The following MD&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. MD&A contains forward-looking statements. See "Forward-Looking Statements" and "Item 1A. Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those contained in any forward-looking statements.
ServiceSource is a leading provider of BPaaS solutions that enable the transformation of go-to-market organizations and functions for global technology clients. We design, deploy, and operate a suite of innovative solutions and complex processes that support and augment our clients' B2B customer acquisition, engagement, expansion and retention activities. Our clients - ranging from Fortune 500 technology titans to high-growth disruptors and innovators - rely on our holistic customer engagement methodology and process excellence, global scale and delivery footprint, and data analytics and business insights to deliver trusted business outcomes that have a meaningful and material positive impact to their long-term revenue and profitability objectives. Through our unique integration of people, process and technology - leveraged against our more than 20 years of experience and domain expertise in the cloud, software, hardware, medical device and diagnostic equipment, and industrial IoT sectors - we effect and transact billions of dollars of B2B commerce in more than 175 countries on our clients' behalf annually.
Factors Affecting our Performance
We 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 failure 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 geographically 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
U.S.Net revenue for a particular geography generally reflects commissions earned from sales of service contracts managed from our revenue delivery center in that geography. Predominantly all of the service contracts sold and managed by our revenue delivery centers relate to end customers located in the same geography. 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 typically six to twelve months. Implementation 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 are based on realized revenue that the contract delivers over time and on the estimated total annual contract value. Commission amounts based on realized revenue are expensed in the period the related revenue is recognized by the Company. Upfront commissions based on estimated total annual contract value are capitalizable as contract acquisition costs and expensed ratably over the expected life of the applicable contract or five years if the contract is between the Company and one of its long-standing clients. We also make upfront investments in technology and personnel to support the engagement. These upfront commissions and investments are typically incurred one to three months before we begin generating sales and recognizing revenue. Accordingly, in a given quarter, an increase in new clients, and, to a lesser extent, an increase in engagements with existing clients, or a significant increase in the contract value associated with such new clients and engagements, will negatively impact our gross margin and 19
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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, 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 service performance targets. Our new client contracts typically have an initial term between one and two 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 with relatively short notice and can be subject 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 our clients' product sales, particularly in the international regions. The impact of this seasonal fluctuation can be amplified if the economy as a whole is experiencing disruption or uncertainty, leading to deferral of some renewal decisions. Foreign 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, 2021and 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. 20
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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 Organizationon 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 millionconsisting 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, 2021and 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 Singaporegovernment, 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 millionand $1.3 millionfrom the grant during the years ended December 31, 2021and 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
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 on a monthly basis for sales commissions, and on a quarterly basis for certain performance sales 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. We also generate revenues from selling professional services for which we are the principal. Professional services involve providing data integration at scale with our systems and processes, combined with client data enhancement, enablement and optimization. We typically invoice our clients for professional services on a monthly basis.
Cost of Revenue and Gross Profit
Our cost of revenue includes employee compensation, technology costs, including those related to the delivery of our cloud-based technologies, and allocated overhead expenses. Employee compensation includes salary, bonus, commissions, benefits, and stock-based compensation for our dedicated service sales teams. Allocated overhead expenses include depreciation, amortization of internal-use software associated with our selling services revenue technology platform and cloud applications, and costs for facilities and information technology. Allocated overhead expenses for facilities consist of rent, maintenance, and compensation of personnel in our facilities departments. Our allocated overhead 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-Implementation Cycle." 21 Table of Contents Operating Expenses Sales and Marketing Sales and marketing expenses primarily consist of employee compensation expense and sales commissions paid to our sales and marketing employees, amortization of contract acquisition costs, marketing programs and events and allocated overhead expenses which consist of depreciation, amortization of internally developed software, and facility and technology costs. 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 multiple 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 the sales representatives' continued employment. We generally capitalize the amounts payable for obtaining a contract and amortize ratably to sales and marketing expense over the contract term for new clients or five years for long-standing client relationships. Revenue based commissions are generally expensed to sales and marketing expense each quarter as revenue is recorded. Research and Development Research and development expenses primarily consist of employee compensation expense, third-party consultant costs and allocated overhead expenses which consist of 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.
General and Administrative
General and administrative expenses primarily consist of employee compensation expense for our executive, human resources, finance and legal functions and expenses for professional fees for accounting, tax and legal services, as well as allocated overhead expenses, which consist of depreciation, amortization of internally developed software, facility and technology costs.
Restructuring and Other Related Costs
Restructuring and other related costs primarily consist of employees' severance payments and related employee benefits, related legal fees and charges related to lease termination costs. During 2020, the Company announced a restructuring effort to align with its virtual-first operating model and reduce the operating cost structure resulting in a reduction of headcount and office lease costs. As of
December 31, 2021, the Company does not expect to incur additional restructuring charges related to this restructuring effort.
Interest and Other Expense, Net
Interest and other expense, net consists of interest expense associated with our Revolver, imputed interest from finance lease payments, interest income earned on our cash and cash equivalents, amortization of debt issuance costs and foreign exchange gains and losses.
Provision for Income Tax 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. 22 Table of Contents 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 wherein management analyzes all positive and negative evidence available at the balance sheet date to determine whether all or some portion of our deferred tax assets will not be realized. Under this guidance, a valuation allowance must be established for deferred tax assets when it is more-likely-than-not (a probability level of more than 50 percent) that they will not be realized. In assessing the realization of our deferred tax assets, we consider all available evidence, both positive and negative, and place significant emphasis on guidance contained in ASC 740, which states that "a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome." We account for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. We record an income tax liability, if any, 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 provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
Key Financial Results – Full Year Ended
? GAAP revenue was
the year ended
GAAP net loss was
? net loss of
Adjusted EBITDA, a non-GAAP financial measure, was
Financial Measurements” below for a reconciliation of Adjusted EBITDA from net
Ended the year with
? cash and
Revolver. Results of Operations
For the Year Ended
Net Revenue, Cost of Revenue and Gross Profit
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
$ 195,704100 % $ 194,601100 % $ 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 increased by $1.1 million, or 1%, for the year ended December 31, 2021compared to the same period in 2020, primarily due to lower client churn and increased bookings.
Cost of revenue increased
compensation expense associated with higher revenue attainment;
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virtual-first operating model and sublease income.
Operating Expenses 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 %
$ 24,99913 % $ (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 %
$ 74,11338 % $ (5,752)(8) % Sales and Marketing Sales and marketing expense decreased $7.9 million, or 32%, for the year ended December 31, 2021compared to the same period in 2020, primarily due to a $4.9 milliondecrease in employee related costs largely associated with a reduction in headcount, a $2.8 milliondecrease in information technology and facility costs related to transitioning to a virtual-first operating model, and a $0.2 milliondecrease in marketing cost.
Research and Development
Research and development expense decreased
$0.4 million, or 7%, for the year ended December 31, 2021compared to the same period in 2020, primarily due to a $0.7 milliondecrease in information technology and facility costs and a $0.5 milliondecrease in professional fees, partially offset by a $0.4 millionincrease in employee related costs primarily due to increased compensation expense associated with higher revenue attainment and a $0.4 millionreduction 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, 2021compared to the same period in 2020, primarily due to the following:
reduction in headcount.
Restructuring and Other Related Costs
Restructuring and other related costs decreased
the year ended
decreased costs incurred during the year ended
restructuring efforts resulting in a reduction of headcount and office lease
costs compared to the year ended
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Interest and Other Expense, Net
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 decreased
borrowings on the Revolver.
Other expense, net increased
$0.6 million, or 96%, for the year ended December 31, 2021compared to the same period in 2020 primarily due to foreign currency fluctuations. 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
compared to 2020, primarily due to approval of a one-year tax holiday and a
decrease in profitable operations in certain foreign jurisdictions.
Liquidity and Capital Resources
Our primary operating cash requirements include the payment of compensation and related employee costs and costs for our facilities and information technology infrastructure. Historically, we have financed our operations from cash provided by our operating activities. We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs over the next twelve months.
We have considered the effects of the COVID-19 pandemic, including customer
purchasing and renewal decisions, in our assessment of the sufficiency of our
liquidity and capital resources. We will continue to monitor our financial
position to the extent that pandemic-related challenges continue.
December 31, 2021, we had cash and cash equivalents of $28.5 million, which primarily consist of demand deposits and money market mutual funds. Included in cash and cash equivalents was $6.5 millionheld by our foreign subsidiaries used to satisfy their operating requirements. We consider the undistributed earnings of ServiceSource Europe Ltd.and ServiceSource International Singapore Pte. Ltd.permanently reinvested in foreign operations and have not provided for U.S.income taxes on such earnings. As of December 31, 2021, the Company had no unremitted earnings from our foreign subsidiaries. In July 2021, ServiceSource, together with its wholly owned subsidiary, ServiceSource Delaware, Inc., entered into the 2021 Credit Agreement, which provides for a $35.0 millionrevolving line of credit allowing each borrower to borrow against its receivables as defined in the 2021 Credit Agreement. At the Company's request and subject to customary conditions, the aggregate commitments under the 2021 Credit Agreement may be increased up to an additional $10.0 million, for a total maximum commitment amount of $45.0 million. The Revolver in the 2021 Credit Agreement matures in July 2024and 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, 2021, the Company had $10.0 millionof 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 millionwas 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 25
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maturity or require an incremental payment if the borrowing base decreases below the current amount outstanding during the term of the BSBY borrowing. Proceeds from the Revolver are used for working capital and general corporate purposes. The obligations under the 2021 Credit Agreement are secured by substantially all 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 of
December 31, 2021.
Letters of Credit and Restricted Cash
In connection with two of our leased facilities, the Company is required to maintain two letters of credit totaling
$2.3 million. The letters of credit are secured by $2.3 millionof cash in money market accounts, which are classified as restricted cash in "Prepaid expenses and other" and "Other assets" in the Consolidated Balance Sheets.
The following table presents a summary of our cash flows:
For the Year Ended
December 31, 20212020 (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
Depreciation and amortization expense were comprised of the following:
For the Year Ended
December 31, 20212020 (in thousands)
Internally developed software amortization $ 9,388 $
Property and equipment depreciation 5,279
Total depreciation and amortization
13,925 Operating Activities
Net cash provided by operating activities increased
$3.2 millionduring the year ended December 31, 2021compared to the same period in 2020, primarily as a result of lower payments for operating costs and increased revenue, partially offset by a decrease in cash collections from our clients.
Net cash used in investing activities decreased
$3.9 millionduring the year ended December 31, 2021compared to the same period in 2020, due to decreased cash outflows from purchases of property and equipment during the year ended December 31, 2021. Financing Activities Net cash provided by financing activities decreased $20.0 millionduring the year ended December 31, 2021compared to the same period in 2020, primarily due to $5.0 millionin net cash outflows from repayments on the Revolver during the current period compared to $15.0 millionin net cash inflows from borrowings on the Revolver during the prior period. 26 Table of Contents Critical Accounting Estimates General The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. 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 Notes to the Consolidated Financial Statements, "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, 2021and are consistent with the year ended December 31, 2020.
The Company derives its revenues primarily from selling and professional
services. Revenue is recognized in accordance with ASC 606 when performance
obligations identified in a contract are satisfied, which is achieved through
the transfer of control of the services to our client.
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. A significant portion of our contracts is based on a pay-for-performance model that provides the Company with commissions and revenue based on a volume of closed bookings each time period and variable consideration if certain performance targets are achieved during a given period of time (such as exceeding 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 risk of a significant revenue reversal is not probable. 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. Stock-Based Compensation
Stock-based compensation expense for RSUs and PSUs is determined using the fair value of our common stock on the date of grant and is recognized on a straight-line basis over the vesting period. PSU compensation expense is only recorded if it is probable the performance conditions will be met. Judgment is required to estimate achievement of the performance metrics.
We evaluate goodwill for possible impairment at least annually or if indicators of impairment arise, such as significant changes in key factors including the industry and competitive environment, stock price, actual revenue performance year over year, EBITDA and 27
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cash flow generation that would more-likely-than-not indicate the carrying amount of such assets may not be recoverable. Significant judgments are required to estimate the fair value of the reporting unit which include estimating future cash flows. Changes in these estimates and assumptions could materially affect the determination of fair value for the reporting unit which could trigger impairment.
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-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, or goodwill would be adjusted at our final determination of the valuation allowance related to an acquisition within the measurement period. If we later determine that it is more-likely-than-not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance as an adjustment to earnings at such time. 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 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 – 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. 28 Table of Contents
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
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