| Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Interim Financial Information The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these financial statements do not include all the information required by GAAP for annual financial statements. The unaudited Consolidated Balance Sheet as of December 31, 2017 has been derived from the Company’s audited annual Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on March 2, 2018 . In the opinion of management, these Consolidated Financial Statements reflect all adjustments, including normal recurring adjustments, management considers necessary for a fair presentation of the Company’s financial position, operating results, and cash flows for the interim periods presented. These Consolidated Financial Statements and accompanying notes should be read in conjunction with our audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2017 , included in our annual report on Form 10-K. Interim results are not necessarily indicative of results for the entire year. Basis of Presentation and Principles of Consolidation The accompanying unaudited interim Consolidated Financial Statements include the accounts of ServiceSource International, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates Preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. New Accounting Standards Issued but not yet Adopted Leases In February 2016, the Financial Accounting Standard Board ("FASB") issued an Accounting Standard Update ("ASU") that modifies existing accounting standards for lease accounting. The new standard requires a lessee to record a lease asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. Leases in which the Company is the lessee will generally be accounted for as operating leases and we will record a lease asset and a lease liability. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The standard requires a modified retrospective transition approach for all capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with an option to use certain transition relief. The Company will adopt this standard effective January 1, 2019, and is in the process of assessing the impact of this standard. Comprehensive Income In February 2018, the FASB issued an ASU that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The guidance should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of this standard will not have a material impact on the Company. New Accounting Standards Adopted Restricted Cash In November 2016, the FASB issued an ASU that requires companies to combine restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning and end of period total amounts on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, with early adoption permitted. The Company adopted this standard effective January 1, 2018 and the effects of this standard were applied retrospectively to all prior periods presented within these Consolidated Financial Statements. As a result, we include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning and end of period balances on our Consolidated Statements of Cash Flows. For the year ended December 31, 2017 and for the six months ended June 30, 2018 the effect of the change in accounting principle was an increase in cash, cash equivalents and restricted cash of $1.2 million , on our Consolidated Statements of Cash Flows. Revenue Recognition In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers" which amended the existing FASB Accounting Standards Codification Topic 605 (“ASC 605” or “legacy GAAP") and created Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606"). Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in amounts that reflect the consideration the entity expects to receive in exchange for those goods or services. ASC 606 also specifies the incremental costs of obtaining a contract with a customer and the costs of fulfilling a contract with a customer (if those costs are not within the scope of another Topic or Sub-Topic) should be deferred and recognized over the appropriate period of contract performance if they are expected to be recovered. In addition, ASC 606 requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The most significant impact to the Company's financial position and results of operations is the timing of expense recognition for certain sales commissions and to a lesser extent, the timing of revenue recognition for certain contracts that include certain performance-based fees. See Impact of Changes in Accounting Policies for additional information regarding the application of this new standard and its impact on our Consolidated Financial Statements. The Company adopted this standard effective January 1, 2018 utilizing the modified retrospective approach, or the cumulative catch-up transition method and applied ASC 606 to all contracts not completed as of January 1, 2018. The initial adoption impact to the Company’s financial position was not material. Under the transition guidance, the Company recorded a $3.3 million contract acquisition asset and corresponding offset to the opening accumulated deficit balance related to previously expensed sales commissions. The $3.3 million asset will be expensed over the next four years as follows: $1.5 million in 2018, $0.9 million in 2019 , $0.6 million in 2020 , and $0.3 million in 2021 . Additionally, the Company recorded a $0.4 million net contract asset and corresponding offset to the opening accumulated deficit balance related to previously unrecognized revenue under legacy GAAP which would have been recognized in periods prior to 2018 under ASC 606. New Accounting Policies upon Adoption of ASC 606 Revenue Recognition The Company provides a comprehensive suite of selling and professional services to its clients. Selling services involves three categories of selling motions: recurring revenue management, customer success activities and inside sales efforts. Recurring revenue management includes hardware and software maintenance contract renewals, subscription renewals and extensions, asset and contract opportunity management, and sales enablement and quoting solutions. Customer success activities include onboarding, product adoption, health checks, account management and certain service support. Inside sales efforts include lead generation and conversion, cross-sell and upsell activities, technology refresh, warranty conversion, win-backs and recaptures, cloud migration, and client and asset management. Professional services involves 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 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. The length of a selling services contract is generally 2-3 years, while professional services performance obligations are generally fulfilled within 90 days. The Company generally invoices its clients for services on a monthly or quarterly basis with 30-day payment terms. 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 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. The total contract consideration, or transaction price, is allocated between the separate services identified in the contract based on their stand-alone selling price ("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 the SSP for professional services. 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. 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. The Company also 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. Contract Acquisition Costs To obtain contracts with clients, the Company pays its sales team commissions based in part 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 expected to be recoverable, are capitalized as contract acquisition costs in the period the contract is executed. Capitalized sales commissions are amortized to sales and marketing expense based on the pattern of transfer of services to which the asset relates over the estimated contract term, generally 2-3 years for a new client or 5 years for long-standing client relationships. The contract acquisition costs asset is evaluated for recoverability and impairment at each reporting period through the amortization period. The Company does not capitalize incremental acquisition costs for contracts if the amortization period of the asset is one year or less. Significant Estimates and Judgments Significant estimates and judgments for revenue recognition and contract acquisition cost capitalization include: identifying and determining distinct performance obligations in contracts with clients, determining the timing of the satisfaction of performance obligations, estimating the timing and amount of variable consideration in a contract and assessing whether it should be constrained in determining the total contract consideration, determining SSP for each performance obligations and the methodology to allocate the total contract consideration to the distinct performance obligations. Our revenue contracts often include promises to transfer services involving multiple selling motions to a client. Determining whether those services are considered distinct performance obligations and qualify as a series of distinct performance obligations 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. Impact of Changes in Accounting Policies The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective approach by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening accumulated deficit balance as of January 1, 2018. As a result, the comparative information throughout these financial statements has not been adjusted and continues to be reported under legacy GAAP as disclosed in our 2017 annual report on Form 10-K. As described above, the Company changed its accounting policy for revenue recognition and certain sales commissions. The qualitative and the quantitative impact of adopting ASC 606 is presented below. Selling Services The Company historically recognized all performance based fees in the period when the specific performance criteria was achieved. Under ASC 606, in certain circumstances the Company estimates the variable fees for which it is probable that a significant reversal will not occur and recognizes these estimated variable fees over the estimated contract life. For certain contracts, this could result in the recognition of the performance-based fees sooner than under ASC 605. Professional Services Prior to the adoption of ASC 606, the Company recognized revenue from professional services at the best estimated selling price upon client acceptance at the end of the implementation or data integration event due to the short-term nature of the services, generally 90 days from the start of the services. Under ASC 606, the Company recognizes revenue at SSP over time as control of the service is transferred to the client, resulting in the recognition of professional services fees sooner than under ASC 605. Sales Commissions The Company previously recognized a portion of certain sales commissions as sales and marketing expense when it was earned by the employee upon obtaining and executing a contract. Under ASC 606, the Company capitalizes this portion of certain sales commissions as contract acquisition costs and amortizes the amount ratably over the contract term for new clients or the estimated life of the client for long-standing client relationships. As a result, sales and marketing expense is recognized later and over a longer period of time than under ASC 605. The following tables summarize the impacts of adopting ASC 606 on the Company's Consolidated Financial Statements: For the Six Months Ended June 30, 2018 As reported ASC 606 adjustments Balances without adoption of ASC 606 Assets Accounts receivable, net $ 50,583 $ 80 $ 50,663 Prepaid expenses and other 6,081 (148 ) 5,933 Contract acquisition costs 3,294 (3,294 ) — Other assets 4,252 (85 ) 4,167 Total assets $ 64,210 $ (3,447 ) $ 60,763 Liabilities Deferred revenue $ — $ 2,541 $ 2,541 Other current liabilities 4,696 (2,392 ) 2,304 Total liabilities $ 4,696 $ 149 $ 4,845 Accumulated deficit $ (263,037 ) $ (3,596 ) $ (266,633 ) For the Three Months Ended June 30, 2018 As Reported ASC 606 adjustments Balances without adoption of ASC 606 Net revenue $ 61,111 $ 222 $ 61,333 Cost of revenue 42,463 — 42,463 Gross profit 18,648 222 18,870 Operating expenses: Sales and marketing 9,252 (55 ) 9,197 Research and development 1,780 — 1,780 General and administrative 13,157 — 13,157 Restructuring and other 156 — 156 Total operating expenses 24,345 (55 ) 24,290 Loss from operations (5,697 ) 277 (5,420 ) Interest expense and other, net (2,776 ) — (2,776 ) Loss before income taxes (8,473 ) 277 (8,196 ) Provision for income tax expense (414 ) — (414 ) Net loss $ (8,887 ) $ 277 $ (8,610 ) Net loss per common share: Basic and diluted $ (0.10 ) $ 0.01 $ (0.09 ) Weighted-average common shares outstanding: Basic and diluted 91,323 — 91,323 For the Six Months Ended June 30, 2018 As Reported ASC 606 adjustments Balances without adoption of ASC 606 Net revenue $ 119,696 $ 61 $ 119,757 Cost of revenue 84,187 — 84,187 Gross profit 35,509 61 35,570 Operating expenses: Sales and marketing 18,490 (51 ) 18,439 Research and development 3,296 — 3,296 General and administrative 26,046 — 26,046 Restructuring and other 209 — 209 Total operating expenses 48,041 (51 ) 47,990 Loss from operations (12,532 ) 112 (12,420 ) Interest expense and other, net (5,622 ) — (5,622 ) Impairment loss on investment securities (1,958 ) — (1,958 ) Loss before income taxes (20,112 ) 112 (20,000 ) Provision for income tax expense (427 ) — (427 ) Net loss $ (20,539 ) $ 112 $ (20,427 ) Net loss per common share: Basic and diluted $ (0.23 ) $ — $ (0.23 ) Weighted-average common shares outstanding: Basic and diluted 90,843 — 90,843 For the Six Months Ended June 30, 2018 As Reported ASC 606 adjustments Balances without adoption of ASC 606 Cash flows from operating activities Net loss $ (20,539 ) $ 112 $ (20,427 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 9,744 — 9,744 Amortization of debt discount and issuance costs 4,923 — 4,923 Amortization of contract acquisition cost 930 (930 ) — Amortization of premium on short-term investments (1,197 ) — (1,197 ) Stock-based compensation 6,538 — 6,538 Restructuring and other 482 — 482 Impairment loss on investment securities 1,958 — 1,958 Other 56 — 56 Changes in operating assets and liabilities: — Accounts receivable, net 5,593 (80 ) 5,513 Deferred revenue 174 2,541 2,715 Contract acquisition costs (878 ) 878 — Prepaid expenses and other (434 ) (129 ) (563 ) Accounts payable (2,515 ) — (2,515 ) Accrued taxes (472 ) — (472 ) Accrued compensation and benefits (1,647 ) — (1,647 ) Accrued expenses (1,339 ) — (1,339 ) Other liabilities 1,025 (2,392 ) (1,367 ) Net cash provided by operating activities 2,402 — 2,402 Cash flows from investing activities: Net cash provided by investing activities 130,412 — 130,412 Cash flows from financing activities Net cash used in financing activities (126 ) — (126 ) Net increase in cash, cash equivalents and restricted cash 132,688 — 132,688 Effect of exchange rate changes on cash, cash equivalents and restricted cash 243 — 243 Cash, cash equivalents and restricted cash, beginning of period 52,633 — 52,633 Cash, cash equivalents and restricted cash, end of period $ 185,564 $ — $ 185,564 |
