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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
—————————————————
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-35108
—————————————————
 SERVICESOURCE INTERNATIONAL, INC.
(Exact name of registrant as specified in our charter)
Delaware
 
81-0578975
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
707 17th Street,
25th Floor
 
80202
Denver,
Colorado
 
 
(Address of principal executive offices)
 
(Zip Code)
(720)
889-8500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.0001 Par Value
SREV
The Nasdaq Stock Market LLC
(Title of each class)
(Trading Symbol)
(Name of each exchange on which registered)
—————————————————
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No  
Indicate by check mark whether the registrant has submitted electronically on its corporate Web site, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 


Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of July 31, 201994,082,381 shares of common stock of ServiceSource International, Inc. were outstanding.



Table of Contents

SERVICESOURCE INTERNATIONAL, INC.
Form 10-Q
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents



ServiceSource International, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
25,652

 
$
26,535

Accounts receivable, net
42,933

 
54,284

Prepaid expenses and other
6,704

 
5,653

Total current assets
75,289

 
86,472

 
 
 
 
Property and equipment, net
37,029

 
36,593

Contract acquisition costs
2,041

 
2,660

Right-of-use assets
33,190

 

Goodwill
6,334

 
6,334

Other assets
4,801

 
4,521

Total assets
$
158,684

 
$
136,580

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,096

 
$
2,424

Accrued expenses
2,673

 
3,380

Accrued compensation and benefits
14,735

 
15,509

Operating lease liabilities
8,419

 

Other current liabilities
5,690

 
6,894

Total current liabilities
33,613

 
28,207

 
 
 
 
Operating lease liabilities, net of current portion
28,684

 

Other long-term liabilities
3,537

 
6,540

Total liabilities
65,834

 
34,747

 
 
 
 
Commitments and contingencies (Note 7)

 

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 20,000 shares authorized and none issued and outstanding

 

Common stock; $0.0001 par value; 1,000,000 shares authorized; 94,210 shares issued and 94,089 shares outstanding as of June 30, 2019; 92,895 shares issued and 92,774 shares outstanding as of December 31, 2018
9


9

Treasury stock
(441
)
 
(441
)
Additional paid-in capital
372,201

 
369,246

Accumulated deficit
(279,137
)
 
(267,383
)
Accumulated other comprehensive income
218

 
402

Total stockholders’ equity
92,850

 
101,833

Total liabilities and stockholders’ equity
$
158,684

 
$
136,580







The accompanying notes are an integral part of these Consolidated Financial Statements.

3

Table of Contents

ServiceSource International, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
 
 For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net revenue
$
52,358

 
$
61,111

 
$
107,869

 
$
119,696

Cost of revenue
38,349

 
42,463

 
77,825

 
84,187

Gross profit
14,009

 
18,648

 
30,044

 
35,509

Operating expenses:
 
 

 
 
 

Sales and marketing
7,486

 
9,252

 
15,435

 
18,490

Research and development
1,274

 
1,780

 
2,537

 
3,296

General and administrative
10,970

 
13,157

 
21,952

 
26,046

Restructuring and other related costs
148

 
156

 
1,206

 
209

Total operating expenses
19,878

 
24,345

 
41,130

 
48,041

Loss from operations
(5,869
)
 
(5,697
)
 
(11,086
)
 
(12,532
)
Interest and other expense, net
(58
)
 
(2,776
)
 
(548
)
 
(5,622
)
Impairment loss on investment securities

 

 

 
(1,958
)
Loss before income taxes
(5,927
)
 
(8,473
)
 
(11,634
)
 
(20,112
)
Provision for income tax expense
(108
)
 
(414
)
 
(120
)
 
(427
)
Net loss
$
(6,035
)
 
$
(8,887
)
 
$
(11,754
)
 
$
(20,539
)
Net loss per common share
 
 
 
 
 
 
 
Basic and diluted
$
(0.06
)
 
$
(0.10
)
 
$
(0.13
)
 
$
(0.23
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
93,712

 
91,323

 
93,315

 
90,843















The accompanying notes are an integral part of these Consolidated Financial Statements.

4

Table of Contents

ServiceSource International, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
 For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(6,035
)
 
$
(8,887
)
 
$
(11,754
)
 
$
(20,539
)
Other comprehensive (loss) income
 
 
 
 
 
 
 
Available for sale securities:
 
 
 
 
 
 
 
Unrealized gain (loss) on short-term investments

 
5

 

 
(700
)
Reclassification adjustment for impairment loss included in net loss

 

 

 
1,958

Net change in available for sale debt securities

 
5

 

 
1,258

Foreign currency translation adjustments
(260
)
 
(210
)
 
(184
)
 
64

Other comprehensive (loss) income
(260
)
 
(205
)
 
(184
)
 
1,322

Comprehensive loss
$
(6,295
)
 
$
(9,092
)
 
$
(11,938
)
 
$
(19,217
)






















The accompanying notes are an integral part of these Consolidated Financial Statements.

5

Table of Contents

ServiceSource International, Inc.
Consolidated Statements of Stockholders' Equity
(in thousands)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Treasury Shares/Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Total
 
Shares
 
Amount
 
Shares
 
Amount    
 
Balance at January 1, 2019
92,895

 
$
9

 
(121
)
 
$
(441
)
 
$
369,246

 
$
(267,383
)
 
$
402

 
$
101,833

Net loss

 

 

 

 

 
(5,719
)
 

 
(5,719
)
Other comprehensive income

 

 

 

 

 

 
76

 
76

Stock-based compensation

 

 

 

 
1,564

 

 

 
1,564

Issuance of common stock, restricted stock units
229

 

 

 

 

 

 

 

Proceeds from the exercise of stock options and employee stock purchase plan
139

 

 

 

 
141

 

 

 
141

Balance at March 31, 2019
93,263

 
$
9

 
(121
)
 
$
(441
)
 
$
370,951

 
$
(273,102
)
 
$
478

 
$
97,895

Net loss

 

 

 

 

 
(6,035
)
 

 
(6,035
)
Other comprehensive loss

 

 

 

 

 

 
(260
)
 
(260
)
Stock-based compensation

 

 

 

 
1,269

 

 

 
1,269

Issuance of common stock, restricted stock units
947

 

 

 

 

 

 

 

Net cash paid for payroll taxes on restricted stock unit releases

 

 

 

 
(19
)
 

 

 
(19
)
Balance at June 30, 2019
94,210

 
$
9

 
(121
)
 
$
(441
)
 
$
372,201

 
$
(279,137
)
 
$
218

 
$
92,850

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Treasury Shares/Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
Balance at December 31, 2017
90,380

 
$
8

 
(121
)
 
$
(441
)
 
$
359,347

 
$
(246,207
)
 
$
(598
)
 
$
112,109

Cumulative effect of ASC 606 - initial adoption

 

 

 

 

 
3,709

 

 
3,709

Adjusted balance at January 1, 2018
90,380

 
$
8

 
(121
)
 
$
(441
)
 
$
359,347

 
$
(242,498
)
 
$
(598
)
 
$
115,818

Net loss

 

 

 

 

 
(11,652
)
 

 
(11,652
)
Other comprehensive income

 

 

 

 

 

 
1,527

 
1,527

Stock-based compensation

 

 

 

 
3,223

 

 

 
3,223

Issuance of common stock, restricted stock units
84

 

 

 

 

 

 

 

Proceeds from the exercise of stock options and employee stock purchase plan
119

 

 

 

 
353

 

 

 
353

Net cash paid for payroll taxes on restricted stock unit releases

 

 

 

 
(53
)
 

 

 
(53
)
Balance at March 31, 2018
90,583

 
$
8

 
(121
)
 
$
(441
)
 
$
362,870

 
$
(254,150
)
 
$
929

 
$
109,216

Net loss

 

 

 

 

 
(8,887
)
 

 
(8,887
)
Other comprehensive loss

 

 

 

 

 

 
(205
)
 
(205
)
Stock-based compensation

 

 

 

 
3,525

 

 

 
3,525

Issuance of common stock, restricted stock units
1,207

 

 

 

 

 

 

 

Proceeds from the exercise of stock options and employee stock purchase plan
32

 

 

 

 
94

 

 

 
94

Net cash paid for payroll taxes on restricted stock unit releases

 

 

 

 
(364
)
 

 

 
(364
)
Balance at June 30, 2018
91,822

 
$
8

 
(121
)
 
$
(441
)
 
$
366,125

 
$
(263,037
)
 
$
724

 
$
103,379



The accompanying notes are an integral part of these Consolidated Financial Statements.

6

Table of Contents

ServiceSource International, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
 
For the Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(11,754
)
 
$
(20,539
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
Depreciation and amortization
6,994

 
9,744

Amortization of debt discount and issuance costs
38

 
4,923

Amortization of contract acquisition costs
868

 
930

Amortization of premium on short-term investments

 
(1,197
)
Amortization of right-of-use assets
4,725

 

Stock-based compensation
2,806

 
6,538

Restructuring and other related costs
1,166

 
482

Impairment loss on investment securities

 
1,958

Other

 
56

Net changes in operating assets and liabilities


 


Accounts receivable, net
11,328

 
5,593

Prepaid expenses and other assets
(898
)
 
(434
)
Contract acquisition costs
(249
)
 
(878
)
Accounts payable
(263
)
 
(2,515
)
Accrued compensation and benefits
(1,934
)
 
(1,647
)
Operating lease liabilities
(4,767
)
 

Accrued expenses
(797
)
 
(1,811
)
Other liabilities
(546
)
 
1,199

Net cash provided by operating activities
6,717

 
2,402

Cash flows from investing activities:
 
 
 
Acquisition of property and equipment
(6,095
)
 
(7,268
)
Purchases of short-term investments

 
(480
)
Sales of short-term investments

 
133,920

Maturities of short-term investments

 
4,240

Net cash (used in) provided by investing activities
(6,095
)
 
130,412

Cash flows from financing activities:
 
 
 
Repayment on finance lease obligations
(421
)
 
(156
)
Proceeds from issuance of common stock
141

 
447

Payments related to minimum tax withholdings on restricted stock unit releases
(19
)
 
(417
)
Net cash used in financing activities
(299
)
 
(126
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(156
)
 
243

Net change in cash and cash equivalents and restricted cash
167

 
132,931

Cash and cash equivalents and restricted cash, beginning of period
27,779

 
52,633

Cash and cash equivalents and restricted cash, end of period
$
27,946

 
$
185,564

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
136

 
$
1,178

Supplemental disclosures of non-cash activities:
 
 
 
Acquisition of property and equipment accrued in accounts payable and accrued expenses
$
419

 
$
389

Increase in contract acquisition costs and benefit to accumulated deficit related to adoption of ASC 606
$

 
$
3,346

Increase in prepaid expenses and other, other liabilities and benefit to accumulated deficit related to adoption of ASC 606
$

 
$
363

Increase in operating lease liabilities related to the adoption of ASC 842
$
41,760

 
$

Increase in right-of-use assets related to the adoption of ASC 842
$
39,183

 
$

Decrease in prepaids and other assets related to the adoption of ASC 842
$
(749
)
 
$

Decrease in other liabilities related to the adoption of ASC 842
$
(3,308
)
 
$




The accompanying notes are an integral part of these Consolidated Financial Statements.

7

Table of Contents

ServiceSource International, Inc.
Notes to Consolidated Financial Statements
(unaudited)
Note 1The Company
ServiceSource International, Inc. is a global leader in outsourced, performance-based customer success and revenue growth solutions. Through our people, processes and technology, we grow and retain revenue on behalf of our clients — some of the world’s leading business-to-business companies — in more than 45 languages. Our solutions help our clients strengthen their customer relationships, drive improved customer adoption, expansion and retention and minimize churn. Our technology platform and best-practice business processes combined with our highly-trained, client-focused revenue delivery professionals and data from 20 years of operating experience enable us to provide our clients greater value for our customer success services than attained by our clients' in-house customer success teams.
“ServiceSource,” “the Company,” “we,” “us,” or “our”, as used herein, refer to ServiceSource International, Inc. and its wholly-owned subsidiaries, unless the context indicates otherwise.
The Company’s pay-for-performance model allows its clients to pay for the services through either flat-rate or variable commissions based on the revenue generated by the Company on their behalf. Fixed-fee arrangements are typically used in quick deployments to address discrete target areas of our clients’ needs. The Company also earns revenue through its professional services teams, who assist clients with data optimization. The Company’s corporate headquarters is located in Denver, Colorado. The Company has additional U.S. offices in California and Tennessee, and international offices in Bulgaria, Ireland, Japan, Malaysia, Philippines, Singapore and the United Kingdom.

Note 2Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim 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, 2018 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, 2018 filed with the Securities and Exchange Commission on February 28, 2019. 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, 2018, included in our annual report on Form 10-K. Interim results are not necessarily indicative of results for the entire year.
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
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’s significant accounting judgments and estimates include, but are not limited to: revenue recognition, the valuation and recognition of stock-based compensation, the recognition and measurement of current and deferred income tax assets and liabilities and uncertain tax positions, the provision for bad debts and impairment of goodwill and long-lived assets.
The Company bases its estimates and judgments on historical experience and on various assumptions that it believes are reasonable under the circumstances. However, future events are subject to change and estimates and judgments routinely require adjustment. Actual results and outcomes may differ from our estimates.

8

Table of Contents

Reclassifications
Certain items on the Consolidated Statements of Cash Flows for the six months ended June 30, 2018 have been reclassified to conform to the current year presentation. These reclassifications did not affect the Company's Consolidated Balance Sheet as of December 31, 2018 or the Company's Consolidated Statements of Operations, Consolidated Statements of Comprehensive Loss or Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2018.
New Accounting Standards Issued but Not yet Adopted
Financial Instruments - Credit Losses
In June 2016, the Financial Accounting Standard Board ("FASB") issued an Accounting Standard Update ("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. In November 2018, the FASB issued an update to this ASU clarifying receivables arising from operating leases are accounted for using the lease guidance in Accounting Standards Codification Topic 842 Leases ("ASC 842"), and not as financial instruments. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2019, with early adoption permitted. This standard will apply to the Company's trade receivables. Based on our current analysis the Company does not expect the adoption to have a material impact on its Consolidated Financial Statements as credit losses associated from trade receivables have historically been insignificant. The Company will adopt this standard effective January 1, 2020.
New Accounting Standards Adopted
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and will also require significant additional disclosures about the amount, timing, and uncertainty of cash flows from leases. Substantially all leases, including current operating leases, will be recognized by lessees on their balance sheet as a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 initially required entities to adopt the standard using a modified retrospective transition method. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provide transition practical expedients allowing companies to adopt the new standard with a cumulative effect adjustment as of the beginning of the year of adoption with prior year comparative financial information and disclosures remaining as previously reported. The Company adopted this standard effective January 1, 2019 and elected the package of practical expedients, accounting for leases with contractual terms less than 12 months as short-term leases and the transition relief option to apply legacy GAAP to periods prior to the standard’s effective date. Upon initial adoption of the standard, the Company recorded a $29.5 million right-of-use asset ("ROU") and a $32.1 million operating lease liability to the Consolidated Balance Sheets as of January 1, 2019.
Cloud Computing Implementation Costs
In August 2018, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326) that provides guidance on the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the new standard. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2019, with early adoption permitted. The Company early adopted this standard effective January 1, 2019 and the effects of this standard were applied prospectively to eligible costs incurred on or after January 1, 2019. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.

9

Table of Contents

New Accounting Policies upon Adoption of ASC 842
Leases
At the inception of a contract, the Company determines whether the contract is or contains a lease. ROU assets represent the Company's right to use an underlying asset over the lease term and lease liabilities represent our remaining payment obligation under the lease. ROU assets and liabilities are recognized upon the lease commencement based on the present value of lease payments over the lease term. ROU assets are adjusted for any prepaid or accrued lease payments and unamortized lease incentives or initial direct costs. As most of the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate, the variable interest rate on the revolving line of credit (the “Revolver”), and other information available at the lease commencement in determining the present value of lease payments. The Company's lease terms include options to extend or terminate the lease when it is reasonably certain it will exercise the option. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense and sublease income is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components, which are accounted for separately.  See “Note 6 — Leases” for additional information.
Note 3Fair Value of Financial Instruments
The Company follows a three-tier fair value hierarchy, which is described in detail in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. There were no transfers between levels during the six months ended June 30, 2019 and 2018.
Cash equivalents consist of highly liquid investments with original maturities of three months or less at the time of purchase.  Cash and cash equivalents are classified within Level 1.
Short-term investments consist of readily marketable debt securities with a remaining maturity of more than three months from the time of purchase. The Company liquidated its investment securities during the first half of 2018 to repay the $150.0 million convertible notes that matured August 1, 2018. Based on the Company’s decision to sell these investment securities, an other-than-temporary impairment occurred and a $2.0 million impairment loss was recorded in the Consolidated Statements of Operations for the six months ended June 30, 2018.
The Company recognized realized gains from the sale of available-for-sale securities of $0.03 million for the three and six months ended June 30, 2018 and losses from the sale of available-for-sale securities of $0.2 million for the three and six months ended June 30, 2018. Gains and losses on available-for-sale securities are recorded in "Interest and other expense, net" in the Consolidated Statements of Operations.
The Company had restricted cash in "Other assets" in the Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 of $2.3 million and $1.2 million, respectively. Restricted cash is classified within Level 1.
Note 4Other Current and Long-Term Liabilities
Other current liabilities were comprised of the following:
 
June 30, 2019
 
December 31, 2018
 
 
 
 
 
(in thousands)
Legal reserve
$
3,730

 
$
3,750

Finance lease obligations
959

 
954

Contract liability
549

 
873

Other liabilities
201

 
198

Employee stock purchase plan withholdings
251

 
384

Deferred rent

 
735

Total
$
5,690

 
$
6,894



10

Table of Contents

Other long-term liabilities were comprised of the following:
 
June 30, 2019
 
December 31, 2018
 
 
 
 
 
(in thousands)
Asset retirement obligations
$
1,397

 
$
1,368

Finance lease obligations
1,142

 
1,510

Accrued restructuring costs
593

 
716

Deferred tax liability
289

 
268

Other accrued costs
116

 
105

Deferred rent

 
2,573

Total
$
3,537

 
$
6,540


Note 5Debt
Revolving Line of Credit
In July 2018, the Company entered into a $40.0 million senior secured Revolver that allows us to borrow against our domestic receivables as defined in the credit agreement. The Revolver matures July 2021 and bears interest at a variable rate per annum based on the greater of the prime rate, the Federal Funds rate plus 0.50% or the one-month LIBOR rate plus 1.00%, plus, in each case, a margin of 1.00% for base rate borrowings or 2.00% for Eurodollar borrowings. As of June 30, 2019, the Company did not have any borrowings outstanding on the Revolver and therefore has no future obligations.
The obligations under the credit agreement are secured by substantially all assets of the borrowers and certain of their subsidiaries, including pledges of equity in certain of the Company’s subsidiaries. The Revolver has covenants with which the Company was in compliance as of June 30, 2019 and December 31, 2018.
Deferred Debt Issuance Costs
Discounts and premiums to the principal amounts are included in the carrying value of debt and amortized to "Interest and other expense, net" over the remaining life of the underlying debt. Unamortized debt issuance costs related to the Revolver were $0.1 million and $0.2 million as of June 30, 2019 and December 31, 2018, respectively. The amortization of all premiums and discounts related to the convertible notes that matured August 2018 was $2.3 million and $4.5 million for the three and six months ended June 30, 2018, respectively.
Interest expense related to the amortization of debt issuance costs, interest expense associated with the Company's debt obligations and accretion of the Company's debt discount was $0.04 million and $3.1 million for the three months ended June 30, 2019 and 2018, respectively, and $0.1 million and $6.0 million for the six months ended June 30, 2019 and 2018, respectively.

Note 6Leases
The Company has operating leases for office space and finance leases for certain equipment under non-cancelable agreements with various expiration dates through April 2030. Certain office leases include the option to extend the term between three to seven years and certain office leases include the option to terminate the lease upon written notice within one to eight years after lease commencement. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
In January 2018, the Company entered into a sublease with a third-party for the San Francisco office space through the remaining term of the lease of November 30, 2022. 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.
Rent expense for the three and six months ended June 30, 2018 was $3.1 million and $5.8 million, respectively. Rent income for the three and six months ended June 30, 2018 was $0.5 million and $0.6 million, respectively.

11

Table of Contents

Supplemental income statement information related to leases was as follows:
 
For the Three Months Ended June 30, 2019
 
For the Six Months Ended June 30, 2019
 
 
 
 
 
(in thousands)
Operating lease cost
$
3,116

 
$
5,997

 
 
 
 
Finance lease cost:
 
 
 
Amortization of leased assets
171

 
322

Interest on lease liabilities
45

 
86

Total finance lease cost
216

 
408

 
 
 
 
Sublease income
(468
)
 
(936
)
Net lease cost
$
2,864

 
$
5,469


Supplemental balance sheet information related to leases was as follows:
 
June 30, 2019
 
(in thousands)
Operating leases:
 
Right-of-use assets
$
33,190

 
 
Operating lease liabilities
$
8,419

Operating lease liabilities, net of current portion
28,684

Total operating lease liabilities
$
37,103

 
 
Finance leases:
 
Property and equipment
$
3,479

Accumulated depreciation
(1,463
)
Property and equipment, net
$
2,016

 
 
Other current liabilities
$
959

Other long-term liabilities
1,142

Total finance lease liabilities
$
2,101


Lease term and discount rate information related to leases was as follows:
 
June 30, 2019
Weighted-average remaining lease term (in years):
 
Operating lease
5.0

Finance lease
2.3

Weighted-average discount rate:
 
Operating lease
6.5
%
Finance lease
8.2
%



12

Table of Contents

Maturities of lease liabilities were as follows as of June 30, 2019:
 
Operating Leases
 
Operating Sublease
 
Finance Leases
 
 
 
 
 
 
 
(in thousands)
Remainder of 2019
$
4,882

 
$
(942
)
 
$
555

2020
11,030

 
(1,932
)
 
1,040

2021
10,562

 
(1,989
)
 
633

2022
7,126

 
(1,878
)
 
64

2023
2,218

 

 

Thereafter
8,769

 

 

Total lease payments
44,587

 
(6,741
)
 
2,292

Less: interest
(6,828
)
 

 
(191
)
Less: tenant improvements reimbursement
(656
)
 

 

Total
$
37,103

 
$
(6,741
)
 
$
2,101


Subsequent to June 30, 2019, the Company entered into a sublease agreement with a third party for the San Francisco office space through the remaining term of the lease, November 30, 2023, with total sublease income of approximately $2.8 million.

Note 7Commitments 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.
Litigation
The Company is subject to various legal proceedings and claims arising in the ordinary course of our business, including the cases discussed below.  Although the results of litigation and claims cannot be predicted with certainty, the Company is currently not aware of any litigation or threats of litigation in which the final outcome could have a material adverse effect on our business, operating results, financial position or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies. As of June 30, 2019 and December 31, 2018, the Company accrued a $3.7 million and $3.8 million, respectively, reserve relating to our potential liability for currently pending disputes, reflected in "Other current liabilities" in the Consolidated Balance Sheets.
On August 23, 2016, the United States District Court for the Middle District of Tennessee granted conditional class certification in a lawsuit originally filed on September 21, 2015 by three former senior sales representatives. The lawsuit, Sarah Patton, et al v. ServiceSource Delaware, Inc., asserts a claim under the Fair Labor Standards Act alleging that certain non-exempt employees in our Nashville location were not paid for all hours worked and were not properly paid for overtime hours worked.  The complaint also asserts claims under Tennessee state law for breach of contract and unjust enrichment; and, on September 28, 2018, the plaintiffs filed a motion to certify the state law breach of contract and unjust enrichment claims as a class action.  A settlement of all claims has been reached and the settlement amounts will be paid in phases. The Company anticipates settlement payments will be completed by the end of 2019.

13

Table of Contents

Non-cancelable Service Contract Commitments
Future minimum payments under non-cancelable service contract commitments were as follows:
 
June 30, 2019
 
(in thousands)
Remainder of 2019
$
3,886

2020
9,091

2021
7,986

2022
7,431

2023
8,237

Thereafter

Total
$
36,631



Note 8Revenues, Contract Asset and Liability Balances and Contract Acquisition Costs
The following tables present the disaggregation of revenue from contracts with our clients:
Revenue by Performance Obligation
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(in thousands)
Professional services
$
442

 
$
692

 
$
825

 
$
2,699

Selling services
51,916

 
60,419

 
107,044

 
116,997

Total revenue
$
52,358

 
$
61,111

 
$
107,869

 
$
119,696

Revenue by Geography
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(in thousands)
APJ
$
9,345

 
$
9,255

 
$
18,019

 
$
16,849

EMEA
13,418

 
14,669

 
27,054

 
30,191

NALA
29,595

 
37,187

 
62,796

 
72,656

Total revenue
$
52,358

 
$
61,111

 
$
107,869

 
$
119,696

Revenue by Contract Pricing
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(in thousands)
Fixed consideration
$
18,828

 
$
20,683

 
$
38,557

 
$
38,425

Variable consideration
33,530

 
40,428

 
69,312

 
81,271

Total revenue
$
52,358

 
$
61,111

 
$
107,869

 
$
119,696


Contract Balances
Once the Company obtains a client contract, 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. As of June 30, 2019 and December 31, 2018, the contract asset balance totaled $0.1 million and $0.2 million, respectively, and the contract liability balance totaled $0.5 million and $0.9 million, respectively. Contract assets and contract liabilities are reflected in "Prepaid expenses and other", "Other assets" and "Other current liabilities" in the Consolidated Balance Sheets.

14

Table of Contents

Transaction Price Allocated to Remaining Performance Obligations
The Company maintains contracts with fixed consideration that are generally with long-standing client relationships and typically renew annually. Assuming none of the Company’s current contracts with fixed consideration are renewed, we estimate receiving approximately $42.5 million in future selling services fixed consideration as of June 30, 2019. Professional services revenues from fixed consideration are based on proportional performance which is typically concluded within 90 days of contract execution. The Company typically bills professional services upfront upon obtaining a client contract. As of June 30, 2019, we estimate $0.2 million in professional services fixed consideration revenue to be recognized through the remainder of 2019.
Contract Acquisition Costs
Certain commissions paid to the Company's sales team upon obtaining a client contract are incremental and recoverable, and capitalized as contract acquisition costs. 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 Company expensed $1.5 million of the $3.3 million of contract acquisition asset during 2018 and will expense the remainder of the asset over the next five years as follows: $0.4 million remaining in 2019, $0.6 million in 2020 and $0.3 million in 2021 and beyond. The Company recorded $0.2 million and $0.5 million, respectively, in amortization expense for the three and six months ended June 30, 2019 and $0.4 million and $0.8 million, respectively, of amortization for the three and six months ended June 30, 2018 related to amounts capitalized upon the adoption of ASC 606.
Subsequent to the adoption of ASC 606, the Company capitalized an additional $0.2 million and $1.1 million as of June 30, 2019 and December 31, 2018, respectively, of sales commissions as contract acquisition costs related to contracts obtained during the period. The Company recorded amortization expense of $0.3 million and $0.4 million, respectively, for the three and six months ended June 30, 2019 and $0.1 million for the three and six months ended June 30, 2018 related to the amounts capitalized. As of June 30, 2019, the weighted-average remaining amortization period related to these capitalized costs was approximately 2.4 years.
Impairment recognized on contract costs was insignificant for the three and six months ended June 30, 2019 and 2018.
Applying the practical expedient for 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" in the Consolidated Statements of Operations.
Note 9Stockholders' Equity
Stock-Based Compensation Expense
The following table presents stock-based compensation expense as allocated within the Company's Consolidated Statements of Operations:
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(in thousands)
Cost of revenue
$
129

 
$
279

 
$
288

 
$
558

Sales and marketing
429

 
833

 
872

 
1,719

Research and development
18

 
58

 
12

 
122

General and administrative
660

 
2,257

 
1,634

 
4,139

Total stock-based compensation
$
1,236

 
$
3,427

 
$
2,806

 
$
6,538


The above table does not include capitalized stock-based compensation related to internal-use software of $0.03 million for the three and six months ended June 30, 2019 and $0.1 million and $0.2 million for the three and six months ended June 30, 2018, respectively.

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Table of Contents

Stock Awards Issued to Employees
The following table summarizes information related to stock options:
 
Shares
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Life (Years)
 
Intrinsic Value
 
(in thousands)
 
 
 
 
 
(in thousands)
Outstanding as of December 31, 2018
7,516

 
$
3.34

 
 
 
$

Granted
182

 
$
1.03

 
 
 
 
Expired and/or forfeited
(3,589
)
 
$
4.17

 
 
 
 
Outstanding as of June 30, 2019
4,109

 
$
2.51

 
7.89
 
$

Exercisable as of June 30, 2019
1,232

 
$
5.17

 
4.46
 
$


The weighted-average fair value of options granted during the six months ended June 30, 2019 and 2018 was $0.51 and $1.84, respectively. As of June 30, 2019, there was $1.7 million of unrecognized compensation expense related to stock options granted under the 2011 Equity Incentive Plan (the "2011 Plan"), which is expected to be recognized over a weighted-average period of 2.7 years.
The following table summarizes information related to restricted stock units and performance-based restricted stock units:
 
Units
 
Weighted-Average Grant Date Fair Value
 
(in thousands)
 
 
Non-vested as of December 31, 2018
5,669

 
$
3.29

Granted
325

 
$
1.03

Vested(1)
(1,195
)
 
$
3.78

Forfeited
(995
)
 
$
3.79

Non-vested as of June 30, 2019
3,804

 
$
2.81


(1) 1,175 thousand shares of common stock were issued for restricted stock units vested and the remaining 20 thousand shares were withheld for taxes.
As of June 30, 2019, there was $8.6 million of unrecognized compensation expense related to non-vested restricted stock units and performance-based restricted stock units granted under the 2011 Plan, which is expected to be recognized over a weighted-average period of 2.4 years.
Potential shares of common stock that are not included in the determination of diluted net loss per share because they are anti-dilutive for the periods presented consist of stock options, unvested restricted stock and shares to be purchased under our 2011 Employee Stock Purchase Plan. The Company excluded from diluted earnings per share the weighted-average common share equivalents related to 7.6 million and 5.1 million shares for the three months ended June 30, 2019 and 2018, respectively, and 8.9 million and 5.7 million shares for the six months ended June 30, 2019 and 2018, respectively, because their effect would have been anti-dilutive.
Note 10Income Taxes
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The Company computes its quarterly income tax provision by using a forecasted annual effective tax rate and adjusts for any discrete items arising during the quarter. The primary difference between the effective tax rate and the federal statutory tax rate relates to the valuation allowances on the Company’s net operating losses and foreign tax rate differences. The "Provision for income tax expense" in the Consolidated Statements of Operations primarily consist of income and withholding taxes for foreign and state jurisdictions where the Company has profitable operations, as well as valuation allowance adjustments for certain U.S. tax jurisdictions. No tax benefit was provided for losses incurred in the U.S., Ireland and Singapore because those losses are offset by a full valuation allowance. The tax years 2011 through 2019 generally remain subject to examination by federal, state and foreign tax authorities.
The gross amount of the Company’s unrecognized tax benefits was $1.0 million and $0.9 million as of June 30, 2019 and December 31, 2018, respectively, 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 three and six months ended June 30, 2019 and 2018, interest and penalties recognized were insignificant.

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Table of Contents


Note 11Restructuring and Other Related Costs
The Company has undergone restructuring efforts to better align its cost structure with business and market conditions. These restructuring efforts included severance and other employee costs, lease and other contract termination costs and asset impairments. Severance and other employee costs include severance payments, related employee benefits, stock-based compensation related to the accelerated vesting of certain equity awards and employee-related legal fees. Lease and other contract termination costs include charges related to lease consolidation and abandonment of spaces no longer utilized and the cancellation of certain contracts with outside vendors. Asset impairments include charges related to leasehold improvements and furniture in spaces vacated or no longer in use. The restructuring plans and future cash outlays are recorded in "Accrued expenses", "Accrued compensation and benefits" and "Other long-term liabilities" in our Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018.
In February 2019, the Company announced a restructuring effort to better align its cost structure with current business and market conditions, resulting in a headcount reduction. The Company recognized charges related to this restructuring effort of $0.1 million and $1.2 million for the three and six months ended June 30, 2019, respectively, and expects to incur additional costs through September 2019.
The following table presents a reconciliation of the beginning and ending fair value liability balance related to the February 2019 restructuring effort:
 
Severance and Other Employee Costs
 
(in thousands)
Balance as of January 1, 2019
$

Restructuring and other related costs
1,167

Cash paid
(1,117
)
Balance as of June 30, 2019
$
50


In May 2017, the Company announced a restructuring effort to better align its cost structure with current business and market conditions, including a headcount reduction and the reduction of office space in four locations. The Company recognized charges related to this restructuring effort of $0.04 million for the three and six months ended June 30, 2019 and $0.2 million for the three and six months ended June 30, 2018. The Company does not expect to incur additional restructuring charges related to the May 2017 restructuring as of June 30, 2019.
The following table presents a reconciliation of the beginning and ending fair value liability balance related to the May 2017 restructuring effort:
 
Severance and Other Employee Costs
 
Lease and Other Contract Termination Costs
 
Asset Impairments
 
Total
 
 
 
 
 
 
 
 
 
(in thousands)