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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 September 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:
(Title of each class)
(Trading Symbol)
(Name of each exchange on which registered)
Common Stock, $0.0001 Par Value
SREV
The Nasdaq Stock Market LLC
—————————————————
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 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 October 24, 201994,495,042 shares of common stock of ServiceSource International, Inc. were outstanding.



Table of Contents

SERVICESOURCE INTERNATIONAL, INC.
Form 10-Q
For the Fiscal Quarter Ended September 30, 2019
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents



ServiceSource International, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)
 
September 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
23,143

 
$
26,535

Accounts receivable, net
43,792

 
54,284

Prepaid expenses and other
5,217

 
5,653

Total current assets
72,152

 
86,472

 
 
 
 
Property and equipment, net
37,629

 
36,593

Contract acquisition costs
1,778

 
2,660

Right-of-use assets
38,519

 

Goodwill
6,334

 
6,334

Other assets
4,806

 
4,521

Total assets
$
161,218

 
$
136,580

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,557

 
$
2,424

Accrued expenses
3,829

 
3,380

Accrued compensation and benefits
17,089

 
15,509

Operating lease liabilities
8,509

 

Other current liabilities
1,806

 
6,894

Total current liabilities
32,790

 
28,207

 
 
 
 
Operating lease liabilities, net of current portion
35,370

 

Other long-term liabilities
3,287

 
6,540

Total liabilities
71,447

 
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; 94,599 shares issued and 94,478 shares outstanding as of September 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
373,486

 
369,246

Accumulated deficit
(283,574
)
 
(267,383
)
Accumulated other comprehensive income
291

 
402

Total stockholders’ equity
89,771

 
101,833

Total liabilities and stockholders’ equity
$
161,218

 
$
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 September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net revenue
$
53,395

 
$
57,173

 
$
161,264

 
$
176,869

Cost of revenue
37,871

 
39,949

 
115,696

 
124,136

Gross profit
15,524

 
17,224

 
45,568

 
52,733

Operating expenses:
 
 

 
 
 

Sales and marketing
7,499

 
8,622

 
22,934

 
27,112

Research and development
1,165

 
1,395

 
3,702

 
4,691

General and administrative
10,129

 
12,907

 
32,081

 
38,953

Restructuring and other related costs
630

 

 
1,836

 
209

Total operating expenses
19,423

 
22,924

 
60,553

 
70,965

Loss from operations
(3,899
)
 
(5,700
)
 
(14,985
)
 
(18,232
)
Interest and other expense, net
(419
)
 
(1,058
)
 
(967
)
 
(6,680
)
Impairment loss on investment securities

 

 

 
(1,958
)
Loss before income taxes
(4,318
)
 
(6,758
)
 
(15,952
)
 
(26,870
)
Provision for income tax (expense) benefit
(119
)
 
133

 
(239
)
 
(294
)
Net loss
$
(4,437
)
 
$
(6,625
)
 
$
(16,191
)
 
$
(27,164
)
Net loss per common share
 
 
 
 
 
 
 
Basic and diluted
$
(0.05
)
 
$
(0.07
)
 
$
(0.17
)
 
$
(0.30
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
94,228

 
92,113

 
93,637

 
91,271















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 September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(4,437
)
 
$
(6,625
)
 
$
(16,191
)
 
$
(27,164
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Available for sale securities:
 
 
 
 
 
 
 
Unrealized loss on short-term investments

 
(5
)
 

 
(705
)
Reclassification adjustment for impairment loss included in net loss

 

 

 
1,958

Net change in available for sale debt securities

 
(5
)
 

 
1,253

Foreign currency translation adjustments
73

 
(112
)
 
(111
)
 
(48
)
Other comprehensive income (loss)
73

 
(117
)
 
(111
)
 
1,205

Comprehensive loss
$
(4,364
)
 
$
(6,742
)
 
$
(16,302
)
 
$
(25,959
)
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

Net loss

 

 

 

 

 
(4,437
)
 

 
(4,437
)
Other comprehensive income

 

 

 

 

 

 
73

 
73

Stock-based compensation

 

 

 

 
1,203

 

 

 
1,203

Issuance of common stock, restricted stock units
265

 

 

 

 

 

 

 

Proceeds from the exercise of stock options and employee stock purchase plan
124

 

 

 

 
82

 

 

 
82

Balance at September 30, 2019
94,599

 
$
9

 
(121
)
 
$
(441
)
 
$
373,486

 
$
(283,574
)
 
$
291

 
$
89,771



6

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 (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

Net loss

 

 

 

 

 
(6,625
)
 

 
(6,625
)
Other comprehensive loss

 

 

 

 

 

 
(117
)
 
(117
)
Stock-based compensation

 

 

 

 
2,540

 

 

 
2,540

Issuance of common stock, restricted stock units
790

 
1

 

 

 

 

 

 
1

Proceeds from the exercise of stock options and employee stock purchase plan
123

 

 

 

 
312

 

 

 
312

Net cash paid for payroll taxes on restricted stock unit releases

 

 

 

 
(349
)
 

 

 
(349
)
Balance at September 30, 2018
92,735

 
$
9

 
(121
)
 
$
(441
)
 
$
368,628

 
$
(269,662
)
 
$
607

 
$
99,141










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

7

Table of Contents

ServiceSource International, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
 
For the Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(16,191
)
 
$
(27,164
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
10,158

 
13,398

Amortization of debt discount and issuance costs
56

 
5,843

Amortization of contract acquisition costs
1,239

 
1,361

Amortization of premium on short-term investments

 
(1,204
)
Amortization of right-of-use assets
7,222

 

Stock-based compensation
3,985

 
9,033

Restructuring and other related costs
1,785

 
470

Impairment loss on investment securities

 
1,958

Other
(256
)
 
74

Net changes in operating assets and liabilities
 
 
 
Accounts receivable, net
10,238

 
7,322

Prepaid expenses and other assets
507

 
180

Contract acquisition costs
(362
)
 
(955
)
Accounts payable
(365
)
 
(2,204
)
Accrued compensation and benefits
(1
)
 
(2,037
)
Operating lease liabilities
(6,949
)
 

Accrued expenses
316

 
(5,146
)
Other liabilities
(4,144
)
 
4,356

Net cash provided by operating activities
7,238

 
5,285

Cash flows from investing activities:
 
 
 
Acquisition of property and equipment
(9,243
)
 
(12,484
)
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
(9,243
)
 
125,196

Cash flows from financing activities:
 
 
 
Repayment on finance lease obligations
(666
)
 
(278
)
Repayment of convertible notes

 
(150,000
)
Debt issuance costs

 
(192
)
Proceeds from revolving line of credit

 
32,000

Proceeds from issuance of common stock
223

 
759

Payments related to minimum tax withholdings on restricted stock unit releases
(19
)
 
(766
)
Net cash used in financing activities
(462
)
 
(118,477
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
125

 
134

Net change in cash and cash equivalents and restricted cash
(2,342
)
 
12,138

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

 
52,633

Cash and cash equivalents and restricted cash, end of period
$
25,437

 
$
64,771

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
203

 
$
2,341

Supplemental disclosures of non-cash activities:
 
 
 
Acquisition of property and equipment accrued in accounts payable and accrued expenses
$
1

 
$
260

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.

8

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.

9

Table of Contents

Reclassifications
Certain items on the Consolidated Statements of Cash Flows for the nine months ended September 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 nine months ended September 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 accounts receivables and contract assets. 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 requires 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 2018-15, cloud computing implementation costs, 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.

10

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 nine months ended September 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 nine months ended September 30, 2018.
The Company recognized realized gains from the sale of available-for-sale securities of $0.03 million and losses of $0.2 million from the sale of available-for-sale securities for the nine months ended September 30, 2018. No realized gains or losses were recognized for the three months ended September 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 September 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:
 
September 30, 2019
 
December 31, 2018
 
 
 
 
 
(in thousands)
Finance lease obligations
$
962

 
$
954

Contract liability
336

 
873

Other liabilities
238

 
198

Legal reserve
192

 
3,750

Employee stock purchase plan withholdings
78

 
384

Deferred rent

 
735

Total
$
1,806

 
$
6,894



11

Table of Contents

Other long-term liabilities were comprised of the following:
 
September 30, 2019
 
December 31, 2018
 
 
 
 
 
(in thousands)
Asset retirement obligations
$
1,393

 
$
1,368

Finance lease obligations
893

 
1,510

Accrued restructuring costs
532

 
716

Deferred tax liability
348

 
268

Other accrued costs
121

 
105

Deferred rent

 
2,573

Total
$
3,287

 
$
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 September 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 September 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 September 30, 2019 and December 31, 2018, respectively. The amortization of all premiums and discounts related to the convertible notes that matured August 2018 was $0.8 million and $5.3 million for the three and nine months ended September 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 $1.1 million for the three months ended September 30, 2019 and 2018, respectively, and $0.1 million and $7.1 million for the nine months ended September 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 one 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 July 2019, the Company entered into a sublease with a third-party for its San Francisco office space leased during 2018 through the remaining term of the lease, November 30, 2023. In January 2018, the Company entered into a sublease with a third-party for its San Francisco office space leased during 2015 through the remaining term of the lease, 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 nine months ended September 30, 2018 was $3.1 million and $8.9 million, respectively. Sublease income for the three and nine months ended September 30, 2018 was $0.5 million and $1.1 million, respectively.

12

Table of Contents

Supplemental income statement information related to leases was as follows:
 
For the Three Months Ended September 30, 2019
 
For the Nine Months Ended September 30, 2019
 
 
 
 
 
(in thousands)
Operating lease cost
$
2,897

 
$
8,894

 
 
 
 
Finance lease cost:
 
 
 
Amortization of leased assets
164

 
486

Interest on lease liabilities
41

 
127

Total finance lease cost
205

 
613

 
 
 
 
Sublease income
(602
)
 
(1,538
)
Net lease cost
$
2,500

 
$
7,969


Supplemental balance sheet information related to leases was as follows:
 
September 30, 2019
 
(in thousands)
Operating leases:
 
Right-of-use assets
$
38,519

 
 
Operating lease liabilities
$
8,509

Operating lease liabilities, net of current portion
35,370

Total operating lease liabilities
$
43,879

 
 
Finance leases:
 
Property and equipment
$
3,443

Accumulated depreciation
(1,581
)
Property and equipment, net
$
1,862

 
 
Other current liabilities
$
962

Other long-term liabilities
893

Total finance lease liabilities
$
1,855


Lease term and discount rate information related to leases was as follows:
 
September 30, 2019
Weighted-average remaining lease term (in years):
 
Operating lease
5.9

Finance lease
2.0

Weighted-average discount rate:
 
Operating lease
6.5
%
Finance lease
8.1
%



13

Table of Contents

Maturities of lease liabilities were as follows as of September 30, 2019:
 
Operating Leases
 
Operating Sublease
 
Finance Leases
 
 
 
 
 
 
 
(in thousands)
Remainder of 2019
$
2,249

 
$
(624
)
 
$
268

2020
12,009

 
(2,554
)
 
1,040

2021
11,900

 
(2,631
)
 
633

2022
8,467

 
(2,538
)
 
64

2023
3,532

 
(623
)
 

Thereafter
16,029

 

 

Total lease payments
54,186

 
(8,970
)
 
2,005

Less: interest
(9,426
)
 

 
(150
)
Less: tenant improvements reimbursement
(881
)
 

 

Total
$
43,879

 
$
(8,970
)
 
$
1,855


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 September 30, 2019 and December 31, 2018, the Company accrued a $0.2 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. A settlement of all claims was reached. The Company anticipates settlement payments will be completed by the end of 2019.
Non-cancelable Service Contract Commitments
Future minimum payments under non-cancelable service contract commitments were as follows:
 
September 30, 2019
 
(in thousands)
Remainder of 2019
$
1,327

2020
9,467

2021
8,362

2022
7,650

2023
8,237

Thereafter

Total
$
35,043



Note 8Revenues, Contract Asset and Liability Balances and Contract Acquisition Costs
The following tables present the disaggregation of revenue from contracts with our clients:

14

Table of Contents

Revenue by Performance Obligation
 
 For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(in thousands)
Professional services
$
732

 
$
652

 
$
1,557

 
$
3,351

Selling services
52,663

 
56,521

 
159,707

 
173,518

Total revenue
$
53,395

 
$
57,173

 
$
161,264

 
$
176,869

Revenue by Geography
 
 For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(in thousands)
APJ
$
8,324

 
$
9,093

 
$
26,343

 
$
25,943

EMEA
12,918

 
13,822

 
39,972

 
44,013

NALA
32,153

 
34,258

 
94,949

 
106,913

Total revenue
$
53,395

 
$
57,173

 
$
161,264

 
$
176,869

Revenue by Contract Pricing
 
 For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(in thousands)
Fixed consideration
$
15,818

 
$
19,668

 
$
54,375

 
$
58,093

Variable consideration
37,577

 
37,505

 
106,889

 
118,776

Total revenue
$
53,395

 
$
57,173

 
$
161,264

 
$
176,869


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 September 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 $0.3 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.
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 $56.0 million in future selling services fixed consideration as of September 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 September 30, 2019, we estimate $1.0 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: $0.1 million remaining in 2019, $0.6 million in 2020 and $0.3 million in 2021 and beyond. The Company recorded $0.3 million and $0.8 million, respectively, in amortization expense for the three and nine months ended September 30, 2019 and $0.3 million and $1.2 million, respectively, of amortization for the three and nine months ended September 30, 2018 related to amounts capitalized upon the adoption of ASC 606.

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Table of Contents

Subsequent to the adoption of ASC 606, the Company capitalized an additional $0.3 million and $1.1 million as of September 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 $0.1 million and $0.5 million, respectively, for the three and nine months ended September 30, 2019 and $0.1 million for the three and nine months ended September 30, 2018 related to the amounts capitalized. As of September 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 nine months ended September 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 September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(in thousands)
Cost of revenue
$
126

 
$
194

 
$
414

 
$
752

Sales and marketing
518

 
717