021 and 2015.
Comprehensive Loss
We report comprehensive loss in our Consolidated Statements of Comprehensive Loss. Amounts reported in “Accumulated other comprehensive loss”income” consist of foreign currency translation adjustments from those subsidiaries not usingwith a functional currency other than the U.S. dollar as their functional currencydollar.
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Revenue Recognition
The Company provides a comprehensive suite of selling and unrealized gainsprofessional services to its clients.
Selling services consists of sales earned from the following categories of selling motions:
● | Digital sales activities include demand qualification, demand conversion, and account management; |
● | Customer success and renewals activities include onboarding, adoption, and renewals management; and |
● | Channel management efforts include partner onboarding, partner enablement, and partner success management. |
Professional services involve providing data integration at scale with our systems and lossesprocesses, combined with client data enhancement, enablement and optimization.
The Company derives all of its revenue from contracts with clients. Revenue is measured based on available-for-sale securities.
The Company recognizes revenue when it satisfies the performance obligations identified in the contract, which is derived primarily from recurring revenue management. Other revenues include subscriptionsachieved through the transfer of control of the services to the client. The timing of satisfying performance obligations and the receipt of client consideration can be different and will give rise to contract assets and contract liabilities. Contract assets relate to the Company’s cloud applicationsconditional rights to consideration for services provided but not yet billable at the reporting date. Accounts receivable balances reflected in the Consolidated Balance Sheet represent the Company’s unconditional rights to consideration for services provided. Contract asset amounts are transferred to accounts receivables when the rights become unconditional, typically in the same period control of services is transferred to the client and the amount is contractually billable. Contract liabilities primarily relate to the advance consideration received from clients for fixed consideration contracts where transfer of control of the services has not yet occurred. Contract liability balances generally convert to revenue upon either the satisfaction of professional services obligations or when services under fixed consideration contracts are transferred to the client, typically within six months of being recorded. These contract balances are reflected in "Prepaid expenses and other", "Other assets" and "Other current liabilities" in the Consolidated Balance Sheets.
The Company accounts for individual services within a single contract separately if they are distinct. A service is distinct if it is separately identifiable from other services in the contract and if a client can benefit from the service on its own or with other resources that are readily available to the client. Determining whether these services are considered distinct performance obligations and qualify as a series of distinct performance obligations that represent a single performance obligation requires significant judgment. The total contract consideration, or transaction price, is allocated between the separate services identified in the contract based on their SSP. SSP is determined based on a cost-plus margin analysis for selling services and a standard hourly rate card for professional services.
The Company’s performance obligations are satisfied over time and revenue is recognized based on monthly or quarterly time increments and the variable volume of closed bookings during the period at the contractual commission rates for selling services, or proportional performance during the period at SSP for professional services. Due to the continuous nature of providing services to our clients, judgment is required in determining when persuasive evidencecontrol of an arrangement exists, delivery has occurred, the sales priceservices is fixed or determinabletransferred to the client. Because the client simultaneously receives and collectability is reasonably assured from clients and no significant obligations remain unfulfilled byconsumes the Company.
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December 31, 2021 and 2020, respectively. These accrued revenue balances are reflected in "Accounts Receivable” in the Consolidated Balance Sheets.
While multiple selling motions in a contract are performed at various times and patterns throughout the month or quarter and the number of closed bookings vary in any given period, each time increment of a service activity is substantially the same and has the same pattern of transfer to the client, and therefore, represents a series of distinct performance obligations that form a single performance obligation. As a result, the Company allocates all variable consideration in a contract to the selling services performance obligation in accordance with the service contracts. Some client contracts include performance-based fees determined byvariable consideration allocation exception provisions in ASC 606, (less amounts for which it is probable a significant reversal of revenue will occur when the achievement of specified performance metrics. Recurring revenue management contracts entitle the Company to additional fees and adjustments which are invoked in various circumstances including a client’s failure to provide the Company with a specified minimum value of sales prospects, untimely delivery of client sales prospect data or other obligations inhibiting the Company’s ability to perform its obligations. In addition, many client contracts contain early termination fees.
Significant estimates and judgments for revenue recognition include: (1) identifying and determining distinct performance obligations in contracts with clients, (2) determining the timing of the satisfaction of performance obligations, (3) estimating the timing and amount of variable consideration in a contract, (4) determining SSP for each performance obligations and the methodology to allocate the total contract consideration to the distinct performance obligations, and (5) determining and measuring variable revenue that has yet to be invoiced as of period end.
Our revenue contracts often include promises to transfer services involving multiple selling motions to a client. Determining whether those services are considered distinct and qualify as a series of distinct services that represent a single performance obligation requires significant judgment. Also, due to the continuous nature of providing services to our clients, judgment is required in determining when control of the services is transferred to the client.
We also enter into contracts with multiple performance obligations that incorporate fixed consideration, pay-for-performance commissions and variable bonus commissions. Judgment is required to estimate the amount of variable consideration to include when estimating the total contract consideration and how to allocate the consideration if one of the distinct performance obligations is not sold at SSP.
Contract Acquisition Costs
To obtain contracts with clients, the Company pays its sales team commissions partly based on the estimated value of the contract. Because these sales commissions are incurred and paid upon contract execution and would not have been metincurred or a triggering event has occurred.
Advertising Costs
Advertising costs are expensed as incurred and are reported in "Sales and marketing expenses"marketing" in the Consolidated Statements of Operations. Advertising expensecosts was $0.2 million for the yearsyear ended December 31, 2017, 20162021 and 2015insignificant for the year ended December 31, 2020.
Stock-Based Compensation
The Company issues stock-based awards to employees and directors. The Company previously offered an ESPP until it expired in February 2021.
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Stock options are recorded at fair value on the date of grant date using the Black-Scholes option-pricing model and generally vest ratably over a three to four-year period. Vested options may be exercised up to ten years from the grant date, as defined in the 2020 Plan. Vested but unexercised options expire 90 days after termination of employment with the Company. Stock-based compensation expense is amortized on a straight-line basis over the service period during which the right to exercise such options fully vests.
RSUs are recorded at fair value on the date of grant and amortized on a straight-line basis over the service period during which the stock vests. RSUs generally vest ratably over three years with vesting contingent upon employment of the Company.
PSUs are stock-based awards in which the number of shares ultimately received by the employee varies depending on the Company’s achievement of specified targets. PSU expense is based on a fixed grant date fair value and adjusted based on the estimated achievement of the performance metrics and recognized on a straight-line basis over the vesting period.
The Company estimates the fair value of purchase rights under the ESPP using the Black-Scholes option-pricing model and the straight-line attribution approach.
The fair value of stock options and purchase rights under the ESPP was determined by the Company using the methods and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.
Expected Term - The expected term represents the period that the Company’s share-based awards are expected to be outstanding. The Company calculates the expected term based on the average of the weighted-average vesting term and contractual term.
Expected Volatility - The expected volatility is based on the historical stock volatility of the Company’s own common shares.
Risk-Free Interest Rate - The risk-free interest rate is based on the implied yield on U.S. Treasury zero-coupon issues for each option grant date with maturities approximately $0.2 million, $0.1 million, and $0.1 million, respectively.
Expected Dividend Yield - The Company has not paid dividends on its common shares nor does it expect to pay dividends in the foreseeable future.
See "Note 7 — Stock-Based Compensation" for additional information.
Income Taxes
The Company accounts for income taxes using an asset and liability method, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basis of our taxable subsidiaries’ assets and liabilities using the enacted tax rates in effect for 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.
The Company files U.S. federal and state and foreign income tax returns in jurisdictions with varying statutes of limitations. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. These audits include questioning the timing and amount of deductions, the allocation of income among various tax jurisdictions and compliance with federal, state, local and foreign tax laws. The Company accounts 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. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The Company records an income tax liability, if any, for the difference between the benefit recognized and measured and the tax position taken or expected to be taken on our tax returns. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision.
Net Income (Loss)Loss Per Common Share
Basic net income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing income
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available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase planESPP, non-vested RSUs and unvested restricted stock units (“RSUs”).PSUs. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.
Potential shares of common stock that are not included in the determination of diluted net lossincome per share because they are anti-dilutive for the periods presented consist of stock options, non-vested restricted stockRSUs and PSUs, and shares to be purchased under our Employee Stock Purchase Plan. ESPP.
The Company excluded from diluted earnings per share the weighted-average common share equivalents related to 7.1 million, 7.71.7 million and 9.53.3 million shares for the years ended December 31, 2017, 20162021 and 2015,2020, respectively, because their effect would have been anti-dilutive.
Government Assistance
During 2020, ServiceSource received various grants from the Singapore government, including the Job Support Scheme, which assists enterprises in retaining their local employees during the COVID-19 pandemic. ServiceSource received and recognized income related to the grants of $0.3 million and $1.3 million for the years ended December 31, 2021 and 2020, respectively. There are no conditions to repay the grants. The Company does not expect to receive additional income related to these grants. Government grants are primarily recognized within “Cost of revenue” expense in the Company’s Consolidated Statements of Operations during the same period that the expenses related to the grant are incurred if there is reasonable assurance the grant will be anti-dilutive.
New Accounting Standards Issued but not yetNot Yet Adopted
Financial Instruments - Credit Losses
In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”) which amended the existing FASB Accounting Standards Codification. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. The standard also specifies that the incremental costs of obtaining a contract with a customer and the costs of fulfilling a contract with a customer (if those costs are not within the scope of another Topic or Sub-Topic) would be deferred and recognized over the appropriate period of contract performance if they are expected to be recovered. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method, also known as the cumulative catch-up transition method).
New Accounting Standards Adopted
Income Taxes
In November 2016,December 2019, the FASB issued an ASU that requires companiessimplifies the accounting for income taxes by eliminating certain exceptions to combine restricted cashthe guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and restricted cash equivalents with cash and cash equivalents when reconciling the beginning and endrecognition of period total amounts on the statement of cash flows. The guidancedeferred tax liabilities for outside basis differences. This ASU is effective for fiscal yearsannual periods and interim periods for those annual periods beginning after December 15, 2017, and interim periods within those fiscal years,2020, with early adoption permitted. The Company will adopt theadopted this standard effective January 1, 2018 utilizing the retrospective transition method.2021. The adoption of this guidance willstandard did not have a significantan impact on ourthe Company’s Consolidated Financial Statements.
Government Assistance
In February 2018,November 2021, the FASB issued an ASU that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cutswhich requires and Jobs Act. The guidanceclarifies disclosures of government assistance received by business entities. This ASU is effective for fiscal yearsannual periods beginning after December 15, 2018, and interim periods within those fiscal years2021, with early adoption permitted. The guidance should be applied either in the periodCompany adopted this standard retrospectively effective December 1, 2021. The adoption of adoption or retrospectively to each period in which the effect of the change in federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We are currently evaluating this guidance.
Gross Carrying Amount | Accumulated Amortization | Net | |||||||||
Balance as of December 31, 2015 | $ | 6,050 | $ | (2,940 | ) | $ | 3,110 | ||||
Amortization expense | — | (1,512 | ) | (1,512 | ) | ||||||
Balance as of December 31, 2016 | 6,050 | (4,452 | ) | 1,598 | |||||||
Amortization expense | — | (1,512 | ) | (1,512 | ) | ||||||
Balance as of December 31, 2017 | $ | 6,050 | $ | (5,964 | ) | $ | 86 |
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | ||||||||||||
Level 1: | |||||||||||||||
Cash | $ | 48,712 | $ | — | $ | — | $ | 48,712 | |||||||
Cash equivalents: | |||||||||||||||
Money market mutual funds | 2,677 | — | — | 2,677 | |||||||||||
Total cash and cash equivalents | 51,389 | — | — | 51,389 | |||||||||||
Level 2: | |||||||||||||||
Short-term investments: | |||||||||||||||
Corporate bonds | 55,763 | 1 | (346 | ) | 55,418 | ||||||||||
U.S. agency securities | 34,640 | — | (410 | ) | 34,230 | ||||||||||
Asset-backed securities | 21,739 | — | (127 | ) | 21,612 | ||||||||||
U.S. Treasury securities | 26,292 | — | (371 | ) | 25,921 | ||||||||||
Total short-term investments | 138,434 | 1 | (1,254 | ) | 137,181 | ||||||||||
Cash, cash equivalents and short-term investments | $ | 189,823 | $ | 1 | $ | (1,254 | ) | $ | 188,570 |
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | ||||||||||||
Level 1: | |||||||||||||||
Cash | $ | 47,060 | $ | — | $ | — | $ | 47,060 | |||||||
Cash equivalents: | |||||||||||||||
Money market mutual funds | 632 | — | — | 632 | |||||||||||
Total cash and cash equivalents | 47,692 | — | — | 47,692 | |||||||||||
Level 2: | |||||||||||||||
Short-term investments: | |||||||||||||||
Corporate bonds | 54,827 | 19 | (188 | ) | 54,658 | ||||||||||
U.S. agency securities | 34,658 | — | (281 | ) | 34,377 | ||||||||||
Asset-backed securities | 26,431 | 25 | (23 | ) | 26,433 | ||||||||||
U.S. Treasury securities | 22,701 | — | (288 | ) | 22,413 | ||||||||||
Total short-term investments | 138,617 | 44 | (780 | ) | 137,881 | ||||||||||
Cash, cash equivalents and short-term investments | $ | 186,309 | $ | 44 | $ | (780 | ) | $ | 185,573 |
Amortized Cost | Estimated Fair Value | ||||||
Less than 1 year | $ | 14,315 | $ | 14,295 | |||
Due in 1 to 3 years | 126,796 | 125,563 | |||||
Total | $ | 141,111 | $ | 139,858 |
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Note 3 — Consolidated Financial Statement Details
Property and equipment, net wereis comprised of the followingfollowing:
| | | | | | | | |
| | | | December 31, | ||||
|
| Depreciable Life |
| 2021 |
| 2020 | ||
| | | | (in thousands) | ||||
Computers and equipment | | 2 - 5 years | | $ | 17,949 | | $ | 17,904 |
Software(1) | | 2 - 7 years | | | 45,683 | | | 60,771 |
Furniture and fixtures | | 2 - 7 years | | | 8,766 | | | 10,727 |
Leasehold improvements | | Lesser of estimated useful life or life of lease | | | 14,890 | | | 17,823 |
Finance leases | | | | | 2,861 | | | 2,880 |
Property and equipment | | | | | 90,149 | | | 110,105 |
Less: accumulated depreciation and amortization | | | | | (71,428) | | | (80,157) |
Property and equipment, net | | | | $ | 18,721 | | $ | 29,948 |
(1)Includes capitalized internally developed software as follows (in thousands):
For the Year Ended December 31, | |||||||
2017 | 2016 | ||||||
Computers and equipment | $ | 22,186 | $ | 19,930 | |||
Software | 72,147 | 59,453 | |||||
Leasehold improvements | 19,574 | 18,092 | |||||
Furniture and fixtures | 11,606 | 10,947 | |||||
Property and equipment | 125,513 | 108,422 | |||||
Less: accumulated depreciation and amortization | (91,394 | ) | (70,242 | ) | |||
Property and equipment, net | $ | 34,119 | $ | 38,180 |
| | | | | | | | |
Balance as of January 1, 2020 |
| |
| | |
| $ | 19,417 |
Capitalized costs | | | | | | | | 5,076 |
Amortization expense | | | | | | | | (7,701) |
Balance as of December 31, 2020 | | | | | | | | 16,792 |
Capitalized costs | | | | | | | | 2,864 |
Amortization expense | | | | | | | | (9,510) |
Balance as of December 31, 2021 | | | | | | | $ | 10,146 |
Depreciation and amortization expense related to property and equipment, which includes amortization expense related to capitalfor internally developed software and finance leases, was approximately $21.1 million, $16.1$14.7 million and $13.7 million, respectively, during the years ended December 31, 2017, 2016 and 2015.
The following table presents long-lived assets by geographic location:
| | | | | | | | |
| | | | December 31, | ||||
|
| |
| 2021 |
| 2020 | ||
| | | | (in thousands) | ||||
NALA | | | | $ | 15,947 | | $ | 24,420 |
APJ | | | | | 2,137 | | | 4,456 |
EMEA | | | | | 637 | | | 1,072 |
Property and equipment, net | | | | $ | 18,721 | | $ | 29,948 |
Note 4 — Debt
Revolving Line of Credit
In July 2018, ServiceSource, together with its wholly owned subsidiary, ServiceSource Delaware, Inc., entered into the 2018 Credit Agreement, providing for a $40.0 million revolving line of credit allowing each borrower to internal-use software. borrow against its domestic receivables as defined in the 2018 Credit Agreement. The Revolver in the 2018 Credit Agreement was scheduled to mature in July 2021 and was repaid in full in connection with the Company’s entry into the 2021 Credit Agreement.
In July 2021, ServiceSource, together with its wholly owned subsidiary, ServiceSource Delaware, Inc., entered into the 2021 Credit Agreement, which provides for a $35.0 million revolving line of credit allowing each borrower to borrow against its receivables subject to the terms and conditions set forth in the 2021 Credit Agreement. At the Company’s request and subject to customary
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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 December 31, 20172021, the Company had $10.0 million of borrowings under the Revolver in the 2021 Credit Agreement through a three-month BSBY borrowing at an effective interest rate of 2.40% maturing February 2022. An additional $18.0 million was available for borrowing under the Revolver as of December 31, 2021. The BSBY borrowings may be extended upon maturity, converted into a base rate borrowing upon maturity or require an incremental payment if the borrowing base decreases below the current amount outstanding during the term of the BSBY borrowing.
The obligations under the 2021 Credit Agreement are secured by substantially all assets of ServiceSource and 2016,certain of its subsidiaries, including pledges of equity in certain of the carrying valueCompany’s subsidiaries. The 2021 Credit Agreement has financial covenants that the Company was in compliance with as of capitalizedDecember 31, 2021.
Subsequent to December 31, 2021, the $10.0 million BSBY borrowing was extended for a six-month term at an effective interest rate of 3.04% maturing August 2022.
Interest Expense
Unamortized debt issuance costs related to internal-use software, netthe 2021 Revolver was $0.1 million as of accumulated amortization, was $16.5 million and $17.2 million, respectively. AmortizationDecember 31, 2021.
Interest expense related to internal-use softwarethe amortization of debt issuance costs and interest expense associated with the Company’s debt obligation was approximately $13.3 million, $7.6$0.4 million and $5.0$0.5 million duringfor the years ended December 31, 2017, 20162021 and 2015,2020, respectively.
For the Year Ended December 31, | |||||||
2017 | 2016 | ||||||
Accrued interest – convertible notes | $ | 938 | $ | 938 | |||
Deferred rent | 748 | 1,359 | |||||
ESPP withholding | 418 | 661 | |||||
Total | $ | 2,104 | $ | 2,958 |
For the Year Ended December 31, | |||||||
2017 | 2016 | ||||||
Principal amount | $ | 150,000 | $ | 150,000 | |||
Unamortized debt discount | (5,336 | ) | (13,928 | ) | |||
Unamortized debt issuance costs | (497 | ) | (1,297 | ) | |||
Net carrying amount | $ | 144,167 | $ | 134,775 |
For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Contractual interest expense at 1.5% per annum | $ | 2,250 | $ | 2,250 | $ | 2,250 | |||||
Amortization of debt issuance costs | 800 | 743 | 686 | ||||||||
Accretion of debt discount | 8,592 | 7,981 | 7,362 | ||||||||
Total | $ | 11,642 | $ | 10,974 | $ | 10,298 |
The Company paid $31.4 millionhas operating leases for the Note Hedges. The Note Hedges cover approximately 9.25 million shares of the Company's common stock at a strike price of $16.21 per share. The Note Hedges will expire upon the maturity of the Notes. The Note Hedges are intended to reduce the potential dilution to the Company's common stock upon conversion of the Notes and/or offset the cash payment in excess of the principal amount of the Notes the Company is required to make in the event that the market value per share of the Company's common stock at the time of exercise is greater than the conversion price of the Notes.
During 2021, the Company extended its agreement to sublease 1 floor of office space at one of its locations in Manila, Philippines to a third-party through the end of the original lease term in September 2023, entered into an agreement to sublease 2 floors of office space at a second location in Manila, Philippines to a third-party through the end of the original lease term in December 2022. Rent expense during the years ended2021, extended its lease for reduced office space at its location in Yokohama, Japan through May 2024, and extended its lease for reduced office space at its location in Manila, Philippines through December 31, 2017, 2016 and 2015 was approximately $10.6 million, $11.3 million and $9.4 million, respectively. 2026.
The Company recognizes rent expense and sublease income on a straight-line basis over the lease period and accrues for rent expense and sublease income incurred but not paid.
Supplemental income statement information related to leases was as follows:
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Operating lease cost | | $ | 11,346 | | $ | 12,264 |
| | | | | | |
Finance lease cost: | | | | | | |
Amortization of leased assets | | | 442 | | | 744 |
Interest on lease liabilities | | | 25 | | | 88 |
Total finance lease cost | | | 467 | | | 832 |
| | | | | | |
Sublease income | | | (4,903) | | | (3,599) |
Net lease cost | | $ | 6,910 | | $ | 9,497 |
44
Supplemental balance sheet information related to leases was as follows:
| | | | | | |
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Operating leases: | | | | | | |
ROU assets | | $ | 23,043 | | $ | 29,798 |
| | | | | | |
Operating lease liabilities | | $ | 8,614 | | $ | 10,797 |
Operating lease liabilities, net of current portion | | | 19,869 | | | 25,975 |
Total operating lease liabilities | | $ | 28,483 | | $ | 36,772 |
| | | | | | |
Finance leases: | | | | | | |
Property and equipment | | $ | 2,861 | | $ | 2,880 |
Accumulated depreciation | | | (2,397) | | | (1,963) |
Property and equipment, net | | $ | 464 | | $ | 917 |
| | | | | | |
Other current liabilities | | $ | 63 | | $ | 608 |
Other long-term liabilities | | | — | | | 63 |
Total finance lease liabilities | | $ | 63 | | $ | 671 |
Lease term and discount rate information was as follows:
| | | | | | | |
| | For the Year Ended December 31, | |||||
|
| 2021 |
| 2020 | |||
Weighted-average remaining lease term (in years): | | | | | | | |
Operating lease | | | 5.7 | | | 5.7 | |
Finance lease | | | 0.1 | | | 1.0 | |
Weighted-average discount rate: | | | | | | | |
Operating lease | | | 6.0 | % | | 6.2 | % |
Finance lease | | | 6.5 | % | | 6.5 | % |
Maturities of lease payments under non-cancelable operating leasesliabilities were as follows as of December 31, 2017 were as follows (in thousands):2021:
| | | | | | | | | | | | |
|
| Operating Leases |
| Operating Sublease |
| Finance Leases |
| Total | ||||
| | (in thousands) | ||||||||||
2022 | | $ | 10,030 | | $ | (3,588) | | $ | 64 | | $ | 6,506 |
2023 | | | 4,952 | | | (1,410) | | | 0 | | | 3,542 |
2024 | | | 3,579 | | | 0 | | | 0 | | | 3,579 |
2025 | | | 3,563 | | | 0 | | | 0 | | | 3,563 |
2026 | | | 3,329 | | | 0 | | | 0 | | | 3,329 |
Thereafter | | | 8,468 | | | 0 | | | 0 | | | 8,468 |
Total lease payments | | | 33,921 | | | (4,998) | | | 64 | | | 28,987 |
Less: interest | | | (5,438) | | | 0 | | | (1) | | | (5,439) |
Total | | $ | 28,483 | | $ | (4,998) | | $ | 63 | | $ | 23,548 |
45
Fiscal Year | |||
2018 | $ | 11,354 | |
2019 | 9,600 | ||
2020 | 8,362 | ||
2021 | 7,819 | ||
2022 | 4,616 | ||
Thereafter | — | ||
Total | $ | 41,751 |
Note 6 — Revenue Recognition
The following tables present the Company entered into a subleasedisaggregation of revenue from contracts with a third-partyour clients:
Revenue by Performance Obligation
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Selling services | | $ | 192,525 | | $ | 190,906 |
Professional services | | | 3,179 | | | 3,695 |
Total revenue | | $ | 195,704 | | $ | 194,601 |
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 San Francisco office space forCompany’s solutions. Predominantly all the remaining term ofservice contracts sold and managed by the lease. The future minimum payments through November 30, 2022 under the original lease total approximately $9.3 million and future sublease rental income totals approximately $8.9 million overrevenue delivery centers relate to end customers located in the same period.
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
NALA | | $ | 107,326 | | $ | 111,085 |
EMEA | | | 58,189 | | | 54,975 |
APJ | | | 30,189 | | | 28,541 |
Total revenue | | $ | 195,704 | | $ | 194,601 |
Revenue by Contract Pricing
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Variable consideration | | $ | 141,529 | | $ | 142,355 |
Fixed consideration | | | 54,175 | | | 52,246 |
Total revenue | | $ | 195,704 | | $ | 194,601 |
Four of our business, including the cases discussed below. Although the results of litigationclients represented 16%, 16%, 15% and claims cannot be predicted with certainty, the Company is currently not aware of any litigation or threats of litigation in which the final outcome could have a material adverse effect on our business, operating results, financial position, or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies. As of December 31, 2017 and 2016, the Company accrued a $1.5 million reserve relating to our potential liability for currently pending disputes, reflected in "Accrued expenses" in the Consolidated Balance Sheets.
Contract Assets and the 2011 Employee Stock Purchase Plan. The Company’s Board of Directors, by delegation to its compensation committee, administers the 2011 Plan and has authority to determine the directors, officers, employees and consultants to whom options, restricted stock units or restricted stock awards may be granted, the option price or restricted stock purchase price, the timing of when each share is exercisable and the duration of the exercise period and the nature of any restrictions or vesting periods applicable to an option or restricted stock grant
As of December 31, 2017, there2021, contract liabilities were $0.5 million. As of December 31, 2020, contract assets and liabilities were $0.5 million and $0.4 million, respectively.
Transaction Price Allocated to Remaining Performance Obligations
As of December 31, 2021, assuming none of the Company’s current contracts with fixed consideration are renewed, the Company estimates receiving approximately 12.4$36.6 million in future selling services fixed consideration and approximately $0.7 million in professional services fixed consideration.
Contract Acquisition Costs
As of December 31, 2021 and 2020, capitalized contract acquisition costs were $0.6 million and $0.9 million, respectively. The Company recorded amortization expense related to capitalized contract acquisition costs of $0.5 million and $0.8 million for the years ended December 31, 2021 and 2020, respectively.
Impairment recognized on contract costs was insignificant for the years ended December 31, 2021 and 2020.
46
Note 7 — Stock-Based Compensation
2020 Equity Incentive Plan
The 2020 Plan was approved by the Company’s stockholders on May 14, 2020 and expires March 4, 2025. The 2020 Plan provides for the Company’s common stock to be issued pursuant to permitted awards, which include, but are not limited to, options, stock appreciation rights, restricted stock units, performance stock units and other cash and stock-based awards. As of December 31, 2021, 8.5 million shares were available for grant under the 2020 Plan.
On May 14, 2020, following the approval of the 2020 Plan, the Company’s board of directors terminated the 2011 Plan. On January 1, 2018, 3.6 millionPlan with the effect that no additional shares were reservedawards may be issued under the 2011 Equity Incentive Plan pursuantand all outstanding awards under the 2011 Plan shall continue and be unaffected by the termination of the 2011 Plan.
2021 PSU Awards
During March 2021, the Company granted PSUs under the 2020 Plan to certain executives in which the automatic increase.
Additionally, certain of the Company’s senior leaders elected to receive a portion of their annual cash corporate incentive plan in PSUs. The Company granted the PSUs under the 2020 Plan during March 2021. The number of shares ultimately received depends on the Company’s achievement of specified revenue, Adjusted EBITDA, and those restrictedfree cash flow performance goals for fiscal year 2021. The aggregate target number of shares subject to these awards is 0.4 million. The awards were valued using the Company’s closing stock units that became eligibleprice on the grant date and had an aggregate grant date fair value of $0.6 million. The number of shares ultimately received related to vestthese awards ranges from 0% to 200% of the participant’s target award and will vest 50% on the first anniversary of the grant datedate. The Company’s expense will be recognized over the service period and 50%adjusted based on the second anniversaryestimated achievement of the grant date, except as otherwise providedperformance targets.
2020 PSU Awards
During May 2020 and prior to expiration of the 2011 Plan, the Company granted PSUs to certain executives under certain termination and change-in-control provisions in each award agreement.the 2011 Plan. The aggregate target number of restricted stock unitsshares outstanding as of December 31, 2020 subject to the 2017 PSU Awards was 1.0these awards is 0.7 million, with an aggregate grant date fair value of $3.7$0.9 million.
For the Year Ended December 31, | ||||||||
2017 | 2016 | 2015 | ||||||
Expected term (in years) | 5.0 | 5.0 | 5.0 | |||||
Expected volatility | 59 | % | 58 | % | 34 | % | ||
Risk-free interest rate | 1.87 | % | 1.23 | % | 1.64 | % | ||
Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % |
For the Year Ended December 31, | ||||||||
2017 | 2016 | 2015 | ||||||
Expected term (in years) | 0.5 -1.0 | 0.5 -1.0 | 0.5 -1.0 | |||||
Expected volatility | 29%-66% | 38%-52% | 25%-35% | |||||
Risk-free interest rate | 0.65%-1.21% | 0.42%-0.56% | 0.07%-0.37% | |||||
Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % |
Shares | Weighted-Average Option Price Per Share | Weighted-Average Fair Value of Options Granted During the Year | Weighted-Average Remaining Contractual Life (Years) | Intrinsic Value | |||||||||||
Issued and outstanding as of December 31, 2014 | 10,070 | $ | 5.08 | ||||||||||||
Granted | 4,206 | $ | 4.45 | $ | 1.45 | ||||||||||
Options exercised | (1,126) | $ | 4.13 | $ | 1,312 | ||||||||||
Expired and/or Forfeited | (2,534) | $ | 5.65 | ||||||||||||
Issued and outstanding as of December 31, 2015 | 10,616 | $ | 4.79 | ||||||||||||
Granted | 709 | $ | 4.11 | $ | 2.05 | ||||||||||
Options exercised | (2,111) | $ | 4.62 | $ | 1,455 | ||||||||||
Expired and/or Forfeited | (1,719) | $ | 5.43 | ||||||||||||
Issued and outstanding as of December 31, 2016 | 7,495 | $ | 4.63 | ||||||||||||
Granted | 173 | $ | 3.63 | $ | 1.86 | ||||||||||
Options exercised | (14) | $ | 4.86 | $ | 8 | ||||||||||
Expired and/or Forfeited | (1,143) | $ | 5.31 | ||||||||||||
Issued and outstanding as of December 31, 2017 | 6,511 | $ | 4.48 | 6.54 | $ | 6,571 | |||||||||
Options exercisable as of December 31, 2017 | 4,619 | $ | 4.61 | 6.13 | $ | 4,889 |
Shares | Weighted-Average Grant Date Fair Value | ||||
Unvested as of December 31, 2016 | 4,236 | $ | 4.77 | ||
Granted | 3,458 | $ | 3.58 | ||
Vested(1) | (1,963) | $ | 4.89 | ||
Forfeited | (704) | $ | 4.30 | ||
Unvested as of December 31, 2017 | 5,027 | $ | 3.98 |
Stock-Based Compensation Expense
The following table presents stock-based compensation expense as allocated within the Company’s Consolidated Statements of Operations (in thousands):
For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Stock-based compensation included in operating expenses: | |||||||||||
Cost of revenue | $ | 1,335 | $ | 1,484 | $ | 2,666 | |||||
Sales and marketing | 3,774 | 3,004 | 3,393 | ||||||||
Research and development | 149 | 586 | 1,299 | ||||||||
General and administrative | 8,425 | 5,678 | 6,029 | ||||||||
Restructuring and other | 352 | — | 2,579 | ||||||||
Total stock-based compensation | $ | 14,035 | $ | 10,752 | $ | 15,966 |
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 | | 2020 | ||
| | (in thousands) | ||||
Cost of revenue | | $ | 512 | | $ | 389 |
Sales and marketing | | | 1,236 | | | 1,416 |
Research and development | | | 74 | | | 57 |
General and administrative | | | 4,305 | | | 3,003 |
Total stock-based compensation | | $ | 6,127 | | $ | 4,865 |
The above table does not include approximately $0.5 million, $0.6 million and $0.4 million of capitalized stock-based compensation related to internal-use software that was insignificant for the years ended December 31, 2017, 20162021 and 2015, respectively.2020.
47
Fair Value of Equity Compensation
The Black-Scholes option-pricing model assumptions for stock options were as follows:
| | | |
| | 2020 | |
Expected term (in years) | | | 5.0 |
Expected volatility | | | 56% |
Risk-free interest rate | | | 0.75% |
Expected dividend yield | | | —% |
Weighted-average grant date fair value | | | $0.63 |
The Black-Scholes option-pricing model assumptions for purchase rights under the ESPP were as follows:
| | | |
| | 2020 | |
Expected term (in years) | | | 0.5 - 1.0 |
Expected volatility | | | 53% - 60% |
Risk-free interest rate | | | 0.12% - 1.52% |
Expected dividend yield | | | —% |
Stock Awards
A summary of the Company’s stock option activity and related information was as follows:
| | | | | | | | | | | | |
| | | | | | | | Weighted- | | | | |
| | | | | Weighted- | | Average | | | | ||
| | | | | Average | | Remaining | | | | ||
| | | | | Exercise | | Contractual | | | | ||
|
| Shares |
| Price |
| Life (Years) |
| Intrinsic Value | ||||
| | (in thousands) | | | | | | | | (in thousands) | ||
Outstanding as of December 31, 2020 | | | 3,030 | | $ | 2.09 | | | | | $ | 1,372 |
Exercised | | | (292) | | $ | 1.16 | | | | | | |
Expired and/or forfeited | | | (862) | | $ | 2.22 | | | | | | |
Outstanding as of December 31, 2021 | | | 1,876 | | $ | 2.18 | | | 6.11 | | $ | 16 |
Exercisable as of December 31, 2021 | | | 1,782 | | $ | 2.24 | | | 6.03 | | $ | 11 |
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 | | 2020 | ||
| | (in thousands) | ||||
Fair value of options vested | | $ | 96 | | $ | 733 |
Intrinsic value of options exercised | | $ | 127 | | $ | 46 |
As of December 31, 2017,2021, there was approximately $15.9$0.04 million of unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the 2011 Plan,stock options, which is expected to be recognized over a weighted-average period of 1.960.9 years.
A summary of the Company’s RSU and PSU activity and related information was as follows:
| | | | | | |
| | | | | Weighted- | |
| | | | | Average Grant | |
|
| Units | | Date Fair Value | ||
| | (in thousands) | | | | |
Non-vested as of December 31, 2020 | | | 7,015 | | $ | 1.55 |
Granted | | | 4,831 | | $ | 1.51 |
Vested(1) | | | (1,950) | | $ | 1.64 |
Forfeited | | | (1,665) | | $ | 1.60 |
Non-vested as of December 31, 2021 | | | 8,231 | | $ | 1.49 |
(1) 1,812 shares of common stock were issued for RSUs and PSUs vested and the remaining 138 shares were withheld for taxes.
48
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 | | 2020 | ||
| | (in thousands) | ||||
Fair value of RSUs and PSUs vested | | $ | 2,837 | | $ | 2,940 |
As of December 31, 2021, there was $6.5 million of unrecognized compensation expense related to RSUs and PSUs, which is expected to be recognized over a weighted-average period of 1.7 years.
Note 8 — Restructuring and Other Related Costs
The Company maintainshas undergone restructuring efforts to better align its cost structure with its business and market conditions. These restructuring efforts include severance and other employee costs, lease and other contract termination costs and asset impairments. Severance and other employee costs include severance payments, related employee benefits, stock-based compensation related to the accelerated vesting of certain equity awards and employee-related legal fees. Lease and other contract termination costs include charges related to lease consolidation and abandonment of spaces no longer utilized and the cancellation of certain contracts with outside vendors. Asset impairments include charges related to leasehold improvements and furniture in spaces vacated or no longer in use. The restructuring plans and future cash outlays are recorded in "Accrued expenses," "Accrued compensation and benefits," and "Other long-term liabilities" in the Consolidated Balance Sheets as of December 31, 2020. There are no future restructuring plans and future cash outlays as of December 31, 2021.
During 2020, the Company announced a 401(k) defined contribution plan that covers domestic employees who have attained 21 yearsrestructuring effort to align with its virtual-first operating model and reduce the operating cost structure resulting in a reduction of ageheadcount and provide at least 20 hoursoffice lease costs. The Company recognized charges related to this restructuring effort of service per week. This plan allows U.S. employees to contribute up to 90% of their pre-tax salary into investments at the discretion of the employee, up to maximum annual contribution limits established by the U.S. Department of Treasury. During$1.1 million and $0.8 million for the years ended December 31, 2017, 20162021 and 2015, the2020, respectively. The Company matched updoes 0t expect to 50%incur additional charges related to this restructuring effort as of an employee's contributions up to an annual limit of $2,000. Matching contributions by the Company are fully vested upon completionDecember 31, 2021.
The following table presents a reconciliation of the first year of employment. Employer matching contributions, which may be discontinued atbeginning and ending fair value liability balance related to the Company’s discretion, were approximately $1.5 million, $1.7 million and $2.1 million, during 2017, 2016 and 2015, respectively.
| | | | | | | | | |
| | Severance and Other | | Lease Termination | | | | ||
|
| Employee Costs |
| Costs |
| Total | |||
| | (in thousands) | |||||||
Balance as of January 1, 2020 | | $ | 0 | | $ | 0 | | $ | 0 |
Restructuring and other related costs | | | 780 | | | 59 | | | 839 |
Cash paid | | | (442) | | | 0 | | | (442) |
Balance as of December 31, 2020 | | | 338 | | | 59 | | | 397 |
Restructuring and other related costs | | | 897 | | | 174 | | | 1,071 |
Cash paid | | | (1,235) | | | (233) | | | (1,468) |
Balance as of December 31, 2021 | | $ | 0 | | $ | 0 | | $ | 0 |
Loss from continuing operations before provision for income taxes for the Company’s domestic and international operations was as follows (in thousands):follows:
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
U.S. | | $ | (12,150) | | $ | (18,278) |
International | | | (2,293) | | | 446 |
Loss before provision for income taxes | | $ | (14,443) | | $ | (17,832) |
49
For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
U.S. | $ | (28,463 | ) | $ | (32,499 | ) | $ | (40,720 | ) | ||
International | (3,030 | ) | 3,802 | 1,711 | |||||||
Loss before provision for income taxes | $ | (31,493 | ) | $ | (28,697 | ) | $ | (39,009 | ) |
For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Current: | |||||||||||
Federal | $ | 94 | $ | 279 | $ | — | |||||
Foreign | 46 | 1,112 | 632 | ||||||||
State and local | 212 | 89 | (32 | ) | |||||||
Total current income tax provision | 352 | 1,480 | 600 | ||||||||
Deferred: | |||||||||||
Federal | (1,645 | ) | 129 | 160 | |||||||
Foreign | (5 | ) | (54 | ) | 52 | ||||||
State and local | (349 | ) | 1,874 | 772 | |||||||
Total deferred income tax provision (benefit) | (1,999 | ) | 1,949 | 984 | |||||||
Income tax provision (benefit) | $ | (1,647 | ) | $ | 3,429 | $ | 1,584 |
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Current: | | | | | | |
Federal | | $ | 43 | | $ | 121 |
Foreign | | | 216 | | | 559 |
State and local | | | 57 | | | 43 |
Total current income tax provision | | | 316 | | | 723 |
Deferred: | | | | | | |
Federal | | | (16) | | | (13) |
Foreign | | | (21) | | | 7 |
State and local | | | (1) | | | (8) |
Total deferred income tax provision | | | (38) | | | (14) |
Income tax provision | | $ | 278 | | $ | 709 |
The following table provides a reconciliation of income taxes provided at the federal statutory rate of 35%21% for the years ended December 31, 2021 and 2020 to the income tax provision (in thousands):
For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
U.S. income tax at federal statutory rate | $ | (11,012 | ) | $ | (10,046 | ) | $ | (13,388 | ) | ||
State income taxes, net of federal benefit | (650 | ) | (170 | ) | 342 | ||||||
Section 956 inclusion | — | 2,976 | — | ||||||||
Foreign tax rate differential | (21 | ) | (882 | ) | (85 | ) | |||||
Share-based compensation | 1,748 | 5,038 | — | ||||||||
Permanent differences | 926 | 383 | 254 | ||||||||
Tax cuts and jobs act | 37,042 | — | — | ||||||||
Tax credits | (5 | ) | (111 | ) | (405 | ) | |||||
Federal rate change | — | (1,954 | ) | — | |||||||
Return to provision | (407 | ) | 1,068 | — | |||||||
Adjustments to opening deferreds | — | 2,009 | — | ||||||||
Valuation allowance | (29,334 | ) | 4,458 | 14,529 | |||||||
Other, net | 66 | 660 | 337 | ||||||||
Income tax provision (benefit) | $ | (1,647 | ) | $ | 3,429 | $ | 1,584 |
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
U.S. income tax at federal statutory rate | | $ | (3,032) | | $ | (3,745) |
State income taxes, net of federal benefit | | | (344) | | | (1,575) |
Share-based compensation | | | 409 | | | 277 |
Foreign tax rate differential | | | 147 | | | (1,749) |
Permanent differences | | | (270) | | | 3,355 |
Tax law change | | | (256) | | | — |
Valuation allowance | | | 3,456 | | | 3,756 |
Other, net | | | 168 | | | 390 |
Income tax provision | | $ | 278 | | $ | 709 |
In November 2015, the Philippine Economic Zone Authority granted a four yearfour-year tax holiday to the Company'sCompany’s Philippine affiliate, commencing with its fiscal year beginning January 1, 2016. The earnings per share benefit in 2017, 2016 and 2015was initially set to expire on December 31, 2019. The Company applied for a one-year tax holiday extension and received notice during the year ended December 31, 2021 that the full exclusion for the year ended December 31, 2020 was granted. As the extension was not material.
In December 2013, Malaysia granted a ten yearten-year tax holiday to the Company’s Malaysia affiliate, commencing with its fiscal year beginning January 1, 2014. This resulted in a tax benefit in fiscal 2013 of approximately $0.2 million from the elimination of the Malaysia subsidiary’s deferred tax liabilities. The earnings per share benefit in 2017, 20162021 and 20152020 was not material.
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The following table provides the effect of temporary differences that created deferred income taxes as of December 31, 20172021 and 2016.2020. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carryforwards at the end of the respective periods (in thousands):
For the Year Ended December 31, | |||||||
2017 | 2016 | ||||||
Deferred tax assets: | |||||||
Accrued liabilities | $ | 3,847 | $ | 3,540 | |||
Share-based compensation expense | 3,904 | 4,961 | |||||
Net operating loss carryforwards | 65,958 | 92,087 | |||||
Tax credits | 6,860 | 5,676 | |||||
Amortization of tax intangibles | 2,842 | 5,957 | |||||
Investments | — | 1,774 | |||||
Other, net | 355 | 351 | |||||
Total deferred tax assets | 83,766 | 114,346 | |||||
Deferred tax liabilities: | |||||||
Property and equipment | (811 | ) | (3,607 | ) | |||
Convertible debt costs | (263 | ) | (1,041 | ) | |||
Total deferred tax liabilities | (1,074 | ) | (4,648 | ) | |||
Net deferred tax assets | 82,692 | 109,698 | |||||
Less: Valuation allowance | (82,923 | ) | (111,935 | ) | |||
Net deferred tax liabilities | $ | (231 | ) | $ | (2,237 | ) |
| | | | | | |
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Deferred tax assets: | | | | | | |
Accrued liabilities | | $ | 4,284 | | $ | 5,710 |
Share-based compensation | | | 1,188 | | | 864 |
Net operating loss carryforwards | | | 87,431 | | | 84,450 |
Tax credits | | | 7,527 | | | 7,310 |
Interest | | | 265 | | | 187 |
Total deferred tax assets | | | 100,695 | | | 98,521 |
Deferred tax liabilities: | | | | | | |
Property and equipment | | | (2,254) | | | (3,423) |
ROU assets | | | (2,509) | | | (3,704) |
Amortization of tax intangibles | | | (1,577) | | | (232) |
Other, net | | | (247) | | | (533) |
Total deferred tax liabilities | | | (6,587) | | | (7,892) |
Net deferred tax assets | | | 94,108 | | | 90,629 |
Less: valuation allowance | | | (94,341) | | | (90,899) |
Net deferred tax liabilities | | $ | (233) | | $ | (270) |
As of December 31, 20172021 and 2016,2020, management assessed the realizability of deferred tax assets and evaluated the need for a valuation allowance for 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 the Company'sCompany’s 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 the asset will not be realized. In assessing the realization of the Company'sCompany’s deferred tax assets, management considers all available evidence, both positive and negative.
In concluding on the evaluation, management placed significant emphasis on guidance in ASC 740, which states that “a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.” Based upon available evidence, it was concluded on a more-likely-than-not basis that all deferred tax assets were not realizable as of December 31, 2017.2021. Accordingly, a valuation allowance of $82.9$94.3 million has been recorded to offset this deferred tax asset. The change in valuation allowance increased $3.4 million for the yearsyear ended December 31, 20172021 and 2016 wasdecreased $3.8 million for the year ended December 31, 2020.
The Company also maintains a decrease of $29.0 million and an increase of $24.3 million, respectively.
Deferred income taxes have not been provided for undistributed earnings of the Company’s consolidated foreign subsidiaries because the Parent entity is not required to include the distribution into income as the amount is tax free. As of December 31, 2017 relate to jurisdictions in which2021 and 2020, the Company has net adjusted historical pretax profits and sufficient forecast profitability to assure future realization of such deferred tax assets.
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces thesubjects a U.S. federal corporate tax rate from 35%shareholder to 21%, requires companies to pay a one-time transition tax on earnings ofGILTI earned by certain foreign subsidiariessubsidiaries. The FASB Staff Q&A, Topic 740 No. 5. Accounting for Global Intangible Low-Taxed Income, states that were previously taxan entity can make an accounting policy election to either recognize deferred and creates new taxes on certain foreign sourced earnings. In accordance with Staff Accounting Bulletin 118, we have not completed our accountingfor temporary basis differences expected to reverse as GILTI in future years or to provide for the tax effects of enactment ofexpense related to GILTI in the Act; however, in certain cases,year the tax is incurred as described below, wea period expense only. We have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. In other cases, we have not been able to make a reasonable estimate and continueelected to account for those items based on our existing accounting under ASC 740, Income Taxes, andGILTI in the provisions ofyear the tax laws that were in effect immediately prior to enactment. For the items for which we were able to determine a reasonable estimate, we recognized a provisional benefit of $2.1 million, which is included as a component of income tax expense from continuing operations. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the tax law.incurred.
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Operating Loss and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was $37.0 million, which was offset by a decrease in our valuation allowance of $39.1 million. We recognized a $2.1 million tax benefit related to remeasurement of indefinite-lived deferred tax liabilities and the release of valuation allowance associated with tax reform changes in net operating loss carryforwards. Future net operating losses generated will have an indefinite carryover as opposed to a 20-year carryover. Therefore, we expect the reversal of our deferred tax assets to result in indefinite lived deferreds (future net operating losses) which can be used as an offset in our valuation allowance calculations.
As of December 31, 2017, the Company's had no unremitted earnings from its foreign subsidiaries.
As of December 31, 2021, the Company had net operating loss carryforwards of approximately $325.4 million for federal income tax purposes of which $68.6 million can be carried forward indefinitely and the remaining $256.8 million will expire at various dates beginning in 2024. The Company has $234.7 million in state net operating losses. These losses are available to reduce taxable income and expire at various dates beginning in 2021. The Company also has foreign net operating loss carryforwards of approximately $26.8 million of which $26.5 million is indefinitely available to reduce taxable income and will expire in 2025.
Utilization of the Company’s net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue CodeIRC and similar state provisions. Such an annual limitation could result in the expiration or elimination of the net operating loss and tax credit carryforwards before utilization. Management believes that the limitation will not limit utilization of the carryforwards prior to their expiration.
The Company acquired U.S. federal net operating loss carryforwards of Scout Analytics, Inc. upon the acquisition of that entity in January 2014, subject to the ownership change limitations. Acquired U.S. federal net operating losses from Scout total approximately $30.2 million net of amounts unavailable due to ownership change limitations, which is included in the total U.S. federal net operating loss above.
The Company files U.S. federal and state and foreign income tax returns in jurisdictions with varying statutes of limitations. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. These audits could include examining the timing and amount of deductions, the allocation of income among various tax jurisdictions and compliance with federal, state, local and foreign tax laws. Our 2005Company’s 2017 through 20162021 tax years generally remain subject to examination by federal, state, and foreign tax authorities.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Beginning balance | $ | 926 | $ | 937 | $ | 948 | |||||
Additions based on tax positions related to the current year | 1 | 24 | 62 | ||||||||
Reductions for tax positions of prior years | 5 | (35 | ) | (73 | ) | ||||||
Ending balance | $ | 932 | $ | 926 | $ | 937 |
| | | |
Balance as of January 1, 2020 |
| $ | 964 |
Additions based on tax positions related to the current year | | | 12 |
Reductions for tax positions of prior years | | | (11) |
Balance as of December 31, 2020 | | | 965 |
Additions based on tax positions related to the current year | | | — |
Reductions for tax positions of prior years | | | (11) |
Balance as of December 31, 2021 | | $ | 954 |
As of December 31, 2017,2021, the Company had a liability for unrecognized tax benefits of $0.9$1.0 million, noneNaN 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 yearyears ended December 31, 2017, the2021 and 2020, interest and penalties recognized were insignificant. During the years ended December 31,
Note 10 — Employee Benefit Plan
The Company recognized and accrued an insignificant amount of interest or penalties related to unrecognized tax benefits.
For the Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Net revenue | |||||||||||
NALA | $ | 151,015 | $ | 163,371 | $ | 166,511 | |||||
EMEA | 60,941 | 62,479 | 59,708 | ||||||||
APJ | 27,171 | 27,037 | 25,984 | ||||||||
Total net revenue | $ | 239,127 | $ | 252,887 | $ | 252,203 |
For the Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
NALA | $ | 24,520 | $ | 28,916 | ||||
EMEA | 2,189 | 2,297 | ||||||
APJ | 7,410 | 6,967 | ||||||
Total property and equipment, net | $ | 34,119 | $ | 38,180 |
Severance and Other Employee Costs | Lease and Other Contract Termination Costs | Asset Impairments | Total | ||||||||||||
Restructuring and other liability as of December 31, 2016 | $ | — | $ | — | $ | — | $ | — | |||||||
Restructuring and other charges | 3,483 | 2,939 | 886 | 7,308 | |||||||||||
Cash paid | (3,060 | ) | (1,185 | ) | — | (4,245 | ) | ||||||||
Non-cash impairment charges | — | — | (886 | ) | (886 | ) | |||||||||
Acceleration of stock-based compensation expense in additional paid-in capital | (352 | ) | — | — | (352 | ) | |||||||||
Restructuring and other liability as of December 31, 2017 | $ | 71 | $ | 1,754 | $ | — | $ | 1,825 |
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For the Quarter Ended | |||||||||||||||||||||||||||||||
Dec. 31, 2017 | Sep. 30, 2017 | Jun. 30, 2017 | Mar. 31, 2017 | Dec. 31, 2016 | Sep. 30, 2016 | Jun. 30, 2016 | Mar. 31, 2016 | ||||||||||||||||||||||||
(in thousands, except per share amounts) | |||||||||||||||||||||||||||||||
Net revenue | $ | 66,024 | $ | 58,132 | $ | 58,262 | $ | 56,708 | $ | 68,654 | $ | 62,514 | $ | 61,969 | $ | 59,750 | |||||||||||||||
Gross profit | $ | 24,044 | $ | 17,329 | $ | 18,745 | $ | 15,299 | $ | 26,152 | $ | 21,725 | $ | 21,625 | $ | 18,316 | |||||||||||||||
Income (loss) from operations | $ | 531 | $ | (4,636 | ) | $ | (10,338 | ) | $ | (9,264 | ) | $ | (2,168 | ) | $ | (3,712 | ) | $ | (3,269 | ) | $ | (6,344 | ) | ||||||||
Loss before income taxes | $ | (1,800 | ) | $ | (5,375 | ) | $ | (12,984 | ) | $ | (11,334 | ) | $ | (7,572 | ) | $ | (8,303 | ) | $ | (4,969 | ) | $ | (7,853 | ) | |||||||
Net income (loss) | $ | 74 | $ | (5,195 | ) | $ | (13,101 | ) | $ | (11,624 | ) | $ | (8,496 | ) | $ | (9,271 | ) | $ | (5,218 | ) | $ | (9,141 | ) | ||||||||
Net loss per common share: | |||||||||||||||||||||||||||||||
Basic and diluted | $ | 0.00 | $ | (0.06 | ) | $ | (0.15 | ) | $ | (0.13 | ) | $ | (0.10 | ) | $ | (0.11 | ) | $ | (0.06 | ) | $ | (0.11 | ) |
Note 11 — Commitments and Contingencies
Letter of Credit
In connection with 2 of our leased facilities, the Company is required to maintain 2 letters of credit totaling $2.3 million. The letters of credit are secured by $2.3 million of cash in money market accounts, which are classified as restricted cash in “Prepaid expenses and other” and "Other assets" in our Consolidated Balance Sheets.
Non-cancelable Service Contract Commitments
Future minimum payments under non-cancelable service contract commitments were as follows:
| | | |
| | December 31, 2021 | |
|
| (in thousands) | |
2022 | | $ | 9,801 |
2023 | | | 7,871 |
2024 | | | 21 |
Thereafter | | | 0 |
Total | | $ | 17,693 |
53
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of ServiceSource International, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ServiceSource International, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2022 expressed an entity to disclose events that occur after the balance sheet date but beforeunqualified opinion thereon.
Basis for Opinion
These financial statements are issued orthe responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are availablea public accounting firm registered with the PCAOB and are required to be issued (“subsequent events”)independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the date through which an entity has evaluated subsequent events. There are two types of subsequent events. The first type consists of events or transactions that provide additional evidence about conditions that existed at the dateoverall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
54
| Measurement of revenue accruals |
Description of the Matter | As more fully described in Note 2 to the consolidated financial statements, a significant portion of the Company’s contracts is based on a pay-for-performance model in which commission revenue is based on a volume of closed bookings each time period. Significant judgment was required to estimate such accrued commission revenue at year end for amounts that the Company has not yet invoiced. At December 31, 2021 the Company recorded $15.8 million of accrued commission revenue. Auditing accrued commission revenue was subjective and involved significant audit effort due to the amount of the commission revenue accrual and the subjectivity applied in our audit procedures, including the testing of closed bookings which is an underlying assumption of the accrual. |
| |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls relating to accrued commission revenue, including management’s review of the completeness and accuracy of data used in the accrual. For example, we tested the Company’s controls over management’s review of the underlying data used in the commission revenue accrual and controls over management’s review of the amounts subsequently invoiced compared to the amounts accrued. To test the Company’s calculation of the commission revenue accrual, our audit procedures included, among others, testing the completeness and accuracy of underlying data used in the calculation, and comparing the commission revenue accrual to actual invoices for closed bookings approved subsequent to year end. We also performed analytical procedures by developing expectations of the amount of the commission revenue accrual for which actual invoices have not been approved as of the financial statement issuance date based on historical activity. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
Denver, Colorado
February 23, 2022
55
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of ServiceSource International, Inc.
Opinion on Internal Control over Financial Reporting
We have audited ServiceSource International, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, ServiceSource International, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet, includingsheets of the estimates inherentCompany as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2021, and the related notes and our report dated February 23, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of preparingfinancial reporting and the preparation of financial statements (“recognized subsequent events”). The second type consistsfor external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of eventsrecords that, provide evidence about conditions that did not exist atin reasonable detail, accurately and fairly reflect the datetransactions and dispositions of the balance sheet but arose subsequentassets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that date (“nonrecognized subsequent events”). No significant recognizedreceipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or nonrecognized subsequent events were noted other than those mentionedtimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in “Note 8 - Commitments and Contingencies.”conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Denver, Colorado
February 23, 2022
56
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including our chief executive officerCEO and chief financial officer,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 Securities Exchange Act, of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Reportannual report on Form 10-K.
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 officerCEO and chief financial officerCFO concluded that, as of December 31, 20172021, our disclosure controls and procedures are designed to, and are effective to, provide at a reasonable assurance level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange CommissionSEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officerCEO and chief financial officer,CFO, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our chief executive officerCEO and chief financial officer,CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20172021 based on the guidelines established in
Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.2021. The effectiveness of our internal control over financial reporting as of December 31, 20172021 has been audited by Ernst and& Young LLP, an independent registered public accounting firm, as stated in its report which is included herein.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 20172021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Inherent Limitations on Effectiveness of Controls
Our management, including our chief executive officerCEO and chief financial officer,CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B.OTHER INFORMATION
None.
ITEM 9C.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from the information contained under the caption “Election of Directors” in our Proxy Statement for our 2018 Annual Meeting of Stockholders (the “2018 Proxy Statement”). Information regarding our current executive officers is incorporated by reference from information contained under the caption “Executive Officers” in our 20182022 Proxy Statement. Information regarding Section 16 reporting compliance is incorporated by reference from information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2018 Proxy Statement. Information regarding the Audit Committee of our Board of Directors and information regarding an Audit Committee financial expert is incorporated by reference from information contained under the caption “Board Committees” in our 2018 Proxy Statement. Information regarding our code of ethics is incorporated by reference from information contained under the caption “Code of Business Conduct and Ethics” in our 2018 Proxy Statement. Information regarding our implementation of procedures for stockholder nominations to our Board of Directors is incorporated by reference from information contained under the caption “Process for Recommending Candidates to the Board of Directors” in our 2018 Proxy Statement.
We intend to disclose any amendment to our code of ethics, or waiver from, certain provisions of our code of ethics as applicable for our directors and executive officers, including our principal executive officer, principal financial and accounting officer, chief accounting officer, and controller, or persons performing similar functions, by posting such information on our website at
http://www.servicesource.com.ITEM 11.EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the information contained under the captions “Compensation Discussion and Analysis” and “Executive Compensation” in our 20182022 Proxy Statement.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Other than information regarding securities authorized for issuance under equity compensation plans, which is set forth in the Notes to the Consolidated Financial Statements above, the information required by this item is incorporated by reference from the information contained under the caption “Security Ownership” in our 20182022 Proxy Statement.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from the information contained under the captions “Related Person Transactions and Section 16(a) Beneficial Ownership Reporting Compliance” and “Director Independence” in our 20182022 Proxy Statement.
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the information contained under the caption “Principal Accountant Fees and Services” in our 20182022 Proxy Statement.
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ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
Consolidated Financial Statements filed as part of this annual report are listed under Part II, Item 8 pages [47] through [51] of this Form 10-K.
(2) Financial Statement Schedules
No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the notes thereto.
(3) Exhibits
The exhibits listed on the accompanying Exhibit Index immediately followingpreceding the signature page are filed as part of, or are incorporated by reference into, this Annual Reportannual report on Form 10-K.
ITEM 16.FORM 10-K SUMMARY None. 60 GLOSSARY OF TERMS The following abbreviations or acronyms used in this Form 10-K are defined below:
61
62
INDEX TO EXHIBITS
63
64
†Indicates a management contract or compensatory plan. #Portions omitted in accordance with Item 601(b) of Regulation S-K. *These exhibits are furnished with this Annual Report on Form 10-K and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of the Registrant under the Securities Act of 1933 or the Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filings. 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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.
66 KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the ServiceSource International, Inc. and in the capacities and on the dates indicated.
67 |