ServiceSource International
Annual Report 2015

Plain-text annual report

SERVICESOURCE INTERNATIONAL, INC. FORM 10-K (Annual Report) Filed 03/08/16 for the Period Ending 12/31/15 Address Telephone CIK Symbol SIC Code 760 MARKET STREET, 4TH FLOOR SAN FRANCISCO, CA 94102 4159016030 0001310114 SREV 7389 - Business Services, Not Elsewhere Classified Industry Computer Services Sector Fiscal Year Technology 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-KýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2015or¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number 001-35108 SERVICESOURCE INTERNATIONAL, INC.(Exact name of registrant as specified in its charter)Delaware No. 81-0578975(State or Other Jurisdiction ofIncorporation or Organization) (I.R.S. EmployerIdentification No.) 760 Market Street, 4th FloorSan Francisco, California 94102(Address of Principal Executive Offices) (Zip Code)Registrant’s telephone number, including area code: (415) 901-6030Securities registered pursuant to Section 12(b) Name of each exchange on which registeredCommon Stock, $0.0001 Par Value The NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ýIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ýIndicate 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 1934 duringthe 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 thepast 90 days. Yes ý No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes ý No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§29.405 of this chapter) is not contained herein, and will notbe contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinition of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ¨ Accelerated filer ý Non-accelerated filer ¨ Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ýThe aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price atwhich the common stock was sold on June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, as reported on TheNASDAQ Global Market, was $332,004,954 . Shares of common stock held by each executive officer, director and holder of 5% or more of the outstandingcommon stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status does not reflect a determination thatsuch persons are affiliates of the registrant for any other purpose.As of February 26, 2016, there were approximately 86,188,899 shares of the registrant’s common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive Proxy Statement for its 2016 Annual Meeting of Stockholders are incorporated by reference in Part III of this AnnualReport on Form 10-K. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year towhich this report relates. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to befiled as part of this Form 10-K.Table of ContentsTABLE OF CONTENTS Page PART I Item 1.Business1Item 1A.Risk Factors7Item 1B.Unresolved Staff Comments26Item 2.Properties26Item 3.Legal Proceedings27Item 4.Mine Safety Disclosures27 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities28Item 6.Selected Financial Data31Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations33Item 7A.Quantitative and Qualitative Disclosures About Market Risk53Item 8.Financial Statements and Supplementary Data55Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure89Item 9A.Controls and Procedures89Item 9B.Other Information89 PART III Item 10.Directors, Executive Officers and Corporate Governance90Item 11.Executive Compensation90Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters90Item 13.Certain Relationships and Related Transactions, and Director Independence90Item 14.Principal Accounting Fees and Services90 PART IV Item 15.Exhibits and Financial Statement Schedules91Signatures92 iiTable of ContentsSPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS AND INDUSTRY DATAThis Annual Report on Form 10-K contains “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could causeour results to differ materially from those expressed or implied by such forward-looking statements. These forward looking statements include, but are not limitedto, statements related to changes in market conditions that impact our ability to generate service revenue on behalf of our clients; errors in estimates as to theservice revenue we can generate for our clients; our ability to attract new clients and retain existing clients; risks associated with material defects or errors in oursoftware or the effect of data security breaches; our ability to adapt our solution to changes in the market or new competition; our ability to improve our clients’renewal rates, margins and profitability; our Opportunity Under Management; our ability to increase our revenue and contribution margin over time from newand existing clients, including as a result of sales of our next generation technology platform, Renew OnDemand, on a stand-alone subscription basis; our abilityto implement Renew OnDemand, ServiceSource Revenue Analytics, ServiceSource Customer Success or our other SaaS offerings; our strategy with respect to ourbusiness services and SaaS businesses, cloud technologies and managed services and cost allocation and management efforts; the potential effect of mergers andacquisitions on our client base; business strategies and new sales initiatives; technology development; protection of our intellectual property; investment andfinancing plans; liquidity, our leverage consisting of convertible notes and related matters concerning our note hedges and warrants; our stock repurchaseprogram; our competitive position; the effects of competition; industry environment; potential growth opportunities; our expected benefits from the acquisition ofScout Analytics; and our expected benefits from international expansion. Forward-looking statements are also often identified by the use of words such as, but notlimited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,”“would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of ourmanagement based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other importantfactors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-lookingstatements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section ofthis Annual Report on Form 10-K titled “Risk Factors.” Furthermore, such forward-looking statements speak only as of the date of this report. Except as requiredby law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarilysubject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this Annual Report onForm 10-K. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us. Giventhese uncertainties, you should not place undue reliance on these forward looking statements. You should read this Annual Report on Form 10-K and thedocuments that we have filed as exhibits hereto, completely and with the understanding that our actual future results may be materially different from what weexpect.As used herein, “ServiceSource” the “Company,” “we,” “our,” and similar terms include ServiceSource International, Inc. and its subsidiaries, unless thecontext indicates otherwise.PART IITEM 1.BUSINESSOverviewServiceSource International, Inc. (NASDAQ: SREV) is the global leader in customer and revenue lifecycle solutions that power enterprise revenuerelationships. Based on the science of Revenue Lifecycle Management (RLM), ServiceSource provides some of the world’s leading business to business (B2B)companies with expert, technology-enabled services and solutions that are proven to grow and retain revenue from existing customers, directly or through achannel. With a holistic approach to managing the entire revenue lifecycle (which includes onboarding, client success, quoting, up-sell, cross-sell, warrantyservices and renewals), ServiceSource solutions help companies drive improved customer adoption, expansion and retention for our B2B clients.Our solutions are comprised of a unique and precise mix of managed services, a purpose-built RLM technology platform, and best-practice processesdeveloped over more than 15 years of exclusive focus on revenue retention, revenue growth, and client success. With the experience of nearly $8.4 billion inrecurring revenue sold in 2015 and global1Table of Contentsdeployments across 40 languages and 150 countries, ServiceSource solutions can uniquely leverage industry and company data, leading-edge technology and best-practices drawn from our significant and in-depth database of renewal benchmarks. By integrating managed services, cloud software and data, we provide ourclients with insights into their end customers’ businesses, end-to-end management and optimization of end customer onboarding, adoption, subscription, assetmanagement, and service contract renewal processes whether managed by us directly or through our client’s channel partners.Our managed services business leverages either a pay-for-performance or a flat-rate model whereby our clients pay us a commission based on renewal salesthat we generate on their behalf. Our cloud software technologies are an integral component to our unique RLM technology platform and may be managed byServiceSource or provided directly to the client. Such cloud technologies include: ServiceSource Revenue Analytics, Renew OnDemand and the ServiceSourceCustomer Success application, all of which automate and provide data driven insights into these highly valuable but typically manual business processes. Thisblend of technology capabilities, managed services and best-practice process can drive higher subscription, maintenance and support revenue while improving endcustomer retention and increasing business predictability.In 2015 we managed approximately $9.9 billion of Opportunity Under Management for our clients. Opportunity Under Management is a non-GAAP metricthat represents our estimate of the value of all end customer service contracts that we had the opportunity to sell on behalf of our clients over a designated period oftime. In addition, we processed more than $4.0 billion of contract value through our cloud technologies in 2015 for which we received fees. As of December 31,2015 , we managed approximately 154 engagements across 78 clients. Also in 2015 we sold $8.4 billion of recurring revenue on behalf of our clients, which werefer to as bookings and is a non-GAAP metric. Our total revenue was $252.2 million , $272.2 million and $272.5 million for the years ended December 31, 2015 ,2014 and 2013 , respectively. For summarized financial information by geographic area, see Note 15 of the Notes to Consolidated Financial Statements.The scalability of our solution enables us to sell in over 40 languages from six centers around the globe. Our solution is designed to optimize recurringrevenue across different revenue models, distribution models, and segments, including hardware, software, Software-as-a-Service (SaaS), industrial systems,information and media, as well as technology-enabled health care and life sciences.We were formed in Delaware as a limited liability company in 2002 and converted to a Delaware corporation on March 24, 2011. Additional informationabout us is available on our website at http://www.servicesource.com. The information on our website is not incorporated herein by reference and is not a part ofthis Form 10-K. We make available free of charge on our corporate website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and CurrentReports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon asreasonably practicable after those reports are electronically filed with, or furnished to, the SEC. From time to time, we may use our website as a channel ofdistribution of material Company information. Financial and other material information regarding our business is routinely posted on and accessible athttp://ir.servicesource.com.Our Solutions Our solutions are based on more than 15 years of experience pioneering solutions in the Revenue Lifecycle category and are offered via managed services aswell as the cloud. We believe this dual approach is critical to addressing the unique requirements of effective recurring revenue management and customer success. Our suite of managed services includes customer success, onboarding, activation, enablement and selling services, in which dedicated service teams withspecific expertise in our clients’ businesses are deployed under our clients’ brands and follow a sales process tailored specifically to improve end customerretention and increase service contract renewals.The components of our cloud solution consist of a suite of managed services and cloud technologies, and include ServiceSource Revenue Analytics, RenewOnDemand and ServiceSource Customer Success. The ServiceSource Customer Success application, which was introduced in October 2014, leverages thecapabilities of our ServiceSource Revenue Analytics platform. Our cloud technologies increase the visibility and control of recurring revenue streams and customersuccess data, and are utilized by clients, their channel partners, end customers and our service sales teams.2Table of ContentsManaged Services OfferingsServiceSource leverages deep experience, analytical expertise, high-performance sales teams and unique technology to drive customer success and renewalsthrough our managed services. With our dedicated sales or channel sales teams, who are highly trained in selling the value of renewable products and services, ourclients consistently see improved end customer adoption and retention, higher cross-sell and upsell, lower churn rates and, ultimately, greater recurring revenue.Our managed services leverages our knowledge base across the following critical business processes:•Service Performance Analysis . During the Service Performance Analysis (SPA) process, we conduct interviews with our prospective clients, analyzetheir historical performance and future opportunity, and evaluate their recurring revenue business using a number of metrics. We also use our breadth ofexperience to benchmark and identify service renewal opportunities, and to calculate our ability to improve our clients' performance based on ourperformance with similar types of businesses and revenue streams.•Business Case, Pricing and Contract Structuring . We utilize our reservoir of data and benchmarks to estimate the critical components of the businesscase and appropriate pricing model for prospective clients. This intelligence is fundamental to our pay-for-performance business model.•Recurring Revenue Performance . Once a partnership is in place with one of our clients, we leverage our data warehouse to enable, measure, analyze,benchmark and optimize the performance of our service sales teams.•Client Benchmarking and Continuous Improvement . Our extensive platform and the accumulation of more than 15 years of experience serve as thefoundation for benchmarking our clients’ evolving recurring revenue and end customer success performance against industry peers and previous periodperformance. We generally conduct quarterly business review meetings and annual partnership reviews with our clients to review performance, identifypotential weaknesses in their processes and determine opportunities for improvement, and make recommendations that we believe will allow our clientsand us to achieve higher levels of performance and efficiencies.•Developing and Delivering Applications . Our data warehouse fuels the opportunity data, sales methodologies, metrics, and reporting dashboards that weengineer into our applications. Accordingly, we design our applications to leverage the transactional, analytical and industry data housed in our platform.For our selling services, we employ service sales personnel that interact directly with end customers to sell service renewals or provide other customersuccess services that deepen our client's relationship with their end customer. They also provide active sales enablement, support and management of channelpartners. Our service sales teams act as an extension of our clients’ brands.We have developed a set of service delivery best-practices that includes role specialization for selling, enablement, and data service. We believe that rolespecialization is a key component in driving higher recurring revenue rates. We offer a package of managed services for each of these specialized roles, and ourclients can choose to purchase individual solutions or a full pay-for-performance solution. They include renewal selling services, up-sell and cross-sell services,enablement and quoting services, warranty services, customer success services and onboarding services.Cloud TechnologiesWe provide a suite of cloud technologies uniquely designed to help companies drive revenue growth and customer success from their existing end customersthroughout the Revenue Lifecycle. Our cloud technologies are purpose-built to address the challenges of B2B customer success, account management, andrecurring revenue renewals. Our technologies include:ServiceSource Revenue AnalyticsServiceSource Revenue Analytics is a Revenue Lifecycle management platform that helps subscription based businesses execute cost-effective processesacross onboarding and adoption, up-sell and cross-sell, retention and renewals throughout the entire Revenue Lifecycle. ServiceSource RevenueAnalytics, correlates product usage, billing and customer revenue management (CRM) data with success plans to proactively trigger intelligent workflowautomations, and helps companies engage the right end customer with the right play at the right time.3Table of ContentsRenew OnDemandRenew OnDemand is a cloud application that helps clients increase recurring revenue and profitability, improve retention and gain unique businessinsights. Renew OnDemand provides clients with a unified view of their data from diverse sources and leverages a data warehouse of transactional,analytical, and industry information to offer a comparative view of our clients' results against their industry peers.ServiceSource Customer SuccessServiceSource Customer Success is a best-practices driven customer success management solution, powered by account, user and subscription levelpredictive analytics, outcomes based success plans, closed loop reporting and revenue advisory services. The solution enables our client to profile asuccessful end customer journey, deliver actionable insight into end customer health and retention risks, prioritize accounts based on business goals anduser behavior, and recommend next best actions for each end customer at every stage of the customer lifecycle. ServiceSource Customer Success ensuresthat best-practice onboarding, adoption and retention processes are applied.Our cloud technologies are hosted at third party data centers where we employ rigorous technologies, policies and procedures to protect client and endcustomer data.Key benefits of our managed services and cloud solutions include:Financial Benefits•Increased recurring revenue. Our solution is designed to increase recurring revenues for our clients. Each client engagement begins with a SPA, which isan in-depth analysis of current renewal rates. We actively monitor the contract renewal rates we drive on behalf of our clients in each engagement. Whenwe generate higher renewal rates, we not only drive incremental revenue for the associated period, but also have a compounding effect in increasing thebase number of contracts eligible for renewal in subsequent periods, which expands the opportunity to generate greater revenue in future periods.•Improved retention and customer success. Our solutions drive end customer retention and revenue growth for some of the world’s leading companies,leveraging more than 15 years of expertise to continuously monitor end customer health, engage each end customer with the right play at the right timeand reinforce the unique value and benefits of each end customer’s product. The result is reduced end customer churn, increased revenue through up-selland cross-sell, stronger end customer relationships and higher satisfaction.•Increased margin and profitability. We believe that the costs associated with delivering maintenance, support and subscription services by many of ourclients can be relatively fixed, and thus growth of these recurring revenue streams can benefit our clients’ profitability. In addition, clients that deploy oursolution can avoid infrastructure expenditures and personnel costs that would otherwise be associated with managing renewals internally. As a result, eachincremental dollar of recurring revenue generated by our solution can drive greater profitability for our clients.Operational Benefits•Greater business insight and analytics. The analytics engines in our cloud technologies allow us to analyze each client’s renewals and churn rates againstsimilar transactions, identifying areas for improvement and enabling greater insight into their business. All transactions, regardless of outcome, arerecorded in our platform. We leverage this platform to provide benchmarking, end customer metrics, sales efficiency data, and insight into successful andunsuccessful renewal efforts. The breadth of our data allows us to provide powerful analysis across regions, industries, channel partners, and productsegments.•Greater visibility and forecasting tools. Our cloud technologies deliver real-time analytics and visibility into our client’s recurring revenue performance,sales efficiency and forecasts. We measure recurring revenue performance across dozens of key performance indicators and provide real-time data to ourclients through a clear and impactful web-based interface. Chief Financial Officers and other executives rely on our applications to assist in forecastingtheir results and to measure progress against their forecasts on a real-time basis.4Table of Contents•Global consistency. We are able to maintain a globally consistent customer success and revenue growth selling process for our clients. Our global salescenters operate from a unified platform. Our cloud technologies automate the application of best-practices to recurring revenue renewals and customersuccess processes, and provide all relevant constituencies with a consistent view of the data. This automation facilitates contract renewals and providesreliable performance management and analytics.Our StrategyWe intend to continue our industry leadership by delivering solutions to support the challenges faced by our clients in managing their revenue lifecycle. Ourstrategy to execute this vision is: •Expand our client base within existing industry verticals . In the last two years we have expanded our list of target industries. We currently have 78 clientsand believe there are over 900 companies in our addressable market.•Increase footprint with existing clients to drive greater revenue per client . Our goal is to manage a greater portion of each client’s recurring revenue. Wehave increasingly taken on the management of more than just one component of a client’s recurring revenue, such as a specific product, market segmentor geographic region. Because we baseline our clients’ performance prior to any engagement, we are able to quantify our results for the client, whichfrequently leads to increased opportunities to expand our Opportunity Under Management for that client, and ultimately generating greater revenue forourselves.•Continue to expand our suite of cloud technologies. We have developed our cloud technologies to increase our client's sales efficiency and automate tasksassociated with client success and recurring revenue management. By continuing to invest in our cloud technologies, automation processes, and theinnovation of our technology platform, we can uncover new revenue opportunities, lower operating costs, increase the efficiency of our solutions, andenhance our profitability and cash flow.CustomersWe sell our solutions to B2B companies, which we refer to as our clients, within a range of industries such as computer hardware, software, SaaS,telecommunications, healthcare, life sciences, media and industrial systems. In 2015 we managed approximately $9.9 billion of Opportunity Under Managementfor our clients and sold $8.4 billion of recurring revenue on behalf of our clients. In addition, we processed more than $4.0 billion of contract value through ourcloud technologies in 2015 for which we received fees. As of December 31, 2015 , we managed approximately 154 engagements across 78 clients.Our top ten clients accounted for approximately 57% , 51% and 50% of our revenue in 2015 , 2014 and 2013 , respectively. No single client represented 10%or more of our revenues in 2015. One client represented 12% and 14% of our revenue in 2014 and 2013 , respectively.Sales and MarketingWe sell our solutions through our global sales organization. Our sales representatives are organized by geographic regions: North America and Latin America(NALA), Europe, Middle East and Africa (EMEA) and Asia Pacific-Japan (APJ). We deploy quota-carrying sales and solution design professionals to targetspecific regions and industry verticals.We generate client leads, accelerate sales opportunities and build brand awareness through our marketing programs. Our marketing programs target sales,services, customer success, account management, technology and finance executives within the computer hardware, software, SaaS, telecommunications,healthcare, life sciences, media and industrial systems industries. Our marketing teams and programs are organized by geography and industry segment to focus onthe unique needs of clients within the specific target markets.We participate in industry trade shows and host local and regional events around the world to stimulate industry dialog on revenue lifecycle management andto promote our cloud technologies and managed services.We are actively involved in the Service Executive Industry Board (“SEIB”), an independent industry board we founded to share best-practices and addressissues impacting the industry. The board members consist of 24 senior executives, including two of our executives, who manage and grow recurring revenue atleading technology based hardware, software, and health5Table of Contentscare companies. SEIB meets twice a year to establish industry standards and best-practices for benchmarking and measuring the health of global maintenance,support and recurring revenue and customer satisfaction.Research and DevelopmentWe focus our research and development efforts on enhancing our cloud technologies and managed services as well as creating complementary newcapabilities to add to our proprietary solution. Our development strategy is to identify features, business intelligence, applications and other technology elementsthat are, or are expected to be, needed by sales professionals, customer success and account management professionals, clients, channel partners and end customersto optimize recurring revenue performance and customer success. We are also continuing to invest in the development of our cloud technologies to serve ourclients’ needs and enable greater operational efficiencies in our organization. Our research and development expenses were $16.5 million in 2015 , $25.8 million in 2014 and $23.9 million in 2013 . In addition, we capitalized certainexpenditures related to the development and enhancement of internal-use software in 2015 and 2014. We did not capitalize any expenditures in 2013.CompetitionThe market for recurring revenue management is evolving. Historically, technology companies have managed their service renewals through internalpersonnel and relied upon a variety of technologies including spreadsheets, internally developed software and customized versions of traditional businessintelligence tools and end customer relationship management or enterprise resource planning software from vendors such as Oracle Corporation, SAP AG,salesforce.com, inc. and NetSuite, Inc. Some companies have made further investments in this area using firms such as Accenture, Plc. and McKinsey & Company,Inc. for technology consulting and education services focused on service renewals. These internally developed solutions represent the primary alternative to ourintegrated approach of combining software, managed services and data to provide end-to-end optimized recurring revenue performance.We believe the principal competitive factors in our markets include the following:•recurring revenue and customer success industry expertise, best-practices, and benchmarks;•ability to increase recurring revenue and renewal rates;•global capabilities;•completeness of solution;•performance-based pricing of solutions;•ability to effectively represent client brands to end customers and channel partners;•quality of the business and client insight and its ability to generate revenue and customer success;•size of upfront investment; and•size and financial stability of operations.With respect to our cloud technologies, we are seeing competition from companies targeting product usage, renewals and customer success relatedtechnologies. Although we believe we compete or compare favorably with respect to many of these factors and currently have few direct competitors that offerintegrated solutions at our scale, we expect competition and competitive pressure, from both new and existing competitors, to increase in the future.Intellectual PropertyWe rely upon a combination of copyrights, trade secrets and trademarks, in addition to contractual restrictions such as confidentiality agreements, to establishand protect our proprietary rights. We currently have one registered copyright in the United States, nine issued patents in the United States, sixteen pending patentapplications in the United States, one pending international patent application, and eight national phase patent applications pending in four foreign patent offices(two applications in each of Europe, Australia, Canada, and Japan). This summary includes patents obtained from our acquisition of Scout Analytics, Inc. We alsohave registered trademarks for “ServiceSource” in the United States, the European Community, Japan, Singapore and Australia. In addition, we have registeredtrademarks and pending trademark applications for a number of product names in various jurisdictions.Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or obtain and use our technology and/or brand names todevelop products with the same functionality as our solution. Policing unauthorized use of our technology is difficult. The laws of other countries in which wemarket our solutions may offer little or no effective protection of our proprietary technology. Our competitors could also independently develop technologiesequivalent or superior6Table of Contentsto ours, and our intellectual property rights may not be broad enough for us to prevent competitors from selling products incorporating those technologies. Reverseengineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology withoutpaying us for it, which would significantly harm our business.We expect that technology solutions in our industry may be increasingly subject to third-party patent infringement claims as the number of competitors growsand the functionality of products in different industry segments overlaps. Such competitors could make a claim alleging that we infringe one or more of theirpatents, and we do not own any patents, which could be asserted against them. Third parties may currently have, or may eventually be issued, patents upon whichour current solution or future technology infringe. Any of these third parties might make a claim of infringement against us at any time.EmployeesAs of December 31, 2015 , we had 2,745 employees. None of our employees is represented by a labor union with respect to their employment with us.ITEM 1A.Risk FactorsYou should carefully consider the risks and uncertainties described below together with all the other information in this Annual Report on Form 10-K. If anyof the following risks are realized, our business, financial condition, results of operations, cash flows, the trading price of our common stock could be materiallyand adversely affected. The risks described below are not the only risks facing us. Risks and uncertainties not currently known to us or that we currently deem tobe immaterial may also materially affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.Risks Related to Our Business and IndustryOur business and growth depend substantially on clients renewing their agreements with us and expanding their use of our solution for additional availablemarkets. Any decline in our client renewals, termination of ongoing engagements or failure to expand their relationships with us could harm our futureoperating results.In order for us to improve our operating results and grow, it is important that our clients renew their agreements with us when the initial contract term expiresand that we expand our client relationships to add new market opportunities and the related revenue management opportunity. Our clients may elect not to renewtheir contracts with us after their initial terms have expired or may elect to otherwise terminate our services, and we cannot assure you that our clients will renewservice contracts with us at the same or higher level of service, if at all, or provide us with the opportunity to manage additional revenue managementopportunities. Although our renewal rates have been historically higher than those achieved by our clients prior to their using our solution, some clients have stillelected not to renew their agreements with us. Our clients’ renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction ordissatisfaction with our solution and results, our pricing, mergers and acquisitions affecting our clients or their end customers, the effects of economic conditions orreductions in our clients’ or their end customers’ spending levels. If our clients do not renew their agreements with us, renew on less favorable terms, terminatetheir services with us or fail to contract with us for additional Opportunity Under Management, our revenue may decline and our operating results may beadversely affected.Our revenue will decline if there is a decrease in the overall demand for our clients’ products and services for which we provide service revenue management.Our revenue is based on a pay-for-performance model under which we are paid a commission based on the service contracts we sell on behalf of our clients.If a particular client’s products or services fail to appeal to its end customers, our revenue will decline for our work with that client. In addition, if end customerdemand decreases for other reasons, such as negative news regarding our clients or their products, unfavorable economic conditions, shifts in strategy by ourclients away from promoting the service contracts we sell in favor of selling their other products or services to their end customers, or if end customers experiencefinancial constraints and terminate or fail to renew the service contracts we sell, we may experience a decrease in our revenue as the demand for our clients’ servicecontracts declines. Similarly, if our clients come under economic pressure, they may be more likely to terminate their contracts with us and/or seek to restructurethose contracts, and for clients whose contracts are up for renewal, they may seek to renew those contracts on less favorable terms. We have experienced a declinein our Opportunity Under Management from our managed services clients in 2015 as compared to 2014 and in 2014 as compared to 2013. We expect that theOpportunity Under Management reduction in 2014 and 2015 will continue to impact our results into 2016. If we continue to experience such a decline inOpportunity Under Management, our revenue and results ofoperations will be adversely affected.7Table of ContentsIf booking rates fall short of our estimates, our client relationships will be at risk, our revenue will suffer and our ability to grow and achieve broader marketacceptance of our solution could be harmed.Given our pay-for-performance pricing model, our revenue is directly tied to booking rates. Booking rates represent the percentage of the actual OpportunityUnder Management delivered that we renew on behalf of our clients. If the booking rate for a particular client is lower than anticipated, then our revenue for thatclient will also be lower than projected. If booking rates fall short of expectations across a broad range of clients, or if they fall below expectations for aparticularly large client, then the impact on our revenue and our overall business will be significant. In the event booking rates are lower than expected for a givenclient, our margins will suffer because we will have already incurred a certain level of costs in both personnel and infrastructure to support the engagement. Thisrisk is compounded by the fact that many of our client relationships are terminable if we fail to meet certain specified sales targets over a sustained period of time.If actual booking rates fall to a level at which our revenue and client contracts are at risk, then our financial performance will decline and we will be severelycompromised in our ability to retain and attract new clients. Increasing our client base and achieving broader market acceptance of our solution depends, to a largeextent, on how effectively our solution increases service sales. As a result, poor performance with respect to our booking rates, in addition to causing our revenue,margins and earnings to suffer, will likely damage our client relationships and overall reputation, and prevent us from effectively developing and maintainingawareness of our brand or achieving widespread acceptance of our solution, in which case we could fail to grow our business and our revenue, margins andearnings would suffer.The loss of one or more of our key clients could slow our revenue growth or cause our revenue to decline.A substantial portion of our revenue to date has come from a relatively small number of clients. During the twelve months ended December 31, 2015 our topten clients accounted for 57% of our revenue, with two clients each representing over 9% of our revenue during this period. A relatively small number of clientsmay continue to account for a significant portion of our revenue for the foreseeable future. The loss of revenue from any of our significant clients for any reason,including the failure to renew our contracts, termination of some or all of our services, a change of relationship with any of our key clients or their acquisition asdiscussed below, may cause a significant decrease in our revenue.Our restructuring plans may not produce anticipated benefits and may lead to charges that will adversely affect our results of operations.Commencing in the second half of 2014, we implemented restructuring and other cost-reduction plans designed to reduce our overhead and our operatingexpenses. As we experience changes in our strategy, we will continue to determine whether additional restructuring efforts are required. These restructuring effortsmay result in significant restructuring charges that may adversely affect our results of operations for the periods in which such charges occur. Additionally, actualcosts related to such restructuring plans may exceed the amounts that we previously estimated, leading to additional charges as actual costs are incurred. Weincurred restructuring and other charges of $ 3.7 million in the twelve months ended December 31, 2015.We also plan to invest and re-focus our efforts to improve efficiency in our managed services business. These investments and changes will relate totechnology, processes, and people. If such changes do not result in the improvements we expect, we could see a decrease in our performance in certain accounts,lower client satisfaction, and therefore increased client churn.Our quarterly results of operations may fluctuate as a result of numerous factors, many of which may be outside of our control.Our quarterly operating results are likely to fluctuate. Some of the important factors that may cause our revenue, operating results and cash flows to fluctuatefrom quarter to quarter include:•our ability to attract new clients;•our ability to retain existing clients and/or maintain the size of our engagements with those clients;•the renewal rates we achieve early in an engagement and the time it takes to achieve the booking rates expected for the term of the engagement;•our ability to effectively sell and implement our cloud technologies;•fluctuations in the value of end customer contracts delivered to us;•fluctuations in booking rates;•changes in our commission rates;8Table of Contents•seasonality;•loss of clients for any reason including due to acquisition;•the mix of new clients as compared to existing clients;•the length of the sales cycle for our solution, and our level of upfront investments prior to the period we begin generating revenue associated with suchinvestments;•the timing of client payments and payment defaults by clients;•the amount and timing of operating costs and capital expenditures related to the operations of our business, including the development of new products orcloud technologies;•the rate of expansion, productivity and realignment of our direct sales force;•the occurrence of management and employee turnover;•the cost and timing of the introduction of new technologies or new services, including additional investments in our cloud technologies;•general economic conditions;•technical difficulties or interruptions in delivery of our solution;•changes in foreign currency exchange rates;•changes in tax rates;•regulatory compliance costs, including data privacy;•costs associated with acquisitions of companies and technologies;•changes in our stock price and the impact of such changes on our convertible notes and related note hedges and warrants;•the effects of our stock repurchase program;•extraordinary expenses such as litigation or other dispute-related settlement payments; and•the impact of new accounting pronouncements.Many of the above factors are discussed in more detail elsewhere in these Risk Factors. Many of these factors are outside our control, and the variability andunpredictability of such factors could result in our failing to meet our revenue or operating results expectations for a given period. In addition, the occurrence ofone or more of these factors might cause our operating results to vary widely which could lead to negative impacts on our margins, short-term liquidity or ability toretain or attract key personnel, and could cause other unanticipated issues. Accordingly, we believe that quarter-to-quarter comparisons of our revenue, operatingresults and cash flows may not be meaningful and should not be relied upon as an indication of future performance.Our client relationships and overall business will suffer if our cloud technologies do not meet expectations or if we encounter significant problemsimplementing them for our clients.Since 2012, we have offered Renew OnDemand, our next-generation service revenue management platform on a subscription basis. We have expanded intoother cloud technologies such as ServiceSource Revenue Analytics and ServiceSource Customer Success on the salesforce.com platform. Renew OnDemand andour cloud technologies remains relatively new and we have limited experience selling and/or implementing it for clients, as well as limited experience migratingclients from our traditional platform to Renew OnDemand. Given the complexity and significance of this ongoing transition, including as a result of the amount ofclient data within our systems that will need to be accessed and migrated, our client relationships, our reputation, and our overall business could be severelydamaged if our implementations or migrations are poorly executed. In addition, we expect to incur additional expenses as a result of our 2016 plans to run dualtechnology platforms as we move toward broad use and adoption of certain cloud and technologies internally while maintaining our existing technology platform.Similarly our business operations and client relationships will be at high risk if our cloud9Table of Contentstechnologies do not meet our performance expectations or those of our clients. This could harm our business in numerous ways including, without limitation, a lossof revenue and client contracts and damage to our reputation.If we cannot efficiently implement our offering for clients, we may be delayed in generating revenue, fail to generate revenue and/or incur significant costs.In general, our client engagements are complex and may require lengthy and significant work to implement our offerings. Changes in our go-to-market andtechnology strategies also will increase costs and create implementation risks for us. We also have limited experience implementing our current cloud technologiesin general. As a result, we generally incur sales and marketing expenses related to the commissions owed to our sales representatives and make upfront investmentsin technology and personnel to support the engagements one to three months before we begin selling end customer contracts. Each client’s situation may bedifferent, and unanticipated difficulties and delays may arise as a result of our failure, or that of our client, to meet respective implementation responsibilities. If theclient implementation process is not executed successfully or if execution is delayed, we could incur significant costs without yet generating revenue, and ourrelationships with some of our clients may be adversely impacted.The market for our solution is relatively undeveloped and may not grow.The market for recurring revenue management is still relatively undeveloped, has not yet achieved widespread acceptance and may not grow quickly or at all.In addition, we are still promoting market acceptance of our cloud technologies. Our success will depend to a substantial extent on the willingness of companies toengage a third party such as us to manage the sales of their support, maintenance and subscription contracts and subscribe for our cloud technologies. Manycompanies have invested substantial personnel, infrastructure and financial resources in their own internal service revenue organizations or in some cases havebuilt or modified software applications to help manage renewals, and therefore may be reluctant to switch to a solution such as ours. Companies may not engage usfor other reasons, including a desire to maintain control over all aspects of their sales activities and end customer relations, concerns about end customer reaction, abelief that they can sell their support, maintenance and subscription services more cost-effectively using their internal sales organizations, perceptions about theexpenses associated with changing to a new approach and the timing of expenses once they adopt a new approach, general reluctance to adopt any new anddifferent approach to old ways of doing business, or other considerations that may not always be evident. New concerns or considerations may also emerge in thefuture. Particularly because our market is relatively undeveloped, we must address our potential clients’ concerns and explain the benefits of our approach in orderto convince them to change the way that they manage the sales of support, maintenance and subscription contracts. If companies are not sufficiently convinced thatwe can address their concerns and that the benefits of our solution are compelling, then the market for our solution may not develop as we anticipate and ourbusiness will not grow.Delayed or unsuccessful investment in new technology, services and markets may harm our financial results.We plan to invest significant resources in research and development and general and administrative in order to enhance our managed services offerings andSaaS cloud technologies and other new offerings that will appeal to clients and potential clients. We have undertaken the development of our cloud technologies,including enhancements to our applications to offer improved and more scalable revenue management. In addition, we have continued to develop our cloudtechnologies to utilize a salesforce.com based platform for our solutions. The development of new products and services entails a number of risks that couldadversely affect our business and operating results, including:•the risk of diverting the attention of our management and our employees from the day-to-day operations of the business;•insufficient revenue to offset increased expenses associated with research, development, operational and marketing activities; and•write-offs of the value of such technology investments as a result of unsuccessful implementation or otherwise.If our cloud technologies or any of our other new or modified technology do not work as intended, are not responsive to user preferences or industry orregulatory changes, are not appropriately timed with market opportunity, or are not effectively brought to market, we may lose existing and potential clients orrelated revenue opportunities, in which case our results of operations may suffer. The cost of future development of new revenue management offerings ortechnologies also could require us to raise additional debt or equity financing. These actions could be dilutive to our stockholders and negatively impact ourfinancial condition or our results of operations.10Table of ContentsWe have sold subscriptions to our cloud technologies separately from our integrated solution, which may not be successful and could impact revenue from ourexisting solution.We currently derive a portion of our revenue from subscriptions to our cloud technologies for a few clients, and we package and price the applications weoffer on such applications on a subscription model. We may not be able to fully develop a successful market for our subscription applications. In addition, becausewe have limited prior experience selling technology subscriptions on a stand-alone basis, we may encounter technical and execution challenges that undermine thequality of the technology offering or cause us to fall short of client expectations. We also have little experience pricing our technology subscriptions separately,which could result in underpricing that damages our profit margins and financial performance. It is also possible that selling a technology solution separately fromour integrated solution will result in a reduction in sales of our current offerings that we might otherwise have sold. An unsuccessful expansion of our business topromote a stand-alone subscription model for any of the foregoing reasons or otherwise would lead to a diversion of financial and managerial resources from ourexisting business and an inability to generate sufficient revenue to offset our investment costs.The anticipated benefits of our planned integration of separate business units may not materialize, and such integration could adversely affect our businessand therefore may be re-evaluated in the future.Since 2014, we have separately operated our Cloud & Business Intelligence unit and our Managed Services unit, though both units retain the same finance,legal, human resources, and high level executive oversight. The anticipated operating efficiencies and cost savings of separately operating these business units werenot fully realized for a variety of reasons. Because of this, we have taken the initial steps to integrate these two lines of business into one in 2016. The plannedintegration may involve the potential disruption of our operations, diverting management attention from other business operations, failure to obtain anticipatedgrowth rates, a loss of employee morale and productivity, including the effects of employee attrition, and higher than projected costs. If we are unable toeffectively integrate our business units our future growth rates and results of operations may be harmed.Our estimates of Opportunity Under Management and other metrics may prove inaccurate.We use various estimates in formulating our business plans and analyzing our potential and historical performance, including our estimate of OpportunityUnder Management. We base our estimates upon a number of assumptions that are inherently subject to significant business and economic uncertainties andcontingencies, many of which are beyond our control. Our estimates therefore may prove inaccurate.Opportunity Under Management is a non-GAAP metric that represents our estimate, over a designated period of time, of the value of all end customer servicecontracts that we have the opportunity to sell on behalf of our clients. Opportunity Under Management is not a measure of our expected revenue. We estimate thevalue of such end customer contracts based on a combination of factors, including the value of end customer contracts made available to us by clients in pastperiods; the minimum value of end customer contracts that our clients are required to give us the opportunity to sell pursuant to the terms of their contracts with us;periodic internal business reviews of our expectations as to the value of end customer contracts that will be made available to us by clients; the value of endcustomer contracts included in the SPA; and collaborative discussions with our clients assessing their expectations as to the value of service contracts that theymake available to us for sale. While the minimum value of end customer contracts that our clients are required to give us represents a portion of our estimatedOpportunity Under Management, a significant portion of the Opportunity Under Management is estimated based on the other factors described above.When estimating Opportunity Under Management and other similar metrics, we must, to a large degree, rely on the assumptions described above, which mayprove incorrect. These assumptions are inherently subject to significant business and economic uncertainties and contingencies, many of which are beyond ourcontrol. Our estimates therefore may prove inaccurate, causing the actual value of end customer contracts delivered to us in a given period to differ from ourestimate of Opportunity Under Management. These factors include:•the extent to which clients deliver a greater or lesser value of end customer contracts than may be required or otherwise expected;•changes in the pricing or terms of service contracts offered by our clients;•increases or decreases in the end customer base of our clients;•the extent to which the renewal rates we achieve on behalf of a client early in an engagement affect the amount of opportunity that the client makesavailable to us later in the engagement;•client cancellations of their contracts with us due to acquisitions or otherwise; and11Table of Contents•changes in our clients’ businesses, sales organizations, sales processes or priorities, including changes in executive support for our partnership.In addition, Opportunity Under Management reflects our estimates over a designated period of time and should not be used to estimate our historical or futureopportunity for any particular quarter within that period.If our security measures are breached or fail, resulting in unauthorized access to client data, our solution may be perceived as insecure, the attractiveness ofour solution to current or potential clients may be reduced and we may incur significant liabilities.Our solution involves the storage and transmission of the proprietary information and protected data that we receive from our clients. We rely on proprietaryand commercially available systems, software, tools and monitoring, as well as other processes, to provide security for processing, transmission and storage of suchinformation. If our security measures are breached or fail as a result of third-party action, employee negligence, error, malfeasance or otherwise, unauthorizedaccess to client or end customer data may occur. Improper activities by third parties, advances in computer and software capabilities and encryption technology,new tools and discoveries and other events or developments may facilitate or result in a compromise or breach of our computer systems. Techniques used to obtainunauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, and we may be unable to anticipatethese techniques or implement adequate protective measures. Our security measures may not be effective in preventing these types of activities, and the securitymeasures of our third-party data centers and service providers may not be adequate.Our client contracts generally provide that we will indemnify our clients for data privacy breaches. If such a breach occurs, we could face contractualdamages, damages and fees arising from our indemnification obligations, penalties for violation of applicable laws or regulations, possible lawsuits by affectedindividuals and significant remediation costs and efforts to prevent future occurrences. Insurance may not be able to cover these costs in full, in particular if thedamages are large. In addition, whether there is an actual or a perceived breach of our security, the market perception of the effectiveness of our security measurescould be harmed significantly and we could lose current or potential clients.We may be liable to our clients or third parties if we make errors in providing our solution or fail to properly safeguard our clients' confidential information.The solution we offer is complex, and we make errors from time to time. These may include human errors made in the course of managing the sales processfor our clients as we interact with their end customers, or errors arising from our technology solution as it interacts with our clients’ systems and the disparate datacontained on such systems. Errors may also arise from the launch of and migration of our current technologies to the cloud technologies. The costs incurred incorrecting any material errors may be substantial. In addition, as part of our business, we collect, process and analyze confidential information provided by ourclients and prospective clients. Although we take significant steps to safeguard the confidentiality of client information, we could be subject to claims that wedisclosed their information without appropriate authorization or used their information inappropriately. Any claims based on errors or unauthorized disclosure oruse of information could subject us to exposure for damages, significant legal defense costs, adverse publicity and reputational harm, regardless of the merits oreventual outcome of such claims.Changes in the U.S. and foreign legal and regulatory environment that affect our operations, including those relating to privacy, data security and cross-border data flows, could pose a significant risk to us by disrupting our business and increasing our expenses.We are subject to a wide variety of laws and regulations in the United States and the other jurisdictions in which we operate, and changes in the level ofgovernment regulation of our business have the potential to materially alter our business practices with resultant increases in costs and decreases in profitability.Depending on the jurisdiction, those changes may come about through new legislation, the issuance of new regulations or changes in the interpretation of existinglaws and regulations by a court, regulatory body or governmental official. Sometimes those changes have both prospective and retroactive effect, which isparticularly true when a change is made through reinterpretation of laws or regulations that have been in effect for some time.Privacy and data security are rapidly evolving areas of regulation, and additional regulation in those areas, some of it potentially difficult and costly for us toaccommodate, is frequently proposed and occasionally adopted. Laws in many countries and jurisdictions, particularly in the European Union and Canada, governthe requirements related to how we store, transfer or otherwise process the private data provided to us by our clients. In addition, the centralized nature of ourinformation systems at the data and operations centers that we use requires the routine flow of data relating to our clients and their respective end customers acrossnational borders, both with respect to the jurisdictions within which we have operations and the12Table of Contentsjurisdictions in which we provide services to our clients. If this flow of data becomes subject to new or different restrictions, our ability to serve our clients andtheir respective end customers could be seriously impaired for an extended period of time.With regard to data transfers of personal data from our European employees and clients to the United States, we have historically relied on our adherence tothe U.S. Department of Commerce’s Safe Harbor Privacy Principles and compliance with the U.S.-EU and U.S.-Swiss Safe Harbor Frameworks as agreed to andset forth by the U.S. Department of Commerce, and the European Union and Switzerland, which established means for legitimizing the transfer of personal data byU.S. companies doing business in Europe from the European Economic Area, or EEA, to the U.S. As a result of the October 6, 2015 European Union Court ofJustice, or ECJ, opinion in Case C-362/14 (Schrems v. Data Protection Commissioner) (the “ECJ Ruling”), the U.S.-EU Safe Harbor Framework was deemed aninvalid method of compliance with restrictions set forth in EU Directive 95/46/EC (and member states’ implementations thereof) regarding the transfer of personaldata outside of the EEA. In light of the ECJ Ruling, we may be required to engage in efforts to legitimize our transfers of personal data from the EEA to the UnitedStates. On February 2, 2016, European and U.S. authorities announced a political agreement regarding a new framework for transfers of personal data from the EUto the U.S. called the EU-U.S. Privacy Shield. The EU-U.S. Privacy Shield may provide a framework for legitimate transfers of personal data from the EU to theU.S., but the European Commission must take several steps to implement the EU-U.S. Privacy Shield and it is unclear that we will find it appropriate for ourpurposes or be able to utilize it. We may be unsuccessful in establishing legitimate means for us to transfer personal data from the EEA, and/or we may experiencereluctance or refusal by European clients to use our solutions due to potential risk exposure as a result of the ECJ Ruling. We and our clients may face a risk ofenforcement actions taken by EU data protection authorities until the time, if any, that personal data transfers to us and by us from the EEA are legitimized underEU Directive 95/46/EC and applicable member states’ implementations thereof.We also have entered into various model contracts and related contractual provisions to enable these data flows. For any jurisdictions in which thesemeasures are not recognized or otherwise not compliant with the laws of the countries in which we process data, or where more stringent data privacy laws areenacted irrespective of international treaty arrangements or other existing compliance mechanisms, we could face increased compliance expenses and facepenalties for violating such laws or be excluded from those markets altogether, in which case our operations could be materially damaged.If we are unable to compete effectively against current and future competitors, our business and operating results will be harmed.The market for revenue management is evolving. Historically, technology companies have managed their renewals through internal personnel and relied upontechnology ranging from Excel spreadsheets to internally-developed software to customized versions of traditional business intelligence tools and CRM or ERPsoftware from vendors such as Oracle Corporation, SAP AG, salesforce.com, inc. and NetSuite, Inc. Some companies have made further investments in this areausing firms such as Accenture, Plc. and McKinsey & Company, Inc. for technology consulting and education services focused on renewals. These internally-developed solutions represent the primary alternative to our offerings. We also face direct competition from smaller companies that offer specialized revenuemanagement solutions, typically providing technology for use by their end customers’ internal sales personnel. With our acquisition of Scout Analytics in January2014, we also face competition from other SaaS and enterprise software providers and service providers that offer products and services that analyze recurringrevenue management.We believe the principal competitive factors in our markets include the following:•recurring revenue industry expertise, best-practices, and benchmarks;•quality and reliability of software offerings, including convenience and efficacy of cloud-based technologies;•marketing resources and capabilities;•performance-based pricing of solutions;•ability to increase recurring revenue, renewal rates, and booking rates;•global capabilities;•completeness of solution;•ability to effectively represent client brands to end customers and channel partners;•size of upfront investment; and13Table of Contents•size and financial stability of operations.We believe that more competitors will emerge. With respect to our cloud technologies, we are seeing competition from companies targeting product usage,renewals and customer success related offerings. Competitors may have greater name recognition, longer operating histories, well-established relationships withclients in our markets and substantially greater financial, technical, personnel and other resources than we have, and even a potentially broader array of offerings.Potential competitors of any size may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or endcustomer requirements. Even if our solution is more effective than competing solutions, potential clients might choose new entrants unless we can convince themof the advantages of our integrated solution. We expect competition and competitive pressure, from both new and existing competitors, to increase in the future.If there is a widespread shift away from business end customers purchasing maintenance and support service contracts, we could be adversely impacted if weare not able to adapt to new trends or expand our target markets.As a result of our historical concentration in the software and hardware industries, a significant portion of our revenue comes from the sale of maintenanceand support service contracts for the software and hardware products used by our clients’ end customers. Although we also sell other types of renewals, such assubscriptions to software-as-a-service offerings, those sales have to date constituted a relatively small portion of our revenue. The emergence of cloud computingand other alternative technology purchasing models, in which technology services are provided on a remote-access basis, may have a significant impact on the sizeof the market for traditional maintenance and support contracts. If these alternative models continue gaining traction and reduce the size of our traditional market,we will need to continue to adapt our solution to capitalize on these trends or our results of operations will suffer.Supporting our existing and growing client base could strain our personnel resources and infrastructure, and if we cannot scale our operations and increaseproductivity, we may be unsuccessful in implementing our business plan.Anticipated growth in our client base will place a strain on our management, administrative, operational and financial infrastructure. We expect thatadditional investments in sales personnel, information technology, infrastructure and research and development spending will be required to:•further develop and enhance our offerings;•address the needs of our clients;•scale our operations and increase productivity;•develop new technology; and•expand our markets and Opportunity Under Management, including into new industry verticals and geographic areas.Our success will depend in part upon our ability to manage our growth effectively. To do so, we must continue to increase the productivity of our existingemployees and to hire, train and manage new employees as needed. To manage domestic and international growth of our operations and personnel, we will need tocontinue to improve our operational, financial and management controls and our reporting processes and procedures, and implement more extensive and integratedfinancial and business information systems. These additional investments will increase our operating costs, which will make it more difficult for us to offset anyfuture revenue shortfalls by reducing expenses in the short term. Moreover, if we fail to scale our operations successfully and increase productivity, our overallbusiness will be at risk.Consolidation in the technology sector is continuing at a rapid pace, which could harm our business in the event that our clients are acquired and theircontracts are cancelled.Consolidation among technology companies in our target market has been robust in recent years, and this trend poses a risk for us. Acquisitions of our clientscould lead to cancellation of our contracts with those end customers by the acquiring companies and could reduce the number of our existing and potential clients.For example, Oracle has acquired a number of our clients in recent years, including our then-largest client, Sun Microsystems, in January 2010. Oracle elected toterminate our service contracts with each client because Oracle conducted its service revenue management internally. If mergers and acquisitions continue, weexpect that some of the acquiring companies, and Oracle in particular, will terminate, renegotiate and/or elect not to renew our contracts with the companies theyacquire, which would reduce our revenue.14Table of ContentsWe enter into long-term, commission-based contracts with our clients, and our failure to correctly price these contracts may negatively affect our profitability.We enter into long-term contracts with our clients that are priced based on multiple factors determined in large part by the SPA we conduct for our clients.These factors include opportunity size, anticipated booking rates and expected commission rates at various levels of sales performance. Some of these factorsrequire forward-looking assumptions that may prove incorrect. If our assumptions are inaccurate, or if we otherwise fail to correctly price our client contracts,particularly those with lengthy contract terms, then our revenue, profitability and overall business operations may suffer. Further, if we fail to anticipate anyunexpected increase in our cost of providing services, including the costs for employees, office space or technology, we could be exposed to risks associated withcost overruns related to our required performance under our contracts, which could have a negative effect on our margins and earnings.Many of our client contracts allow termination for our failure to meet certain performance conditions.Although most of our client contracts are subject to multi-year terms, these agreements often have termination rights if we fail to meet specified sales targets.During the SPA and contract negotiation phase with a client, we typically negotiate minimum performance levels for the engagement. If we fail to meet ourrequired targets and our clients choose to exercise their termination rights, our revenue could decline. These termination rights may also create instability in ourrevenue forecasts and other forward-looking financial metrics.Our business may be harmed if our clients rely upon our service revenue forecasts in their business and actual results are materially different.The contracts that we enter into with our clients provide for sharing of information with respect to forecasts and plans for the renewal of maintenance, supportand subscription agreements of our clients. Our clients may use such forecasted data for a variety of purposes related to their business. Our forecasts are basedupon the data our clients provide to us, and are inherently subject to significant business, economic and competitive uncertainties, many of which are beyond ourcontrol. In addition, these forecasted expectations are based upon historical trends and data that may not be true in subsequent periods. Any material inaccuraciesrelated to these forecasts could lead to claims on the part of our clients related to the accuracy of the forecasted data we provide to them, or the appropriateness ofour methodology. Any liability that we incur or any harm to our brand that we suffer because of inaccuracies in the forecasted data we provide to our clients couldimpact our ability to retain existing clients and harm our business.Changing global economic conditions and large scale economic shifts may impact our business.Our overall performance depends in part on worldwide economic conditions that impact the technology sector and other technology-enabled industries suchas healthcare, life sciences and industrial systems. For example, the economic downturn typically results in many businesses deferring technology investments,including purchases of new software, hardware and other equipment, and purchases of additional or supplemental maintenance, support and subscription services.To a certain extent, these businesses also slow the rate of renewals of maintenance, support and subscription services for their existing technology base. Any futuredownturn could cause business end customers to stop renewing their existing maintenance, support and subscription agreements or contracting for additionalmaintenance services as they look for ways to further cut expenses, in which case our business could suffer. Various economic uncertainty in the start of 2016,including stock market and commodity pricing volatility, lead to such a downturn that may impact our business.Conversely, a significant upturn in global economic conditions could cause business purchasers to purchase new hardware, software and other technologyproducts, which we generally do not sell, instead of renewing or otherwise purchasing maintenance, support and subscription services for their existing products. Ageneral shift toward new product sales could reduce our near term opportunities for these contracts, which could lead to a decline in our revenue.Our inability to expand our target markets could adversely impact our business and operating results.We derive substantially all of our revenue from clients in certain sectors in the technology and technology-enabled healthcare and life sciences industries, andan important part of our strategy is to expand our existing client base and win new clients in these industries. In addition, because of the service revenueopportunities that we believe exist beyond these industries, we intend to target new clients in additional industry vertical markets, such as heavy machinery andmanufacturing. In connection with the expansion of our target markets, we may not have familiarity with such additional industry verticals, and our execution ofsuch expansion could face risks where our experience base is less developed within a particular new vertical. We may encounter clients in these previouslyuntapped markets that have different pricing and other business sensitivities than we are used to managing. As a result of these and other factors, our efforts toexpand our solution to additional industry vertical15Table of Contentsmarkets may not succeed, may divert management resources from our existing operations and may require us to commit significant financial resources to unprovenparts of our business, all of which may harm our financial performance.A substantial portion of our business consists of supporting our clients’ channel partners in the sale of service contracts. If those channel partners becomeunreceptive to our solution, our business could be harmed.Many of our clients, including some of our largest clients, sell service contracts through their channel partners and engage our solution to help those channelpartners become more effective at selling service contract renewals. These channel partners may have access to some of our cloud technologies in addition to othersales support services we provide. In this context, the ultimate buyers of the service contracts are end customers of those channel partners, who then receive theactual services from our clients. In the event our clients’ channel partners become unreceptive to our involvement in the renewals process, those channel partnerscould discourage our current or future clients from engaging our solution to support channel sales. This risk is compounded by the fact that large channel partnersmay have relationships with more than one of our clients or prospects, in which case the negative reaction of one or more of those large channel partners couldimpact multiple client relationships. Accordingly, with respect to those clients and prospective clients who sell service contracts through channel partners, anysignificant resistance to our solution by their channel partners could harm our ability to attract or retain clients, which would damage our overall businessoperations.We face long sales cycles to secure new client contracts, making it difficult to predict the timing of specific new client relationships.We face a variable selling cycle to secure new client agreements, typically spanning a number of months and requiring our effort to obtain and analyze ourprospect’s business through the SPA, for which we are not paid. We recently have also experienced a lengthening of our sales cycles reflecting the hiring of anumber of new sales personnel in the past eighteen months who are new to selling our solution as well as slower decision making by a few end customers as wellas other end customers considering renewals of large, multi-year contracts. This has adversely affected the conversion rates of new client contracts. Moreover, evenif we succeed in developing a relationship with a potential new client, the scope of the potential subscription or service revenue management engagementfrequently changes over the course of the business discussions and, for a variety of reasons, our sales discussions may fail to result in new client acquisitions.Consequently, we have only a limited ability to predict the timing and size of specific new client relationships.If we fail to balance our expenses with our revenue forecasts or experience significant fluctuations in our business, our results could be harmed and we mayneed to raise additional capital.Due to our evolving business model, the uncertain size of our markets and the unpredictability of future general economic and financial market conditions,we expect to continue to require significant capital and may not be able to accurately forecast our revenue and operating needs. We require a significant amount ofcash resources to operate our business. We plan our expense levels and investments based on estimates of future sales performance for our clients with respect totheir end customers, future revenue and future end customer acquisition. If our assumptions prove incorrect, we may not be able to adjust our spending quicklyenough to offset the resulting decline in growth and revenue. Consequently, we expect that our gross margins, operating margins and cash flows may fluctuatesignificantly on a quarterly basis, and we may need to raise additional capital in order to meet operating and capital expenditure requirements. Any decline in ourclient renewals or termination of our ongoing engagements may result in higher than anticipated losses in the future and shorten the time before we would need toraise additional capital. If we issue equity securities in order to raise additional funds, substantial dilution to existing stockholders may occur. If we raise cashthrough additional indebtedness, we may be subject to additional contractual restrictions on our business.Changes to management, including continued turnover of our top executives, or an inability to attract, hire, integrate and retain key personnel and othernecessary employees, may harm our business.Our future success depends on the continued contributions of our executives, each of whom may be difficult to replace. Our future success also depends inpart on our ability to attract, hire, integrate and retain qualified service sales personnel, sales representatives and management- level employees to oversee suchsales forces in addition to marketing, research and development and general and administrative personnel to support our global operation. Recently, we haveexperienced increased turnover in key executive positions, including our chief executive officer and chief financial officer. These new executives may view thebusiness differently than prior members of management, and over time may make changes to our strategic focus, operations or business plans with correspondingchanges in how we report our results of operations. We can make no assurances that our new executives will be able to properly manage any such shift in focus orthat any changes to our business would ultimately prove successful. The loss of any of our key executives, or our inability to continue to attract, retain and integratehigh-quality talent, could harm our business.16Table of ContentsBecause competition for our target employees is intense, we may be unable to attract and retain the highly skilled employees we need to support our plannedgrowth.To continue to execute on our growth plan, we must attract and retain highly qualified sales representatives, engineers and other key employees in theinternational markets in which we have operations. Competition for these personnel is intense, especially for highly educated, qualified sales representatives. Wehave from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled keyemployees with appropriate qualifications. In addition, declines in the trading price of our common stock may make attracting and retaining our employees moredifficult given the competitive compensatory environment we face recruiting technology employees in the San Francisco Bay Area. If we fail to attract new salesrepresentatives, engineers and other key employees, or fail to retain and motivate our most successful employees, our business and future growth prospects couldbe harmed.The length of time it takes our newly-hired sales representatives to become productive could adversely impact our success rate, the execution of our overallbusiness plan and our costs.It can take twelve months or longer before our internal sales representatives are fully trained and productive in selling our solution to prospective clients. Thislong ramp period presents a number of operational challenges as the cost of recruiting, hiring and carrying new sales representatives cannot be offset by therevenue such new sales representatives produce until after they complete their long ramp periods. Further, given the length of the ramp period, we often cannotdetermine if a sales representative will succeed until he or she has been employed for a year or more. If we cannot reliably develop our sales representatives to aproductive level, or if we lose productive representatives in whom we have heavily invested, our future growth rates and revenue will suffer.We depend on revenue from sources outside the United States, and our international business operations and expansion plans are subject to risks related tointernational operations, and may not increase our revenue growth or enhance our business operations.For the year ended December 31, 2015 approximately 34% of our revenue, was generated outside of the United States. As a result of our continued focus oninternational markets, we expect that revenue derived from international sources will continue to represent a significant portion of our total revenue.A portion of the sales commissions earned from our international clients is paid in foreign currencies. As a result, fluctuations in the value of these foreigncurrencies may make our solution more expensive or cause resulting fluctuations in cost for international clients, which could harm our business. We currently donot undertake hedging activities to manage these currency fluctuations. In addition, if the effective price of the contracts we sell to end customers were to increaseas a result of fluctuations in the exchange rate of the relevant currencies, demand for such contracts could fall, which in turn would reduce our revenue.Our growth strategy includes further expansion into international markets. Our international expansion, including opening new office locations, may requiresignificant additional financial resources and management attention, and could negatively affect our financial condition, cash flows and operating results. Inaddition, we may be exposed to associated risks and challenges, including:•the need to localize and adapt our solution for specific countries, including translation into foreign languages and associated expenses;•difficulties in staffing and managing foreign operations;•different pricing environments, longer sales cycles and longer accounts receivable payment cycles and difficulties in collecting accounts receivable;•new and different sources of competition;•weaker protection for our intellectual property than in the United States and practical difficulties in enforcing our rights abroad;•laws and business practices favoring local competitors;•compliance obligations related to multiple, conflicting and changing foreign governmental laws and regulations, including employment, tax, privacy anddata protection laws and regulations;•increased financial accounting and reporting burdens and complexities;17Table of Contents•restrictions on the transfer of funds;•adverse tax consequences; and•unstable regional economic and political conditions.We cannot assure you we will succeed in creating additional international demand for our solution or that we will be able to effectively sell serviceagreements in the international markets we enter.We incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which couldadversely affect our operating results.As a public company, we incur significant legal, accounting and other expenses, and greater expenditures may be necessary in the future with the advent ofnew laws, regulations and stock exchange listing requirements pertaining to public companies. The Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010,as well as rules subsequently implemented by the Securities and Exchange Commission and The NASDAQ Stock Market LLC, impose various requirements onpublic companies, including establishing effective internal controls and certain corporate governance practices. Our management and other personnel devote asubstantial amount of time to these compliance initiatives, and additional laws and regulations may divert further management resources. Moreover, if we are notable to meet new compliance requirements in a timely manner, the market price of our stock could decline, and we could be subject to investigations and otheractions by The NASDAQ Stock Market LLC, the Securities and Exchange Commission, or other regulatory authorities, which would require additional financialand management resources.While we believe we currently have adequate internal control over financial reporting, we are required to evaluate our internal control over financial reportingunder Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in ourfinancial reports and have an adverse effect on our stock price.Under Section 404 of the Sarbanes-Oxley Act, we are required to furnish a report by our management on our internal control over financial reporting. Thereport contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including astatement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in ourinternal control over financial reporting identified by management.We monitor and assess our internal control over financial reporting, and if our management identifies one or more material weaknesses in our internal controlover financial reporting and such weakness remains uncorrected at year-end, we will be unable to assert such internal control is effective at such time. If we areunable to assert that our internal control over financial reporting is effective at year-end (or if our independent registered public accounting firm is unable toexpress an opinion on the effectiveness of our internal control over financial reporting or concludes that we have a material weakness in our internal controls), wecould lose investor confidence in the accuracy and completeness of our financial reports, which would likely have an adverse effect on our business and stockprice.If we do not adequately protect our intellectual property rights, our competitive position and our business may suffer.We rely upon a combination of patent, trademark, copyright and trade secret law and contractual terms to protect our intellectual property rights, all of whichprovide only limited protection. Our success depends, in part, upon our ability to establish, protect and enforce our intellectual property and other proprietaryrights. If we fail to protect or effectively enforce our intellectual property rights, others may be able to compete against us using intellectual property that is thesame as or similar to our own. In addition, we cannot assure you that our intellectual property rights are sufficient to provide us with a competitive advantageagainst others who offer services similar to ours.While we have filed patent applications to protect our intellectual property, we cannot assure you that any patents will issue or that any issued patents arisingfrom our applications will provide the protection we seek, or that any future patents issued to us will not be challenged, invalidated or circumvented. Also, wecannot assure you that we will obtain any copyright or trademark registrations from our pending or future applications or that any of our trademarks will beenforceable or provide adequate protection of our proprietary rights. We also rely in some circumstances on trade secrets to protect our technology. Trade secretsmay lose their value if not properly protected. We endeavor to enter into non-disclosure agreements with our employees, clients, contractors and business partnersto limit access to and disclosure of our proprietary information. The steps we have taken, however, may not prevent unauthorized use of our technology, andadequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets and proprietary technology. However, trade secretprotection does not prevent others from reverse engineering or independently developing similar technologies. In addition, reverse18Table of Contentsengineering, unauthorized copying or other misappropriation of our trade secrets could enable third parties to benefit from our technology without paying for it.Accordingly, despite our efforts, we may be unable to prevent third parties from infringing or misappropriating our intellectual property and using ourtechnology for their competitive advantage. Any such infringement or misappropriation could have a material adverse effect on our business, results of operationsand financial condition. Monitoring infringement of our intellectual property rights can be difficult and costly, and enforcement of our intellectual property rightsmay require us to bring legal actions against infringers. Infringement actions are inherently uncertain and therefore may not be successful, even when claims aremeritorious. Even if such actions are successful, they may require a substantial amount of resources and divert our management’s attention.Claims by others that we infringe or violate their intellectual property could force us to incur significant costs and require us to change the way we conduct ourbusiness.Numerous technology companies including potential competitors protect their intellectual property rights by means such as patents, trade secrets, copyrightsand trademarks. We have not conducted an independent review of patents issued to third parties. Additionally, because patent applications in the United States andmany other jurisdictions are kept confidential for some period of time before they are published, we may be unaware of pending patent applications that relate toour proprietary technology. From time to time we may receive letters from other parties alleging, or inquiring about, possible breaches of their intellectual propertyrights.Any party asserting that we infringe its proprietary rights would force us to defend ourselves, and possibly our clients, against the alleged infringement. Thetechnology industry is characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based onallegations of infringement or other violations of intellectual property rights. Moreover, the risk of such a lawsuit will likely increase as we become larger, thescope of our solution and technology expands and the number of competitors in our market increases. Any such claims or litigation could:•be time-consuming and expensive to defend, and deplete our financial resources, whether meritorious or not;•require us to stop providing the services that use the technology that infringes the other party’s intellectual property;•divert the attention of our technical and managerial resources away from our business;•require us to enter into royalty or licensing agreements with third parties, which may not be available on terms that we deem acceptable, if at all;•prevent us from operating all or a portion of our business or force us to redesign our technology, which could be difficult and expensive and may makethe performance or value of our solution less attractive;•subject us to significant liability for damages or result in significant settlement payments; or•require us to indemnify our clients as we are required by contract to indemnify some of our clients for certain claims based upon the infringement oralleged infringement of any third party’s intellectual property rights resulting from our clients’ use of our intellectual property.During the course of any intellectual property litigation, confidential information may be disclosed in the form of documents or testimony in connection withdiscovery requests, depositions or trial testimony. Disclosure of our confidential information and our involvement in intellectual property litigation could harm us.In addition, any uncertainties resulting from the initiation and continuation of any litigation could significantly limit our ability to continue our operations andcould harm our relationships with current and prospective clients. Any of the foregoing could disrupt our business and have a material adverse effect on ouroperating results and financial condition.In addition, we may incorporate open source software into our technology solution. The terms of many open source licenses have not been interpreted byUnited States or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on ourcommercialization of any of our solutions that may include open source software. As a result, we will be required to analyze and monitor our use of open sourcesoftware closely. As a result of the use of open source software, we could be required to seek licenses from third parties in order to develop such future products,re-engineer our products, discontinue sales of our solutions or release our software code under the terms of an open source license to the public. Given the nature ofopen source software, there is also a risk that third parties may assert copyright and other intellectual property infringement claims against us based on any use ofsuch open source software, as more generally discussed with respect to general intellectual property claims.19Table of ContentsVarious risks could affect our worldwide operations, including numerous events outside of our control, exposing us to significant costs that could adverselyaffect our operations and client confidence.We conduct operations throughout the world, including our headquarters in the United States and operations in Ireland, Japan, Malaysia, Singapore and theUnited Kingdom. Also, we have leased new facilities in the Philippines, which we expect to be operational in early 2016 and in Bulgaria, which we expect to befully operational in mid-2016. Such worldwide operations expose us to potential operational disruptions and costs as a result of a wide variety of events, includinglocal inflation or economic downturn, currency exchange fluctuations, political turmoil, labor issues, terrorism, natural disasters and pandemics. Any suchdisruptions or costs could have a negative effect on our ability to provide our solution or meet our contractual obligations, the cost of our solution, clientsatisfaction, our ability to attract or maintain clients, and, ultimately, our profits.Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thuscould have a strong negative effect on us. Our business operations are subject to interruption by natural disasters, fire, power shortages, pandemics and other eventsbeyond our control. Such events could make it difficult or impossible for us to deliver our solution to our clients, and could decrease demand for our solution. Themajority of our research and development activities, corporate headquarters, information technology systems and other critical business operations are located nearmajor seismic faults in the San Francisco Bay Area. Because we may not have insurance coverage that would cover quake-related losses, and significant recoverytime could be required to resume operations, our financial condition and operating results could be materially adversely affected in the event of a major earthquakeor catastrophic event.Terrorist attacks and other acts of violence or war may adversely affect worldwide financial markets and could potentially lead to economic recession, whichcould adversely affect our business, results of operations, financial condition and cash flows. These events could adversely affect our clients’ levels of businessactivity and precipitate sudden significant changes in regional and global economic conditions and cycles.The technology we currently use may not operate properly, which could damage our reputation, give rise to claims against us or divert application of ourresources from other purposes, any of which could harm our business and operating results.The technology we currently use, which includes our cloud technologies, may contain or develop unexpected defects or errors. There can be no assurance thatperformance problems or defects in our technology will not arise in the future. Errors may result from receipt, entry or interpretation of client or end customerinformation or from the interface of our technology with legacy systems and data that are outside of our control. Despite testing, defects or errors may arise in oursolution. Any defects and errors that we discover in our technology and any failure by us to identify and effectively address them could result in loss of revenue ormarket share, liability to clients or others, failure to achieve market acceptance or expansion, diversion of development resources, injury to our reputation, andincreased costs. Defects or errors in our technology may discourage existing or potential clients from contracting with us. Correction of defects or errors couldprove impossible or impracticable. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability may be substantial andcould adversely affect our operating results.Disruptions in service or damage to the data center that hosts our data and our locations could adversely affect our business.Our operations depend on our ability to maintain and protect our data servers and cloud applications, which are located in data centers operated for us by thirdparties. We cannot control or assure the continued or uninterrupted availability of these third-party data centers. In addition, our information technologies andsystems, as well as our data center, are vulnerable to damage or interruption from various causes, including natural disasters, war and acts of terrorism and powerlosses, computer systems failures, Internet and telecommunications or data network failures, operator error, losses of and corruption of data and similar events.Although we conduct business continuity planning and maintain certain insurance for certain events, the situations for which we plan, and the amount of insurancecoverage we maintain, may prove inadequate in any particular case. In addition, the occurrence of any of these events could result in interruptions, delays orcessations in the delivery of the solutions we offer to our clients. Any of these events could impair or prohibit our ability to provide our solution, reduce theattractiveness of our solution to current or potential clients and adversely impact our financial condition and results of operations.In addition, despite the implementation of security measures, our infrastructure, data centers, operations and other centers or systems that we interface with,including the Internet and related systems, may be vulnerable to physical intrusions, hackers, improper employee or contractor access, computer viruses,programming errors, denial-of-service attacks or other attacks by third parties.20Table of ContentsWe are dependent on the continued participation and level of service of our third-party platform provider. Any failure or disruption in this service couldmaterially and adversely affect our ability to manage our business effectively.We rely on salesforce.com to provide the platform supporting many of our cloud technologies and Amazon Web Services (AWS) to support a significantportion of our data storage. If salesforce.com or AWS stops supporting our technologies or if they fail to provide a platform that consistently and adequatelysupports our solution, including as a result of errors or failures in their systems or events beyond their control, or refuse to provide this platform on termsacceptable to us or at all and we are not able to find suitable alternatives, our business may be materially and adversely affected.Any failure or interruptions in the Internet infrastructure, bandwidth providers, data center providers, other third parties or our own systems for providing oursolution to clients, and changes in the terms and conditions of third-party platform providers, could negatively impact our business.Our ability to deliver our solution is dependent on the development and maintenance of the infrastructure of the Internet and other telecommunicationsservices by third parties. Such services include maintenance of a reliable network backbone with the necessary speed, data capacity and security for providingreliable Internet access and services and reliable telecommunications systems that connect our global operations. As we plan to transition to a salesforce.com basedplatform for certain portions of our solutions, we will rely on salesforce.com to make application programming interfaces publicly available in order to enableclient integrations with our platform. In addition, any deterioration in our relationship with salesforce.com could adversely affect our operating results.While our solution is designed to operate without interruption, we have experienced and expect that we will in the future experience interruptions and delaysin services and availability from time to time. We rely on internal systems as well as third-party vendors, including data center, bandwidth, andtelecommunications equipment providers, to provide our solution. We do not maintain redundant systems or facilities for some of these services. In the event of acatastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which couldnegatively impact our relationship with our clients.Additional government regulations may reduce the size of the market for our solution, harm demand for our solution and increase our costs of doing business.Any changes in government regulations that impact our clients or their end customers could have a harmful effect on our business by reducing the size of ouraddressable market or otherwise increasing our costs. For example, with respect to our technology-enabled healthcare and life sciences clients, any change in U.S.Food and Drug Administration or foreign equivalent regulation of, or denial, withholding or withdrawal of approval of, our clients’ products could lead to a lack ofdemand for service revenue management with respect to such products. Other changes in government regulations, in areas such as privacy, export compliance oranti-bribery statutes, such as the U.S. Foreign Corrupt Practices Act, could require us to implement changes in our services or operations that increase our cost ofdoing business and thereby hurt our financial performance.The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and businessapplications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting dataprivacy and the use of the Internet as a commercial medium. In addition, government agencies or private organizations may begin to impose taxes, fees or othercharges for accessing the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, result in a decline inthe use of the Internet and the viability of Internet-based applications such as ours and reduce the demand for our solution.We operate and offer our services in many jurisdictions and, therefore, may be subject to state, local and foreign taxes that could harm our business.We operate service sales centers in multiple locations. Some of the jurisdictions in which we operate, such as Ireland, give us the benefit of either relativelylow tax rates, tax holidays or government grants, in each case, that are dependent on how we operate or how many jobs we create and employees we retain. Weplan on utilizing such tax incentives in the future as opportunities are made available to us. Any failure on our part to operate in conformity with applicablerequirements to remain qualified for any such tax incentives or grants may result in an increase in our taxes. In addition, jurisdictions may choose to increase ratesat any time due to economic or other factors, such as the current economic situation in Ireland. Any such rate increases may harm our results of operations.We may lose sales or incur significant costs should various tax jurisdictions impose taxes on either a broader range of services or services that we haveperformed in the past. We may be subject to audits of the taxing authorities in the jurisdictions21Table of Contentswhere we do business that would require us to incur costs in responding to such audits. Imposition of such taxes on our services could result in substantialunplanned costs, would effectively increase the cost of such services to our clients and may adversely affect our ability to retain existing clients or to gain newclients in the areas in which such taxes are imposed.As we acquire companies or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value and adverselyaffect our operating results and the value of our common stock.As part of our business strategy, we may acquire, enter into joint ventures with, or make investments in companies, services and technologies that we believeto be complementary. Acquisitions and investments involve numerous risks, including:•difficulties in identifying and acquiring technologies or businesses that will help our business;•difficulties in integrating operations, technologies, services and personnel;•diversion of financial and managerial resources from existing operations;•the risk of entering new markets in which we have little to no experience;•risks related to the assumption of known and unknown liabilities;•potential litigation by third parties, such as claims related to intellectual property or other assets acquired or liabilities assumed;•the risk of write-offs of goodwill and other intangible assets;•delays in client engagements due to uncertainty and the inability to maintain relationships with clients of the acquired businesses;•inability to generate sufficient revenue to offset acquisition or investment costs;•incurrence of acquisition-related costs;•harm to our existing business relationships with business partners and clients as a result of the acquisition;•the key personnel of the acquired entity or business may decide not to work for us or may not perform according to our expectations; and•use of substantial portions of our available cash or dilutive issuances of equity securities or the incurrence of debt to consummate the acquisition.We may record impairment charges related to our acquisitions or strategic investments, such as the $25.1 million goodwill and other intangible assetimpairment we recorded in 2014 that was, in part, related to our acquisition of Scout Analytics. In assessing goodwill for impairment, we make significantestimates and assumptions, including estimates and assumptions about market penetration, anticipated growth rates and risk-adjusted discount rates based on ourbudgets, business plans, economic projections, anticipated future cash flows and industry data. The estimates and assumptions used by management have a highdegree of subjectivity and require significant judgment on the part of management. Changes in estimates and assumptions in the context of our impairment testingmay have a material impact on us. Any losses or impairment charges that we incur related to acquisitions or strategic investments may have a negative impact onour financial results, and we may continue to incur new or additional losses related to acquisitions or strategic investments that we have not fully impaired orexited.As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, we may incurcosts in excess of what we anticipate and management resources and attention may be diverted from other necessary or valuable activities.We may be exposed to various risks related to legal proceedings or claims that could adversely affect our operating results.From time to time, we may be party to lawsuits in the normal course of our business. Such litigation may include claims, suits, government investigations andother proceedings involving intellectual property rights, commercial, corporate and securities, labor and employment, wage and hour, and other matters. Litigationin general can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict.Responding to lawsuits brought against us, or legal actions initiated by us, can often be expensive and time-consuming. Unfavorable outcomes from any claimsand/or lawsuits could adversely affect our business, results of operations, or financial22Table of Contentscondition, and we could incur substantial monetary liability and/or be required to change our business practices. Our business and technology acquisition activitycould also result in litigation in connection with such acquired companies.Risks Relating to Owning Our Common Stock and Capitalization MattersOur share price has been volatile and is likely to be volatile in the future.The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors. In addition tothe risks described in this section, factors that may cause the market price of our common stock to fluctuate include:•fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us as discussed in more detailelsewhere in these “Risk Factors”;•failure to achieve our revenue or earnings expectations, or those of investors or analysts, such as we experienced for the second quarter of 2014;•actual or perceived changes in general economic, industry and market conditions, especially the technology industry;•changes in estimates of our financial results or recommendations by securities analysts;•recruitment or departure of key personnel;•investors’ general perception of us;•volatility inherent in prices of technology company stocks;•adverse publicity;•the volume of trading in our common stock, including sales upon exercise of outstanding options;•sales of shares of our common stock by existing stockholders;•effects of our share repurchase programs;•regulatory developments in our target markets affecting us, our clients or our competitors; and•terrorist attacks or natural disasters or other such events impacting countries where we or our clients have operations.In addition, if the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelatedto our business, financial condition or results of operations.Some companies that have had volatile market prices for their securities have had securities class actions filed against them. If a suit were filed against us,regardless of its merits or outcome, it would likely result in substantial costs and divert management’s attention and resources. This could have a material adverseeffect on our business, operating results and financial condition.Our actual results may differ significantly from any guidance that we may issue in the future.From time to time, we may release financial guidance or other forward-looking statements in our earnings releases, earnings conference calls or otherwise,regarding our future performance that represent our management’s estimates as of the date of release. If given, this guidance will be based on forecasts prepared byour management. These forecasts are not prepared with a view toward compliance with published accounting guidelines, and neither our independent registeredpublic accounting firm nor any other independent expert or outside party compiles or examines the forecasts and, accordingly, no such person expresses anyopinion or any other form of assurance with respect to such forecasts. The principal reason that we may release guidance is to provide a basis for our managementto discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any third persons.Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of any future guidance furnished by us may not materializeor may vary significantly from actual future results.23Table of ContentsConcentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing significantcorporate decisions.Our directors and executive officers and their affiliates beneficially own, in the aggregate, approximately 30% of our outstanding common stock as ofDecember 31, 2015. As a result, these stockholders will have substantial influence over all matters requiring stockholder approval, including the election ofdirectors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limitthe ability of other stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.Our certificate of incorporation, by laws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging anacquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:•authorizing blank check preferred stock, which could be issued by our board of directors without stockholder approval, with voting, liquidation, dividendand other rights superior to our common stock;•classifying our board of directors, staggered into three classes, only one of which is elected at each annual meeting;•limiting the liability of, and providing indemnification to, our directors and officers;•limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;•requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates forelection to our board of directors;•controlling the procedures for the conduct and scheduling of stockholder meetings;•providing the board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled specialmeetings;•limiting the determination of the number of directors on our board and the filling of vacancies or newly created seats on the board to our board ofdirectors then in office; and•providing that directors may be removed by stockholders only for cause.These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management. As a Delaware corporation, we arealso subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which limits the ability of stockholders owning inexcess of 15% of our outstanding common stock to merge or combine with us.Any provision of our certificate of incorporation, by laws or Delaware law that has the effect of delaying or deterring a change in control could limit theopportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to payfor our common stockOur business could be negatively affected as a result of actions of activist stockholders.Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term stockholder valuethrough various corporate actions. We have recently seen some activist investors take ownership positions in our common stock. Altai Capital Management is thebeneficial owner of approximately 14% of our common stock, has a representative on our board and has entered into a letter agreement and registration rightsagreement with us governing various rights and obligations. As a general matter, if we become engaged in a proxy contest with an activist stockholder in thefuture, our business could be adversely affected as such contests could be costly and time consuming, disrupt our operations and divert the attention ofmanagement and our employees from executing our strategic plan. Additionally, perceived uncertainties as to our future direction as a result of stockholderactivism or changes to the composition of our board of directors may lead to the perception of a change in the direction of our business, instability or lack ofcontinuity which may be exploited by our competitors, cause concern to current or potential buyers and sellers on our platform, and make it more difficult to attractand retain qualified personnel. If buyers and/or sellers choose to delay, defer or reduce transactions with us or24Table of Contentsthrough our platform or transact with our competitors instead of us because of any such issues, then our revenue, earnings and operating cash flows could beadversely affected.If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change theirrecommendations regarding our stock, our stock price and trading volume could decline.The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business.If any of these analysts cease coverage of us, the trading price and trading volume of our stock could be negatively impacted. If analysts downgrade our stock orpublish unfavorable research about our business, our stock price would also likely decline.We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient fundsto satisfy our future growth, business needs and development plans.We have substantial existing indebtedness. In August 2013, we issued $150.0 million aggregate principal amount of our convertible notes.The degree to which we are leveraged could have negative consequences, including, but not limited to, the following:•we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business andeconomic conditions;•our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may belimited;•a substantial portion of our cash flows from operations in the future may be required for the payment of the principal amount of our existing indebtednesswhen it becomes due; and•we may be required to make cash payments upon any conversion of the convertible notes, which would reduce our cash on hand.A failure to comply with the covenants and other provisions of our debt instruments could result in events of default under such instruments, which couldpermit acceleration of all of our outstanding convertible notes and credit facilities.Any required repurchase of the convertible notes as a result of a fundamental change or acceleration of the convertible notes would reduce our cash on handsuch that we would not have those funds available for use in our business. If we are at any time unable to generate sufficient cash flows from operations to serviceour indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance allor a portion of the indebtedness or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any suchrefinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.Conversion of our convertible notes will dilute the ownership interest of existing stockholders and may depress the price of our common stock.The conversion of some or all of our convertible notes will dilute the ownership interests of then-existing stockholders to the extent we deliver shares uponconversion of any of the notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market pricesof our common stock. In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could be usedto satisfy short positions, or anticipated conversion of the notes into shares of our common stock could depress the price of our common stock.The conditional conversion feature of the notes, if triggered, may adversely affect our financial condition and operating results.In the event the conditional conversion feature of the notes is triggered, holders of notes will be entitled to convert the notes at any time during specifiedperiods at their option. If one or more holders elect to convert their notes, unless we elect to satisfy our conversion obligation by delivering solely shares of ourcommon stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion of our conversion obligation through thepayment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicableaccounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long term liability, which would result in a materialreduction of our net working capital.25Table of ContentsThe accounting method for convertible debt securities that may be settled in cash, such as the convertible notes, may have a material effect on our reportedfinancial results.In May 2008, the Financial Accounting Standards Board, which we refer to as FASB, issued FASB Staff Position No. APB 14-1, Accounting for ConvertibleDebt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as AccountingStandards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20. Under ASC 470-20, an entity must separately accountfor the liability and equity components of the convertible debt instruments (such as the notes) that may be settled entirely or partially in cash upon conversion in amanner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting for the notes is that the equity component is included in theadditional paid-in capital section of stockholders' equity on our consolidated balance sheet, and the value of the equity component is treated as an original issuediscount for purposes of accounting for the debt component of the notes. As a result, we will record a greater amount of non-cash interest expense in currentperiods presented as a result of the amortization of the discounted carrying value of the notes to their face amount over the term of the notes. We will report lowernet income (or greater net loss) in our financial results because ASC 470-20 will require interest to include both the current period's amortization of the debtdiscount and the instrument's coupon interest, which could adversely affect our reported or future financial results, the market price of our common stock and thetrading price of the notes. In addition, convertible debt instruments (such as the notes) that may be settled entirely or partly in cash are currently accounted forutilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the notes are not included in the calculation of dilutedearnings per share except to the extent that the conversion value of the notes exceeds their principal amount. Under the treasury stock method, the transaction fordiluted earnings per share is accounted for as the number of shares of common stock necessary to settle such excess in the principal amount, if we elected to settlesuch excess in issued shares. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we areunable to use the treasury stock method in accounting for the shares issuable upon conversion of the notes, then our diluted earnings per share would be adverselyaffected.We have incurred and may in the future incur impairments to goodwill, long-lived assets or strategic investments.We perform an annual impairment analysis of goodwill in the fourth quarter of each year and between annual tests if events or circumstances indicate that itis more likely than not that the asset is impaired. Negative industry or economic trends, including reduced market prices of our common stock, reduced estimates offuture cash flows, disruptions to our business, slower growth rates, or lack of growth in our relevant business units, could lead to impairment charges against ourlong-lived assets, including goodwill and other intangible assets. During 2014 the value of our common stock declined and we experienced slowing revenuegrowth, which led us to perform an impairment analysis. Based on the outcome of this analysis, we incurred a goodwill impairment charge of $22.7 million whicheliminated all of the carrying value of goodwill in the Cloud and Business Intelligence (CBI) segment. During 2014, we had a change in strategy for part of theCBI segment which resulted in an impairment charge of $2.5 million of certain intangible assets from the Scout Analytics acquisition. If in any future period theCompany’s market capitalization declines, this could indicate a potential impairment, and we may be required to record an impairment charge in that period againstany remaining goodwill or other long-lived assets.Also, in 2013, we made a $4.5 million equity investment in an early stage private company. We carry this investment on a cost basis and periodically evaluatethe carrying value to determine if the investment is impaired. To date we have concluded that our investment in this private company is not impaired. However, theevaluation of whether or not there is an impairment in the carrying value is judgmental and is based on a number of subjective factors including the privatecompany's financial performance, the terms and conditions of financing arrangements and the private company's liquidity situation. There may be a time when ourevaluation will indicate an impairment exists in the value of the investment and we will record an impairment charge to adjust the cost basis of the investment to itsrecoverable amount. This potential charge could be material to our results of operations.ITEM 1B.UNRESOLVED STAFF COMMENTSNone.ITEM 2.PROPERTIESOur corporate headquarters are located in San Francisco, California. We also have six globally distributed sales centers. We have two sales centers in NorthAmerica located in Denver and Nashville. We have additional international sales centers in Dublin, Ireland; Liverpool, United Kingdom; Singapore andYokohama, Japan. We also have service delivery centers in Kuala Lumpur, Malaysia; Manila, Philippines and Sofia, Bulgaria. We use these centers to centralizekey contract renewal processes that do not require regional expertise, such as client data management and quoting. We do not own any real estate. All of26Table of Contentsour office space is occupied under long-term leases with varying expiration dates. We believe that our facilities are adequate to meet our needs in the near future.In May 2015, the Company commenced a 7 -year office lease expiring in November 2022, for a new corporate headquarters in San Francisco, California tooccupy 24,394 square feet. The total minimum lease payments are estimated to be approximately $13.3 million over the lease term.In October 2015, the Company signed a 6-year office lease expiring in July 2021, for a new service delivery center in Manila, Philippines to occupy 46,134square feet. The total minimum lease payments are estimated to be approximately $7.0 million over the lease term.In December 2015, the Company signed a 5-year office lease expiring in February 2021, for a new service delivery center in Sofia, Bulgaria to occupy22,104 square feet. The total minimum lease payments are estimated to be approximately $1.8 million over the lease term.LocationSquare Footage LeasedRegionPrincipal UseSan Francisco24,394NALAHeadquartersDenver71,319NALASales CenterNashville120,685NALASales CenterIssaquah15,572NALAR&D CenterSingapore17,086APJInternational Sales CenterKuala Lumpur70,782APJService Delivery CenterYokohama8,977APJInternational Sales CenterManila46,134APJService Delivery CenterDublin37,923EMEAInternational Sales CenterLiverpool22,500EMEAInternational Sales CenterSofia22,104EMEAService Delivery CenterITEM 3.LEGAL PROCEEDINGSOn July 8, 2015, a single plaintiff filed a putative securities class action lawsuit, Weller v. ServiceSource International, Inc. et al., in the U.S. District Courtfor the Northern District of California (the “Weller Lawsuit”) against the Company and the Company’s former Chief Executive Officer. The Weller Lawsuit wasbrought on behalf of purchasers of Company stock during the period January 22, 2014 through May 1, 2014, and alleges violations under Sections 10(b) and 20(a)of the Securities Exchange Act of 1934, as amended (Exchange Act. In connection with the mandatory lead plaintiff appointment process under the PrivateSecurities Litigation Reform Act (PSLRA), various law firms issued press releases between July 2015 and September 2015 to search for additional shareholdersthat would be willing to serve as lead plaintiffs in this lawsuit. This solicitation period ended on September 29, 2015 and no other shareholders came forward,leaving only the named plaintiff as the sole shareholder seeking to be appointed lead plaintiff. The court appointed Weller a lead plaintiff on October 21, 2015. Atthis time, no motion to certify a class has been filed. The Company believes that the claims are meritless, and will vigorously defend itself against such claims.From time to time, the Company may be subject to other litigation or threatened litigation arising in the ordinary course of our business. Although the resultsof 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 outcomecould have a material adverse effect on our business, operating results, financial position, or cash flows. Regardless of the outcome, litigation can have an adverseimpact on the Company because of defense and settlement costs, diversion of management resources, and other factors. The Company records a contingent liabilitywhen it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies.ITEM 4.MINE SAFETY DISCLOSURESNot applicable27Table of ContentsPART IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESMarket InformationOur common stock is traded on The NASDAQ Global Market under the symbol “SREV” since it began trading on March 25, 2011. Our initial public offering waspriced at $10.00 per share on March 24, 2011. The following table sets forth, for the time period indicated, the high and low prices of our common stock asreported on The NASDAQ Global Market. 2015 High LowFirst Quarter$4.70 $3.05Second Quarter$5.55 $3.00Third Quarter$6.15 $3.95Fourth Quarter$5.75 $3.93 2014 High LowFirst Quarter$9.63 $6.97Second Quarter$8.98 $3.95Third Quarter$5.91 $3.16Fourth Quarter$4.89 $2.81HoldersAs of February 26, 2016, there were 80 holders of record of our common stock. A substantially greater number of holders of our common stock are “streetname” or beneficial holders, whose shares are held by banks, brokers and other financial institutions.DividendsWe have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in theoperation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividendswill be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general businessconditions and other factors that our board of directors may deem relevant.Stock Performance GraphThis performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), orincorporated by reference into any filing of ServiceSource under the Securities Act of 1933, as amended, or the Securities Act, except as shall be expressly set forthby specific reference in such filing.The following graph shows a comparison from March 25, 2011(the date our common stock commenced trading on The NASDAQ Global Market) through December 31, 2015 , of the cumulative total return for (1) our common stock, (2) the Morgan Stanley Technology Index, and (3) the NASDAQ Composite Index.Such returns are based on historical results and are not intended to suggest future performance. Data for the NASDAQ Composite Index and the Morgan StanleyTechnology Index assume reinvestment of dividends. We have never declared or paid cash dividends on our common stock nor do we anticipate paying any suchcash dividends in the foreseeable future. 28Table of Contents ServiceSource Morgan Stanley Technology Index NASDAQ Composite Index3/25/2011 100.00 100.00 100.0012/30/2011 128.82 86.91 93.6712/31/2012 48.03 101.22 108.5712/31/2013 68.80 133.39 150.1812/31/2014 38.42 149.78 172.6612/31/2015 37.85 159.91 182.55Recent Sales of Unregistered SecuritiesNone.Purchases of Equity Securities by the Issuer and Affiliated PurchasersThe following table includes information about our stock repurchases during the year ended December 31, 2015:Period (1)Total number of shares of commonstock purchased as part of publiclyannounced plans (in thousands)Weighted-average price per shareTotal price paid for shares (includescommissions) (in thousands)For the three months ended September30, 20151594.12$655For the three months ended December31, 20151364.09557Total for the year ended December 31,2015295 $1,212___________________(1) In August 2015, the Board authorized a stock repurchase program with a maximum authorization to repurchase up to $30.0 million worth of commonstock of the Company. The program expires in August 2017. The aggregate amount available under the program was approximately $28.8 million at December 31,2015. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased inprivately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act, as29Table of Contentsamended. All shares repurchased were made using currently available cash resources and the reacquired shares were retired upon repurchase.Securities Authorized for Issuance Under Equity Compensation Plans Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference from our Proxy Statement to be filedfor our 2016 Annual Meeting of Stockholders.30Table of ContentsITEM 6.SELECTED FINANCIAL DATAThe following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. Years Ended December 31, 2015 2014 2013 2012 2011 (in thousands, except per share amounts) Net revenue$252,203 $272,180 $272,482 $243,703 $205,501Cost of revenue (1)171,369 194,009 162,449 136,321 113,406Gross profit80,834 78,171 110,033 107,382 92,095Operating expenses: Sales and marketing (1)44,086 59,988 58,826 56,925 48,520Research and development (1)16,480 25,802 23,855 19,255 13,073General and administrative (1)46,299 47,808 44,913 41,135 33,647Restructuring and other (1)3,662 3,314 — — —Goodwill and other intangibles impairments— 25,108 — — —Total operating expenses110,527 162,020 127,594 117,315 95,240Income (loss) from operations(29,693) (83,849) (17,561) (9,933) (3,145)Interest expense and other, net(9,316) (11,008) (4,420) (774) (1,127)Loss before income taxes(39,009) (94,857) (21,981) (10,707) (4,272)Income tax provision (benefit)1,404 302 871 32,107 (19,383)Net income (loss)$(40,413) $(95,159) $(22,852) $(42,814) $15,111Net income (loss) per common share: Basic$(0.47) $(1.15) $(0.29) $(0.58) $0.23Diluted$(0.47) $(1.15) $(0.29) $(0.58) $0.21 Weighted-average shares used in computing net income (loss) percommon share: Basic85,417 82,872 78,408 74,270 66,656Diluted85,417 82,872 78,408 74,270 73,585 (1)Reported amounts include stock-based compensation expense as follows: Years Ended December 31, 2015 2014 2013 2012 2011 (in thousands)Cost of revenue$2,666 $3,995 $3,303 $2,780 $1,877Sales and marketing3,393 6,193 9,831 8,146 4,456Research and development1,299 2,800 2,414 1,880 1,167General and administrative6,029 7,911 8,072 8,077 4,099Restructuring and other2,579 — — — —Total stock-based compensation15,966 20,899 23,620 20,883 11,599 31Table of Contents As of December 31, 2015 2014 2013 2012 2011 (in thousands)Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments$208,712 $215,382 $275,133 $109,442 $108,865Working capital236,431 249,590 315.815 149,431 134,796Total assets319,605 339,846 399,946 224,472 238,961Obligations under capital leases, current and non-current317 521 657 964 1,664Convertible notes, net128,092 120,730 113,915 — —Total stockholders' equity150,094 171,288 240,697 186,927 197,01632Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with ourannual consolidated financial statements and notes thereto which appear elsewhere in this Annual Report on Form 10-K.This discussion contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or proveincorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. These statements are based on thebeliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks,uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed orimplied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, andthose discussed in the section of this Annual Report on Form 10-K titled “Special Note Regarding Forward Looking Statements and Industry Data” and “RiskFactors”. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to updateany forward-looking statements to reflect events or circumstances after the date of such statements.OverviewServiceSource International, Inc. (NASDAQ: SREV) is the global leader in customer and revenue lifecycle solutions that power enterprise revenuerelationships. Based on the science of Revenue Lifecycle Management (RLM), ServiceSource provides some of the world’s leading business to business (B2B)companies with expert, technology-enabled services and solutions that are proven to grow and retain revenue from existing customers, directly or through achannel. With a holistic approach to managing the entire revenue lifecycle (which includes onboarding, client success, quoting, up-sell, cross-sell, warrantyservices and renewals), ServiceSource solutions help companies drive improved customer adoption, expansion and retention for our B2B clients.Our solutions are comprised of a unique and precise mix of managed services, a purpose-built RLM technology platform, and best-practice processesdeveloped over more than 15 years of exclusive focus on revenue retention, revenue growth, and client success. With the experience of nearly $8.4 billion inrecurring revenue sold in 2015 and global deployments across 40 languages and 150 countries, ServiceSource solutions can uniquely leverage industry andcompany data, leading-edge technology and best-practices drawn from our significant and in-depth database of renewal benchmarks. By integrating managedservices, cloud software and data, we provide our clients with insights into their end customers’ businesses, end-to-end management and optimization of endcustomer onboarding, adoption, subscription, asset management, and service contract renewal processes whether managed by us directly or through our client’schannel partners.Our managed services business leverages either a pay-for-performance or a flat-rate model whereby our clients pay us a commission based on renewal salesthat we generate on their behalf. Our cloud software technologies are an integral component to our unique RLM technology platform and may be managed byServiceSource or provided directly to the client. Such cloud technologies include: ServiceSource Revenue Analytics, Renew OnDemand and the ServiceSourceCustomer Success application, all of which automate and provide data driven insights into these highly valuable but typically manual business processes. Thisblend of technology capabilities, managed services and best-practice process can drive higher subscription, maintenance and support revenue while improving endcustomer retention and increasing business predictability.The scalability of our solution enables us to sell in over 40 languages from six centers around the globe. Our solution is designed to optimize recurringrevenue across different revenue models, distribution models, and segments, including hardware, software, Software-as-a-Service (SaaS), industrial systems,information and media, as well as technology-enabled health care and life sciences.Key Business MetricsIn assessing the performance of our business, we consider a variety of business metrics in addition to the financial metrics discussed below under, “Basis ofPresentation.” These key metrics include Opportunity Under Management and number of engagements, both of which are non-GAAP metrics.Opportunity Under Management. For the year ended December 31, 2015, our Opportunity Under Management in our managed services business wasapproximately $9.9 billion . Opportunity Under Management is a non-GAAP metric that represents our estimate of the value of all end customer service contractsthat we have the opportunity to sell on behalf of our33Table of Contentsclients over a designated period of time. In addition, we processed more than $4.0 billion of contract value through our cloud technologies in 2015 for which wereceived fees. Opportunity Under Management is not a measure of our expected revenue. Opportunity Under Management reflects our estimate over a designatedperiod of time and should not be used as an estimate of our opportunity for any particular quarter within that period. Also, the value of end customer contractsactually delivered during a twelve-month period should not be expected to occur in even quarterly increments due to seasonality and other factors impacting ourclients and their end customers. We estimated the value of such end customer contracts based on a combination of factors, including the value of end customercontracts made available to us by our clients in past periods, the minimum value of end customer contracts that our clients are required to give us the opportunity tosell pursuant to the terms of our contracts with them, periodic internal business reviews of our expectations as to the value of end customer contracts that will bemade available to us by our clients, the value of end customer contracts included in the Service Performance Analysis (SPA) and collaborative discussions with ourclients assessing their expectations as to the value of service contracts that they make available to us for sale. While the minimum value of end customer contractsthat our clients are required to give us represented a portion of our estimated Opportunity Under Management, a significant portion of the Opportunity UnderManagement is estimated based on the other factors described above. As our experience with our business, our clients and their contracts has grown, we havecontinually refined the process, improved the assumptions and expanded the data related to our calculation of the Opportunity Under Management. Whenestimating Opportunity Under Management, we must, to a large degree, rely on the assumptions described above, which may prove incorrect. These assumptionsare inherently subject to significant business and economic uncertainties and contingencies, many of which are beyond our control. Our estimates therefore mayprove inaccurate, causing the actual value of end customer contracts delivered to us in a given period to differ from our estimate of Opportunity UnderManagement. These factors include:• the extent to which clients deliver a greater or lesser value of end customer contracts than may be required or• otherwise expected;• changes in the pricing or terms of service contracts offered by our clients;• increases or decreases in the end customer base of our clients;• the extent to which the renewal rates we achieve on behalf of a client early in an engagement affect the amount ofopportunity that the client makes available to us later in the engagement;• client cancellations of their contracts with us; and• changes in our clients’ businesses, sales organizations, management, sales processes or priorities.Our managed services revenue also depends on our booking rate and commissions. Our bookings is the total amount of Opportunity Under Management thatwe renew on behalf of our clients. Our commission rate is an agreed-upon percentage of the renewal value of end customer contracts that we sell on behalf of ourclients.Our booking rate is impacted principally by our ability to successfully sell service contracts on behalf of our clients. Other factors impacting our booking rateinclude: the manner in which our clients price their service contracts for sale to their end customers; the stage of life-cycle associated with the products andunderlying technologies covered by the service contracts offered to the end customer; the extent to which our clients or their competitors introduce new products orunderlying technologies; the nature, size and age of the service contracts; and the extent to which we have managed the renewals process for similar products andunderlying technologies in the past.In determining commission rates for an individual engagement, various factors, including our booking rate, as described above, are evaluated. These factorsinclude: historical, industry specific and client specific renewal rates for similar service contracts; the magnitude of the Opportunity Under Management in aparticular engagement; the number of end customers associated with these opportunities; and the opportunity to receive additional performance commissions whenwe exceed certain renewal levels. We endeavor to set our commission rates at levels commensurate with these factors and other factors that may be relevant to aparticular engagement. Accordingly, our commission rates vary, often significantly, from engagement to engagement. In addition, we sometimes agree to lowercommission rates for engagements with significant Opportunity Under Management.In 2014 and 2015, we experienced a decline in Opportunity Under Management for our managed services business due to a number of contractions and non-renewals by some of our clients. We expect the reduction in Opportunity Under Management experienced in 2014 and 2015 will continue to impact our revenuesinto 2016 until we can replace this decline in Opportunity Under Management.34Table of ContentsNumber of Engagements . We track the number of engagements we have with our clients. We often have multiple engagements with a single client,particularly where we manage the sales of service renewals relating to different product lines, technologies, types of contracts or geographies for the client. Whenthe set of renewals we manage on behalf of a client is associated with a separate client contract or a distinct product set, type of end customer contract or geographyand therefore requires us to assign a service sales team to manage the renewals, we designate the set of renewals and associated revenues and costs as a uniqueengagement. For example, we may have one engagement consisting of a service sales team selling maintenance contract renewals of a particular product for aclient in the United States and another engagement consisting of a sales team selling warranty contract renewals of a different product for the same client inEurope. These would count as two engagements. We had approximately 154 , 191 and 150 engagements as of December 31, 2015 , 2014 and 2013 respectively.Factors Affecting our PerformanceSales Cycle. We sell our integrated solution through our sales organization. At the beginning of the sales process, our quota-carrying sales representativescontact prospective clients and educate them about our offerings. Educating prospective clients about the benefits of our solution can take time, as many of theseprospects have not historically relied upon integrated solutions like ours for service revenue management, nor have they typically put out a formal request forproposal or otherwise made a decision to focus on this area. As part of our sales process, we utilize our solutions design team to perform a SPA of our prospect’sservice revenue. The SPA includes an analysis of best-practices and benchmarks the prospect’s service revenue against industry peers. Through the SPA process,which typically takes several weeks, we are able to assess the characteristics and size of the prospect’s service revenue, identify potential areas of performanceimprovement, and formulate our proposal for managing the prospect’s service revenue. The length of our sales cycle for a new client, inclusive of the SPA processand measured from our first formal discussion with the client until execution of a new client contract, is typically longer than six months and has increased inrecent periods.We generally contract with new clients to manage a specified portion of their service revenue opportunity, such as the opportunity associated with a particularproduct line or technology, contract type or geography. We negotiate the engagement specific terms of our client contracts, including commission rates, based onthe output of the SPA, including the areas identified for improvement. Once we demonstrate success to a client with respect to the opportunity under contract, weseek to expand the scope of our engagement to include other opportunities with the client. For some clients, we manage all or substantially all of their servicecontract renewals.For cloud technologies, the SPA may be more limited and focused on the benefits of the respective technology and therefore may take less time.Implementation Cycle . After entering into an engagement with a new client, and to a lesser extent after adding an engagement with an existing client, weincur sales and marketing expenses related to the commissions owed to our sales personnel. These commissions are based on the estimated total contract value,with a material portion of the commission expensed upfront and the remaining portion expensed ratably over a period of twelve to fourteen months. We also makeupfront investments in technology and personnel to support the engagement. These expenses are typically incurred one to three months before we begin generatingsales and recognizing revenue. Accordingly, in a given quarter, an increase in new clients, and, to a lesser extent, an increase in engagements with existing clients,or a significant increase in the contract value associated with such new clients and engagements, will negatively impact our gross margin and operating marginsuntil we begin to achieve anticipated sales levels associated with the new engagements, which is typically two to three quarters after we begin selling contracts onbehalf of our clients.Although we expect new client engagements to contribute to our operating profitability over time, in the initial periods of a client relationship, the near termimpact on our profitability can be negatively impacted by slower-than anticipated growth in revenues for these engagements as well as the impact of the upfrontcosts we incur, the lower initial level of associated service sales team productivity and lack of mature data and technology integration with the client. As a result,an increase in the mix of new clients as a percentage of total clients may initially have a negative impact on our operating results. Similarly, a decline in the ratio ofnew clients to total clients may positively impact our near-term operating results.Contract Terms . Substantially all of our managed services revenue comes from our pay-for-performance model. Under our pay-for-performance model, weearn commissions based on the value of service contracts we sell on behalf of our clients. In some cases, we earn additional performance-based commissions forexceeding pre-determined service renewal targets.Our new client contracts typically have an initial term between two and four years. Our contracts generally require our clients to deliver a minimum value ofqualifying service revenue contracts for us to renew on their behalf during a specified period. To the extent that our clients do not meet their minimum contractualcommitments over a specified period, they may be subject to fees for the shortfall. Our client contracts are cancelable on relatively short notice, subject in mostcases to the35Table of Contentspayment of an early termination fee by the client. The amount of this fee is based on the length of the remaining term and value of the contract.We invoice our clients on a monthly basis based on commissions we earn during the prior month, and with respect to performance-based commissions, on aquarterly basis based on our overall performance during the prior quarter. Revenue is recognized in the period in which our services are performed or, in the caseof performance commissions, when the performance condition is achieved. Because the invoicing for our services generally coincides with or immediately followsthe sale of service contracts on behalf of our clients, we do not generate or report a significant deferred revenue balance. However, the combination of factors suchas, but not limited to, minimum contractual commitments, the performance improvement potential identified by our SPA process, our success in generatingimproved renewal rates for our clients, and our clients’ historical renewal rates, for example, help to provide us with revenue visibility, but may all affect ourperformance favorably or unfavorably.M&A Activity. Our clients, particularly those in the technology sector, participate in an active environment for mergers and acquisitions. Large technologycompanies have maintained active acquisition programs to increase the breadth and depth of their product and service offerings and small and mid-sized companieshave combined to better compete with large technology companies. A number of our clients have merged, purchased other companies or been acquired by othercompanies. We expect merger and acquisition activity to continue to occur in the future.The impact of these transactions on our business can vary. Acquisitions of other companies by our clients can provide us with the opportunity to pursueadditional business to the extent the acquired company is not already one of our clients. Similarly, when a client is acquired, we may be able to use our relationshipwith the acquired company to build a relationship with the acquirer. In some cases we have been able to maintain our relationship with an acquired client evenwhere the acquiring company handles its other service contract renewals through internal resources. In other cases, however, acquirers have elected to terminate ornot renew our contract with the acquired company.Economic Conditions and Seasonality . An improving economic outlook generally has a positive, but mixed, impact on our business. As with mostbusinesses, improved economic conditions can lead to increased end customer demand and sales. In particular, within the technology sector, we believe that therecent economic downturn led many companies to cut their expenses by choosing to let their existing maintenance, support and subscription agreements lapse. Animproving economy may have the opposite effect.However, an improving economy may also cause companies to purchase new hardware, software and other technology products, which we generally do notsell on behalf of our clients, instead of purchasing maintenance, support and subscription services for existing products. To the extent this occurs, it would have anegative impact on our opportunities in the near term that would partially offset the benefits of an improving economy.We believe the current uncertainty in the economy, combined with shifting market forces toward subscription-based models, is impacting a number of ourclients and prospective clients, particularly in the traditional enterprise software and hardware segments. These forces have placed pressure on end customerdemand for their renewal contracts and also have led to some slower decision making in general. This economic and industry environment has adversely affectedthe conversion rates for end customers and contracts. To the extent these conditions continue they will impact our future revenues.In addition to the uncertainty in the macroeconomic environment, we experience a seasonal variance in our revenue typically for the third quarter of the yearas a result of lower or flat renewal volume corresponding to the timing of our clients’ product sales particularly in the international regions. The impact of thisseasonal fluctuation can be amplified if the economy as a whole is experiencing disruption or uncertainty, leading to deferral of some renewal decisions. As weincrease our subscription revenue base, this seasonality will become less apparent. However, for at least the foreseeable future, we would expect this pattern tocontinue.Establishment of “Software-as-a-Service” Business unit . Within the software industry, there is a growing trend toward providing software to clients using aSaaS model. Under this model, SaaS companies provide access to software applications to customers on a remote basis, and provide their customers with asubscription to use the software, rather than licensing software to their customers.We have several SaaS-based applications that we develop and support: Renew OnDemand (our purpose-built offering to manage and maximize recurringrevenue), ServiceSource Revenue Analytics (our SaaS offering to help companies with predictive analytics for recurring revenue), and other SaaS cloudtechnologies such as ServiceSource Customer Success. Our research and development costs are primarily related to SaaS based applications and development ofother technologies that are integrated with our overall solutions. We intend to maintain client support, training and professional service organizations to supportdeployments of our SaaS based applications and solutions. Our 2015 research and development costs were related to36Table of Contentsthe further development of our SaaS based applications and the design and development of other technologies that are integrated with our overall solutions. Weexpect our research and development costs to decline in 2016 as we complete the development of specific, major releases.Basis of PresentationNet RevenueSubstantially all of our net revenue is attributable to commissions we earn from the sale of renewals of maintenance, support and subscription agreements onbehalf of our clients. We generally invoice our clients for our services in arrears on a monthly basis for sales commissions, and on a quarterly basis for certainperformance sales commissions; accordingly, we typically have no deferred revenue related to these services. We do not set the price, terms or scope of services inthe service contracts with end customers and do not have any obligations related to the underlying service contracts between our clients and their end customers.We also earn revenue from the sale of subscriptions to our cloud based applications. To date, subscription revenue has been a small percentage of totalrevenue. We expect revenues generated from subscriptions of Renew OnDemand and ServiceSource SaaS cloud technologies to decline in 2016. Subscription feesare accounted for separately from commissions, and they are billed in advance over a monthly, quarterly or annual basis. Subscription revenue is recognizedratably over the related subscription term.We have generated a significant portion of our revenue from a limited number of clients. Our top ten clients accounted for 57% , 51% and 50% of our netrevenue for the years ended December 31, 2015 , 2014 and 2013 , respectively. No single client represented 10% or more of our revenues in 2015. One clientaccounted for 10% or more of our revenues in 2014 and 2013 .In the first quarter of 2015, our largest client at the time notified the Company of its intention to reduce the scope of their managed services and engagementand subscription of our legacy system contracted effective April 2015.The loss of revenue from any of our top clients for any reason, including the failure to renew our contracts, termination of some or all of our services, achange of relationship with any of our key clients or their acquisition, can cause a significant decrease in our revenue. The client cancellations and reductions in2015 returned to historical rates after being above these historical averages in 2014. Since revenue recognized from client cancellations and reductions continues aquarter or two past the date of termination, depending on client contract, revenues in the first half of 2016 as compared to the prior year period will be slightlyimpacted. The timing of cancellations and client reductions can have a material impact to our revenue.Our business is geographically diversified. During 2015 , 66% of our net revenue was earned in North America and Latin America (NALA), 24% in Europe,Middle East and Africa (EMEA) and 10% in Asia Pacific-Japan (APJ). Net revenue for a particular geography generally reflects commissions earned from sales ofservice contracts managed from our sales centers in that geography. Predominantly all of the service contracts sold and managed by our sales centers relate to endcustomers located in the same geography. APJ is our newest region, and as a result accounts for less of our net revenue. In addition, our Kuala Lumpur and Manilalocations are global service delivery centers where we have centralized, for our worldwide operations, the key contract renewal processes that do not requireregional expertise, such as client data management and quoting. We do not generate any client revenue out of Kuala Lumpur or Manila, so they are effectively costcenters which contribute to our APJ region.Cost of Revenue and Gross ProfitOur cost of revenue expenses include employee compensation expense, technology costs, including those related to the delivery of our cloud-basedtechnologies, and allocated overhead costs. Compensation expense includes salary, bonus, benefits and stock-based compensation for our dedicated service salesteams. Our allocated overhead includes costs for facilities, information technology and depreciation, including amortization of internal-use software associatedwith our service revenue technology platform and cloud applications. Allocated costs for facilities consist of rent, maintenance and compensation of personnel inour facilities departments. Our allocated costs for information technology include costs associated with third-party data centers where we maintain our data servers,compensation of our information technology personnel and the cost of support and maintenance contracts associated with computer hardware and software. To theextent our client base or Opportunity Under Management expands, we may need to hire additional service sales personnel and invest in infrastructure to supportsuch growth. Our cost of revenue may fluctuate significantly and increase or decrease on an absolute basis and as a percentage of revenue in the near term,including for the reasons discussed above under, “Factors Affecting Our Performance—Implementation Cycle”. We saw material reductions in cost of revenueexpenses in 2015 related primarily to our efforts to better align our personnel costs with the decrease in revenue during 2015. We expect cost of revenues to remainflat as37Table of Contentsadditional cost reduction measures will be offset by incremental investments in technology, the addition of new service delivery centers and the expansion of ourclient engagements. Gross profit as a percent of revenue is expected to be flat to slightly improved for 2016.Operating ExpensesSales and Marketing. Sales and marketing expenses are the largest component of our operating expenses and consist primarily of compensation expenses andsales commissions for our sales and marketing staff, allocated expenses and marketing programs and events. We sell our solutions through our global salesorganization, which is organized across three geographic regions: NALA, EMEA and APJ. Our commission plans provide that payment of commissions to oursales representatives is contingent on their continued employment, and we recognize expense over a period that is generally between twelve and fourteen monthsfollowing the execution of the applicable contract. When commissions are paid out upon contract signing and are not contingent on future payments and continuedemployment, we expense the sales commission upon contract signing. We currently expect sales and marketing expenses to decline in 2016 and decrease or remainflat as a percentage of revenue in future years.Research and Development. Research and development expenses consist primarily of employee compensation expense, allocated costs and the cost of third-party service providers. We focus our research and development efforts on developing new products and applications related to our technology platform. Inconnection with the development and enhancements of our SaaS cloud applications, we capitalize certain expenditures related to the development andenhancement of internal-use software related to our technology platform. We expect research and development spending to decline in 2016 and decrease or remainflat as a percentage of revenue in future years.General and Administrative. General and administrative expenses consist primarily of employee compensation expense for our executive, human resources,finance and legal functions, and related expenses for professional fees for accounting, tax and legal services, as well as allocated expenses. We expect that ourgeneral and administrative expenses will increase in 2016 as we invest in additional facilities, expand our learning and development function and we invest inadditional information technology.Restructuring and Other. Restructuring and other expenses consist primarily of stock compensation expense related to the accelerated vesting of certainequity awards, employees’ separation payments and related employee benefits and charges related to cancellation of contracts. We completed this restructuring in2015.Goodwill and other intangibles impairment. No impairment charges were recognized in 2015. The goodwill and other intangibles impairment chargerecorded in 2014 is related to the outcome of our impairment analysis which resulted in a non-cash goodwill impairment charge of $ 22.7 million relating to ourCloud and Business Intelligence (CBI) reporting unit, and a charge of $2.5 million related to the impairment of intangible assets. Our policy is to perform anannual impairment analysis of goodwill in the fourth quarter of each year and between annual tests if events or circumstances indicate that it is more likely than notthat the asset is impaired. Additionally, any further decline in the Company’s market capitalization or other events or circumstances may require additionalimpairment charges to be recorded in future periods against any remaining other intangiblesInterest Expense and Other, NetInterest expense. Interest expense consists primarily of interest expense associated with our convertible debt, fees related to our credit facility, capital leasepayments; accretion of debt discount; and amortization of debt issuance costs. We recognize accretion of debt discount and amortization of interest costs using theeffective interest method. We expect our interest expense to increase slightly in 2016 from accretion of debt discount, amortization of deferred financing costs andcontractual interest costs as a result of our August 2013 issuance of $150.0 million aggregate principal amount of convertible notes due August 2018.Other, Net. Other, net consists primarily of foreign exchange gains and losses and the interest income earned on our cash, cash equivalents and marketablesecurities investments. We expect other income to vary depending on the movement in foreign currency exchange rates and the related impact on our foreignexchange gain (loss) and the return of interest on our investments.Income Tax Provision (Benefit)We account for income taxes using an asset and liability method, which requires the recognition of taxes payable or refundable for the current year anddeferred tax assets and liabilities for the expected future tax consequences of temporary38Table of Contentsdifferences that currently exist between the tax basis and the financial reporting basis of our taxable subsidiaries’ assets and liabilities using the enacted tax rates ineffect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized inoperations in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that,based on available evidence, are not expected to be realized.We evaluate our ability to realize the tax benefits associated with deferred tax assets on a jurisdictional basis. This evaluation utilizes the frameworkcontained in ASC 740, Income Taxes, wherein management analyzes all positive and negative evidence available at the balance sheet date to determine whether allor some portion of our deferred tax assets will not be realized. Under this guidance, a valuation allowance must be established for deferred tax assets when it ismore likely than not (a probability level of more than 50 percent) that they will not be realized. In assessing the realization of our deferred tax assets, we considerall available evidence, both positive and negative.In performing our evaluation, we place significant emphasis on guidance contained in ASC 740, which states that “a cumulative loss in recent years is asignificant piece of negative evidence that is difficult to overcome.”We account for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions takenor expected to be taken in a tax return. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxeswill be due. We record an income tax liability, if any, for the difference between the benefit recognized and measured and the tax position taken or expected to betaken on our tax returns. To the extent that the assessment of such tax positions change, the change in estimate is recorded in the period in which the determinationis made. The reserves are adjusted in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes theimpact of reserve provisions and changes to reserves that are considered appropriate.Results of OperationsThe table below sets forth our consolidated results of operations for the periods presented. The period-to-period comparison of financial results presentedbelow is not necessarily indicative of financial results to be achieved in future periods. 39Table of Contents Years Ended December 31, 2015 2014 2013Consolidated statement of operations data:(in thousands)Net revenue$252,203 $272,180 $272,482Cost of revenue171,369 194,009 162,449Gross profit80,834 78,171 110,033Operating expenses: Sales and marketing44,086 59,988 58,826Research and development16,480 25,802 23,855General and administrative46,299 47,808 44,913Restructuring and other3,662 3,314 —Goodwill and other intangibles impairments— 25,108 —Total operating expenses110,527 162,020 127,594Loss from operations(29,693) (83,849) (17,561)Interest expense and other, net(9,316) (11,008) (4,420)Loss before income taxes(39,009) (94,857) (21,981)Income tax provision1,404 302 871Net loss$(40,413) $(95,159) $(22,852)Includes stock-based compensation of: Cost of revenue$2,666 $3,995 $3,303Sales and marketing3,393 6,193 9,831Research and development1,299 2,800 2,414General and administrative6,029 7,911 8,072Restructuring and other2,579 — —Total stock-based compensation$15,966 $20,899 $23,620The following table sets forth our operating results as a percentage of net revenue: Years Ended December 31, 2015 2014 2013 (as % of net revenue)Net revenue100 % 100 % 100 %Cost of revenue68 % 71 % 60 %Gross profit32 % 29 % 40 %Operating expenses: Sales and marketing17 % 22 % 22 %Research and development7 % 9 % 9 %General and administrative18 % 18 % 16 %Restructuring and other1 % 1 % — %Goodwill and other intangibles impairment— % 9 % — %Total operating expenses43 % 59 % 47 %Loss from operations(11)% (30)% (7)%40Table of ContentsYears Ended— December 31, 2015 and 2014Net Revenue Years Ended December 31, 2015 2014 Amount % of Net Revenue Amount % of Net Revenue Change % Change (in thousands)Net revenue Managed Services$227,645 90% $240,573 89% $(12,928) (5)%Cloud and Business Intelligence24,558 10% 31,607 11% (7,049) (22)%Total net revenue$252,203 100% $272,180 100% $(19,977) (7)% Net revenue decreased $20.0 million, or 7% , in 2015 compared to 2014. The overall decrease in revenue in 2015 was due to client cancellations andengagement reductions, including some of our top clients, in excess of new client engagement additions from 2014. The client cancellations and reductions in 2015were in line with our historical rates.Managed services revenue decreased by $12.9 million , or 5%, in 2015 related to the higher than average client cancellations and reductions in 2014.The $7.0 million , or 22% , decrease in revenue from our CBI business in 2015, compared to 2014, was primarily attributable to a loss of subscriptionrevenue related to the elimination of certain services provided to one of our largest clients.Cost of Revenue and Gross Profit Years Ended December 31, 2015 2014 Amount % of Net Revenue Amount % of Net Revenue Change % Change (in thousands)Cost of Revenue Managed Services$155,898 62% $170,820 63% $(14,922) (9)%Cloud and Business Intelligence15,471 6% 23,189 9% (7,718) (33)%Total cost of revenue$171,369 68% $194,009 72% $(22,640) (12)% Years Ended December 31, 2015 2014 Amount % of Net Revenue Amount % of Net Revenue Change % Change (in thousands)Gross profit Managed Services$71,747 28% $69,753 26% $1,994 3%Cloud and Business Intelligence9,087 4% 8,418 3% 669 8%Total gross profit$80,834 32% $78,171 29% $2,663 3% The $14.9 million , or 9% , decrease in our cost of revenue for our managed services business in 2015 compared to 2014 reflects a $15.9 million decrease inemployee compensation expense as a result of lower headcount that corresponded with our efforts to better align employee costs with the decrease in revenue,offset by a $3.8 million increase in temporary labor, and a $3.4 million decrease in allocated overhead.The $7.7 million , or 33% , decrease in our cost of revenue for our CBI business in 2015 compared to 2014, reflected a $4.0 million reduction in employeecompensation costs related to lower headcount that corresponded with our efforts to better align41Table of Contentsemployee costs with the decrease in revenue. Also contributing to the decrease was a $2.8 million reduction in temporary labor and consultant costs, a $2.1 millionreduction in information technology spending, a $0.4 million decrease in travel expenses and a $0.3 million decrease in allocated overhead offset by a $1.8 millionincrease in depreciation expenses, related to certain internally developed software projects placed into service during the year.The $2.0 million , or 3% , increase in managed services gross profit in 2015 compared to 2014 was mainly driven by the lower headcount and relatedpersonnel costs.Gross profit in 2015 compared to 2014 increased by $0.7 million , or 8% , for our CBI business due to continued focus on cost reductions. Also, contributingto the cost reductions were lower cost of professional services and lower support and hosting costs related to our software solutions.Operating Expenses Years Ended December 31, 2015 2014 Amount % of NetRevenue Amount % of NetRevenue Change % Change (in thousands)Operating expenses: Sales and marketing$44,086 17% $59,988 22% $(15,902) (27)%Research and development16,480 7% 25,802 9% (9,322) (36)%General and administrative46,299 18% 47,808 18% (1,509) (3)%Restructuring and other3,662 1% 3,314 1% 348 11 %Goodwill and other intangibles impairment— —% 25,108 9% (25,108) (100)%Total operating expenses$110,527 43% $162,020 59% $(51,493) (32)%Includes stock-based compensation of: Sales and marketing$3,393 $6,193 $(2,800) Research and development1,299 2,800 (1,501) General and administrative6,029 7,911 (1,882) Restructuring and other2,579 $— $— Total stock-based compensation$13,300 $16,904 $(6,183) Sales and marketing expensesThe $15.9 million , or 27% , decrease in sales and marketing expenses in 2015 compared to 2014 resulted primarily from decreased employee compensationexpense of $8.3 million due to lower headcount. The lower headcount period over period is the result of our efforts to rationalize our cost structure. Also,contributing to the decrease was a $3.4 million decrease in temporary labor and consultant costs, a $1.0 million decrease in travel expenses, a $1.4 million decreasein marketing programs and a $0.6 million decrease in recruiting fees. We expect sales and marketing expenses to decrease in 2016 as we seek to better match ourexpense levels to our revenue.Research and development expensesThe $9.3 million , or 36% , decrease in research and development expense in 2015 compared to 2014 was primarily due to a $4.2 million increase incapitalized internal-use software costs, $3.9 million decrease in employee compensation expense and a $0.7 million decrease in temporary labor, travel andrecruiting costs, all related to our efforts to reduce research and development spend starting in the second half of 2014. We also expect to continue capitalizinginternal-use software costs in the future and the amount capitalized will depend on the level of expenditures on research and development.General and administrative expensesThe $1.5 million , or 3% , decrease in general and administrative expense in 2015 compared to 2014 reflected a $1.4 million decrease in employeecompensation expense related to lower headcount and a $4.9 million decrease across the42Table of Contentsfollowing: temporary labor and professional fees, facilities costs, technology spend, recruiting and depreciation, all offset by a $4.2 million reduction in overheadallocations to other departments.We anticipate spending in 2016 for general and administrative functions to remain flat or slightly increase from 2015 as we balance cost reduction activitieswith global investments in the business.Restructuring and other expenses The increase in restructuring and other expenses in 2015 of $0.3 million, or 11% , was related to the recognition of additional employee termination relatedcosts in 2015. The 2015 charge consists primarily of $2.6 million of stock compensation expense related to the accelerated vesting of certain equity awards grantedto our former interim CFO and CEO, and separation payments. The Company completed this restructuring effort in 2015.Goodwill and other intangibles impairment expensesThe decrease in goodwill and other intangible expenses in 2015 compared to 2014 is due to no impairment charges being recognized in 2015. Refer to thegoodwill and other intangibles impairment expenses in the 2014 versus 2013 section below for a discussion of the 2014 impairment charges.Interest Expense and Other, Net Years Ended December 31, 2015 2014 Amount % of Net Revenue Amount % of Net Revenue Change % Change (in thousands)Interest expense$10,393 4 % $9,886 4% $507 5 %Other, net$(1,077) — % $1,122 —% $(2,199) (196)%Interest expense for 2015 increased by $0.5 million , or 5% , as compared to 2014 due to the accretion of debt discount related to the convertible notes issuedin August 2013.Other, net for 2015 decreased by $2.2 million due primarily to lower foreign currency expenses as a result of the U.S. dollar strengthening against the Euroand other foreign currencies where we have operations.Income Tax Provision Years Ended December 31, 2015 2014 Change % Change (in thousands)Income tax provision$1,404 $302 $1,102 * *Not considered meaningful.For the year ended December, 31, 2015, we recorded a charge to income tax expense of $1.4 million . This includes the impact of state income tax lawchanges that were recorded during the second quarter ended June 30, 2015 and affects the manner in which the Company apportions revenue to the state ofTennessee. The remaining portion of our tax expense relates to anticipated taxes in jurisdictions where we have profitable operations, including certain U.S. states,offset by benefits available from state tax credits. No benefit was otherwise provided for losses incurred in U.S. and Singapore, because these losses are offset by afull valuation allowance. In November 2015, the Philippine Economic Zone Authority granted a four year tax holiday to the Company's Philippine affiliate,commencing with its fiscal year, beginning January 1, 2016.For the year ended December 31, 2014, a charge to income tax expense of $0.3 million was recorded. This amount primarily represents anticipated taxes injurisdictions where we have profitable operations, including certain U.S. states, offset by benefits from state credits. No benefit was otherwise provided for lossesincurred in U.S. and Singapore, because these losses are offset by a full valuation allowance. The benefit associated with losses in Ireland is also offset by a fullvaluation allowance, except to the extent of losses which may be carried back to offset taxable income in the preceding year. In43Table of ContentsDecember 2013, our Malaysia affiliate was granted a 10-year tax holiday as an Operational Headquarters (OHQ), commencing January 1, 2014.Years Ended— December 31, 2014 and 2013Net Revenue Years Ended December 31, 2014 2013 Amount % of Net Revenue Amount % of Net Revenue Change % Change (in thousands)Net revenue Managed Services$240,573 89% $255,547 94% $(14,974) (6)%Cloud and Business Intelligence31,607 11% 16,935 6% 14,672 87 %Total net revenue$272,180 100% $272,482 100% $(302) — % Net revenue decreased $0.3 million in 2014 compared to 2013. The overall decrease in revenue in 2014 was due to client cancellation and reductions,including among some of our top clients, in excess of new client additions and expansions for the managed services segment. Offsetting this decrease was anincrease in Scout Analytics revenue in 2014.Managed services revenue decreased by 6% in 2014, compared to 2013 due to the restructuring of certain of the managed services revenue contracts with ourinstalled base clients to include a subscription to our SaaS platform, which resulted in a shift of some revenue from managed services to CBI. The clientcancellation and reductions occurred heavily in the second part of 2014, and therefore had a limited impact on 2014.The increase in revenue from our CBI business in 2014, compared to 2013, was primarily attributable to nearly $10 million from the restructuring of certaincontracts with our installed based clients that were originally only Managed Services to include a subscription to our SaaS platform and approximately $4 millionin revenue attributable to our Scout SaaS platform acquired in January 2014. CBI benefited from expansions from several clients but was offset by cancellationsfrom other clients.Cost of Revenue and Gross Profit Years Ended December 31, 2014 2013 Amount % of NetRevenue Amount % of Net Revenue Change % Change (in thousands)Cost of Revenue Managed Services$170,820 63% $147,278 54% $23,542 16%Cloud and Business Intelligence23,189 9% 15,171 6% 8,018 53%Total cost of revenue$194,009 72% $162,449 60% $31,560 19% Years Ended December 31, 2014 2013 Amount % of NetRevenue Amount % of Net Revenue Change % Change (in thousands)Gross profit Managed Services$69,753 26% $108,269 40% $(38,516) (36)%Cloud and Business Intelligence8,418 3% 1,764 1% 6,654 377 %Total gross profit$78,171 29% $110,033 41% $(31,862) (29)%44Table of ContentsThe 19% increase in our cost of revenue in 2014 compared to 2013 reflects a $22.4 million increase in the compensation expense of service sales personnelfor managed services as a result of increased headcount and higher average salaries, and a $2.0 million increase in our information technology and depreciationexpenses related to the expansion of the service sales teams and amortization related to developed technology assets developed internally and related to ouracquisition of Scout Analytics in 2014.The $8.0 million increase in our cost of revenue for our CBI business in 2014 compared to 2013, reflected a $3.4 million increase in compensation expensepartially due to incremental employees of Scout Analytics that was acquired January 2014, employees that moved to revenue generating efforts rather thanengineering related work in 2013, a $2.5 million increase for information technology, depreciation and amortization expense and a $0.5 million increase in stockcompensation expense with the increase in headcount and addition of resources related to our acquisition of Scout Analytics.Gross profit in 2014 was adversely impacted for our managed services business due to the restructuring of some of the managed services contracts with ourinstalled base clients to include a subscription to our SaaS platform. This change had the effect of reducing the revenue for our managed services business, withoutreducing the cost structure to serve the client in many cases. In addition, to better support our clients, we have increased our investment across several keyaccounts, both in terms of increased managed services and professional services personnel. This increased allocation of resources has continued to compress ourgross margins across both of our business segments.Gross profit in 2014 increased for our CBI business due to the improved scale in our SaaS business, increase in revenue from restructuring of certainmanaged services contracts with our installed base clients to include a subscription to our SaaS platform and revenue from Scout Revenue Analytic solutionacquired in January 2014, offset by a shift in expenses from research and development to cost of revenue, as we transitioned from development to clientdeployment of these products.Operating Expenses Years Ended December 31, 2014 2013 Amount % of NetRevenue Amount % of NetRevenue Change % Change (in thousands)Operating expenses: Sales and marketing$59,988 22% $58,826 22% $1,162 2%Research and development25,802 9% 23,855 9% 1,947 8%General and administrative47,808 18% 44,913 16% 2,895 6%Restructuring and other$3,314 1% $— —% $3,314 100%Goodwill and other intangibles impairment$25,108 9% $— —% $25,108 100%Total operating expenses$162,020 59% $127,594 47% $34,426 27%Includes stock-based compensation of: Sales and marketing$6,193 $9,831 $(3,638) Research and development2,800 2,414 386 General and administrative7,911 8,072 (161) Total stock-based compensation$16,904 $20,317 $(3,413) Sales and marketing expensesThe 2% increase in sales and marketing expenses in 2014 is due to an increase in the number of sales and marketing personnel, primarily in NALA andEMEA resulting in a $4.0 million increase in employee compensation expense and recruiting costs. Also, the increase in headcount reflected hiring for the RevenueAnalytics sales team and overall increase in sales effort primarily in the first half of 2014. There was also a total of $1.6 million increase in consulting fees relatedto strategic initiatives in 2014 and higher overall costs including depreciation expenses and Scout Analytics related expenses, which was partially offset by lowermarketing expenses of $0.5 million as a result of lower spending on brand development. Stock compensation expense decreased by $3.6 million from 2013 due tostreamlining of sales management in 2014 where certain executive roles that existed in 2013 did not exist in 2014 and the lower stock price from 2013 reduced thecost of stock compensation.45Table of ContentsResearch and development expensesThe 8% increase in research and development expense in 2014 was primarily due to higher headcount, professional fees and the addition of the ScoutAnalytics engineering team in January 2014 of $5.3 million. Capitalization of internally developed software increased $3.0 million compared to 2013 due todevelopment of our Renew OnDemand and Revenue Analytics offerings and related applications. Travel declined $0.3 million due to an effort to reduce spendingin the second half of 2014. We expect research and development spending to decrease or remain the same on an absolute basis and as a percentage of revenue inthe near term as we focus on achieving profitability through a combination of revenue growth and spending controls.General and administrative expensesThe 6% increase in general and administrative expense in 2014 compared to 2013 reflected a $2.9 million increase in compensation expense due to hiringacross finance, human resources and information technology as the team expanded to support the new business lines and integration of our acquisition.Restructuring and other expensesThe increase in restructuring and other expenses in 2014 of $3.3 million was related to the Company executing a restructuring effort during the second half of2014. The charge consists primarily of employees’ severance payments, related employee benefits, retention bonuses and cancellation of contracts.Goodwill and other intangibles impairment expensesThe goodwill and other intangibles impairment charge recorded in 2014 is related to the outcome of impairment analysis which resulted in a non-cashgoodwill impairment charge of $22.7 million relating to our CBI reporting unit, and a charge of $2.5 million related to the impairment of intangible assets relatedto the cancellation of a product line acquired in the Scout acquisition. The Company recorded a $21.0 million goodwill impairment as part of its interimimpairment performed in the third quarter and a $1.7 million goodwill impairment charge in the fourth quarter as part of its annual impairment analysis. Allgoodwill impairment charges were related to the CBI business unit due to the slower than expected adoption of its SaaS products in tandem with the costs tosupport the platform. The Company also recorded an intangible asset impairment of $2.5 million related to the carrying value of the intangible assets impacted bythe cancellation of a product line acquired in the Scout acquisition in the fourth quarter.Interest Expense and Other, Net Years Ended December 31, 2014 2013 Amount % of Net Revenue Amount % of Net Revenue Change % Change (in thousands)Interest expense$9,886 4% $3,754 1% $6,132 163%Other, net$1,122 —% $666 —% $456 68%Interest expense for 2014 increased by $6.1 million as compared to 2013 due to accretion of debt discount and the amortization of debt issuance costs of $7.5million and interest expense of $2.3 million for the convertible notes issued in August 2013. The increase in interest expense is due 2014 incurring a full year ofthese costs and 2013 incurring these costs starting August 2013.Other, net for 2014 increased by $0.5 million due primarily to higher foreign currency expenses as compared to 2013.Income Tax Provision Years Ended December 31, %Change 2014 2013 Change (in thousands) Income tax provision$302 $871 $(569) (65)%46Table of Contents For the year ended December 31, 2014, a charge to income tax expense of $0.3 million was recorded. This amount primarily represents anticipated taxes injurisdictions where we have profitable operations, including certain U.S. states, offset by benefits available from state tax credits. No benefit was otherwiseprovided for losses incurred in U.S. and Singapore, because these losses are offset by a full valuation allowance. The benefit associated with losses in Ireland isalso offset by a full valuation allowance, except to the extent of losses which may be carried back to offset taxable income in the preceding year. In December2013, our Malaysia affiliate was granted a 10-year tax holiday as an Operational Headquarters (OHQ), commencing January 1, 2014.In 2013, a charge to income tax expense of $0.9 million was recorded. This amount primarily represents anticipated taxes in jurisdictions where we haveprofitable operations, including certain U.S. states, offset by benefits from state credits. No benefit was otherwise provided for losses incurred in U.S. andSingapore, because these losses are offset by a full valuation allowance. In December 2013, our Malaysia affiliate was granted a 10-year tax holiday as anOperational Headquarters (OHQ), commencing January 1, 2014. The 2013 tax provision includes a benefit of $0.2 million resulting from a revaluation ofpreviously recorded Malaysia deferred tax liabilities as a result of the OHQ tax holiday.Liquidity and Capital ResourcesAt December 31, 2015 , we had cash, cash equivalents and short-term investments of $208.7 million , which primarily consisted of cash, money marketaccounts, corporate bonds and U.S. government obligations held by well-capitalized financial institutions. In addition, at December 31, 2015 , we had cash andcash equivalents of $6.0 million held outside of the U.S. by our foreign subsidiaries that was generated by such subsidiaries and which is used to satisfy theircurrent operating requirements. We consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested in foreign operations and ourcurrent plans do not require us to repatriate these earnings to fund our U.S. operations as we have sufficient cash, cash-equivalents and short-term investments heldin the U.S.Our primary operating cash requirements include the payment of employee compensation and related costs, working capital requirements related to accountsreceivable and accounts payable, as well as costs for our facilities and information technology infrastructure. Historically, we have financed our operationsprincipally from cash provided by our operating activities, proceeds from stock offerings and the exercise of stock options, and to a lesser extent, from aconvertible note issuance and borrowings under various credit facilities, with no such borrowings in 2014 or 2015. We believe our existing cash and cashequivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months.In August 2013, we issued $150.0 million aggregate principal amount of 1.50% convertible notes due August 1, 2018 (the "Notes") and concurrently enteredinto convertible notes hedges and separate warrant transactions. The Notes will mature on August 1, 2018, unless earlier converted. Upon conversion, the Noteswill be settled in cash, shares of our stock, or any combination thereof, at our option. We received proceeds of $145.1 million from the issuance of the convertiblenotes, net of associated fees, received $21.8 million from the issuance of the warrants and paid $31.4 million for the note hedges. The Notes are classified as a non-current liability on our consolidated balance sheet as of December 31, 2015 .Share Repurchase ProgramIn August 2015, the Board authorized a stock repurchase program (“the program”) repurchase up to $30.0 million worth of common stock of the Company.The program expires in August 2017. The aggregate amount available under the program was approximately $28.8 million at December 31, 2015. The Company’sshare repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiatedand/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.During the year ended December 31, 2015, the Company repurchased 295,097 shares of its common stock under the program at an average price of $4.11per share for a total of $1.2 million. All repurchases were made using currently available cash resources and the reacquired shares were retired upon repurchaseCredit FacilityThe Company’s three-year credit agreement which provided for a secured revolving line of credit based on eligible accounts receivable up to $10.0 millionexpired on July 5, 2015. There were no borrowings under this facility during 2014 or 2015. The expiration of this revolving line of credit had no impact on ourability to fund our business operations.47Table of ContentsLetter of Credit and Restricted CashIn May 2015 the Company commenced a 7-year office lease expiring in November 2022 for a new corporate headquarters in San Francisco, California. Inconnection with this new lease commitment, the Company was required to issue a $1.2 million letter of credit to the landlord. The letter of credit is secured by $1.2million of a money market account which is classified as restricted cash in other assets, net, in our consolidated balance sheet as of December 31, 2015.Summary Cash FlowsThe following table sets forth a summary of our cash flows for the periods indicated: Years Ended December 31, 2015 2014 2013 (in thousands)Net cash provided by (used in) operating activities$2,623 $(23,762) $15,675Net cash used in investing activities(25,194) (61,872) (82,472)Net cash provided by financing activities4,321 4,168 159,765Net increase (decrease) in cash and cash equivalents, net of the effect of exchange rates oncash and cash equivalents$(18,048) $(79,750) $93,564Operating ActivitiesIn 2015 , net cash provided by operating activities was $2.6 million . Our net loss during the period was $40.4 million , which was impacted by non-cashcharges of $13.7 million for depreciation and amortization, and $8.0 million of amortization of debt discount and issuance costs, $13.4 million for stock-basedcompensation, and $2.6 million for restructuring and other. Cash provided by operations as a result of changes in our working capital, include a $12.0 milliondecrease in accounts receivable and a $4.0 million increase in accrued liabilities and other. Uses of cash were related to a $2.8 million increase in prepaid expenses,a $0.5 million decrease in accrued taxes and a $1.6 million decrease in accounts payable.In 2014, net cash used in operating activities was $23.8 million. Our net loss during the period was $95.2 million, which was impacted by non-cash chargesof $13.2 million for depreciation and amortization, and $7.5 million of amortization of debt discount and issuance costs, $20.9 million for stock-basedcompensation and $25.1 million for goodwill and other intangibles impairment. Cash provided by operations as a result of changes in our working capital,including a $3.7 million decrease in accounts receivable, a $0.5 million increase in accrued taxes, and a $1.1 million increase in accrued liabilities and other. Usesof cash were related to a $0.6 million increase in prepaid expenses, and a $0.3 million decrease in accounts payable.In 2013, net cash provided by operating activities was $15.7 million. Our net loss during the period was $22.9 million, adjusted by non-cash charges of $11.7million for depreciation and amortization, $23.6 million for stock-based compensation and $2.8 million of amortization of debt discount and issuance costs. Cashprovided by operations as a result of changes in our working capital, including a $3.8 million increase in accrued employee compensation and benefits, a $3.6million increase in accrued liabilities and other, and a $0.5 million increase in accounts payable. Uses of cash were related to a $7.5 million increase in accountsreceivable and a $1.3 million increase in prepaid expenses. Our working capital management, particularly around accounts receivable and accrued employeecompensation and benefits, contributed to an improvements in our net cash flows from operations in 2013.Investing ActivitiesIn 2015 cash used in investing activities was principally related to the net purchase, sale and maturities of short-term investments of $12.0 million and forpurchases of property and equipment of $12.0 million which includes $7.2 million of internally developed software costs.In 2014 cash used in investing activities was principally related to the net purchase, sale and maturities of short-term investments of $20.0 million,acquisition of Scout Analytics of $32.6 million, and for the purchases of property and equipment of $9.4 million.In 2013 cash used in investing activities was principally related to the net purchase, sale and maturities of short-term investments of $72.7 million andpurchases of property and equipment of $5.3 million and as investments of $4.5 million in a privately held company.48Table of ContentsFinancing ActivitiesCash provided by financing activities was $4.3 million during 2015 and consisted primarily of option exercises and the purchase of common stock under ouremployee stock purchase plan offset by $1.2 million from the repurchase of common stock.Cash provided by financing activities was $4.2 million during 2014 and consisted primarily of option exercises and the purchase of common stock under ouremployee stock purchase plan of $4.4 million, offset by payment of capital leases obligations.Cash provided by financing activities was $159.8 million during 2013 and consisted primarily of proceeds from the issuance of convertible notes of $145.1million, issuance of warrants of $21.8 million, and option exercises and the purchase of common stock under our employee stock purchase plan of $25.0 million.These proceeds were partially offset by our payment of $31.4 million for the convertible note hedges.Off-Balance Sheet ArrangementsWe do not have any relationships with other entities or financial partnerships, such as entities often referred to as structured finance or special-purposeentities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposesContractual Obligations and CommitmentsOur principal commitments consist of obligations under operating leases for office space and computer equipment, and purchase commitments andunrecognized tax benefits during our normal course of business.At December 31, 2015 , the future minimum payments under these commitments were as follows (in thousands): Payments due by period Total Less than 1 year 1-3 years 4-5 years More than 5 yearsObligations under capital leases$317 $119 $198 $— $—Operating lease obligations49,119 9,375 24,932 11,156 3,656 $49,436 $9,494 $25,130 $11,156 $3,656The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding, which specify significantterms, including payment terms, related services and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significantpenalty are not included in the table above.Also excluded from the table above is the income tax liability we recorded for the difference between the benefit recognized and measured and the taxposition taken or expected to be taken on our tax returns (“unrecognized tax benefits”). As of December 31, 2015 , our liability for unrecognized tax benefits wasimmaterial. Reasonably reliable estimates of the amounts and periods of related future payments cannot be made at this time.In May 2015, the Company commenced a 7-year office lease expiring in November 2022, for a new corporate headquarters in San Francisco, California tooccupy 24,394 square feet. The total minimum lease payments are estimated to be approximately $13.3 million over the lease term and are reflected in the tableabove.In October 2015, the Company signed a 6-year office lease expiring in July 2021, for a new service delivery center in Manila, Philippines to occupy 46,134square feet. The total minimum lease payments are estimated to be approximately $7.0 million over the lease term and are reflected in the table above.In December 2015, the Company signed a 5-year office lease expiring in February 2021, for a new service delivery center in Sofia, Bulgaria to occupy22,104 square feet. The total minimum lease payments are estimated to be approximately $1.8 million over the lease term and are reflected in the table above.Critical Accounting Policies and EstimatesRevenue RecognitionOur revenue is derived primarily from managed services. Other revenues include subscriptions to our cloud applications and professional services.49Table of ContentsRevenue is recognized when all of the following criteria have been met:•Persuasive evidence of an arrangement exists. Client contracts are generally used to determine the existence of an arrangement.•Delivery has occurred . The service has been or is being provided to the client.•Our fee is fixed or determinable . We assess whether the fee is fixed or determinable based on the payment terms associated with the transactionand whether the selling price is subject to refund or adjustment.•The collectability of our fee is reasonably assured. We assess collectability based primarily on the creditworthiness of the client as determined bycredit checks and analysis, as well as the client’s payment history. Managed ServicesRevenue from managed services consists of fees earned from the sales of services contracts on behalf of our clients or assisting our clients in their salesprocess. Our contract obligations include administering and managing the sales and/or renewal process for our client’s service contracts, providing adequatelytrained staff, reporting, and holding periodic business reviews with our clients. Under our contracts, clients are obligated to provide us with a detailed listing ofsales prospects, access to their databases or management systems, and sales and marketing materials. Our fees are generally calculated as a fixed percentage of theoverall sales value associated with the successful renewal of service contracts sold on behalf of our clients. In addition, some of our client contracts includeperformance-based fees determined by the achievement of specified performance metrics. Our managed service contracts typically entitle us to additional fees andadjustments resulting from instances where our clients fail to provide us with a specified minimum value of contract renewals or they fail to provide contractrenewal data within the time frames specified in our contract. We also receive termination fees in the event a client cancels a contract without cause prior to itsterminations date. Our managed service contracts can also be canceled by our clients without a termination fee if we fail to achieve certain performance levels.Our fees from managed services are recognized on a net basis since we act as an agent on behalf of our clients. We do not perform the underlyingmaintenance services; determine pricing, terms or scope of services to our client’s end customers. Performance incentive fees and early termination fees arerecorded in the period when the performance criteria have been met.Subscriptions and Professional ServicesSubscription revenue is comprised of subscriptions fees to access our cloud based applications, and professional services is generated from implementationand project based services. Subscription revenue is recognized ratably over the contract term, commencing when our cloud applications are made available to ourclients. Our subscription service arrangements are generally non-cancelable and do not contain refund-type provisions. Professional services are deemed deliveredand revenue recognized upon the successful completion of implementation projects or when project milestones have been achieved and accepted by the client.Multiple-Deliverable ArrangementsWe have entered into a limited number of multiple element arrangements wherein our clients utilize a combination of managed services, subscriptions to ourcloud applications and professional services. We separate deliverables at the inception of the arrangement as if each deliverable has stand-alone value to our client.Arrangement consideration is allocated based on the relative best estimate of selling prices of each deliverable. However, substantially all fees earned from ourmanaged services are contingent in nature as the commissions we earn are based on our performance against the specific terms of each contract. Therefore,contingent fees from managed services are excluded from the allocation of relative best selling prices at inception of our multiple element arrangements.According to the accounting guidance prescribed in Accounting Standards Codification (ASC) 605, Revenue Recognition, selling prices for each deliverableis determined based on the selling price hierarchy of vendor-specific objective evidence (VSOE), third-party evidence (TPE), and best estimated selling price(BESP). We have not been able to establish VSOE for our deliverables due to the customer-specific nature of our products and services. Also, we have not beenable to reliably determine the stand-alone selling prices of competitor’s products and services, and as a result, we cannot rely on TPE for our deliverables.Therefore, we utilize estimates of BESP to determine the selling prices of our deliverables. BESP is determined through consultation with management, taking intoconsideration our marketing and pricing strategies. As these50Table of Contentsstrategies evolve, we may modify our pricing practices in the future, which could result in changes in the estimates used to estimate BESP which could change theallocation of revenue for our multiple element arrangements.Stock-Based CompensationWe measure and recognize compensation expense for share-based payment awards made to our employees and directors, including employee stock optionsand restricted stock units, based on the grant-date fair values of the awards.We estimate the fair value of stock options granted using the Black-Scholes option-pricing model. This model requires us to make estimates and assumptionsincluding, among other things, estimates regarding the length of time an employee will retain vested stock options before exercising them, the estimated volatilityof our common stock price using peer company volatility and the number of options that will be forfeited prior to vesting. The fair value is then amortized on astraight-line basis over the requisite service periods of the awards, which is generally the vesting period. Changes in these estimates and assumptions can materiallyaffect the determination of the fair value of share-based compensation and consequently, the related amount recognized in our consolidated statements ofoperations.Stock-based compensation expense for our restricted stock units and performance based restricted stock awards is determined using the fair value of ourcommon stock on the date of grant, and the expense is recognized on a straight-line basis over the vesting period. Performance based restricted stock awardscompensation expense is only recorded if it is probable that the performance conditions will be met.Valuation analysis of goodwill and intangible assetsWe perform our annual goodwill impairment analysis in the fourth quarter of each year according to the provisions of ASC 350-20-35. A two-stepquantitative impairment test of goodwill is required, unless the simplified method described below is elected. In the first step, the fair value of each reporting unit iscompared to its carrying value. If the fair value exceeds carrying value, goodwill is not impaired and further quantitative testing is not required. If the carryingvalue exceeds fair value, then the second step of the impairment test is required to determine the implied fair value of the reporting unit’s goodwill. The impliedfair value of goodwill is calculated by deducting the fair value of all tangible and intangible net assets of the reporting unit, excluding goodwill, from the fair valueof the reporting unit as determined in the first step. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then an impairment lossmust be recorded equal to the difference.Simplified MethodIn September 2011, the Financial Accounting Standards Board approved changes to the goodwill impairment guidance which are intended to reduce the costand complexity of the annual impairment test, which is referred to as the simplified method. The revised standard gives an entity the option to first assessqualitative factors to determine whether performing the current two-step quantitative impairment test is necessary. Such qualitative factors that may indicateimpairment and the need to perform a two-step include, but are not limited to, macro-economic conditions such as deterioration in the entity's operatingenvironment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; orother events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. > 50% chance) that the fair value of a reporting unit is lessthan its carrying amount, the two-step quantitative impairment test will be required. Otherwise, no further testing will be required.Our goodwill valuation analysis is based on our respective reporting units (Managed Services and CBI), which are consistent with our operating segmentsidentified in Note 15-Segment and Geographic Information of the Notes to Consolidated Financial Statements. We used the simplified method to determine the fairvalue of our reporting units as of December 31, 2015, which was based on an assessment of the qualitative factors noted above in relation to the $6.3 million ofgoodwill recorded on our Consolidated Balance Sheet, all of which is assigned to our Managed Services reporting unit. Based on our qualitative assessment, weconcluded that a two-step quantitative impairment test was not required and that our goodwill asset was not impaired as of December 31, 2015.Significant management judgments are required in order to assess goodwill and intangible asset impairment, including the following:•identification of comparable companies to benchmark under the market approach giving due consideration to the following factors:51Table of Contents◦financial condition and operating performance of the reporting unit being evaluated relative to companies operating in the same or similarbusiness,◦economic, environmental, and political factors faced by such companies, and•impact of goodwill impairment recognized in prior years,•susceptibility of our reporting unit to fair value fluctuations,•reporting unit revenue, gross profit, and operating expense growth rates,•financial forecasts,•discount rate to apply to estimated cash flows,•terminal values,•reasonable gross profit levels,•estimated control premium a willing buyer is likely to pay, including consideration of the following:◦the most similar transactions in relevant industries and determined the average premium indicated by the transactions deemed to be most similarto a hypothetical transaction involving our reporting units,◦weighted average and median control premiums offered in relevant industries,◦industry specific control premiums, and◦specific transaction control premiums.•significant events or changes in circumstances including the following:◦significant negative industry or economic trends,◦significant decline in our stock price for a sustained period,◦our market capitalization relative to net book value,◦significant changes in the manner of our use of the acquired assets,◦significant changes in the strategy for our overall business, and◦our assessment of growth and profitability in each reporting unit over the coming years.Given the uncertainty of the economic environment and the potential impact on our business, there can be no assurance that our estimates and assumptionsregarding the duration of the ongoing economic malaise, made for purposes of our goodwill impairment testing at December 31, 2015 will prove to be accuratepredictions of the future. If our assumptions regarding forecasted revenue or gross profit rates are not achieved, we may be required to record additional goodwillimpairment charges in future periods relating to any of our reporting units, whether in connection with the next annual impairment testing in the fourth quarter of2016 or prior to that, if any such change constitutes an interim triggering event. It is not possible to determine if any such future impairment charge would result,or, if it does, whether such charge would be material.We have engaged a third party valuation firm in the past to assist management in its goodwill impairment analysis. All estimates, key assumptions, andforecasts were either provided by or reviewed by us. While we chose to utilize a third party valuation firm, the impairment analysis and related valuations representthe conclusions of management and not the conclusions or statements of any third party.Income TaxesWe account for income taxes using an asset and liability method, which requires the recognition of taxes payable or refundable for the current year anddeferred tax assets and liabilities for the expected future tax consequences of temporary differences that currently exist between the tax basis and the financialreporting basis of our taxable subsidiaries’ assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse.The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment52Table of Contentsdate. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to berealized.We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negativeevidence related to the likelihood of realization of the deferred tax assets on a jurisdictional basis to determine, based on the weight of available evidence, whetherit is more likely than not that some or all of the deferred tax assets will not be realized. Examples of positive and negative evidence include future growth,forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, ifcarryback is permitted under the law and prudent and feasible tax planning strategies. In the event we were to determine that we would not be able to realize all orpart of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period in which wemake such a determination , or goodwill would be adjusted at our final determination of the valuation allowance related to an acquisition within the measurementperiod. If we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of thepreviously provided valuation allowance as an adjustment to earnings at such time.We account for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions takenor expected to be taken in a tax return. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxeswill be due. We record an income tax liability, if any, for the difference between the benefit recognized and measured and the tax position taken or expected to betaken on our tax returns. We recognize interest accrued and penalties related to unrecognized tax benefits in the income tax provision. To the extent that theassessment of such tax positions change, the change in estimate is recorded in the period in which the determination is made. The reserves are adjusted in light ofchanging facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of reserve provisions and changes toreserves that are considered appropriate.Recent Accounting PronouncementsSee “Note 2. Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Item 8. Financial Statements andSupplementary Data for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on ConsolidatedBalance Sheets and Consolidated Statements of Operations.ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKForeign Currency RiskOur results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro,British pound, Singapore dollar and Malaysian Ringgit. To date, we have not entered into any foreign currency hedging contracts, but may consider entering intosuch contracts in the future. We believe our operating activities act as a natural hedge for a substantial portion of our foreign currency exposure because wetypically collect revenue and incur costs in the currency in the location in which we provide our solution from our sales centers. However, our global servicedelivery centers in Kuala Lumpur and Manila incur costs in the Malaysian Ringgit and Philippine Peso, respectively, but we do not generate revenue or cashproceeds in these currencies and, as a result, have related foreign currency risk exposure. As our international operations grow, we will continue to reassess ourapproach to managing our risk relating to fluctuations in currency rates.We performed a sensitivity analysis of our foreign currency exposure at December 31, 2015 to assess the potential impact of fluctuations in exchange ratesfor all foreign denominated assets and liabilities. A 10% appreciation or depreciation for all currencies against the U.S. dollar at December 31, 2015 would nothave had a material impact on our results of operations or our cash flows.Interest Rate RiskAt December 31, 2015 , we had cash and cash equivalents of $72.3 million and short-term investments of $136.4 million , which primarily consisted ofcorporate bonds, agency securities, asset-backed securities and U.S. treasury securities. The carrying amount of our cash equivalents reasonably approximates fairvalue due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidityneeds and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed tomarket risk due to fluctuations in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature ofour investment portfolio, however, we do not believe an53Table of Contentsimmediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio. We therefore do not expect ouroperating results or cash flows to be materially affected by a sudden change in market interest rates. We do not believe our cash equivalents have significant risk ofdefault or illiquidity. While we believe our cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investmentswill not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financialinstitutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on these deposits As of December 31, 2015 , we had $150.0 million aggregate principal amount of convertible senior notes outstanding and capital lease obligations of$0.3 million, all of which are fixed rate instruments. Therefore, our results of operations are not subject to fluctuations in interest rates.Inflation RiskWe do not believe that inflation has had a material effect on our business, financial condition or results of operations. Nonetheless, if our costs were tobecome subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do socould harm our business, financial condition and results of operations.54Table of ContentsITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAServiceSource International, Inc.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Report of Independent Registered Public Accounting Firm56Consolidated Balance Sheets at December 31, 2015 and 201457Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 201359Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015, 2014 and 201360Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014 and 201361Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 201362Notes to Consolidated Financial Statements6355Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of ServiceSource International, Inc.In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive loss, stockholders’ equity andcash flows present fairly, in all material respects, the financial position of ServiceSource International, Inc. and its subsidiaries at December 31, 2015 andDecember 31, 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity withaccounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintainingeffective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sReport on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on theCompany's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whetherthe financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internalcontrol over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaMarch 8, 201656Table of ContentsServiceSource International, Inc.Consolidated Balance Sheets(In thousands, except per share amounts) December 31,2015 2014Assets Current assets: Cash and cash equivalents$72,334 $90,382Short-term investments136,378 125,000Accounts receivable, net56,563 70,163Deferred income taxes97 398Prepaid expenses and other8,167 6,815Total current assets273,539 292,758Property and equipment, net25,903 25,658Deferred income taxes, net of current portion1,759 2,488Goodwill and intangibles, net9,444 10,957Other assets, net8,960 7,985Total assets$319,605 $339,846 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable$1,067 $2,922Accrued taxes1,112 1,721Accrued compensation and benefits22,116 20,056Deferred revenue5,770 7,018Accrued expenses4,716 8,882Other current liabilities2,327 2,569Total current liabilities37,108 43,168Obligations under capital leases, net of current portion198 329Convertible notes, net128,092 120,730Other long-term liabilities4,113 4,331Total liabilities169,511 168,558Commitments and contingencies (Note 11) Stockholders’ equity: Preferred stock, $0.001 par value; 20,000,000 shares authorized and none issued and outstanding— —Common stock; $0.0001 par value; 1,000,000 shares authorized, 86,893 shares issued and 86,772 sharesoutstanding as of December 31, 2015; 83,928 shares issued and 83,807 shares outstanding at December 31,20148 8Treasury stock(441) (441)Additional paid-in capital331,922 312,017Accumulated deficit(181,822) (141,409)Accumulated other comprehensive income427 1,113Total stockholders’ equity150,094 171,288Total liabilities and stockholders’ equity$319,605 $339,84657Table of ContentsThe accompanying notes are an integral part of these consolidated financial statements.58Table of ContentsServiceSource International, Inc.Consolidated Statements of Operations(In thousands, except per share amounts) Years Ended December 31, 2015 2014 2013Net revenue$252,203 $272,180 $272,482Cost of revenue171,369 194,009 162,449Gross profit80,834 78,171 110,033Operating expenses: Sales and marketing44,086 59,988 58,826Research and development16,480 25,802 23,855General and administrative46,299 47,808 44,913Restructuring and other3,662 3,314 —Goodwill and other intangibles impairment— 25,108 —Total operating expenses110,527 162,020 127,594Loss from operations(29,693) (83,849) (17,561)Interest expense and other, net(9,316) (11,008) (4,420)Loss before income taxes(39,009) (94,857) (21,981)Income tax provision1,404 302 871Net loss$(40,413) $(95,159) $(22,852)Net loss per common share: Basic$(0.47) $(1.15) $(0.29)Diluted$(0.47) $(1.15) $(0.29)Weighted-average shares used in computing net loss per common share: Basic85,417 82,872 78,408Diluted85,417 82,872 78,408The accompanying notes are an integral part of these consolidated financial statements.59Table of ContentsServiceSource International, Inc.Consolidated Statements of Comprehensive Loss(In thousands) Years Ended December 31, 2015 2014 2013Net loss$(40,413) $(95,159) $(22,852)Other comprehensive income: Foreign currency translation adjustments12 471 579Unrealized (loss) gain on short-term investments, net of tax(698) (212) 167Total other comprehensive income (loss), net of tax(686) 259 746Total comprehensive loss, net of tax$(41,099) $(94,900) $(22,106)The accompanying notes are an integral part of these consolidated financial statements.60Table of ContentsServiceSource International, Inc.Consolidated Statements of Stockholders' Equity(In thousands) Common Stock Treasury Shares/Stock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveIncome (Loss) Total Shares Amount Shares Amount Balances at January 1, 201375,258 $8 (121) (441) 210,650 (23,398) 108 186,927Proceeds from the exercise of stock options andemployee stock purchase plan5,887 — — — 24,976 — — 24,976Vested restricted stock units converted to shares514 — — — — — — —Equity component of the convertible notes issuance,net— — — — 37,297 — — 37,297Issuance of warrants— — — — 21,763 — — 21,763Bond hedges— — — — (31,408) — — (31,408)Stock-based compensation— — — — 23,608 — — 23,608Income tax deficiency from stock-basedcompensation— — — — (360) — — (360)Comprehensive loss: Net loss— — — — — (22,852) — (22,852)Other comprehensive income— — — — — — 746 746Total comprehensive loss (22,106)Balances at January 1, 201481,659 $8 $(121) $(441) $286,526 $(46,250) $854 $240,697Proceeds from the exercise of stock options andemployee stock purchase plan937 — — — 4,386 — — 4,386Vested restricted stock units converted to shares1,332 — — — — — — —Stock-based compensation— — — — 20,959 — — 20,959Income tax benefit from stock-based compensation— — — — 146 — — 146Comprehensive loss: Net loss— — — — — (95,159) — (95,159)Other comprehensive income— — — — — — 259 259Total comprehensive loss (94,900)Balances at January 1, 201583,928 $8 $(121) $(441) $312,017 $(141,409) $1,113 $171,288Proceeds from the exercise of stock options andemployee stock purchase plan1,505 — — — 5,761 — — 5,761Vested restricted stock units converted to shares1,755 — — — — — — —Payroll taxes on restricted stock unit releases— — — — (974) — — (974)Share repurchases(295) — — — (1,212) — — (1,212)Stock-based compensation— — — — 13,751 — — 13,751Acceleration of stock-based compensation expensedue to restructuring— — — — 2,579 — — 2,579Income tax benefit from stock-based compensation— — — — — — — —Comprehensive loss: Net loss— — — — — (40,413) — (40,413)Other comprehensive income— — — — — — (686) (686)Total comprehensive loss (41,099)Balances at December 31, 201586,893 $8 $(121) $(441) $331,922 $(181,822) $427 $150,094The accompanying notes are an integral part of these consolidated financial statements.61Table of ContentsServiceSource International, Inc.Consolidated Statements of Cash Flows(In thousands) Years Ended December 31, 2015 2014 2013Cash flows from operating activities Net loss$(40,413) $(95,159) $(22,852)Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization13,736 13,219 11,652Amortization of debt discount and issuance costs8,048 7,474 2,761Amortization of premium on short-term investments(101) (245) 750Deferred income taxes789 (514) 217Stock-based compensation13,387 20,899 23,620Tax (benefit) deficit from stock-based compensation— (146) 360Restructuring and other2,579 952 —Goodwill and other intangibles impairment— 25,108 —Changes in operating assets and liabilities: Accounts receivable, net12,002 3,716 (7,470)Deferred revenue(1,204) (371) 3,069Prepaid expenses and other(2,799) (631) (1,336)Accounts payable(1,562) (278) 521Accrued taxes(539) 477 71Accrued compensation and benefits2,706 248 3,772Accrued expenses(3,940) 1,978 457Other liabilities(66) (489) 83Net cash provided by (used in) operating activities2,623 (23,762) 15,675Cash flows from investing activities Acquisition of property and equipment(11,975) (9,357) (5,261)Restricted cash(1,244) — —Investment in privately held company— — (4,500)Cash paid for acquisition, net of cash acquired— (32,550) —Purchases of short-term investments(95,421) (84,415) (89,747)Sales of short-term investments82,351 60,407 14,436Maturities of short-term investments1,095 4,043 2,600Net cash used in investing activities(25,194) (61,872) (82,472)Cash flows from financing activities Proceeds from issuance of convertible notes— — 150,000Issuance costs related to the issuance of convertible senior notes— — (4,867)Payments of convertible note hedges— — (31,408)Proceeds from the issuance of warrants— — 21,763Repayment of long-term debt and capital lease obligations(170) (364) (329)Repurchase of common stock(1,212) — —Proceeds from common stock issuances5,703 4,386 24,966Tax benefit (deficit) from stock-based compensation— 146 (360)Net cash provided by financing activities4,321 4,168 159,765Net (decrease) increase in cash and cash equivalents(18,250) (81,466) 92,968Effect of exchange rate changes on cash and cash equivalents202 1,716 596Cash and cash equivalents at beginning of period90,382 170,132 76,568Cash and cash equivalents at end of period$72,334 $90,382 $170,132Supplemental disclosure of cash flow information Cash paid for interest$2,286 $2,440 $125Income taxes paid, net854 146 1,168Supplemental disclosure of non-cash investing and financing activities Acquisition of property and equipment through accounts payable and accrued liabilities111 385 34The accompanying notes are an integral part of these consolidated financial statements.62Table of ContentsServiceSource International, IncNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. The CompanyServiceSource International, Inc. ("ServiceSource" or the "Company") is a global leader in customer and revenue lifecycle solutions that power enterpriserevenue relationships, partnering with B2B technology and technology-enabled companies to optimize maintenance, support and subscription revenue streams,while also improving end customer relationships and loyalty. The Company delivers these results via dedicated service teams and integral cloud-basedtechnologies, leveraging benchmarks and best-practices derived from its rich database of service and renewal behavior. By integrating managed services, cloudsoftware and data, the Company provides its clients with insights into their end customers' businesses, end-to-end management and optimization of the service-contract renewals process and customer success activities, including data management, quoting, selling and recurring revenue business intelligence. The Companyreceives commissions from its clients based on renewal sales that the Company generates on their behalf under a pay-for-performance or flat-rate model. Inaddition, the Company also offers a purpose-built cloud application to maximize the renewal of subscriptions, maintenance and support contracts and receivessubscription fees from its clients for the SaaS product. The Company’s corporate headquarters is located in San Francisco, California. The Company has additionalU.S. offices in Colorado, Tennessee and Washington, and International offices in Bulgaria, Ireland, Japan, Malaysia, Philippines, Singapore, and the UnitedKingdom.2. Summary of Significant Accounting PoliciesBasis of ConsolidationThe accompanying consolidated financial statements of ServiceSource include the accounts of the Company and its wholly-owned subsidiaries. Allintercompany balances and transactions have been eliminated in consolidation.Use of EstimatesThe preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilitiesat 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, recognition and measurement of current and deferred income tax assets and liabilities and uncertain tax positions and the provision for baddebts.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 may differ from these estimates, and thesedifferences may be material.ReclassificationsAmounts shown in the Accrued liabilities and other caption in the Consolidated Balance Sheet as of December 31, 2014 and the Consolidated Statement ofCash Flows for the year ended December 31, 2014 and 2013 have been reclassified into Accrued expenses and Other current liabilities to reflect the current periodpresentation.Segment ReportingThe Company operates its business as two reportable segments, Managed Services and Cloud and Business Intelligence ("CBI"). Operating segments aredefined as components of an enterprise that engage in business activities for which discrete financial information is available and is evaluated by the chiefoperating decision maker (CODM) (which for ServiceSource is its Chief Executive Officer) in deciding how to allocate resources and assess performance. SeeNote 15 for segment information.Significant Risks and UncertaintiesThe Company is subject to certain risks and uncertainties that could have a material and adverse effect on its future financial position or results of operations.The Company’s clients are primarily high technology companies and any downturn in these industries, changes in clients’ sales strategies, or widespread shiftaway from end customers purchasing maintenance63Table of Contentsand support contracts could have an adverse impact on the Company’s consolidated results of operations and financial condition.Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, short-terminvestments, accounts receivable and the Note Hedges (Note 10). The Company is also exposed to a variety of market risks, including the effects of changes inforeign currency exchange rates and interest rates.Cash is maintained in demand deposit accounts at U.S., European and Asian financial institutions that management believes are credit worthy. Deposits inthese institutions may exceed the amount of insurance provided on these deposits.Accounts receivable are derived from services performed for clients located primarily in the U.S., Europe and Asia. The Company attempts to mitigate thecredit risk in its trade receivables through its ongoing credit evaluation process and historical collection experience. The Company maintains an allowance fordoubtful accounts based upon the expected collectability of its accounts receivable, which takes into consideration an analysis of historical bad debts and otheravailable information.Two customers represented 13% and 12% , respectively, of accounts receivable as of December 31, 2015. One customer represented 12% of accountsreceivable as of December 31, 2014. Fair Value of Financial InstrumentsThe Company accounts for certain assets and liabilities at fair value. As defined in the authoritative guidance on fair value measurements, fair value is theprice that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Theguidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. An asset or liability’s level is based on thelowest level of input that is significant to the fair value measurement. The guidance requires that assets and liabilities carried at fair value be classified anddisclosed in one of the following three categories:Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;Level 3:Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about theassumptions that market participants would use in pricing.Financial instruments not measured at fair value on a recurring basis include cash, restricted cash recorded in other assets, accounts receivable, accountspayable, accrued taxes, accrued expenses and other accrued liabilities and convertible notes. With the exception of the convertible notes and the financialinstruments discussed in Note 6 - Fair Value of Financial Instruments, the fair value of the Company’s financial instruments approximate carrying value due totheir short maturities.Strategic Investment in Private Company In 2013, we made an equity investment in a private company for $4.5 million , which represented less than 5% of the outstanding equity of the company. Wecarry this investment on a cost basis and periodically evaluate it to determine if there is an impairment in its carrying value. To date there has been no reduction tothe cost basis of this investment.Foreign Currency Translation and RemeasurementAssets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translatedto U.S. dollars at exchange rates in effect at the balance sheet date. Net revenue and expenses are translated at monthly average exchange rates. The Companyaccumulates net translation adjustments in equity as a component of accumulated other comprehensive income (loss). For non-U.S. subsidiaries whose functionalcurrency is the U.S. dollar, transactions that are denominated in foreign currencies have been remeasured in U.S. dollars, and any resulting gains and losses arereported in the accompanying consolidated statements of operations. Foreign currency transaction (gains) losses of $(0.9) million , $0.8 million and $1.0 million ,were included in other (expense) income, net during 2015 , 2014 and 2013 , respectively.Accounts Receivable and Allowance for Doubtful AccountsAccounts receivable are stated at their carrying values net of an allowance for doubtful accounts. The Company evaluates the ongoing collectability of itsaccounts receivable based on a number of factors such as the credit quality of its clients, the age64Table of Contentsof accounts receivable balances, collections experience, current economic conditions and other factors that may affect a client’s ability to pay. In circumstanceswhere the Company is aware of a specific client’s inability to meet its financial obligations to the Company, a specific allowance for doubtful accounts is estimatedand recorded, which reduces the recognized receivable to the estimated amount that management believes will ultimately be collected. Account balances arecharged off against the allowance when it is probable that the receivable will not be recovered.The following are changes in the allowance for doubtful accounts during 2015 , 2014 and 2013 (in thousands): December 31, 2015 2014 2013Balance, beginning of year$37 $128 $253Charged to expense137 37 123Recoveries(37) (128) (248)Balance, end of year$137 $37 $128Property and EquipmentThe Company records property and equipment at cost, less accumulated depreciation and amortization. Depreciation is recorded using the straight-linemethod over estimated useful lives of seven years for office furniture and equipment, two to three years for computer hardware and three to seven years forsoftware. Leasehold improvements are amortized on a straight-line basis over the lesser of the lease term or the estimated useful life of the related assets, rangingfrom three to fifteen years.When assets are retired, the cost and accumulated depreciation and amortization are removed from their respective accounts and any loss on such retirementis reflected in operating expenses. When assets are otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from theirrespective accounts and any gain or loss on such sale or disposal is reflected in interest expense and other, net.Asset Retirement ObligationsThe fair value of a liability for an asset retirement obligation (“ARO”) is recognized in the period in which it is incurred. The Company’s asset retirementobligations are primarily associated with leasehold improvements in APJ, which, at the end of a lease, are contractually obligated to be removed in order to complywith the lease agreement. At the inception of a lease with such conditions, the Company records an ARO liability and a corresponding capital asset in an amountequal to the estimated fair value of the obligation. These assets and liabilities are reflected in other liabilities and other assets in the accompanying ConsolidatedBalance Sheets. The associated retirement costs are capitalized and included as part of the carrying value of the long-lived asset and amortized over the useful lifeof the asset. Upon satisfaction of the ARO conditions, any difference between the recorded ARO liability and the actual retirement costs incurred is recognized asan operating gain or loss in the consolidated statements of earnings. The following table summarizes the activity of the Company’s asset retirement obligationliability (in thousands): Asset retirement obligations as of December 31, 2013$778Additions267Accretion expense28Asset retirement obligations as of December 31, 20141,073Revisions in estimated cash flows(229)Accretion expense46Asset retirement obligations as of December 31, 2015$890Capitalized Internal-Use SoftwareExpenditures related to software developed or obtained for internal use are capitalized and amortized over a period of two to five years on a straight-linebasis. The Company capitalizes direct external costs associated with developing or obtaining internal-use software. In addition, the Company also capitalizescertain payroll and payroll-related costs for employees or professional fees for consultants who are directly associated with the development of such applications.Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred and arerecorded in research and development on the accompanying consolidated statements of operations. Capitalized65Table of Contentscosts related to internal-use software under development are treated as construction-in-progress until the program, feature or functionality is ready for its intendeduse, at which time amortization commences.GoodwillGoodwill assets have indefinite useful lives and are not amortized, but are tested for impairment at least annually or as circumstances indicate their valuemay no longer be recoverable. The Company does not have intangible assets with indefinite useful lives other than goodwill.The Company tests for goodwill impairment at the reporting unit level on an annual basis in the fourth quarter of each of its fiscal years, and at any othertime at which events occur or circumstances indicate that the carrying amount of goodwill may exceed its fair value. To assess if goodwill is impaired a qualitativeassessment, referred to as the simplified method, is first performed to determine whether further quantitative impairment testing is necessary. This qualitativeanalysis evaluates factors including, but not limited to, macro-economic conditions such as deterioration in the entity's operating environment or industry or marketconsiderations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation thata reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers. If, as a result of the qualitative assessment, theCompany considers it more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then a two-step quantitative impairment test isperformed. The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. A potential impairment exists if the fairvalue of the reporting unit is lower than its net book value. The second step of the process, which is performed only if a potential impairment exists, involvesdetermining the difference between the fair value of the reporting unit's net assets other than goodwill and the fair value of the reporting unit. If this difference isless than the net book value of goodwill, impairment exists and is recorded.Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reportingunits, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value ofreporting units include estimating future cash flows and determining appropriate discount rates, growth rates and other assumptions. Changes in these estimatesand assumptions could materially affect the determination of fair value of each reporting unit which could trigger impairment.If a two-step quantitative impairment test is required, the fair value of each reporting unit is determined based upon the income approach. Under the incomeapproach, the Company estimates the fair value of the reporting unit based upon the present value of estimated future cash flows. Cash flow projections aredetermined by management to be commensurate with the risk inherent in current business model. Key assumptions used to estimate the fair value of the reportingunits include the discount rate, compounded annual revenue growth rates, operating expense assumptions, and terminal value capitalization rate. The discount rateused is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related tothe reporting unit's ability to execute on the projected cash flows. The discount rate and terminal value capitalization rate are derived from the use of market datawhich are Level 3 inputs within the fair value hierarchy.The guidance for goodwill impairment testing based on reporting units. The $6.3 million of goodwill in the Consolidated Balance Sheet as of December 31,2015 is assigned to the Managed Service reporting unit. Goodwill related to the CBI reporting unit generated from the January 25, 2014 acquisition of ScoutAnalytics was fully impaired in 2014. The Company used the simplified method described above to determine if any impairment existed as of December 31, 2015and concluded that a two-step quantitative impairment test was not required and that its goodwill asset was not impaired as of December 31, 2015. Refer to Note 4Goodwill and Other Intangibles Impairment for more information.Senior Convertible NotesIn accounting for the senior convertible notes (the “Notes”) at issuance, the Company separated the Notes into debt and equity components pursuant to theaccounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. The fair value of the debt component wasestimated using an interest rate for nonconvertible debt, with terms similar to the Notes, excluding the conversion feature. The carrying amount of the liabilitycomponent was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The excess of the principal amountof the Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discountis accreted to interest expense over the term of the Notes using the effective interest method. The amount recorded to additional paid-in capital is not to beremeasured as long as it continues to meet the conditions for equity classification.66Table of ContentsImpairment of Long-Lived AssetsThe Company evaluates the recoverability of its long-lived assets, which include tangible assets and amortizable intangible such as internal-use software.Acquired intangible assets are amortized over their useful lives on a straight line basis which represents the pattern in which the Company derives benefit from theasset. The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of long-lived assetsmay not be recoverable. The Company recognizes such impairment in the event the net book value of such assets exceeds the future undiscounted cash flowsattributable to such assets. In 2014, the Company recorded intangible assets as part of its acquisition of Scout Analytics. The Company recorded an impairment ofintangible assets in relation to its Cloud and Business Intelligence business unit in 2014 of $2.5 million related to the cancellation of a product line originallyacquired in the Scout acquisition. No impairment of any long-lived assets was identified or recorded during 2015.Operating LeasesThe Company’s operating lease agreements for office facilities include provisions for certain rent holidays, tenant incentives and escalations in the base priceof the rent payment. The Company records rent holidays and rent escalations on a straight-line basis over the lease term and records the difference betweenexpense and cash payments as deferred rent. Tenant incentives are recorded as deferred rent and amortized on a straight-line basis over the lease term. Deferredrent is included in other accrued liabilities in the accompanying consolidated balance sheets.Deferred Debt Issuance CostsThe Company defers debt issuance costs, which primarily consists of the debt discount on the convertible debt and issuance costs related to the convertibledebt. Such costs primarily relates to convertible notes (Note 10) and is amortized using the effective interest method over the term of the debt instrument. Theamortization of deferred debt issuance costs is recorded as interest expense. Unamortized deferred debt issuance costs were $23.9 million at December 31, 2015and $32.0 million as of December 31, 2014 . Amortization of deferred debt issuance costs was $8.0 million in 2015 , $7.5 million in 2014 and $2.8 million in 2013, respectively. Estimated future amortization of deferred debt issuance costs expense will approximate $8.7 million in 2016 , $9.4 million in 2017 and $5.8 millionin 2018 .Comprehensive Income (Loss)Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss)refers to revenue, expenses, gains and losses recorded as an element of equity but are excluded from net income (loss). The Company’s other comprehensiveincome (loss) consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency and unrealizedgains and losses on available-for-sale securities. The Company has disclosed accumulated comprehensive other income (loss) as a separate component ofstockholders' equity.Revenue RecognitionThe Company’s revenue is derived primarily from recurring revenue management. Other revenues include subscriptions to the Company’s cloud applicationsand professional servicesRevenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability isreasonably assured from clients and no significant obligations remain unfulfilled by the Company.Recurring Revenue ManagementRevenue from recurring revenue management consists of fees earned from the sales of services contracts on behalf of the Company’s customers, which arereferred to as clients, or assisting in their sales process. The Company’s contract obligations include administering and managing the sales and/or renewalprocesses for client contracts; providing adequately trained staff; reporting; and holding periodic business reviews with clients. Client obligations include providinga detailed listing of sales prospects, access to their databases or systems and sales or marketing materials. Fees are generally based on a fixed percentage of theoverall sales value associated with the service contracts. However some client contracts include performance-based fees determined by the achievement ofspecified performance metrics. Recurring revenue management contracts entitle the Company to additional fees and adjustments which are invoked in variouscircumstances including a client’s failure to provide the Company with a specified minimum value of sales prospects, untimely delivery of client sales prospectdata or other obligations inhibiting the Company’s ability to perform its obligations. In addition, many client contracts contain early termination fees.67Table of ContentsRecurring revenue management services are deemed delivered when clients accept purchased orders from their sales prospects (the end customer) and nosignificant post-delivery obligations remain for the Company. Fees from recurring revenue management services are recognized on a net basis since the Companyacts as an agent on behalf of its clients. The Company does not provide the services being renewed by the end customers, nor does it determine pricing, terms orscope of services to the end customers. Performance incentive fees and early termination fees are recorded in the period when either the performance criteria havebeen met or a triggering event has occurred. SubscriptionsSubscription revenue is comprised of subscriptions fees to access the Company’s cloud based applications. Subscription revenue is recognized ratably overthe contract term, generally over a period of one to three years , commencing when the cloud applications are made available. The Company's subscription servicearrangements are generally non-cancelable and do not contain refund-type provisions.Professional ServicesProfessional services revenue is generated from implementation services. Professional services are deemed delivered upon the successful completion ofimplementation projects or when project milestones have been achieved and accepted by the client.Multiple Element ArrangementsThe Company enters into multiple element arrangements when clients utilize a combination of recurring revenue management services, subscriptions andprofessional services. Deliverables are separated at the inception of the arrangement if each deliverable has stand-alone value to the client. The Company believesthat it has stand-alone value for professional services. Arrangement consideration is allocated based on the relative best selling prices of each deliverable.However, most fees earned from recurring revenue management services are contingent in nature as the fees earned by the Company are based on performanceagainst the specific terms of each contract. Therefore, contingent fees from recurring revenue management services are excluded from the allocation of relativebest selling prices at inception of multiple element arrangements.Selling prices for each deliverable is determined based on the selling price hierarchy of vendor-specific objective evidence (VSOE), third-party evidence(TPE), and best estimated selling price (BESP). Generally, the Company has not been able to establish VSOE for its deliverables as the items have not been soldseparately. The Company has not been able to reliably determine the stand-alone selling prices of competitors’ products and services, and therefore cannot rely onTPE for its deliverables. Therefore, the Company utilizes BESP to determine the selling prices of its deliverables. The objective of BESP is to determine the priceat which the Company would price a product or service if it were sold on a stand-alone basis. BESP is generally used for offerings that are not typically soldseparately or for new offerings including Renew OnDemand. BESP is determined by considering multiple factors including, but not limited to, pricing practices,market conditions, competitive landscape, internal costs, geographies and gross margin. The determination of BESP is made through consultation with and formalapproval with management, taking into consideration the Company’s marketing strategy. As these marketing strategies evolve, the Company may modify itspricing practices in the future, which could result in changes to selling prices.Once arrangement consideration is allocated to the various deliverables in a multiple element arrangement, revenue is recognized when all other revenuerecognition criteria has been achieved.Advertising CostsAdvertising is expensed as incurred as a component of sales and marketing expenses on the consolidated statements of operations. Advertising expense was$0.1 million each year during 2015 , 2014 and 2013 .Income TaxesThe Company accounts for income taxes using an asset and liability method, which requires the recognition of taxes payable or refundable for the currentyear and deferred tax assets and liabilities for the expected future tax consequences of temporary differences that currently exist between the tax basis and thefinancial reporting basis of our taxable subsidiaries’ assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected toreverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date. Themeasurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.The Company files U.S. federal and state and foreign income tax returns in jurisdictions with varying statutes of limitations. In the normal course of businessthe Company is subject to examination by taxing authorities throughout the world.68Table of ContentsThese audits include questioning the timing and amount of deductions, the allocation of income among various tax jurisdictions and compliance with federal, state,local and foreign tax laws. The Company accounts for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition andmeasurement of tax positions taken or expected to be taken in a tax return. The Company establishes reserves for tax-related uncertainties based on estimates ofwhether, and the extent to which, additional taxes will be due. The Company records an income tax liability, if any, for the difference between the benefitrecognized and measured and the tax position taken or expected to be taken on our tax returns. The Company recognizes interest accrued and penalties related tounrecognized tax benefits in the income tax provision.Stock-Based CompensationThe Company measures and recognizes compensation expense for all share-based awards made to employees and directors based on estimated fair values.The fair value of employee and director options is estimated on the date of grant using the Black-Scholes option-pricing model. The value of awards that areultimately expected to vest is recognized as an expense over the requisite service periods. Since share-based compensation expense is based on awards ultimatelyexpected to vest, it is reduced for expected forfeitures.For awards that are expected to result in a tax deduction, a deferred tax asset is established as the Company recognizes compensation expense. If the taxdeduction exceeds the cumulative recorded compensation expense, the tax benefit associated with the excess deduction is considered a windfall benefit. The excesstax benefit from share compensation plans is recorded in members’ equity and classified as a financing cash flow on the consolidated statements of cash flows.Net Income (Loss) Per Common ShareBasic net income (loss) per share is computed by dividing income available to common shareholders by the weighted-average number of shares of commonstock outstanding during the period. Diluted net income (loss) per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would havebeen outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased underthe Company’s employee stock purchase plan and unvested restricted stock units (“RSUs”). The dilutive effect of potentially dilutive securities is reflected indiluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’scommon stock can result in a greater dilutive effect from potentially dilutive securities.Recent Accounting Pronouncements In May 2014, the Financial Accounting Standard Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-09, Revenue from Contracts withCustomers (Topic 606), which supersedes the revenue recognition requirements in the FASB's Accounting Standards Codification ("ASC") 605, RevenueRecognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature,amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assetsrecognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB approved a one year deferral of the effective date to December 15, 2017, andearly application would be permitted, but not before the original effective date of December 15, 2016, so the effective date will be the first quarter of fiscal year2018 using one of two retrospective application methods. The Company is currently evaluating the impact ASU No. 2014-09 will have on its consolidated financialstatements.In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Cost, which requires that debt issuance costs related to arecognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Thenew guidance is effective for the Company beginning in the first quarter of fiscal year 2017, with early adoption permitted. The Company is currently evaluatingthe impact that adoption of ASU No. 2015-03 will have on its consolidated financial statements.In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal Use Software, which provides guidance to customers aboutwhether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the update specifies that thecustomer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. The update further specifiesthat the customer should account for a cloud computing arrangement as a service contract if the arrangement does not include a software license. ASU No. 2015-05 will be effective for the Company in fiscal year 2016. Early adoption is permitted. An entity can elect to adopt the amendments either (1) prospectively to allarrangements entered into or materially modified after69Table of Contentsthe effective date or (2) retrospectively. The Company is currently evaluating the impact that adoption of ASU No. 2015-03 will have on its consolidated financialstatements.In November 2015, the FASB issued ASU No. 2015-17 Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilitiesto be classified as noncurrent in the consolidated balance sheet. The standard will be effective for financial statements issued for annual periods beginning afterDecember 15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements that have not been previously issued. Thestandard may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Company is currentlyevaluating the impact that adoption of ASU No. 2015-17 will have on its consolidated financial statements.In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” This standard requires entities that lease assets to recognize on the balance sheet theassets and liabilities for the rights and obligations created by those leases. The standard is effective for fiscal years and the interim periods within those fiscal yearsbeginning after December 15, 2018. The guidance is required to be applied by the modified retrospective transition approach. Early adoption is permitted. TheCompany is currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements. 3. Net Income (Loss) Per Common ShareThe basic and diluted net income (loss) per share calculations are presented below (in thousands, except for per share amounts): Years Ended December 31, 2015 2014 2013Basic net loss per common share Net loss$(40,413) $(95,159) $(22,852)Weighted-average common shares outstanding85,417 82,872 78,408Basic net loss per share$(0.47) $(1.15) $(0.29) Years Ended December 31, 2015 2014 2013Diluted net loss per common share Net loss used to determine diluted earnings per common shares$(40,413) $(95,159) $(22,852)Weighted-average common shares outstanding used in basic calculation85,417 82,872 78,408Adjustment for dilutive potential shares— — —Weighted-average common shares for diluted net loss per share85,417 82,872 78,408Diluted net loss per share$(0.47) $(1.15) $(0.29)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 periodspresented consist of weighted stock options, non-vested restricted stock, and shares to be purchased under our Employee Stock Purchase Plan having an anti-dilutive effect of 9.5 million, 6.4 million and 2.0 million shares for the years ended December 31, 2015 , 2014 and 2013 , respectively.4. Goodwill and Other Intangibles ImpairmentOn January 22, 2014, the Company acquired Scout Analytics, Inc. (“Scout”), a privately held company for a total purchase consideration of $32.5 million ,net of cash acquired. Scout provides cloud-based recurring revenue management solutions that enable information services, media publishing, and SaaS companiesto understand how end customers engage with their online content. As a result of the acquisition, the Company recorded $22.7 million of goodwill and $9.0 millionof other intangible assets.Goodwill ImpairmentDuring the third quarter of 2014, the Company’s market capitalization had a significant decline, the Company experienced slowing revenue growth andlosses in 2014 for the CBI reporting unit in the near term and the Company experienced churn of the CBI client base. Therefore, the Company determined thatthere were sufficient indicators to require the Company to perform an interim impairment analysis in the third quarter of 2014.Based on the analysis, the Company determined that the carrying amount of the goodwill for the CBI reporting unit was in excess of its fair value and that aquantitative impairment test was necessary. The fair value of the reporting unit was determined using the income approach, which estimates the fair value based onthe future discounted cash flows. Under the income approach, the company assumed a forecasted cash flow period of nine years, long-term annual growth rates of4% and a discount rate of 16% . As required by the quantitative step of the impairment test, the Company performed an allocation of the70Table of Contentsfair value to all the assets and liabilities of the reporting unit, including identifiable intangible assets, based on their estimated fair values, to determine the impliedfair value of goodwill. Accordingly, the Company recorded a goodwill impairment charge related to the CBI reporting unit of $21.0 million , during the quarterended September 30, 2014 for the difference between the carrying value of the goodwill in the reporting unit and its implied fair value. Consistent with theapproach in the third quarter, the Company performed an analysis for the CBI reporting unit and again determined that the fair value was less than the carryingvalue. The Company then performed the quantitative step of the impairment analysis which resulted in the impairment of all of the reporting unit’s remaininggoodwill in the amount of $1.7 million in the fourth quarter of 2014.In total, the Company recorded a $22.7 million non-cash goodwill impairment charge in 2014 for its CBI reporting unit. No impairment of goodwill wasrecognized on the remaining $6.3 million of goodwill assigned to the Managed Services reporting unit for the year ended December 31, 2015.The changes in the carrying amount of goodwill by reporting units are as follows: Managed Services Cloud and Business Intelligence Total (in thousands)Balance as of December 31, 2013$6,334 $— $6,334Addition due to acquisition$— $22,653 $22,653Impairment$— $(22,653) $(22,653)Balance as of December 31, 2014$6,334 $— $6,334Addition due to acquisition$— $— $—Impairment$— $— $—Balance as of December 31, 2015$6,334 $— $6,334Intangible Assets ImpairmentIn the fourth quarter of 2014, due to a move to a competing solution by the reseller of a technology acquired from the Scout acquisition, and lack ofalternative uses of this technology, the Company decided to not further pursue opportunities with this technology and fully impaired the intangible assets related tothis technology, trademarks and client contracts and recorded at charge of $2.5 million for the year-ended December 31, 2014. No impairment of intangible assetswas recognized for the year ended December 31, 2015.Intangible AssetsIntangible Assets consisted of the following: Gross Carrying Amount Accumulated Amortization Net (in thousands)Balance as of December 31, 2013$— $— $—Addition$9,020 $— $9,020Amortization expenses$— $(1,940) $(1,940)Impairment$(2,970) $513 $(2,457)Balance as of December 31, 2014$6,050 $(1,427) $4,623Addition$— $— $—Amortization expenses$— $(1,513) $(1,513)Impairment$— $— $—Balance as of December 31, 2015$6,050 $(2,940) $3,110Amortization expense for intangibles assets recognized was $1.5 million , $1.9 million and $0.0 million during the years ended December 31, 2015 , 2014,and 2013, respectively. The Company’s intangible asset is comprised of $1.5 million of developed technology assets, $1.1 million of customer relationships assetsand $0.5 million of trade name assets as of December 31, 2015 .71Table of ContentsThe estimated future amortization expense of purchased intangible assets as of December 31, 2015 was as follows: December 31, 2015 (in thousands)2016$1,51320171,513201884Total$3,1105. Cash, Cash Equivalents and Short-term InvestmentsCash equivalents consist of highly liquid fixed-income investments with original maturities of three months or less at the time of purchase. The Company hascash and cash equivalents held on its behalf by a third party of $0.8 million and $0.9 million as of December 31, 2015 and 2014 respectively. Short-terminvestments consist of readily marketable securities with a remaining maturity of more than three months from time of purchase. The Company classifies all of itscash equivalents and short-term investments as “available for sale,” as these investments are free of trading restrictions. These marketable securities are carried atfair value, with the unrealized gains and losses, net of tax, reported as accumulated other comprehensive income and included as a separate component ofstockholders’ equity. Gains and losses are recognized when realized. When the Company determines that an other-than-temporary decline in fair value hasoccurred, the amount of the decline that is related to a credit loss is recognized in earnings. Gains and losses are determined using the specific identificationmethod. The Company’s realized gains and losses in the years ended December 31, 2015 and 2014 were insignificant.Cash and cash equivalents and short-term investments consisted of the following as of December 31, 2015 and 2014 (in thousands):December 31, 2015 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair ValueCash$72,105 $— $— $72,105Cash equivalents: Money market mutual funds229 — — 229Total cash and cash equivalents72,334 — — 72,334Short-term investments: Corporate bonds54,434 — (389) 54,045U.S. agency securities36,010 — (187) 35,823Asset-backed securities30,665 — (132) 30,533U.S. Treasury securities16,024 — (47) 15,977Total short-term investments137,133 — (755) 136,378Cash, cash equivalents and short-term investments$209,467 $— $(755) $208,712 72Table of ContentsDecember 31, 2014 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair ValueCash$89,589 $— $— $89,589Cash equivalents: Money market mutual funds793 — — 793Total cash and cash equivalents90,382 — — 90,382Short-term investments: Corporate bonds49,110 29 (120) 49,019U.S. agency securities42,004 56 (17) 42,043Asset-backed securities21,083 8 (34) 21,057U.S. Treasury securities12,859 27 (5) 12,881Total short-term investments125,056 120 (176) 125,000Cash, cash equivalents and short-term investments$215,438 $120 $(176) $215,382The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on statedeffective maturities as of December 31, 2015 (in thousands): AmortizedCost EstimatedFair ValueLess than 1 year$12,527 $12,498Due in 1 to 5 years124,835 124,109Total$137,362 $136,607As of December 31, 2015 , the Company did not consider any of its investments to be other-than-temporarily impaired.6. Fair Value of Financial InstrumentsThe Company measures certain financial instruments at fair value on a recurring basis. The Company uses a three-tier fair value hierarchy, which prioritizesthe inputs used in the valuation methodologies in measuring fair value:•Level 1 valuations are based on quoted prices in active markets for identical assets or liabilities.•Level 2 valuations are based on inputs that are observable, either directly or indirectly, other than quoted prices included within Level 1. Such inputs usedin determining fair value for Level 2 valuations include quoted prices in active markets for similar assets or liabilities, quoted prices for identical orsimilar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.•Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement. All of the Company’s cash equivalents and short-term investments are classified within Level 1 or Level 2.The following table presents information about the Company’s financial instruments that are measured at fair value as of December 31, 2015 and indicatesthe fair value hierarchy of the valuation (in thousands): 73Table of Contents Total Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2)Description Cash equivalents: Money market mutual funds$229 $229 $—Total cash equivalents229 229 —Short-term investments: Corporate bonds54,045 — 54,045U.S. agency securities35,823 — 35,823Asset-backed securities30,533 — 30,533U.S. Treasury securities15,977 — 15,977Total short-term investments136,378 — 136,378Cash equivalents and short-term investments$136,607 $229 $136,378The following table presents information about the Company’s financial instruments that are measured at fair value as of December 31, 2014 and indicatesthe fair value hierarchy of the valuation (in thousands): Total Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2)Description Cash equivalents: Money market mutual funds$793 $793 $—Total cash equivalents793 793 —Short-term investments: Corporate bonds49,019 — 49,019U.S. agency securities42,043 — 42,043Asset-backed securities21,057 — 21,057U.S. Treasury securities12,881 — 12,881Total short-term investments125,000 — 125,000Cash equivalents and short-term investments$125,793 $793 $125,000The convertible notes issued by the Company in August 2013 are shown in the accompanying consolidated balance sheets at their original issuance value, netof unamortized discount, and are not marked to market each period. The approximate fair value of the convertible notes was $126.0 million and $111.2 million asof December 31, 2015 and 2014 respectively. The fair value of the convertible notes was determined using quoted market prices for similar securities, which, dueto limited trading activity, are considered Level 2 in the fair value hierarchy.The Company did not have any other financial instruments or long-term debt measured at fair value as of December 31, 2015 and 2014 , respectively.74Table of Contents7. Property and Equipment, NetProperty and equipment balances were comprised of the following (in thousands): December 31, 2015 2014Computers and equipment$18,471 $16,335Software46,142 38,273Leasehold improvements12,338 12,643Furniture and fixtures8,853 9,584 85,804 76,835Less: accumulated depreciation and amortization(59,901) (51,177) $25,903 $25,658Depreciation and amortization expense during the years ended December 31, 2015 , 2014 and 2013 , was $13.7 million , $13.2 million and $11.7 million ,respectively.Total property and equipment assets under capital lease at December 31, 2015 and 2014 , was $3.3 million and $3.3 million , respectively. Accumulateddepreciation related to assets under capital lease as of these dates were $3.2 million and $3.1 million , respectively.The Company capitalized costs of $7.2 million , $3.0 million and $0.0 million , during 2015 , 2014 and 2013 , respectively, related to internal-use software.As of December 31, 2015 and 2014 , the carrying value of capitalized costs related to internal-use software, net of accumulated amortization, was $11.7 millionand $8.5 million , respectively. Amortization of capitalized costs related to internal-use software was $5.0 million , $2.9 million and $4.4 million during 2015 ,2014 and 2013 , respectively.8. Other Accrued LiabilitiesOther current accrued liabilities balances were comprised of the following (in thousands): December 31, 2015 2014Accrued Interest - Convertible Notes$948 $938Deferred rent738 855ESPP Withholding641 776Total$2,327 $2,5699. Credit Facility and Capital LeasesRevolving Credit FacilityOn July 5, 2012, the Company entered into a three -year credit agreement which provided for a secured revolving line of credit based on eligible accountsreceivable up to $30.0 million with a $2.0 million letter of credit sublimit. On May 5, 2014, the Company entered into an amendment to the credit agreement whichreduced the secured revolving line of credit to $10.0 million . The credit agreement expired on July 5, 2015.Letter of CreditOn February 3, 2015, the Company issued a $1.2 million letter of credit in connection with a lease for a new San Francisco office facility. The letter of creditis secured by $1.2 million of a money market account which is classified as restricted cash in other assets, net, in the accompanying consolidated balance sheet.Capital LeasesThe Company has capital lease agreements that are collateralized by the underlying property and equipment and expire through September 2019 . Theweighted-average imputed interest rates for capital lease agreements were 4.4% , 5.8% and 2.6% at December 31, 2015 , 2014 and 2013 , respectively.75Table of ContentsThe future contractual maturities of capital lease obligations as of December 31, 2015 are as follows (in thousands): Years Ending 2016$1192017802018672019512020—Total$31710. Convertible NotesSenior Convertible NotesIn August 2013, the Company issued senior convertible notes (the "Notes") raising gross proceeds of $150.0 million .The Notes are governed by an Indenture, dated August 13, 2013 (the "Indenture"), between the Company and Wells Fargo Bank, National Association, astrustee. The Notes will mature on August 1, 2018, unless earlier repurchased or converted, and bear interest at a rate of 1.50% per year payable semi-annually inarrears on February 1 and August 1 of each year, commencing February 1, 2014.The Notes are convertible at an initial conversion rate of 61.6770 of common stock per $1,000 principal amount of Notes, which represents an initialconversion price of approximately $16.21 per share of common stock, subject to anti-dilution adjustments upon certain specified events, including in certaincircumstances, upon a make-whole fundamental change (as defined in the Indenture). Upon conversion, the Notes will be settled in cash, shares of the Company’scommon stock, or any combination thereof, at the Company’s option.Prior to February 1, 2018, the Notes are convertible only upon the following circumstances:•during any calendar quarter commencing after December 31, 2013, (and only during such calendar quarter), if for at least 20 trading days (whether or notconsecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter, the lastreported sale price of common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day.•during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes foreach trading day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of common stock and theapplicable conversion rate on each such trading day; or• upon the occurrence of specified corporate events described in the Indenture.Holders of the Notes may convert their Notes at any time on or after February 1, 2018, until the close of business on the second schedule trading dayimmediately preceding the maturity date, regardless of the foregoing circumstances.The holders of the Notes may require the Company to repurchase all or a portion of their Notes at a cash repurchase price equal to 100% of the principalamount of the Notes being repurchased, plus accrued and unpaid interest, if any, upon a fundamental change (as defined in the Indenture). In addition, upon certainevents of default (as defined in the Indenture), the trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding Notes bynotice to the Company and the trustee, may, and the trustee at the request of such holders shall, declare 100% of the principal amount of the Notes, plus accruedand unpaid interest, if any, on all the Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization involving the Company,100% of the principal of and accrued and unpaid interest on the Notes will automatically become due and payable.To account for the Notes at issuance, the Company separated the Notes into debt and equity components pursuant to the accounting standards for convertibledebt instruments that may be fully or partially settled in cash upon conversion. The fair value of debt component was estimated using an interest rate fornonconvertible debt, with terms similar to the Notes, excluding the conversion feature. The carrying amount of the liability component was calculated bymeasuring the fair value of a similar liability that does not have an associated convertible feature. The excess of the principal amount of the Notes over the fairvalue of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted to interestexpense over the term of the Notes using the interest method. The amount recorded to additional paid-in capital is not to be remeasured as long as it continues tomeet the conditions of equity classification. Upon issuance of the $150.0 million of Notes, the Company recorded $111.5 million to debt and $38.5 million toadditional paid-in capital.76Table of ContentsThe Company incurred transaction costs of approximately $4.9 million related to the issuance of the Notes. In accounting for these costs, the Companyallocated the costs to the debt and equity components in proportion to the allocation of proceeds from the issuance of the Notes to such components. Transactioncosts allocated to the debt component of $3.6 million are deferred as an asset and amortized to interest expense over the term of the Notes. The transaction costsallocated to the equity component of $1.3 million were recorded to additional paid-in capital. The transactions costs allocated to the debt component were recordedas deferred offering costs in other non-current assets.The net carrying amount of the liability component of the Notes as of December 31, 2015 and 2014 consists of the following (in thousands): December 31, 2015 2014Principal amount$150,000 $150,000Unamortized debt discount(21,908) (29,270)Net carrying amount$128,092 $120,730The following table presents the interest expense recognized related to the Notes for the year ended December 31, 2015 and 2014 (in thousands): December 31, 2015 2014Contractual interest expense at 1.5% per annum$2,250 $2,250Amortization of debt issuance costs686 635Accretion of debt discount7,362 6,815Total$10,298 $9,700The net proceeds from the Notes were approximately $145.1 million after payment of the initial purchasers' offering expense. The Company usedapproximately $31.4 million of the net proceeds from the Notes to pay the cost of the Note Hedges described below, which was partially offset by $21.8 million ofthe proceeds from the Company's sale of the Warrants also described below.Note HedgesConcurrent with the issuance of the Notes, the Company entered into note hedges ("Note Hedges") with certain bank counterparties, with respect to itscommon stock. The Company paid $31.4 million for the Note Hedges. The Note Hedges cover approximately 9.25 million shares of the Company's common stockat a strike price of $16.21 per share. The Note Hedges will expire upon the maturity of the Notes. The Note Hedges are intended to reduce the potential dilution tothe Company's common stock upon conversion of the Notes and/or offset the cash payment in excess of the principal amount of the Notes the Company is requiredto make in the event that the market value per share of the Company's common stock at the time of exercise is greater than the conversion price of the Notes.WarrantsSeparately, the Company entered into warrant transactions, whereby it sold warrants to the same bank counterparties as the Note Hedges to acquireapproximately 9.25 million shares of the Company's common stock at an initial strike price of $21.02 per share ("Warrants"), subject to anti-dilution adjustments.The Company received proceeds of approximately $21.8 million from the sale of the Warrants. If the fair value per share of the Company's common stock exceedsthe strike price of the Warrants, the Warrants will have a dilutive effect on earnings per share, unless the Company elects, subject to certain conditions, to settle theWarrants in cash.The amounts paid and received for the Note Hedges and the Warrants have been recorded in additional paid-in capital. The fair value of the Note Hedges andthe Warrants are not remeasured through earnings each reporting period.11. Commitments and ContingenciesOperating LeasesThe Company leases its office space and certain equipment under non-cancelable operating lease agreements with various expiration dates throughNovember 2022 . Rent expense during 2015 , 2014 and 2013 was $9.4 million , $9.2 million and77Table of Contents$8.6 million , respectively. The Company recognizes rent expense on a straight-line basis over the lease period and accrues for rent expense incurred but not paid.In May 2015, the Company commenced a 7 -year office lease expiring in November 2022, for a new corporate headquarters in San Francisco, California tooccupy 24,394 square feet. The total minimum lease payments are estimated to be approximately $13.3 million over the lease term. 7In October 2015, the Company signed a 6 -year office lease expiring in July 2021, for a new service delivery center in Manila, Philippines to occupy 46,134square feet. The total minimum lease payments are estimated to be approximately $7.0 million over the lease term.In December 2015, the Company signed a 5 -year office lease expiring in February 2021, for a new service delivery center in Sofia, Bulgaria to occupy22,104 square feet. The total minimum lease payments are estimated to be approximately $1.8 million over the lease term.Future annual minimum lease payments under all non-cancelable operating leases as of December 31, 2015 were as follows (in thousands): Fiscal Year 2016$9,37520179,16720188,55620197,20920206,034Thereafter8,778Total$49,119Purchase OrdersThe Company had $11.1 million in non-cancelable purchase commitments with our suppliers as of December 31, 2015 .LitigationOn July 8, 2015, a single plaintiff filed a putative securities class action lawsuit, Weller v. ServiceSource International, Inc. et al., in the U.S. District Courtfor the Northern District of California (the “Weller Lawsuit”) against the Company and the Company’s former Chief Executive Officer. The Weller Lawsuit wasbrought on behalf of purchasers of Company stock during the period January 22, 2014 through May 1, 2014, and alleges violations under Sections 10(b) and 20(a)of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In connection with the mandatory lead plaintiff appointment process under the PrivateSecurities Litigation Reform Act (PSLRA), various law firms issued press releases between July 2015 and September 2015 to search for additional shareholdersthat would be willing to serve as lead plaintiffs in this lawsuit. This solicitation period ended on September 29, 2015 and no other shareholders came forward,leaving only the named plaintiff as the sole shareholder seeking to be appointed lead plaintiff. The court appointed Weller as lead plaintiff on October 21, 2015. Atthis time, no motion to certify a class has been filed. The Company believes that the claims are meritless, and will vigorously defend itself against such claims.From time to time, the Company may be subject to other litigation or threatened litigation arising in the ordinary course of our business. Although the resultsof 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 outcomecould have a material adverse effect on our business, operating results, financial position, or cash flows. Regardless of the outcome, litigation can have an adverseimpact on the Company because of defense and settlement costs, diversion of management resources, and other factors. The Company records a contingent liabilitywhen it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies.12. Share Repurchase Program and Stock-Based CompensationShare Repurchase ProgramIn August 2015, the Board authorized a stock repurchase program ("the program") to repurchase up to $30.0 million worth of common stock of theCompany. The program expires in August 2017. The aggregate amount available under the program was approximately $28.8 million as of December 31, 2015.The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privatelynegotiated and/78Table of Contentsor open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. The Company cash settles with the program brokerperiodically and reflects any unsettled amounts as a current liability at each period end.The following shares of common stock were repurchased under the above-described repurchase plan:PeriodShares(in thousands) Weighted-average priceper share Amount (includescommissions)(in thousands)For the three months ended September 30, 2015159 4.12 $655For the three months ended December 31, 2015136 4.09 557Total for the year ended December 31, 2015295 $1,212Stock Option PlansThe Company maintains the following stock plans: the 2011 Equity Incentive Plan (the “2011 Plan”) and the 2011 Employee Stock Purchase Plan. TheCompany’s board of directors, by delegation to its compensation committee, administers the 2011 Plan and has authority to determine the directors, officers,employees and consultants to whom options, restricted stock units or restricted stock awards may be granted, the option price or restricted stock purchase price, thetiming of when each share is exercisable and the duration of the exercise period and the nature of any restrictions or vesting periods applicable to an option orrestricted stock grantUnder the 2011 Plan, options granted are generally subject to a four -year vesting period whereby 25% of the options become vested after a one -year periodand the remainder then vests monthly through the end of the vesting period. Vested options may be exercised up to ten years from the grant date, as defined in the2011 Plan. Vested but unexercised options expire 90 days after termination of employment with the Company. The restricted stock units and awards typically vestover four years with annual vesting as to one-fourth of the grant on each anniversary date with vesting contingent upon employment with the Company.The Company elected to recognize the compensation cost of all stock-based awards on a straight-line basis over the vesting period of the award. Further, theCompany applied an estimated forfeiture rate to unvested awards when computing the share compensation expenses. The Company estimated the forfeiture rate forunvested awards based on its historical experience on employee turnover behavior and other factors.At the end of each fiscal year, the share reserve under the 2011 Plan increases automatically by an amount equal to 4% of the outstanding shares as of theend of that most recently completed fiscal year or 3,840,000 shares, whichever is less. On January 1, 2016, 3.5 million additional shares were reserved under the2011 Equity Incentive Plan pursuant to the automatic increase.Determining Fair Value of Stock OptionsThe estimated fair value of stock options and awards granted during 2015 , 2014 and 2013 , was approximately $18.6 million , $19.4 million and $29.3million , respectively. The Company estimates the fair value of stock option awards at the date of grant using the Black-Scholes option-pricing model. Options aregranted with an exercise price equal to the fair value of the common stock as of the date of grant. Compensation expense is amortized net of estimated forfeitureson a straight-line basis over the requisite service period of the options, which is generally four years. Restricted stock vest over four years and upon vesting, entitlesthe holder to one share of common stock for each restricted stock and has an exercise price of $0.0001 per share, which is equal to the par value of the Company’scommon stock. The fair value of the restricted stock is based on the Company’s closing stock price on the date of grant, and compensation expense, net ofestimated forfeitures, is recognized on a straight-line basis over the vesting period.The fair value of each grant of options during 2015 , 2014 and 2013 was determined by the Company using the methods and assumptions discussed below.The Company stratifies its population of outstanding share options into two relatively homogeneous groups to estimate the expected term and forfeiture rate ofoptions grants. Each of these inputs is subjective and generally requires significant judgment to determine.Expected Term —The expected term represents the period that the Company’s share-based awards are expected to be outstanding. The Company calculatedthe expected term of share options using four data points: options exercised, options expired, options forfeited and options outstanding. The weighted-average ofthe four data points were used to calculate the expected term.79Table of ContentsExpected Volatility —The expected volatility was based on the historical stock volatility of several of the Company’s self-designated publicly listedcomparable companies over a period equal to the expected terms of the options, as the Company has limited trading history to use the volatility of its own commonshares.Risk-Free Interest Rate —The risk-free interest rate was based on the implied yield on U.S. Treasury zero-coupon issues for each option grant date withmaturities approximately equal to the option’s contractual term.Expected Dividend Yield —The Company has not paid dividends on its common shares nor does it expect to pay dividends in the foreseeable future.Forfeiture Rate —The Company estimated its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of theforfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from a forfeiture-rate adjustment will berecognized in full in the period of adjustment, if the actual number of future forfeitures differs from that estimated by the Company.The weighted average Black-Scholes option-pricing model assumptions for years ended 2015 , 2014 and 2013 were as follows: Years Ended December 31, 2015 2014 2013Expected term (in years)5.0 5.0 5.0Expected volatility34% 37% 43%Risk-free interest rate1.64% 1.57% 1.19%Expected dividend yield—% —% —%Employee Stock Purchase PlanThe Company’s 2011 Employee Stock Purchase Plan (the “ESPP”) is intended to qualify under Section 423 of the Internal Revenue Code of 1986. Under theESPP, employees are eligible to purchase common stock through payroll deductions of up to 10% of their eligible compensation, subject to any plan limitations.The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of the Company’s common stock on the first and lasttrading days of each six -month offering period.The Company estimates the fair value of purchase rights under the ESPP using the Black-Scholes option-pricing model. The fair value of each purchase rightunder the ESPP was estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the followingweighted-average assumptions: Years Ended December 31, 2015 2014 2013Expected term (in years)0.5 -1.0 0.5 -1.0 0.5 -1.0Expected volatility35% 32% 27%Risk-free interest rate0.24%-0.37% 0.05%-0.09% 0.13%-0.17%Expected dividend yield—% —% —%The expected term represents the period of time from the beginning of the offering period to the purchase date. The Company uses its peer market volatilityfor a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholesoption valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paidany cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuationmodel.The ESPP provides that additional shares are reserved under the plan annually on the first day of each fiscal year in an amount equal to the lesser of (i) 1.5million shares, (ii) one percent of the outstanding shares of common stock on the last day of the immediately preceding fiscal year, or (iii) an amount determinedby the board of directors and/or the compensation committee of the board of directors. As of December 31, 2015 , 1,483,429 shares had been issued under theESPP and 2,559,144 shares were available for future issuance. On January 1, 2016, 0.9 million additional shares were reserved under the 2011 Employee StockPurchase Plan.80Table of ContentsStock Awards Issued to EmployeesOption and RSU activity under the Option Plans for 2015 , 2014 and 2013 was as follows (shares and aggregate intrinsic value in thousands): Options Outstanding Restricted StockOutstanding SharesAvailablefor Grant Numberof Shares Weighted-AverageExercisePrice Numberof SharesOutstanding—January 1, 20134,024 15,189 6.98 3,928Additional shares reserved under the 2011 equity incentive plan3,025 — — —Granted(6,565) 3,023 7.43 3,542Options exercised/ Restricted stock released— (5,147) 4.47 (920)Canceled/Forfeited5,271 (4,157) 12.77 (1,119)Outstanding — December 31, 20135,755 8,908 5.89 5,431Additional shares reserved under the 2011 equity incentive plan3,279 — — —Granted(8,554) 4,345 4.46 4,209Options exercised/ Restricted stock released— (518) 5.13 (1,332)Canceled/Forfeited5,502 (2,665) 6.77 (2,832)Outstanding — December 31, 20145,982 10,070 5.08 5,476Additional shares reserved under the 2011 equity incentive plan3,364 — — —Granted(6,696) 4,206 4.45 2,490Options exercised/ Restricted stock released— (1,126) 4.13 (1,966)RSU shares withheld for taxes212 212Canceled/Forfeited4,193 (2,534) 5.65 (1,660)Outstanding — December 31, 20157,055 10,616 4.79 4,552 Numberof Shares Weighted-AverageExercisePrice Weighted-AverageRemainingContractualLife (Years) AggregateIntrinsicValueOptions vested and expected to vest—December 31, 20159,770 $4.82 6.54 $2,868Options exercisable—December 31, 20154,520 5.18 3.57 775Restricted stock expected to vest- December 31, 20153,514 — 1.36 16,201The weighted-average grant date fair value of options granted during 2015 , 2014 and 2013 was $1.45 , $1.56 and $3.18 , respectively. The weighted averagegrant date fair values of restricted stock units granted during 2015 , 2014 and 2013 was $5.03 , $4.62 and $8.26 , respectively. The aggregate intrinsic value of options exercised under the Option Plans was $1.3 million , $1.7 million and $23.9 million , in 2015 , 2014 and 2013 ,respectively, determined as of the date of option exercise. The intrinsic value is calculated as the difference between the fair value of the common shares on theexercise date and the exercise price of the option shares. The total estimated fair value of options shares vested in 2015 , 2014 and 2013 was $11.0 million , $4.8million and $15.9 million , respectively.Stock-based compensation expense is based on applying estimated fair values determined at the grant date to those options granted in the year that areultimately expected to vest. Accordingly, the fair values calculated on the total population of grants have been reduced for estimated forfeitures expected to occurin the future.The table below summarizes stock-based compensation expense as allocated within the Company’s consolidated statements of operations (in thousands): 81Table of Contents Years Ended December 31, 2015 2014 2013 (in thousands)Includes stock-based compensation of: Cost of revenue$2,666 $3,995 $3,303Sales and marketing3,393 6,193 9,831Research and development1,299 2,800 2,414General and administrative6,029 7,911 8,072Restructuring and other2,579 $— $—Total stock-based compensation$15,966 $20,899 $23,620The above table does not include $0.4 million of stock-based compensation that was capitalized related to internal-use software in 2015. There was nocapitalized stock-based compensation related to internal-use software in 2014 or 2013.As of December 31, 2015 there was $20.3 million of unrecognized compensation expense related to non-vested share-based compensation arrangementsgranted under the 2011 Plan, which is expected to be recognized over a weighted-average period of 3.07 years.13. Employee Benefit PlanThe Company maintains a 401(k) defined contribution benefit plan that covers domestic employees who have attained 21 years of age and provide at least 20hours of service per week. This plan allows U.S. employees to contribute up to 90% of their pre-tax salary in certain investments at the discretion of the employee,up to maximum annual contribution limits established by the U.S. Department of Treasury. During 2015 , 2014 and 2013 , the Company matched up to 50% ofemployee contributions up to an annual limit of $2,000 . Matching contributions by the Company are fully vested upon completion of the first year of employment.Employer matching contributions, which may be discontinued at the Company’s discretion, amounted to $2.1 million , $1.9 million and $1.3 million , during 2015, 2014 and 2013 , respectively.14. Income TaxesLoss from continuing operations before provision for income taxes for the Company’s domestic and international operations was as follows (in thousands): Years Ended December 31, 2015 2014 2013U.S.$(40,720) $(88,616) $(20,124)International1,711 (6,241) (1,857)Loss before provision for income taxes$(39,009) $(94,857) $(21,981)The income tax provision consisted of the following (in thousands): Years Ended December 31, 2015 2014 2013Current: Federal$— $(16) $—Foreign632 517 501State and local(32) 424 153Total current income tax provision600 925 654Deferred: Foreign52 (97) (90)State and local752 (526) 307Total deferred income tax provision (benefit)804 (623) 217Income tax provision$1,404 $302 $87182Table of ContentsThe following table provides a reconciliation of income taxes provided at the federal statutory rate of 34% to the income tax provision (in thousands): Years Ended December 31, 2015 2014 2013U.S. income tax at federal statutory rate$(13,388) $(32,246) $(7,464)State income taxes, net of federal benefit342 758 544Foreign tax rate differential(85) 1,882 1,000Permanent differences254 464 231Non-deductible impairment charges— 7,702 —Tax credits(405) (1,769) (1,824)Valuation allowance14,349 23,645 8,366Other, net337 (134) 18Income tax provision$1,404 $302 $871In November 2015, the Philippine Economic Zone Authority granted a four year tax holiday to the Company's Philippine affiliate, commencing with its fiscalyear beginning January 1, 2016. The earnings per share benefit for 2015 is not material.In December 2013, Malaysia granted a ten year tax holiday to the Company’s Malaysia affiliate, commencing with its fiscal year beginning January 1, 2014.This resulted in a tax benefit in fiscal 2013 of approximately $0.2 million from the elimination of the Malaysia subsidiary’s deferred tax liabilities. The earningsper share benefit in 2015, 2014 and 2013 is not material. The following table provides the effect of temporary differences that created deferred income taxes as of December 31, 2015 and 2014 . Deferred tax assetsand liabilities represent the future effects on income taxes resulting from temporary differences and carryforwards at the end of the respective periods (inthousands): December 31, 2015 2014Current: Accrued liabilities$2,390 $4,290State taxes1 1Current deferred tax assets2,391 4,291Non-current: Share-based compensation expense12,823 14,177Net operating loss carryforwards66,541 48,594Tax credits5,692 5,325Amortization of tax intangibles7,639 5,210Other, net26 22Non-current deferred tax assets92,721 73,328Total current and non-current deferred tax assets95,112 77,619Deferred tax liabilities: Property & equipment(6,122) (902)Convertible debt costs(1,635) (2,146)Net deferred tax assets87,355 74,571Less: Valuation allowance(85,524) (71,935)Net deferred tax assets$1,831 $2,636As of December 31, 2015 and 2014, management assessed the realizability of deferred tax assets. Management evaluated the need for an amount of anyvaluation allowance for deferred tax assets on a jurisdictional basis. This evaluation utilizes the framework contained in ASC 740, Income Taxes, whereinmanagement analyzes all positive and negative evidence available at the balance sheet date to determine whether all or some portion of our deferred tax assets willnot be realized. Under this83Table of Contentsguidance, a valuation allowance must be established for deferred tax assets when it is more likely than not (a probability level of more than 50 percent) that theywill not be realized. In assessing the realization of our deferred tax assets, we consider all available evidence, both positive and negative.In concluding on the evaluation, management placed significant emphasis on guidance in ASC 740, which states that “a cumulative loss in recent years is asignificant piece of negative evidence that is difficult to overcome.” Based upon available evidence, it was concluded on a more-likely-than-not basis that most ofour U.S. deferred tax assets were not realizable as of December 31, 2015. Significant negative evidence included U.S. pretax losses (as calculated consistent withASC 740) in each of the Company’s 2015 quarters and for the cumulative twelve-quarter period ended December 31, 2015. Additionally, Company forecastsindicated a continuation of U.S pretax losses for calendar 2016. Management also assessed the available positive and negative evidence to estimate if sufficientfuture taxable income will be generated to use our existing state deferred tax assets. A significant piece of objective negative evidence evaluated was a state tax lawchange that occurred during the second quarter ended June 30, 2015 and impacts the manner in which the Company apportions revenue. Such objective evidencelimits the ability to consider other subjective evidence such as our projections for future growth. On the basis of this evaluation as of December 31, 2015, theCompany has recorded a valuation allowance of approximately $0.5 million to reflect only the portion of the state deferred tax asset that is more likely than not tobe realized. Note that changes in tax laws and rates may affect other deferred tax assets and liabilities recorded in the future. These changes are accounted for in theperiod of enactment and thus are reflected in the Company’s December 31, 2015 financial results. As a result of the state tax law change discussed above, theCompany has also recorded approximately $0.3 million in our tax provision for the year ended December 31, 2015.Management also concluded on a more-likely-than-not basis that our Singapore deferred tax assets were not realizable, using the analysis prescribed in ASC740. Other factors were considered but provided neither positive nor negative objectively-verifiable evidence as to the realization of our deferred tax assets. Theremaining deferred tax assets at December 31, 2015 relate to jurisdictions in which we have net adjusted historical pretax profits and sufficient forecastprofitability to assure future realization of such deferred tax assetsBased upon available evidence, it was concluded on a more-likely-than-not basis that most of our U.S. deferred tax assets were not realizable in 2014.Significant negative evidence included U.S. pretax losses (as calculated consistent with ASC 740) in each of the Company’s 2014 quarters and for the cumulativetwelve-quarter period ended December 31, 2014. Additionally, Company forecasts indicated a continuation of U.S pretax losses for calendar 2015. Managementalso concluded on a more- likely-than-not basis that our Singapore and Ireland deferred tax assets were not realizable, using the analysis prescribed in ASC 740.Other factors were considered but provided neither positive nor negative objectively-verifiable evidence as to the realization of our deferred tax assets. Theremaining deferred tax assets in 2014 relate to jurisdictions in which we have net adjusted historical pretax profits and sufficient forecast profitability to assurefuture realization of such defer red tax assets.The change in the valuation allowance for the years ended December 31, 2015 and 2014 was an increase of $13.6 million and $29.8 million , respectively.The change in valuation allowance for the year ended December 31, 2015 of $13.6 million includes a net addition charged to expense of approximately $16.1million offset by a write-off of approximately $2.5 million related to the effect of stock-based compensation shortfalls.As of December 31, 2015 , the Company had net operating loss carryforwards of approximately $225.2 million for federal income tax purposes andapproximately $120.9 million for California income tax purposes. These losses are available to reduce taxable income and expire at various dates beginning in2017 . Approximately $50.2 million of federal net operating loss carryforwards and $35.2 million of California net operating loss carryforwards are related toexcess tax benefits from stock-based compensation. The tax benefits associated with net operating losses attributed to stock-based compensation will be credited toadditional paid-in capital when realized. The Company uses a “with and without” approach to determine the utilization of excess tax benefits from stock-basedcompensation. The Company considers only the direct impact of stock option awards when calculating the amount of windfalls or shortfalls attributable to stock-based compensation.At December 31, 2015 , the Company had $2.5 million of U.S. federal research and development credits which expire beginning in 2031 , and $3.5 millionof California research and development credits which do not expire. The Company also has $0.4 million of California Enterprise Zone Credits which expirebeginning in 2023 if not utilized, and $2.2 million of other state tax credits which expire beginning in 2024 if not utilized. Utilization of the Company’s net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership changelimitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration or elimination of the netoperating loss and tax credit carryforwards before utilization. Management believes that the limitation will not limit utilization of the carryforwards prior to theirexpiration.84Table of ContentsThe Company acquired U.S. federal net operating loss carryforwards of Scout Analytics, Inc. upon the acquisition of that entity in January 2014, subject tothe ownership change limitations. Acquired U.S. federal net operating losses from Scout total approximately $30.2 million , net of amounts unavailable due toownership change limitations, which amount is included in the total U.S. federal net operating loss above.The Company’s income taxes payable has been adjusted for the tax benefits associated with employee stock option transactions. These adjustments tostockholders’ equity amounted to less than $0.1 million credit and $0.1 million credit for the years ended December 31, 2015 and 2014 , respectively.The Company files U.S. federal and state and foreign income tax returns in jurisdictions with varying statutes of limitations. In the normal course of businessthe Company is subject to examination by taxing authorities throughout the world. These audits could include examining the timing and amount of deductions, theallocation of income among various tax jurisdictions and compliance with federal, state, local and foreign tax laws. The Company is currently under audit by thestate of California for its 2008 through 2010 tax years. The 2005 through 2014 tax years generally remain subject to examination by federal, state and foreign taxauthorities.The Company has implemented the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes. A reconciliation of the beginning and endingamount of unrecognized tax benefits is as follows (in thousands): December 31,Years Ended2015 2014 2013Beginning balance$948 $880 $433Additions based on tax positions related to the current year62 169 317Additions for tax position of prior years— — 130Reductions for tax positions of prior years(73) (101) —Ending balance$937 $948 $880At December 31, 2015 , the Company had a liability for unrecognized tax benefits of $0.9 million , none of which, if recognized, would affect theCompany’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 year ended December 31,2015 , the interest and penalties recognized were not material. During the years ended December 31, 2014 and 2013, the Company recognized and accrued aninsignificant amount of interest or penalties related to unrecognized tax benefits.The Company considers its undistributed earnings of its foreign subsidiaries permanently reinvested in foreign operations and has not provided for U.S.income taxes on such earnings. As of December 31, 2015 the Company’s unremitted earnings from its foreign subsidiaries was $6.9 million . The determination ofthe unrecognized deferred U.S. income tax liability, if any, is not practicable due to the complexities associated with its hypothetical calculation.15. Segment and Geographical InformationSegment InformationManaged Services- The Company’s managed services solution consists of end-to-end management and optimization of the recurring revenue process,including quoting, selling and business intelligence. The Company's managed services business is built on its pay-for-performance model, whereby clients pay theCompany a commission based on renewal sales that it generates on their behalf. The Company’s managed services offerings include quoting and selling services,in which dedicated service teams have specific expertise in the clients’ businesses, are deployed under the Company's clients’ brands and follow a sales processtailored specifically to improve client retention and increase service contract renewals.Cloud and Business Intelligence- The Company’s cloud and business intelligence solution consist of its subscription sales and professional services todeploy the Company's solutions. Subscription sales consists of selling subscriptions to Renew OnDemand and Scout Analytics, both SaaS applications. Thefoundation of the Company’s cloud solution is Renew OnDemand, a SaaS-based renewal management system based on its data warehouse of transactional,analytical and industry data that grows with each service renewal transaction and client. 85Table of ContentsThe Company does not allocate sales and marketing, research and development, or general and administrative expenses to its operating segments becausemanagement does not include the information in its measurement of the performance of the operating segments. A measure of assets by segment is not applicableas segment assets are not included in the discrete financial information provided to the CODM.No client represented 10% or more of the Company's revenues in 2015. One client represented 12% and 14% of the Company's revenue in 2014 and 2013,respectively.The following tables provide summary financial information by reportable segment (in thousands): Year Ended December 31, 2015 Year Ended December 31, 2014 Year Ended December 31, 2013 ManagedServices Cloud andBusinessIntelligence Managed Services Cloud andBusinessIntelligence ManagedServices Cloud andBusinessIntelligenceNet Revenue $227,645 $24,558 $240,573 $31,607 $255,547 $16,935Cost of Revenue 155,898 15,471 170,820 23,189 147,278 15,171Gross Profit $71,747 $9,087 $69,753 $8,418 $108,269 $1,764Geographical InformationThe Company’s business is geographically diverse. During 2015 , 66% of our net revenue was earned in North America and Latin America (“NALA”), 24%in Europe, Middle East and Africa (“EMEA”) and 10% in Asia Pacific-Japan (“APJ”). Net revenue for a particular geography generally reflects commissionsearned from sales of service contracts managed from sales centers in that geography and subscription sales and professional services to deploy the Company'ssolutions. Predominantly all of the service contracts sold and managed by the sales centers relate to end customers located in the same geography. All of NALA netrevenue represents revenue generated in the United States.Net revenue by geographic region, is summarized as follows (in thousands): Year Ended December 31, 2015 2014 2013Net revenue NALA$166,511 $176,928 $173,188EMEA59,708 70,425 73,839APJ25,984 24,827 25,455Total net revenue$252,203 $272,180 $272,482The majority of the Company’s assets at December 31, 2015 and 2014 were attributable to its U.S. operations. Property and equipment information is basedon the physical location of the assets. The following table presents the long-lived assets, consisting of property and equipment, by geographic location (inthousands): December 31, 2015 2014NALA $21,626 $21,682EMEA 732 1,207APJ 3,545 2,769Total property and equipment, net $25,903 $25,65816. Restructuring and OtherThe Company announced at the beginning of the third quarter of 2014 a restructuring effort to better align its cost structure with current revenue levels. Therestructuring plans are accounted for in accordance with ASC 420, Exit or Disposal86Table of ContentsCost Obligations. Restructuring and other charges during the years ended December 31, 2015 and 2014, was $3.7 million and $3.3 million , respectively.Restructuring charges in 2015 consisted of $1.1 million of separation payments and related employee benefits and $2.6 million of stock compensationrelated to the accelerated vesting of certain equity awards granted to the Company’s former interim CFO and CEO. Restructuring charges in 2014 consisted of $2.8million of separation payments and related employee benefits and $0.5 million of charges related to cancellation of contracts with outside vendors.Restructuring and other reserve activities for the twelve months ended December 31, 2015 and 2014 are summarized as follows (in thousands): Restructuring Other TotalRestructuring and other liability at January 1, 2014$— $— $—Charges to expense and other adjustments2,054 1,260 3,314Cash paid(1,690) (1,009) (2,699)Restructuring and other liability at December 31, 2014364 251 615Charges to expense and other adjustments353 3,309 3,662Cash paid(717) (886) (1,603)Acceleration of stock-based compensation expense in additional paid-in capital— (2,579) (2,579)Restructuring and other liability at December 31, 2015$— $95 $9517. Related Party Transactions Richard Campione was elected to the Company’s Board of Directors (the “Board”) on November 29, 2012. On December 19, 2012, the Company enteredinto a consulting agreement with Mr. Campione under which Mr. Campione provides certain software consulting services to the Company. The Audit Committeeof the Board pre-approved this consulting agreement in accordance with the Company’s formal policy regarding related party transactions. The Company paid Mr.Campione $0.3 million for consulting services provided during the term of the agreement, which ended April 30, 2013.On November 13, 2014, the Company entered into an agreement with Altai Capital Management, L.P. (Altai) whereby the Company expanded the number ofseats of its Board of directors to 9 from 8 and granted a seat to Altai as long as it holds a 10% or greater equity ownership in the Company. At the Company’s 2015Annual Meeting, Altai Capital voted all of its shares of common stock of the Company in favor of each of the Company's nominees for director.In addition , the Company and Altai Capital entered into a Registration Rights Agreement. Altai Capital is entitled to demand registration rights. If AltaiCapital requests in writing that the Company effect a registration that has an anticipated aggregate offering price to the public of at least $15.0 million , then theCompany will be required to register all registrable securities that Altai Capital requests to be registered, subject to certain conditions and limitations. TheCompany is required to effect only one registration if on a long-form registration statement and up to four registrations if on a short-form registration statement.Depending on certain conditions, however, the Company may defer any such registration for a specified number of days.Altai Capital is entitled to piggyback registration rights. If the Company registers any of its securities either for its own account or for the account of othersecurity holders, Altai Capital is entitled to include all or part of its shares in the registration, subject to certain conditions and limitations.Generally, all of the Company's fees, costs and expenses of registrations will be borne by the Company. However, certain costs of any shelf registrationstatements, in addition to underwriting discounts and commissions, will be borne by Altai Capital. The parties shall provide customary indemnification of eachother in connection with any registered offering pursuant to the terms of the Registration Rights Agreement.87Table of Contents18. Selected Quarterly Financial Data (Unaudited)The following table sets forth data derived from our unaudited quarterly Condensed Consolidated Statement of Operations data for each of the eight quartersended December 31, 2015 . In management’s opinion, the data has been prepared on the same basis as the audited Consolidated Financial Statements included inthis report, and reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. Three Months Ended Dec. 31, 2015 Sep. 30, 2015 Jun. 30, 2015 Mar. 31, 2015 Dec. 31, 2014(1) Sep. 30, 2014 (2) Jun. 30, 2014 Mar. 31, 2014 (in thousands, except per share amounts)Net revenue$64,960 $59,432 $61,613 $66,197 $74,654 $64,713 $65,997 $66,816Gross profit24,667 16,864 18,921 20,382 25,976 15,495 17,479 19,221Loss from operations(3,736) (8,187) (9,579) (8,191) (9,829) (39,119) (18,870) (16,031)Loss before provisionfor income taxes(5,954) (10,700) (12,318) (10,036) (13,200) (41,986) (21,066) (18,605)Net loss$(5,978) $(10,858) $(13,407) $(10,170) $(13,541) $(41,786) $(21,092) $(18,740)Net loss per commonshare: Basic and diluted$(0.07) $(0.13) $(0.16) $(0.12) $(0.16) $(0.50) $(0.25) $(0.23)(1) During the three months ended December 31, 2014, the Company recorded a goodwill impairment charge of $1.7 million and an intangible asset impairmentcharge of $2.5 million .(2) During the three months ended September 30, 2014, the Company recorded a goodwill impairment charge of $21.0 million .88Table of ContentsITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. ITEM 9A.CONTROLS AND PROCEDURES(a) Evaluation of disclosure controls and proceduresUnder the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted anevaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K.In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls andprocedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possiblecontrols and procedures relative to their costs.Based on management’s evaluation, our chief executive officer and chief financial officer concluded that as of December 31, 2015 our disclosure controlsand procedures are designed to, and are effective to, provide at a reasonable assurance level that the information we are required to disclose in reports that we fileor submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rulesand forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, asappropriate, to allow timely decisions regarding required disclosures.(b) Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financialofficer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2015 based on the guidelinesestablished in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Ourinternal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external reporting purposes in accordance with U.S. generally accepted accounting principles.Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2015 .The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independentregistered public accounting firm, as stated in its report which is included in Item 8 of this Annual Report on Form 10-K.(c) Changes in internal control over financial reportingThere was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2015 that has materially affected,or is reasonably likely to materially affect, our internal control over financial reporting.(d) Inherent Limitations on Effectiveness of ControlsOur management, including our chief executive officer and chief financial officer, do not expect that our disclosure controls or our internal control overfinancial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities thatjudgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented bythe individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also isbased in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies orprocedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not bedetected. ITEM 9B.OTHER INFORMATION None.89Table of ContentsPART IIIITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEInformation regarding our directors is incorporated by reference from the information contained under the caption “Election of Directors” in our ProxyStatement for our 2016 Annual Meeting of Stockholders (the “ 2016 Proxy Statement”). Information regarding our current executive officers is incorporated byreference from information contained under the caption “Executive Officers” in our 2016 Proxy Statement. Information regarding Section 16 reporting complianceis incorporated by reference from information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2016 ProxyStatement. Information regarding the Audit Committee of our Board of Directors and information regarding an Audit Committee financial expert is incorporatedby reference from information contained under the caption “Board Committees” in our 2016 Proxy Statement. Information regarding our code of ethics isincorporated by reference from information contained under the caption “Code of Business Conduct and Ethics” in our 2016 Proxy Statement. Informationregarding our implementation of procedures for stockholder nominations to our Board of Directors is incorporated by reference from information contained underthe caption “Process for Recommending Candidates to the Board of Directors” in our 2016 Proxy Statement.We intend to disclose any amendment to our code of ethics, or waiver from, certain provisions of our code of ethics as applicable for our directors andexecutive officers, including our principal executive officer, principal financial and accounting officer, chief accounting officer, and controller, or personsperforming similar functions, by posting such information on our website at http://www.servicesource.com .ITEM 11.EXECUTIVE COMPENSATIONThe information required by this item is incorporated by reference from the information contained under the captions “Compensation Discussion andAnalysis” and “Executive Compensation” in our 2016 Proxy Statement.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSOther than information regarding securities authorized for issuance under equity compensation plans, which is set forth in the Notes to the ConsolidatedFinancial Statements above, the information required by this item is incorporated by reference from the information contained under the caption “SecurityOwnership” in our 2016 Proxy Statement.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated by reference from the information contained under the captions “Related Person Transactions andSection 16(a) Beneficial Ownership Reporting Compliance” and “Director Independence” in our 2016 Proxy Statement.ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item is incorporated by reference from the information contained under the caption “Principal Accountant Fees andServices” in our 2016 Proxy Statement.90Table of ContentsPART IVITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) (1) All financial statementsConsolidated financial statements filed as part of this report are listed under Part II, Item 8, pages [57] through [62] of this Form 10-K.(2) Financial Statement SchedulesNo schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of theschedule, or because the information required is included in the consolidated financial statements or the notes thereto.(3) ExhibitsSee Item 15(b) below. Each management contract and compensatory plan or arrangement required to be filed has been identified.(b) ExhibitsThe exhibits listed on the accompanying Exhibit Index immediately following the signature page are filed as part of, or are incorporated by reference into,this Annual Report on Form 10-K.(c) Financial Statement SchedulesReference is made to Item 15(a)(2) above.91Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. SERVICESOURCE INTERNATIONAL, INC. Dated:March 8, 2016 By: /s/ CHRISTOPHER M. CARRINGTON Christopher M. Carrington Chief Executive Officer (Principal Executive Officer) SERVICESOURCE INTERNATIONAL, INC. Dated:March 8, 2016 By: /s/ ROBERT N. PINKERTON Robert N. PinkertonChief Financial Officer(Principal Financial and Accounting Officer)POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Christopher M. Carrington,Robert N. Pinkerton and Matthew Goldberg, and each of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution, each withpower to act alone, to sign and execute on behalf of the undersigned any and all amendments to this Annual Report on Form 10-K, and to perform any actsnecessary in order to file the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, grantingunto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requested and necessary to be done in connectiontherewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their orhis or her substitutes, shall do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theServiceSource International, Inc. and in the capacities and on the dates indicated. Date Signature TitleMarch 8, 2016 /s/ CHRISTOPHER M. CARRINGTON Chief Executive Officer (Principal Executive Officer) Christopher M. Carrington March 8, 2016 /s/ ROBERT N. PINKERTON Chief Financial Officer (Principal Financial and Accounting Officer) Robert N. Pinkerton March 8, 2016 /s/ ROBERT G. ASHE Director Robert G. Ashe March 8, 2016 /s/ STEVEN M. CAKEBREAD Director Steven M. Cakebread March 8, 2016 /s/ RICHARD J. CAMPIONE Director Richard J. Campione March 8, 2016 /s/ BRUCE W. DUNLEVIE Director Bruce W. Dunlevie 92Table of ContentsMarch 8, 2016 /s/ JAMES C. MADDEN Director James C. Madden March 8, 2016 /s/ RISHI BAJAJ Director Rishi Bajaj March 8, 2016 /s/ THOMAS F. MENDOZA Director Thomas F. Mendoza March 8, 2016 /s/ BARRY D. REYNOLDS Director Barry D. Reynolds 93Table of ContentsIndex to Exhibits Incorporated by Reference HereinExhibitNumber Exhibit Description FiledHerewith Exhibit Form/File No. Filing Date3.1 Certificate of Incorporation of the Company filedMarch 24, 2011 3.1 Form 8-K(No. 001-35108) April 1,20113.2 Bylaws of the Company dated March 24, 2011 3.2 Form 8-K(No. 001-35108) April 1,20114.1 Registration and Information Rights Agreement datedas of December 8, 2006, between the Registrant andGA SS Holding LLC, SSLLC Holdings, Inc.,Housatonic Micro Fund SBIC, LP and HousatonicEquity Investors SBIC, LP 4.1 Form S-1/A(No. 333-171271) February 25,20114.2 Securities Purchase Agreement and RegistrationRights Schedule dated as of January 31, 2003, betweenthe Registrant and the 2003 Holders 4.2 Form S-1/A(No. 333-171271) February 25,20114.3 Specimen common stock certificate of the Registrant 4.3 Form S-1/A(No. 333-171271) March 11,20114.4 Indenture between ServiceSource International, Inc.and Wells Fargo Bank, National Association, dated asof August 13, 2013 4.4 Form 8-K (No.001-35108) August 14, 20134.5 Registration Rights Agreement dated as of November13, 2014, by and between the Company and AltaiCapital Management, L.P. 10.2 Form 8-K (No.001-35108) November 14, 201410.1+ Form of Director and Executive OfficerIndemnification Agreement 10.1 Form S-1(No. 333-171271) December 20,201010.2+ 2004 Omnibus Share Plan and forms of agreementsthereunder 10.2 Form S-1(No. 333-171271) December 20,201010.3+ 2008 Share Option Plan and form of agreementthereunder 10.3 Form S-1(No. 333-171271) December 20,201010.4+ 2011 Equity Incentive Plan and forms of agreementsthereunder 4.4 Form S-8(No. 333-173116) March 28,201110.5+ 2011 Equity Incentive Plan form of Restricted StockAward Agreement 10.1 Form 8-K(No. 001-35108) February 10,201210.6+ 2011 Employee Stock Purchase Plan and form ofagreement thereunder 4.5 Form S-8(No. 333-173116) March 28,201194Table of Contents Incorporated by Reference HereinExhibitNumber Exhibit Description FiledHerewith Exhibit Form/File No. Filing Date10.7 Form of Convertible Note Hedge Confirmation 10.3 Form 8-K (No. 001-35108) August 9, 201310.8 Form of Warrant Confirmation 10.4 Form 8-K (No. 001-35108) August 9, 201310.9 Employment and Confidential InformationAgreement dated as of November 16, 2014,between the Company and Christopher M.Carrington 10.15 Form 10-K/A(No. 001-35108) March 17, 201510.10+ Separation Agreement dated as of December 31,2014 between the Company and Richard Campione 10.16 Form 10-K/A(No. 001-35108) March 17, 201510.11+ Letter Agreement, dated November 13, 2014, byand between the Company and Altai Capital 10.1 Form 8-K (No. 001-35108) November 14, 201410.12+ Employment and Confidential InformationAgreement dated as of April 6, 2015, between theCompany and Robert N. Pinkerton 10.1 Form 10-Q (No.001-35108) May 8, 201510.13+ Separation Agreement dated as of April 6, 2015between the Company and Simon Biddiscombe 10.1 Form 10-Q (No.001-35108) August 7, 201510.14+ Board Resignation Agreement dated as of May 22,2015 between the Company and Michael Smerklo 10.2 Form 10-Q (No.001-35108) August 7, 201510.15+ Employment Agreement dated as of June 8, 2015between the Company and Brian Delaney 10.1 Form 10-Q (No.001-35108) November 6, 201510.16+ Employment Agreement dated as of April 20, 2015between the Company and Gregory Hopkins 10.2 Form 10-Q (No.001-35108) November 6, 201521.1 List of subsidiaries X 23.1 Consent of PricewaterhouseCoopers LLP X 31.1 Certification of Principal Executive Officerrequired by Rule 13a-14(a) or Rule 15d-14(a) ofthe Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Actof 2002. X 31.2 Certification of Principal Financial Officerrequired by Rule 13a-14(a) or Rule 15d-14(a) ofthe Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Actof 2002. X 32.1* Certification of Chief Executive Officer pursuantto 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002. X 32.2* Certification of Chief Financial Officer pursuant to18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002. X 95Table of Contents Incorporated by Reference HereinExhibitNumber Exhibit Description FiledHerewith Exhibit Form/File No. Filing Date101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.DEF XBRL Taxonomy Extension Definition Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase +Management contract or compensatory plan or arrangement.*In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on InternalControl Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and32.2 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act.Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extentthat the registrant specifically incorporates it by reference.96Exhibit 21.1SUBSIDIARIES OF SERVICESOURCE INTERNATIONAL, INC.SUBSIDIARIES STATE OR OTHER JURISDICTION OFINCORPORATION OR ORGANIZATIONServiceSource International, Inc. DelawareServiceSource Delaware, Inc. DelawareServiceSource Europe, Ltd. IrelandSSI Europe UK Limited United KingdomServiceSource International Singapore Pte. Ltd. SingaporeServiceSource International Malaysia SDN. BHD. MalaysiaServiceSource International Hong Kong Limited Hong KongServiceSource International Japan G.K. JapanServiceSource International Philippines, Inc. ManilaExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-188652, No. 333-181104, No. 333-173116, No. 333-194440 and No. 333-202809) of ServiceSource International, Inc. of our report dated March 8, 2016 relating to the financial statements and the effectiveness ofinternal control over financial reporting, which appears in this Form 10-K./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaMarch 8, 2016Exhibit 31.1CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Christopher M. Carrington, certify that:1.I have reviewed this Annual Report on Form 10-K of ServiceSource International, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls overfinancial reporting. Dated:March 8, 2016 By: /s/ CHRISTOPHER M. CARRINGTON Christopher M. Carrington Chief Executive Officer (Principal Executive Officer)Exhibit 31.2CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Robert N. Pinkerton, certify that:1.I have reviewed this Annual Report on Form 10-K of ServiceSource International, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls overfinancial reporting.Dated:March 8, 2016 By: /s/ ROBERT N. PINKERTON Robert N. Pinkerton Chief Financial Officer(Principal Financial Officer)Exhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, Christopher M. Carrington, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that theAnnual Report of ServiceSource International, Inc. on Form 10-K for the fiscal year ended December 31, 2015 fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such Form 10-K fairly presents, in all material respects, thefinancial condition and results of operations of ServiceSource International, Inc. Dated:March 8, 2016 By: /s/ CHRISTOPHER M. CARRINGTON Christopher M. Carrington Chief Executive Officer (Principal Executive Officer)Exhibit 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, Robert N. Pinkerton, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of ServiceSource International, Inc. on Form 10-K for the fiscal year ended December 31, 2015 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934 and the information contained in such Form 10-K fairly presents, in all material respects, the financial condition andresults of operations of ServiceSource International, Inc. Dated:March 8, 2016 By: /s/ ROBERT N. PINKERTON Robert N. Pinkerton Chief Financial Officer (Principal Financial Officer)

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