ServiceSource International, Inc. (together with its subsidiaries, the “Company”) is a global leader in outsourced, performance-based customer success and revenue growth solutions. Through the Company’sour people, processes and technology, the Company finds, converts, growswe grow and retainsretain revenue on behalf of its clients—our clients — some of the world’s leading business-to-business companies—companies — in more than 3545 languages. The Company’sOur solutions help itsour clients strengthen their customer relationships, drive improved customer adoption, expansion and retention and minimize churn. The Company’sOur technology platform and best-practice business processes combined with itsour highly-trained, client-focused revenue delivery professionals and data from over 15nearly 20 years of operating experience enable the Companyus to provide itsour clients greater value for itsour customer success services than attained by its clients’our clients' in-house customer success teams.

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, as well as through supporting select existing clients with the Company’s Renew OnDemand application.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.

The accompanying unaudited interim condensed consolidated financial statements (“condensed consolidated financial statements”) include the accounts of ServiceSource International, Inc. and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statementsConsolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. Also, the results for the interim periods are

In May 2014,February 2016, the Financial Accounting Standard Board (“FASB”("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. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018 and will be applied using a modified retrospective approach with optional practical expedients. Early adoption of the standard is permitted. The Company will adopt the standard January 1, 2019 and expects to elect 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. Based on current analysis, the adoption of the standard will have a material impact on our Consolidated Balance Sheets and will not have a material impact to our Consolidated Statements of Operations.

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, permitsthe 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.

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 methodsdistinct 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 adoption: retrospectivelya 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.

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 priortime 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.

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 presented (fullthrough 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.

The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective method), or retrospectively withapproach by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the guidance recognized atopening accumulated deficit balance as of January 1, 2018. As a result, the date of initial application (modified retrospective method, also knowncomparative information throughout these financial statements has not been adjusted and continues to be reported under legacy GAAP as the cumulative catch-up transition method).  ASU 2014-09 is effective fordisclosed in our 2017 annual report on Form 10-K. As described above, the Company changed its accounting policy for interimrevenue recognition and annual periods beginning after December 15, 2017.certain sales commissions. The qualitative and the quantitative impact of adopting ASC 606 is presented below.

The Company continues to assess the impact of the standard, and has not yet determined whether the standard will have a material impact on our consolidated financial statements. However, we currently believe the most significant impact is from the timing of recognition of certain sales commission expenses, which upon adoption will behistorically recognized as costs over a period of time instead of immediately. We are also in the process of assessing the impact of the new standard on certain of our contracts that include performance-based fees. We currently recognize suchall performance based fees in the period when the specific performance criteria have been met; however, underwas achieved. Under ASC 606, in certain circumstances the new standard we would estimateCompany estimates the variable fees and recognize amounts as control of the promised deliverable is transferred to the client for which it is probable that a significant reversal wouldwill not occur.occur and recognizes these estimated variable fees over the estimated contract life. For certain contracts, this could result in acceleratedthe recognition of the performance-based fees. We do not currently expect our recurringfees sooner than under ASC 605.

Prior to the adoption of ASC 606, the Company recognized revenue management fees, based on a fixed percentage of overall sales value associated withfrom professional services at the service contracts, to be significantly impacted by the new standard.

The Company previously recognized a portion of certain sales commissions as sales and marketing expense when it was earned by the FASB issued ASU No. 2016-02 Leases (Topic 842). This standard requires entities that lease assets to recognizeemployee 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 obligations under the credit agreement are secured by substantially all assets of the borrowers and certain bank counterparties, with respect to its common stock. The Company paid $31.4 million for the Note Hedges. The Note Hedges cover approximately 9.25 million sharesof their subsidiaries, including pledges of equity in certain of the Company’s common stock at a strike pricesubsidiaries. The revolver has covenants with which we are in compliance as of $16.21 per share. The Note Hedges will expire uponSeptember 30, 2018.

Debt issuance costs related to line of credit arrangements are presented as an asset regardless of whether there are any outstanding borrowings on the maturityline of credit arrangement. Deferred loan costs include fees and costs incurred to obtain long-term financing. Deferred loan costs on the Notes. The Note Hedges are intended to reduce the potential dilution to the Company’s common stock upon conversionrevolver was approximately $0.2 million as of the Notes and/or offset the cash payment in excess of the principal amount of the NotesSeptember 30, 2018.

During October 2018, the Company is required to make inrepaid the event that$32.0 million outstanding on the market value per share ofrevolver using cash on hand.

The Company received proceedshas capital lease agreements collateralized by the underlying property and equipment that expire through 2021. As of approximately $21.8 million from the sale of the Warrants. If the fair value per share of the Company’s common stock exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on earnings per share, unlessSeptember 30, 2018 and December 31, 2017, the Company elects, subjecthad capital leases totaling $2.6 million and $0.1 million, respectively, reflected in "Accrued expenses and Other long-term liabilities" in the Consolidated Balance Sheets. The accumulated depreciation related to certain conditions,assets under capital lease as of September 30, 2018 and December 31, 2017 was $0.8 million and $0.4 million, respectively.

During 2018, the Company entered into three separate contracts to settlefinance software licenses and IT equipment.

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 sales account representatives and senior sales representativesnon-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; however,and on September 28, 2018, the plaintiffs have not yet filed a motion to certify the state law breach of contract and unjust enrichment claims as a class action. The Company will continue to vigorously defend itself against these claims.seek to conclude this lawsuit in a manner that is in the best interest of the Company and its stockholders. 

OptionThe following table presents total options outstanding, granted, exercised, expired or forfeited, as well as total options exercisable (shares and restricted stock activity under the 2011 Equity Incentive Plan for the nine months ended September 30, 2017 was as follows (sharesaggregate intrinsic value in thousands):

The Company is subject to taxation in the United StatesU.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. IncomeFor the three and nine months ended September 30, 2018, the Company recorded income tax benefit of $0.1 million and expense of $0.3 million, respectively. These amounts primarily consistsconsist 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 United Statesthe U.S., Ireland and Singapore because those losses are offset by a full valuation allowance. The tax years 2010 through 20172018 remain subject to examination by federal, state and foreign tax authorities.

The gross amount of the Company’s unrecognized tax benefits was $0.9 million as of September 30, 20172018 and December 31, 2016,2017, none of which, if recognized, would affect the Company’s effective tax rate.