NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — The Company
ServiceSource is a leading provider of BPaaS solutions that enable the transformation of go-to-market organizations and functions for global technology clients. We design, deploy, and operate a suite of innovative solutions and complex processes that support and augment our clients’ B2B customer acquisition, engagement, expansion and retention activities. Our clients - ranging from Fortune 500 technology titans to high-growth disruptors and innovators - rely on our holistic customer engagement methodology and process excellence, global scale and delivery footprint, and data analytics and business insights to deliver trusted business outcomes that have a meaningful and material positive impact to their long-term revenue and profitability objectives. Through our unique integration of people, process and technology - leveraged against our more than 20 years of experience and domain expertise in the cloud, software, hardware, medical device and diagnostic equipment, and industrial IoT sectors - we effect and transact billions of dollars of B2B commerce in more than 175 countries on our clients’ behalf annually.
“ServiceSource,” “the Company,” “we,” “us,” or “our”, as used herein, refer to ServiceSource International, Inc. and its wholly owned subsidiaries, unless the context indicates otherwise.
For a summary of commonly used industry terms and abbreviations used in this annual report on Form 10-K, see the Glossary of Terms.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of ServiceSource International, Inc. and its wholly owned subsidiaries and have been prepared in accordance with GAAP and with the instructions to Form 10-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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amount of net revenue and expenses during the reporting period.
The Company bases its estimates and judgments on historical experience and on various assumptions that it believes are reasonable under the circumstances. The Company has considered the effects of the COVID-19 pandemic in determining its estimates. However, future events are difficult to predict and subject to change, especially with the risks and uncertainties related to the impact of the COVID-19 pandemic, which could cause estimates and judgments to require adjustment. Actual results and outcomes may differ from our estimates.
Reclassifications
Certain items on the Consolidated Statements of Cash Flows for the year ended December 31, 2019 have been reclassified to conform to the current year presentation. These reclassifications did not affect the Consolidated Balance Sheet, Consolidated Statements of Operations, Consolidated Statements of Comprehensive Loss or Consolidated Statements of Stockholders' Equity.
Significant Risks and Uncertainties
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company is also exposed to 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.
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, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate their fair value due to their short-term maturities.
Cash Equivalents and Restricted Cash
Cash equivalents consist of highly liquid investments with original maturities of three months or less at the time of purchase and are classified as a Level 1 investment.
Restricted cash consists of cash in money market accounts that are used to secure letters of credit in connection with two of our leased facilities. Restricted cash is recorded within "Other assets" in the Consolidated Balance Sheets and is classified as a Level 1 investment. The Company had restricted cash of $2.3 million as of December 31, 2020 and 2019.
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. For non-U.S. subsidiaries whose functional currency is the U.S. dollar, transactions that are denominated in foreign currencies are remeasured in U.S. dollars, and any resulting gains and losses are reported in "Interest and other expense, net" in the Consolidated Statements of Operations. Foreign currency transaction losses were approximately $0.9 million and $0.7 million for the years ended December 31, 2020 and 2019, 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. The Company performs a periodic review for specific aging evaluation allowance for doubtful accounts based upon the expected collectability of its accounts receivable, which takes into consideration an analysis of historical bad debts, customers' timeliness on payment and other available information.
Accounts receivable are stated at their carrying values net of an allowance for doubtful 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. The allowance for doubtful accounts as of December 31, 2020 and 2019, and recoveries and reductions to revenue for the years ended December 31, 2020 and 2019, were insignificant.
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 lives for each asset class.
When assets are disposed, the cost and related accumulated depreciation and amortization are written-off and any gain or loss on sale or disposal is reported in "General and administrative" expense in the Consolidated Statements of Operations.
Lease Asset Retirement Obligations
The fair value of a liability for an 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. AROs were approximately $1.5 million and $1.4 million as of December 31, 2020 and 2019, respectively. Accretion expense was insignificant for the years ended December 31, 2020 and 2019.
Capitalized Internal-Use Software
Expenditures related to software developed or obtained for internal use are capitalized and amortized over a period of two to seven 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 and 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 Impairment
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 for possible impairment at least annually or whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. This evaluation includes a preliminary assessment of qualitative factors to determine whether it is necessary to compare the fair value of the reporting unit with its carrying value. If there are indicators of impairment, the fair value of the reporting unit is compared to its carrying value. If the carrying value of the reporting unit exceeds its fair value, an impairment loss equal to the difference is recorded. The carrying value of goodwill for the year ended December 31, 2020 and 2019 was $6.3 million. No impairment was recorded for the years ended December 31, 2020 and 2019.
Impairment of Long-Lived 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. No impairment was recorded for the years ended December 31, 2020 and 2019.
Comprehensive Loss
We report comprehensive loss in our Consolidated Statements of Comprehensive Loss. Amounts reported in “Accumulated other comprehensive income” consist of foreign currency translation adjustments from subsidiaries with a functional currency other than the U.S. dollar.
Revenue Recognition
The Company provides a comprehensive suite of selling and professional 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 activities include onboarding, adoption, and renewals management; and
•Channel management efforts include partner recruitment, partner onboarding and enablement, and partner success management.
Professional services involve providing data integration at scale with our systems and processes, combined with client data enhancement, enablement and optimization.
The Company derives all of its revenue from contracts with clients. Revenue is measured based on the consideration specified in a contract. The Company’s contracts generally contain one to two distinct performance obligations that are sold on a variable and/or fixed consideration basis. These two distinct performance obligations are identified as selling services and professional services. Selling services are generally invoiced on a monthly or quarterly basis with standard 30-day payment terms over the length of the contract, typically one to three years. Professional services are generally invoiced upfront upon obtaining a client contract and are typically fulfilled within 90 days.
The Company recognizes revenue when it satisfies the performance obligations identified in the contract, which is achieved 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 conditional 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. For professional services that are contractually priced differently from SSP, the Company estimates the SSP using a standard hourly rate card and allocates a portion of the total contract consideration to reflect professional services revenue at SSP.
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 control of the services is transferred to the client. Because the client simultaneously receives and consumes the benefit of the Company’s selling and professional services as provided, the time increment output method depicts the measure of progress in transferring control of the services to the client. 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. At each reporting period, the Company makes an estimate of this revenue for amounts that have yet to be invoiced, which was $16.3 million and $16.6 million as of December 31, 2020 and 2019, 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 variable consideration allocation exception provisions in ASC 606, (less amounts for which it is probable a significant reversal of revenue will occur when the uncertainties related to the variability are resolved) and applies a single measure of progress to record revenue in the period based on when the output of the variable number of closed bookings occurs or when the variable performance metric is achieved. 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. In addition, judgment is required to determine if the variable consideration should be constrained, and to what extent, until the risk of a significant revenue reversal is not probable. The Company applies the optional disclosure exemptions related to variable consideration and the requirement to disclose the remaining transaction price allocated to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation.
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 incurred or payable otherwise, they are considered incremental costs to acquire the contract; and if recoverable, are capitalized as contract acquisition costs in the period the contract is executed. Capitalized sales commissions are amortized to “Sales and marketing" expense in the Consolidated Statements of Operations based on the transfer of services over the contract term, generally one to three years for a new client or five years for long-standing client relationships. The contract acquisition costs asset is evaluated for recoverability and impairment each reporting period. For initial amortization periods one year or less, the Company recognizes any incremental costs of obtaining contracts as expense when the cost is incurred. These costs are included in "Sales and marketing" expense in the Consolidated Statements of Operations.
Stock-Based Compensation
The Company issues stock-based awards to employees and directors and offered an ESPP until its expiration in February 2021.
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 to four 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 ranges from 0% to 150% of the participant's target award depending on the Company’s achievement of specified Adjusted EBITDA and net bookings 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 equal to the option’s contractual term.
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 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 per share is computed by dividing income 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 ESPP, non-vested RSUs and 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 income per share because they are anti-dilutive for the periods presented consist of stock options, non-vested RSUs and PSUs, and shares to be purchased under our ESPP.
The Company excluded from diluted earnings per share the weighted-average common share equivalents related to 3.3 million and 7.3 million shares for the years ended December 31, 2020 and 2019, 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 approximately $1.3 million from these grants during the year ended December 31, 2020 and is expected to receive an additional $0.2 million through July 2021. There are no conditions to repay the grants. Government grants are recognized in the Company's Consolidated Statements of Operations during the same period that the expenses related to the grant are incurred if there is reasonable assurance the grant will be received, and the Company has complied with any conditions attached to the grant.
New Accounting Standards Issued but Not yet Adopted
Income Taxes
In December 2019, the FASB issued an ASU that simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2020, with early adoption permitted. Based on our current analysis, the Company does not expect the adoption to have a material impact on the Consolidated Financial Statements. The Company will adopt this standard effective January 1, 2021.
Financial Instruments - Credit Losses
In June 2016, the FASB issued an ASU that amends the measurement of credit losses on financial instruments and requires measurement and recognition of expected versus incurred credit losses for financial assets held. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2022, with early adoption permitted. This standard will apply to the Company's accounts receivable and contract assets. Based on our current analysis, the Company does not expect the adoption to have a material impact on the Consolidated Financial Statements as credit losses from trade receivables have historically been insignificant. The Company will adopt this standard effective January 1, 2023.
Note 3 — Consolidated Financial Statement Details
Property and equipment, net were comprised of the following:
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December 31,
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Depreciable Life
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2020
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2019
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(in thousands)
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Computers and equipment
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2 - 5 years
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$
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17,904
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|
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$
|
18,707
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Software(1)
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2 - 7 years
|
|
60,771
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|
|
63,557
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Furniture and fixtures
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7 years
|
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10,727
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|
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10,041
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Leasehold improvements
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Lesser of estimated useful life or life of lease
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17,823
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|
|
18,395
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Finance leases
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|
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2,880
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|
|
3,480
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Property and equipment
|
|
|
110,105
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114,180
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Less: accumulated depreciation and amortization
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(80,157)
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(78,031)
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Property and equipment, net
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|
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$
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29,948
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|
|
$
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36,149
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(1) Includes capitalized internally developed software as follows (in thousands):
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Balance as of January 1, 2019
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$
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18,879
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Capitalized costs
|
6,340
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Amortization expense
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(5,802)
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Balance as of December 31, 2019
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19,417
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Capitalized costs
|
5,076
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Amortization expense
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(7,701)
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Balance as of December 31, 2020
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$
|
16,792
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Depreciation and amortization expense related to property and equipment, which includes amortization expense for internally developed software and finance leases, was $13.9 million and $13.4 million during the years ended December 31, 2020 and 2019, respectively.
The following table presents long-lived assets by geographic location:
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December 31,
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2020
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2019
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(in thousands)
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NALA
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$
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24,420
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|
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$
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28,283
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APJ
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4,456
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|
|
6,580
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EMEA
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1,072
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|
|
1,286
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Property and equipment, net
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$
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29,948
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|
|
$
|
36,149
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Note 4 — Debt
Revolving Line of Credit
In July 2018, the Company entered into a $40.0 million Revolver that allows it and the other Borrower named therein to borrow against their domestic receivables as defined in the Credit Agreement. The Revolver matures July 2021 and bears interest at a variable rate per annum based on the greater of the prime rate, the Federal Funds rate plus 0.50% or the one-month LIBOR rate plus 1.00%, plus, in each case, a margin of 1.00% for base rate borrowings or 2.00% for Eurodollar borrowings.
As of December 31, 2020, the Company had $15.0 million of borrowings under the Revolver through a one-month Eurodollar borrowing at an effective interest rate of 2.15% maturing January 2021. An additional $11.2 million was available for borrowing under the Revolver as of December 31, 2020. The Eurodollar 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 Eurodollar borrowing.
Subsequent to December 31, 2020, the one-month $15.0 million Eurodollar borrowing was extended at an effective interest rate of approximately 2.12% maturing at the end of February 2021.
The obligations under the Credit Agreement are secured by substantially all the assets of the Borrower and certain of their subsidiaries, including pledges of equity in certain of the Company’s subsidiaries. The Revolver has financial covenants which the Company was in compliance with as of December 31, 2020 and 2019.
Interest Expense
Interest expense related to the amortization of debt issuance costs and interest expense associated with the Company's debt obligation was $0.5 million and $0.2 million for the years ended December 31, 2020 and 2019, respectively.
Note 5 — Leases
The Company has operating leases for office space and finance leases for certain equipment under non-cancelable agreements with various expiration dates through May 2030. Certain office leases include the option to extend the term between one to seven years and certain office leases include the option to terminate the lease upon written notice within one year after lease commencement. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
During 2020, the Company entered into a 22-month sublease agreement with a third-party for one floor of its Manila office space through October 2021, extended its lease for two of its five floors in the Kuala Lumpur office space through December 2023, and extended its lease for one of its three floors in the Sofia office space through February 2026.
Subsequent to December 31, 2020, the Company entered into a sublease agreement through the end of the original lease term with a third party for two floors of its Manila office space, with total sublease income of approximately $1.4 million.
The Company recognizes rent expense and sublease income on a straight-line basis over the lease period and accrues for rent expense and sublease income incurred but not paid.
Supplemental income statement information related to leases was as follows:
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For the Year Ended December 31,
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2020
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2019
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(in thousands)
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Operating lease cost
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$
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12,264
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|
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$
|
12,000
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Finance lease cost:
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Amortization of leased assets
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744
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|
|
709
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Interest on lease liabilities
|
88
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|
|
163
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Total finance lease cost
|
832
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|
872
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Sublease income
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(3,599)
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|
(2,166)
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Net lease cost
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$
|
9,497
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|
|
$
|
10,706
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Supplemental balance sheet information related to leases was as follows:
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December 31,
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2020
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2019
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(in thousands)
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Operating leases:
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|
|
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ROU assets
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$
|
29,798
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|
|
$
|
36,396
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Operating lease liabilities
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$
|
10,797
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|
|
$
|
9,652
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|
Operating lease liabilities, net of current portion
|
25,975
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|
|
33,716
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Total operating lease liabilities
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$
|
36,772
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|
|
$
|
43,368
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|
|
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|
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Finance leases:
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Property and equipment
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$
|
2,880
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|
|
$
|
3,480
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|
Accumulated depreciation
|
(1,963)
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|
|
(1,823)
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Property and equipment, net
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$
|
917
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|
|
$
|
1,657
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|
|
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|
|
Other current liabilities
|
$
|
608
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|
|
$
|
952
|
|
Other long-term liabilities
|
63
|
|
|
671
|
|
Total finance lease liabilities
|
$
|
671
|
|
|
$
|
1,623
|
|
Lease term and discount rate information was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
Weighted-average remaining lease term (in years):
|
|
|
|
Operating lease
|
5.7
|
|
5.9
|
Finance lease
|
1.0
|
|
1.8
|
Weighted-average discount rate:
|
|
|
|
Operating lease
|
6.2 %
|
|
6.4
|
%
|
Finance lease
|
6.5 %
|
|
8.0
|
%
|
Maturities of lease liabilities were as follows as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Operating Subleases
|
|
Finance Leases
|
|
Total
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2021
|
$
|
12,846
|
|
|
$
|
(3,560)
|
|
|
$
|
633
|
|
|
$
|
9,919
|
|
2022
|
9,291
|
|
|
(2,538)
|
|
|
64
|
|
|
6,817
|
|
2023
|
4,306
|
|
|
(623)
|
|
|
—
|
|
|
3,683
|
|
2024
|
3,004
|
|
|
—
|
|
|
—
|
|
|
3,004
|
|
2025
|
3,045
|
|
|
—
|
|
|
—
|
|
|
3,045
|
|
Thereafter
|
11,510
|
|
|
—
|
|
|
—
|
|
|
11,510
|
|
Total lease payments
|
44,002
|
|
|
(6,721)
|
|
|
697
|
|
|
37,978
|
|
Less: interest
|
(7,230)
|
|
|
—
|
|
|
(26)
|
|
|
(7,256)
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
36,772
|
|
|
$
|
(6,721)
|
|
|
$
|
671
|
|
|
$
|
30,722
|
|
Note 6 — Revenue Recognition
The following tables present the disaggregation of revenue from contracts with our clients:
Revenue by Performance Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
(in thousands)
|
Selling services
|
$
|
190,906
|
|
|
$
|
213,897
|
|
Professional services
|
3,695
|
|
|
2,238
|
|
Total revenue
|
$
|
194,601
|
|
|
$
|
216,135
|
|
Revenue by Geography
Revenue for each geography generally reflects commissions earned from sales of service contracts managed from revenue delivery centers in that geography and subscription sales and professional services to deploy the Company's solutions. Predominantly all the service contracts sold and managed by the revenue delivery centers relate to end customers located in the same geography. All NALA revenue represents revenue generated within the U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
(in thousands)
|
NALA
|
$
|
111,085
|
|
|
$
|
125,660
|
|
EMEA
|
54,975
|
|
|
55,801
|
|
APJ
|
28,541
|
|
|
34,674
|
|
Total revenue
|
$
|
194,601
|
|
|
$
|
216,135
|
|
Revenue by Contract Pricing
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
(in thousands)
|
Variable consideration
|
$
|
142,355
|
|
|
$
|
146,192
|
|
Fixed consideration
|
52,246
|
|
|
69,943
|
|
Total revenue
|
$
|
194,601
|
|
|
$
|
216,135
|
|
Four of our clients represented 15%, 15%, 11% and 11% of our revenue, respectively, for the year ended December 31, 2020.
Contract Assets and Liabilities
As of December 31, 2020, contract assets and liabilities were $0.5 million and $0.4 million, respectively. As of December 31, 2019, contract assets were insignificant and contract liabilities were $0.8 million.
Transaction Price Allocated to Remaining Performance Obligations
As of December 31, 2020, assuming none of the Company’s current contracts with fixed consideration are renewed, the Company estimates receiving approximately $35.9 million in future selling services fixed consideration and approximately $0.4 million in professional services fixed consideration.
Contract Acquisition Costs
As of December 31, 2020 and 2019, capitalized contract acquisition costs were $0.9 million and $1.6 million, respectively. The Company recorded amortization expense related to capitalized contract acquisition costs of $0.8 million and $1.3 million for the year ended December 31, 2020 and 2019, respectively.
Impairment recognized on contract costs was insignificant for the years ended December 31, 2020 and 2019.
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, 2020, 3.5 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 with the effect that no additional awards may be issued under the 2011 Plan and all outstanding awards under the 2011 Plan shall continue and be unaffected by the termination of the 2011 Plan.
2020 PSU Awards
During May 2020 and prior to expiration of the 2011 Plan, the Company granted PSUs to certain executives under the 2011 Plan. The aggregate target number of shares outstanding as of December 31, 2020 subject to these awards is 0.7 million, with an aggregate grant date fair value of $0.9 million. The number of shares ultimately received related to these awards ranges from 0% to 150% of the executive's target award depending on the Company's achievement of specified Adjusted EBITDA and net bookings targets over a two-year performance period and will vest on the third anniversary of the grant date.
Stock-Based Compensation Expense
The following table presents stock-based compensation expense as allocated within the Company’s Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cost of revenue
|
$
|
389
|
|
|
$
|
538
|
|
|
|
Sales and marketing
|
1,416
|
|
|
1,772
|
|
|
|
Research and development
|
57
|
|
|
41
|
|
|
|
General and administrative
|
3,003
|
|
|
2,811
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
$
|
4,865
|
|
|
$
|
5,162
|
|
|
|
The above table does not include capitalized stock-based compensation related to internal-use software that was insignificant for the years ended December 31, 2020 and 2019.
Fair Value of Equity Compensation
The Black-Scholes option-pricing model assumptions for stock options were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
Expected term (in years)
|
5.0
|
|
5.0
|
Expected volatility
|
56%
|
|
55% - 59%
|
Risk-free interest rate
|
0.75%
|
|
1.39% - 2.57%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
Weighted-average grant date fair value
|
$
|
0.63
|
|
|
$
|
0.47
|
|
The Black-Scholes option-pricing model assumptions for purchase rights under the ESPP were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
Expected term (in years)
|
0.5 - 1.0
|
|
0.5 - 1.0
|
Expected volatility
|
53% - 60%
|
|
39% - 97%
|
Risk-free interest rate
|
0.12% - 1.52%
|
|
1.67% - 2.47%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
|
|
|
Stock Awards
A summary of the Company's stock option activity and related information was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Life (Years)
|
|
Intrinsic Value
|
|
(in thousands)
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
4,146
|
|
$
|
2.16
|
|
|
|
|
1,580
|
Granted
|
20
|
|
|
$
|
1.32
|
|
|
|
|
|
Exercised
|
(212)
|
|
|
$
|
1.20
|
|
|
|
|
|
Expired and/or forfeited
|
(924)
|
|
|
$
|
2.60
|
|
|
|
|
|
Outstanding as of December 31, 2020
|
3,030
|
|
|
$
|
2.09
|
|
|
5.15
|
|
$
|
1,372
|
|
Exercisable as of December 31, 2020
|
2,437
|
|
|
$
|
2.31
|
|
|
5.25
|
|
$
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
(in thousands)
|
Fair value of options vested
|
$
|
733
|
|
|
$
|
865
|
|
Intrinsic value of options exercised
|
$
|
46
|
|
|
$
|
—
|
|
As of December 31, 2020, there was $0.3 million of unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 1.8 years.
A summary of the Company's RSU and PSU activity and related information was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-Average Grant Date Fair Value
|
|
(in thousands)
|
|
|
Non-vested as of December 31, 2019
|
5,305
|
|
$
|
1.88
|
|
Granted
|
5,617
|
|
$
|
1.43
|
|
Vested(1)
|
(1,944)
|
|
$
|
1.95
|
|
Forfeited
|
(1,963)
|
|
$
|
1.70
|
|
Non-vested as of December 31, 2020
|
7,015
|
|
$
|
1.55
|
|
(1) 1,845 shares of common stock were issued for RSUs and PSUs vested and the remaining 99 shares were withheld for taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
(in thousands)
|
Fair value of RSUs and PSUs vested
|
$
|
2,940
|
|
|
$
|
2,076
|
|
As of December 31, 2020, there was $7.5 million of unrecognized compensation expense related to RSUs and PSUs, which is expected to be recognized over a weighted-average period of 2.0 years.
Note 8 — Restructuring and Other Related Costs
The Company has undergone restructuring efforts to better align its cost structure with its business and market conditions. These restructuring efforts include severance and other employee costs, lease and other contract termination costs and asset impairments. Severance and other employee costs include severance payments, related employee benefits, stock-based compensation related to the accelerated vesting of certain equity awards and employee-related legal fees. Lease and other contract termination costs include charges related to lease consolidation and abandonment of spaces no longer utilized and the cancellation of certain contracts with outside vendors. Asset impairments include charges related to leasehold improvements and furniture in spaces vacated or no longer in use. The restructuring plans and future cash outlays are recorded in "Accrued expenses" and "Other long-term liabilities" in the Consolidated Balance Sheets as of December 31, 2020 and 2019.
During 2020, the Company announced a restructuring effort to align with its virtual-first operating model and reduce the operating cost structure resulting in a reduction of headcount and office lease costs. The Company recognized charges related to this restructuring effort of $0.8 million for the year ended December 31, 2020 and expects to incur approximately $1.0 million in additional costs through 2021.
The following table presents a reconciliation of the beginning and ending fair value liability balance related to the 2020 restructuring effort:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Other Employee Costs
|
|
Lease Termination Costs
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Balance as of January 1, 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Restructuring and other related costs
|
780
|
|
|
59
|
|
|
839
|
|
|
|
|
|
|
|
Cash paid
|
(442)
|
|
|
—
|
|
|
(442)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020
|
$
|
338
|
|
|
$
|
59
|
|
|
$
|
397
|
|
|
|
|
|
|
|
During 2019, the Company announced a restructuring effort resulting in a reduction of headcount and office lease costs. The Company recognized charges related to this restructuring effort of $0.7 million and $1.9 million for the year ended December 31, 2020 and 2019, respectively. The Company does not expect to incur additional restructuring charges related to the 2019 restructuring.
The following table presents a reconciliation of the beginning and ending fair value liability balance related to the 2019 restructuring effort:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Other Employee Costs
|
|
Lease Termination Costs
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance as of January 1, 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Restructuring and other related costs
|
1,806
|
|
|
123
|
|
|
|
|
1,929
|
|
Cash paid
|
(1,624)
|
|
|
(123)
|
|
|
|
|
(1,747)
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
182
|
|
|
—
|
|
|
|
|
182
|
|
Restructuring and other related costs
|
703
|
|
|
—
|
|
|
|
|
703
|
|
Cash paid
|
(866)
|
|
|
—
|
|
|
|
|
(866)
|
|
Change in estimates and non-cash charges
|
(19)
|
|
|
—
|
|
|
|
|
(19)
|
|
Balance as of December 31, 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
In May 2017, the Company announced a restructuring effort resulting in a headcount reduction and the reduction of office space in four locations. The Company does not expect to incur additional restructuring charges related to the May 2017 restructuring.
The following table presents a reconciliation of the beginning and ending fair value liability balance related to the May 2017 restructuring effort:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Other Employee Costs
|
|
Lease and Other Contract Termination Costs
|
|
Asset Impairments
|
|
Total
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance as of January 1, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restructuring and other related costs
|
3,483
|
|
|
2,939
|
|
|
886
|
|
|
7,308
|
|
Cash paid
|
(3,060)
|
|
|
(1,185)
|
|
|
—
|
|
|
(4,245)
|
|
Change in estimates and non-cash charges
|
—
|
|
|
—
|
|
|
(886)
|
|
|
(886)
|
|
Acceleration of stock-based compensation expense in additional paid-in capital
|
(352)
|
|
|
—
|
|
|
—
|
|
|
(352)
|
|
Balance as of December 31, 2017
|
71
|
|
|
1,754
|
|
|
—
|
|
|
1,825
|
|
Restructuring and other related costs
|
120
|
|
|
89
|
|
|
—
|
|
|
209
|
|
Cash paid
|
(188)
|
|
|
(1,133)
|
|
|
—
|
|
|
(1,321)
|
|
Change in estimates and non-cash charges
|
(3)
|
|
|
252
|
|
|
—
|
|
|
249
|
|
Balance as of December 31, 2018
|
—
|
|
|
962
|
|
|
—
|
|
|
962
|
|
Cash paid
|
—
|
|
|
(183)
|
|
|
—
|
|
|
(183)
|
|
Change in estimates and non-cash charges
|
—
|
|
|
(63)
|
|
|
—
|
|
|
(63)
|
|
Balance as of December 31, 2019
|
—
|
|
|
716
|
|
|
—
|
|
|
716
|
|
|
|
|
|
|
|
|
|
Cash paid
|
—
|
|
|
(182)
|
|
|
—
|
|
|
(182)
|
|
Change in estimates and non-cash charges
|
—
|
|
|
(63)
|
|
|
—
|
|
|
(63)
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020
|
$
|
—
|
|
|
$
|
471
|
|
|
$
|
—
|
|
|
$
|
471
|
|
Note 9 — Income Taxes
Loss from continuing operations before provision for income taxes for the Company’s domestic and international operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
U.S.
|
$
|
(18,278)
|
|
|
$
|
(9,877)
|
|
|
|
International
|
446
|
|
|
(8,363)
|
|
|
|
Loss before provision for income taxes
|
$
|
(17,832)
|
|
|
$
|
(18,240)
|
|
|
|
The income tax provision consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Current:
|
|
|
|
|
|
Federal
|
$
|
121
|
|
|
$
|
181
|
|
|
|
Foreign
|
559
|
|
|
189
|
|
|
|
State and local
|
43
|
|
|
58
|
|
|
|
Total current income tax provision
|
723
|
|
|
428
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(13)
|
|
|
65
|
|
|
|
Foreign
|
7
|
|
|
(6)
|
|
|
|
State and local
|
(8)
|
|
|
(44)
|
|
|
|
Total deferred income tax provision
|
(14)
|
|
|
15
|
|
|
|
Income tax provision
|
$
|
709
|
|
|
$
|
443
|
|
|
|
The following table provides a reconciliation of income taxes provided at the federal statutory rate of 21% for the years ended December 31, 2020 and 2019 to the income tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
U.S. income tax at federal statutory rate
|
$
|
(3,745)
|
|
|
$
|
(3,830)
|
|
|
|
State income taxes, net of federal benefit
|
(1,575)
|
|
|
238
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
277
|
|
|
2,241
|
|
|
|
Foreign tax rate differential
|
(1,749)
|
|
|
374
|
|
|
|
Permanent differences
|
3,355
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax credits
|
—
|
|
|
(136)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
3,756
|
|
|
1,128
|
|
|
|
Other, net
|
390
|
|
|
25
|
|
|
|
Income tax provision
|
$
|
709
|
|
|
$
|
443
|
|
|
|
In November 2015, the Philippine Economic Zone Authority granted a four-year tax holiday to the Company's Philippine affiliate, commencing with its fiscal year beginning January 1, 2016. The earnings per share benefit in 2020 and 2019 was not material.The Company has applied for the tax holiday extension, however, as of December 31, 2020 the extension has not been granted. Therefore, the Company included tax on modified gross receipts in the current income tax calculation.
In December 2013, Malaysia granted a ten-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 2019 and 2020 was not material.
The following table provides the effect of temporary differences that created deferred income taxes as of December 31, 2020 and 2019. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
(in thousands)
|
Deferred tax assets:
|
|
|
|
Accrued liabilities
|
$
|
5,710
|
|
|
$
|
6,576
|
|
Share-based compensation
|
864
|
|
|
879
|
|
Net operating loss carryforwards
|
84,450
|
|
|
81,533
|
|
Tax credits
|
7,310
|
|
|
7,410
|
|
Amortization of tax intangibles
|
—
|
|
|
525
|
|
Interest
|
187
|
|
|
123
|
|
|
|
|
|
Total deferred tax assets
|
98,521
|
|
|
97,046
|
|
Deferred tax liabilities:
|
|
|
|
Property and equipment
|
(3,423)
|
|
|
(5,037)
|
|
ROU assets
|
(3,704)
|
|
|
(4,631)
|
|
Amortization of tax intangibles
|
(232)
|
|
|
—
|
|
Other, net
|
(533)
|
|
|
(583)
|
|
Total deferred tax liabilities
|
(7,892)
|
|
|
(10,251)
|
|
Net deferred tax assets
|
90,629
|
|
|
86,795
|
|
Less: valuation allowance
|
(90,899)
|
|
|
(87,078)
|
|
Net deferred tax liabilities
|
$
|
(270)
|
|
|
$
|
(283)
|
|
As of December 31, 2020 and 2019, 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 wherein management analyzes all positive and negative evidence available at the balance sheet date to determine whether all or some portion of the Company'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 that the asset will not be realized. In assessing the realization of the Company'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, 2020. Accordingly, a valuation allowance of $90.9 million has been recorded to offset this deferred tax asset. The valuation allowance decreased $3.8 million and $1.3 million for the years ended December 31, 2020 and 2019, respectively.
The Company also maintains a deferred tax liability related to indefinite lived intangible assets in jurisdictions which the Company does not have indefinite lived deferred tax assets, as reversal of the taxable temporary difference cannot serve as a source of income for realization of the non-indefinite deferred tax assets, because the deferred tax liability will not reverse until the asset is sold or written down due to impairment.
ASC 842
The Company adopted ASC 842 on January 1, 2019. Under ASC 842, the Company is required to recognize the assets and liabilities that arise from most operating leases on the balance sheet. Upon adoption, no change in retained earnings was recorded related to income taxes as the Company maintains a full valuation allowance. As of the implementation date, an adjustment of $4.6 million was recorded as a deferred tax liability and an adjustment of $4.6 million was recorded as a deferred tax asset.
Operating Loss and Tax Credit Carryforwards
As of December 31, 2020, the Company had $2.7 million of U.S. federal research and development credits which expire beginning in 2031 and $3.7 million of California research and development credits which do not expire. The Company also has $0.5 million of California Enterprise Zone Credits which expire beginning in 2023 if not utilized and $1.3 million of other state tax credits which expire beginning in 2024 if not utilized.
As of December 31, 2020, the Company had net operating loss carryforwards of approximately $316.7 million for federal income tax purposes of which $52.0 million can be carried forward indefinitely and the remaining $264.8 million will expire at various dates beginning in 2024. The Company has $248.6 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 $15.4 million of which $14.6 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 IRC 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's 2016 through 2020 tax years generally remain subject to examination by federal, state and foreign tax authorities. As the Company has incurred losses in most jurisdictions, the taxing authorities can generally challenge 2006 through 2015 losses to determine either the amount of the carryforward deduction reported in the open year or the amount of an net operating loss deduction that is absorbed in a closed year and supports the determination of the available net operating loss deduction for the open year under examination.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
Balance as of January 1, 2019
|
$
|
944
|
|
Additions based on tax positions related to the current year
|
20
|
|
|
|
|
|
Balance as of December 31, 2019
|
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
|
|
As of December 31, 2020, the Company had a liability for unrecognized tax benefits of $1.0 million, none 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 years ended December 31, 2020 and 2019, interest and penalties recognized were insignificant.
Note 10 — Employee Benefit Plan
The Company maintains a 401(k) defined contribution plan that covers eligible employees. Employer matching contributions, which may be discontinued at the Company’s discretion, were approximately $1.3 million and $1.5 million during the years ended December 31, 2020 and 2019, respectively.
Note 11 — Commitments and Contingencies
Letter of Credit
In connection with two of our leased facilities, the Company is required to maintain two letters of credit totaling $2.3 million. The letters of credit are secured by $2.3 million of cash in money market accounts, which are classified as restricted cash in "Other assets" in our Consolidated Balance Sheets.
Non-cancelable Service Contract Commitments
Future minimum payments under non-cancelable service contract commitments were as follows:
|
|
|
|
|
|
|
December 31, 2020
|
|
(in thousands)
|
2021
|
$
|
10,385
|
|
2022
|
9,699
|
|
2023
|
7,993
|
|
2024
|
821
|
|
|
|
Thereafter
|
—
|
|
Total
|
$
|
28,898
|
|