CALLIDUS SOFTWARE INC - FORM 10-Q

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EX-32.1 - EXHIBIT 32.1 - CALLIDUS SOFTWARE INC	cald-ex321_20150930xq3.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-50463

Callidus Software Inc.

(Exact name of registrant as specified in its charter)



Delaware		77-0438629
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

Callidus Software Inc.

4140 Dublin Boulevard, Suite 400

Dublin, California 94568

(Address of principal executive offices, including zip code)

(925) 251-2200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be 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 the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
(Do not check if a 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 o No x

There were 56,122,337 shares of the registrant’s common stock, par value $0.001, outstanding on October 29, 2015, the latest practicable date prior to the filing of this report.

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TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION	Page
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	26
Item 6. Exhibits	40
Signatures	40
Exhibit Index	41

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CALLIDUS SOFTWARE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)



	September 30, 2015			December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	77,117		$	34,200
Short-term investments	18,597			2,766
Accounts receivable, net of allowances of $810 and $1,063 at September 30, 2015 and December 31, 2014, respectively	37,945			41,623
Prepaid and other current assets	9,995			10,384
Total current assets	143,654			88,973
Property and equipment, net	20,226			18,755
Goodwill	50,414			46,970
Intangible assets, net	16,318			17,757
Deferred income taxes, noncurrent	399			440
Deposits and other noncurrent assets	3,299			3,403
Total assets	$	234,310		$	176,298
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,569		$	2,056
Accrued payroll and related expenses	9,065			9,051
Accrued expenses	12,110			16,868
Deferred income taxes	1,475			1,475
Deferred revenue	71,010			61,427
Capital lease obligations	223			1,001
Total current liabilities	96,452			91,878
Deferred revenue, noncurrent	6,260			10,195
Deferred income taxes, noncurrent	46			561
Revolving line of credit	—			10,481
Other noncurrent liabilities	4,700			4,709
Total liabilities	107,458			117,824
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $0.001 par value; 100,000 shares authorized; 58,444 and 51,285 shares issued and 56,105 and 48,946 shares outstanding at September 30, 2015 and December 31, 2014, respectively	56			49
Additional paid-in capital	424,224			344,312
Treasury stock; 2,339 shares at September 30, 2015 and December 31, 2014	(14,430		)	(14,430		)
Accumulated other comprehensive loss	(1,270		)	(739		)
Accumulated deficit	(281,728		)	(270,718		)
Total stockholders’ equity	126,852			58,474
Total liabilities and stockholders’ equity	$	234,310		$	176,298

See accompanying notes to unaudited condensed consolidated financial statements.

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CALLIDUS SOFTWARE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands, except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Revenue:
Recurring	$	34,301		$	25,547		$	93,907		$	71,481
Services and license	10,643			9,453			32,396			27,011
Total revenue	44,944			35,000			126,303			98,492
Cost of revenue:
Recurring	9,034			8,916			25,233			23,706
Services and license	8,318			6,730			24,041			17,468
Total cost of revenue	17,352			15,646			49,274			41,174
Gross profit	27,592			19,354			77,029			57,318

Operating expenses:
Sales and marketing	14,855			11,153			43,377			33,688
Research and development	6,846			4,920			18,886			14,838
General and administrative	7,883			7,892			24,413			18,113
Restructuring and other	—			305			234			709
Total operating expenses	29,584			24,270			86,910			67,348
Operating loss	(1,992		)	(4,916		)	(9,881		)	(10,030		)
Interest income and other income (expense), net	(38		)	(20		)	(414		)	3,948
Interest expense	(26		)	(38		)	(149		)	(429		)
Loss before provision for income taxes	(2,056		)	(4,974		)	(10,444		)	(6,511		)
Provision for income taxes	187			261			566			941
Net loss	$	(2,243	)	$	(5,235	)	$	(11,010	)	$	(7,452	)
Net loss per share
Basic and diluted	$	(0.04	)	$	(0.11	)	$	(0.20	)	$	(0.16	)

Weighted average shares used in computing net loss per share:
Basic and diluted	56,104			48,564			54,156			47,061

Comprehensive income (loss):
Net loss	$	(2,243	)	$	(5,235	)	$	(11,010	)	$	(7,452	)
Unrealized gain (loss) on available-for-sale securities	15			(3		)	19			(5		)
Foreign currency translation adjustments	(674		)	(208		)	(553		)	(191		)
Comprehensive loss	$	(2,902	)	$	(5,446	)	$	(11,544	)	$	(7,648	)

See accompanying notes to unaudited condensed consolidated financial statements.

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CALLIDUS SOFTWARE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



	Nine Months Ended September 30,
	2015			2014
Cash flows from operating activities:
Net loss	$	(11,010	)	$	(7,452	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense	4,501			3,953
Amortization of intangible assets	3,985			3,667
Gain on sale of intangible assets	—			(3,862		)
Provision for doubtful accounts	1,097			729
Stock-based compensation	13,924			7,916
Excess tax benefit from stock-based compensation	(29		)	—
Deferred income taxes	(381		)	(133		)
Release of valuation allowance	—			(149		)
Loss on disposal of property and equipment	10			44
Amortization of convertible notes issuance cost	—			58
Net amortization on investments	78			21
Changes in operating assets and liabilities:
Accounts receivable	3,373			(2,359		)
Prepaid and other current assets	487			(1,997		)
Other noncurrent assets	104			(197		)
Accounts payable	3			583
Accrued expenses	17			5,471
Accrued payroll and related expenses	14			(627		)
Accrued restructuring and other expenses	(99		)	(98		)
Deferred revenue	4,448			4,548
Net cash provided by operating activities	20,522			10,116
Cash flows from investing activities:
Purchases of investments	(19,444		)	(2,784		)
Proceeds from maturities and sale of investments	3,554			7,850
Purchases of property and equipment	(9,548		)	(5,135		)
Purchases of intangible assets	(524		)	(882		)
Proceeds from sale of intangible assets, net of expenses	—			4,651
Acquisitions, net of cash acquired	(4,365		)	(15,409		)
Net cash used in investing activities	(30,327		)	(11,709		)
Cash flows from financing activities:
Proceeds from follow-on offering, net of issuance costs	64,372			—
Proceeds from issuance of common stock	4,236			4,003
Restricted stock units acquired to settle employee withholding liability	(2,656		)	(1,553		)
Excess tax benefit from stock-based compensation	29			—
(Repayment) proceeds from line of credit	(10,482		)	10,482
Payment of consideration related to acquisitions	(1,802		)	(630		)
Repayment of debt	—			(645		)
Payment of principal under capital leases	(778		)	(744		)
Net cash provided by financing activities	52,919			10,913
Effect of exchange rates on cash and cash equivalents	(197		)	(169		)
Net increase in cash and cash equivalents	42,917			9,151
Cash and cash equivalents at beginning of period	34,200			28,295
Cash and cash equivalents at end of period	$	77,117		$	37,446
Supplemental disclosures of cash flow information:
Cash paid for interest on convertible debt	$	—		$	277
Cash paid for interest on capital leases	$	18		$	35
Cash paid for interest on line of credit	$	122		$	—
Non-cash investing and financing activities:
Conversion of debt to equity	$	—		$	14,197
Reclassification of unamortized debt issuance cost to additional paid-in capital as a result of debt conversion	$	—		$	253
Purchases of property and equipment through accounts payable and other accrued liabilities	$	3,516		$	175

See accompanying notes to unaudited condensed consolidated financial statements.

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CALLIDUS SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Summary of Significant Accounting Policies

Basis of Presentation and Summary of Accounting Policies

All amounts included herein related to these unaudited condensed consolidated financial statements as of September 30, 2015 and the three and nine months ended September 30, 2015 and 2014 are unaudited and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Callidus Software Inc.'s ("Company") Annual Report on Form 10-K for the year ended December 31, 2014. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the Securities and Exchange Commission ("SEC") rules and regulations regarding interim financial statements.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all necessary adjustments for the fair presentation of the Company’s financial position, results of operations and cash flows. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the full fiscal year ending December 31, 2015.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include wholly-owned subsidiaries in Australia, Canada, Germany, Hong Kong, India, Japan, Malaysia, Mexico, New Zealand, Serbia, Singapore, and the United Kingdom. All intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates

Preparation of the unaudited condensed consolidated financial statements in conformity with GAAP and the rules and regulations of the SEC requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, the reported amounts of revenue and expenses during the reporting period and the accompanying notes. Estimates are used for, but not limited to, uncertain tax liabilities, allowances for doubtful accounts, the useful lives of fixed assets and intangible assets, goodwill and intangible asset impairments, stock-based compensation forfeiture rates, accrued liabilities, the allocation of the value of purchase consideration for business acquisitions, and other contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates such estimates and assumptions on an ongoing basis for continued reasonableness, using historical experience and other factors, including the current economic environment. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such evaluation. Illiquid credit markets, volatile equity and foreign currency markets and fluctuations in information technology spending by prospective customers can increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ materially from those estimates. Changes in those estimates, if any, resulting from continuing changes in the economic environment, will be reflected in the condensed consolidated financial statements in future periods.

Revenue Recognition

The Company generates revenue by providing software applications as a service ("SaaS") through an on-demand subscription, on-premise perpetual and term licenses and related software maintenance, and professional services. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.

Recurring Revenue. Recurring revenue, which includes software-as-a-service revenue and maintenance revenue, is recognized ratably over the stated contractual period. SaaS revenue consists of subscription fees from customers accessing our cloud-based service offerings. Maintenance revenue consists of fees from customers purchasing support for on-premise solutions. The Company also recognizes revenue associated with customers using its products in excess of contracted usage ("Overages"). Overages are primarily attributed to SaaS products and such Overages are recorded in SaaS revenue. Revenue related to Overages was immaterial during the three and nine months ended in September 30, 2015 and September 30, 2014.

Service and License Revenue. Service and license revenue primarily consist of training, integration and configuration services. Generally, the Company's professional services arrangements are on a time-and-materials basis. Time and material services are recognized as the services are rendered based on inputs to the project, such as billable hours incurred. For fixed-fee professional service arrangements, the Company recognizes revenue under the proportional performance method of accounting and estimates the proportional performance on a monthly basis, utilizing hours incurred to date as a percentage of total

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estimated hours to complete the project. If the Company does not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion. Service and license revenue also includes revenue from perpetual licenses, which is recognized upon delivery of the product, using the residual method, assuming all the other conditions for revenue recognition have been met.

In a limited number of arrangements with non-standard acceptance criteria, the Company defers the revenue until the acceptance criteria is satisfied. Reimbursements, including those related to travel and out-of-pocket expenses, are included in services and license revenue, and an equivalent amount of reimbursable expenses is included in cost of services and license revenue.

In general, recurring revenue agreements are entered into for 12 to 36 months, and the professional services are performed within nine months of entering into a contract with the customer, depending on the size of integration.

SaaS agreements provide specified service level commitments, excluding scheduled maintenance. The failure to meet this level of service availability may require the Company to credit qualifying customers a portion of their subscription and support fees. Based on the Company's historical experience meeting its service level commitments, the Company does not currently have any liabilities on its balance sheet for these commitments.

The Company recognizes revenue when all of the following conditions are met:

• Persuasive evidence of an arrangement exists;

• Delivery has occurred or services have been rendered;

• The fees are fixed or determinable; and

• Collection of the fees is reasonably assured.

If the Company determines that any one of the four criteria is not met, it will defer recognition of revenue until all the criteria are met.

Multiple-deliverable arrangements with on-demand subscription. For on-demand subscription agreements with multiple-deliverables, the Company evaluates each element to determine whether it represents a separate unit of accounting. The Company determines the best estimated selling price of each deliverable in an arrangement based on a selling price hierarchy of methods contained in Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Accounting Standards Codification (“ASC”) Topic 605)-Multiple-Deliverable Revenue Arrangements. The best estimated selling price for a deliverable is based on its vendor-specific objective evidence (“VSOE”), if available, third-party evidence (“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available. Total arrangement fees are allocated to each element using the relative selling price method. The Company has currently established VSOE for most deliverables, except for fixed fee service arrangements and on-premise software licenses.

The Company considered all of the following factors to establish the ESP for fixed fee service arrangements when sold with its on-demand services: the weighted average actual sales prices of professional services sold on a stand-alone basis for on-demand services; average billing rates for fixed fee service agreements when sold with on-demand services, cost plus a reasonable mark-up and other factors such as gross margin objectives, pricing practices and growth strategy. The Company is currently using cost plus a reasonable mark-up to establish ESP for fixed fee service arrangements.

Multiple-deliverable arrangements with on-premise license. For arrangements with multiple-deliverables, including license, professional services and maintenance, the Company recognizes license revenue using the residual method of accounting pursuant to the requirements of the guidance contained in ASC 985-605, Software Revenue Recognition. Under the residual method, revenue is recognized when VSOE for fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. If evidence of fair value cannot be established for the undelivered elements, all of the revenue is deferred until evidence of fair value can be established, or until the items for which evidence of fair value cannot be established are delivered. For maintenance and certain professional services, the Company has established VSOE as a high number of stand-alone sales of this deliverable have been priced within a reasonably narrow range. The Company's revenue arrangements do not include a general right of return relative to the delivered products.

For the Company's term-based licenses, if the only undelivered element is maintenance, the entire amount of revenue is recognized over the maintenance period, because the Company does not sell maintenance separately.

Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenue.

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Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 may also impact how the Company accounts for certain direct costs associated with its revenues. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted one year earlier. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. The Company has not elected a transition method and is currently in the process of evaluating the impact of the adoption of ASU 2014-09 on the condensed consolidated financial statements and does not plan to early adopt this standard.

Note 2—Acquisition

On July 22, 2015, the Company acquired BridgeFront LLC ("BridgeFront"), a leading provider of cloud-based education content for the healthcare sector, most notably in the compliance and revenue cycle domains. The purchase consideration was approximately $5.1 million, which included approximately $4.4 million paid in cash, $0.1 million held back to cover expenses of the stakeholder representative which is payable in early 2017, and an approximately $0.5 million indemnity holdback payable upon the one year closing anniversary, which remained outstanding as of September 30, 2015.

Earn-out payments based on achievement of targets are normally treated as purchase price, however, because of service conditions, $0.5 million of the $0.6 million is treated as compensation expense and recognized over the term of the payments in 2015 and 2016. The fair value of the remaining balance of $0.1 million of the earn-out is recorded as contingent consideration.

The preliminary purchase price allocation for BridgeFront is summarized as follows (in thousands):



	Fair Value
Net liabilities assumed	$	(849	)
Intangible assets	2,100
Goodwill	3,806
Total purchase price	$	5,057

As of September 30, 2015, the purchase price allocation for the acquisition was preliminary and subject to completion. Adjustments to the current fair value estimates in the above table may occur as the process conducted for the valuation and review is finalized, including assets, liabilities and other attributes.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable assets acquired. The goodwill balance is primarily attributed to the anticipated synergies from the acquisition and the expanded market opportunities of our Litmos mobile learning applications in the healthcare industry.

The financial results of BridgeFront are included in the Company's unaudited condensed consolidated financial statements from the date of acquisition to September 30, 2015.

The acquisition of BridgeFront did not have a material impact on the Company's unaudited condensed consolidated financial statements and therefore pro forma disclosures have not been presented.

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The following table sets forth the components of identifiable intangible assets acquired, their weighted-average useful lives over which they will be amortized using the straight-line method, and the classification of their amortized expense in our condensed consolidated statements of operations (in thousands):



	Fair Value		Weighted -Average Useful life	Statement of Operations Classification: Amortization Expense
Developed technology	$	1,800	5 years	Cost of sales
Customer relationships	300		5 years	Sales and marketing expense
Total intangible assets subject to amortization	$	2,100

The fair values of the intangible assets at the acquisition date were measured primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, Fair Value Measurements. The value of acquired intangibles was determined based on the present value of estimated future cash flows using the following valuation techniques and inputs:


•	Developed technology - Primarily the royalty-from-relief method using inputs such as estimated revenues attributable to the online education content, estimated net royalty revenue, effective income tax rate and discount rate.


•	Customer relationships - Primarily the multi-period excess earnings method under the income approach using inputs such as probability-weighted revenue attributable to existing customer relationships, customer attrition, estimated expenses, effective income tax rate, and discount rate.

The amortization expense of $0.1 million was included in our unaudited condensed consolidated of operations. The acquisition related costs incurred during the quarter of $0.2 million which was included in general and administration expense in the unaudited condensed consolidated statements of operations.

Note 3—Financial Instruments

As of September 30, 2015 and December 31, 2014, all investment debt securities were classified as available-for-sale and carried at estimated fair value, which is determined based on the inputs discussed below.

The Company classifies all highly liquid instruments with an original maturity on the date of purchase of three months or less as cash and cash equivalents. The Company classifies available-for-sale securities that have a maturity date longer than three months as short-term investments, including those investments with a maturity date of longer than one year that are highly liquid and which the Company does not intend to hold to maturity.

Realized gains and losses are calculated using the specific identification method. As of September 30, 2015 and December 31, 2014, the Company had no short-term investments in a material unrealized loss position.

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The components of the Company’s cash, cash equivalents, and investments classified as available-for-sale were as follows at September 30, 2015 and December 31, 2014 (in thousands):



September 30, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash	$	75,659	$	—	$	—		$	75,659
Cash equivalents:
Money market funds	1,458		—		—			1,458
Total cash equivalents	1,458		—		—			1,458
Total cash and cash equivalents	$	77,117	$	—	$	—		$	77,117

Short-term investments:
Certificates of deposits	$	1,500	$	—	$	—		$	1,500
Corporate notes and U.S government agency obligations	17,098				(1		)	17,097
Total short-term investments	$	18,598	$	—	$	(1	)	$	18,597



December 31, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash	$	27,890	$	—	$	—		$	27,890
Cash equivalents:
Money market funds	6,310		—		—			6,310
Total cash equivalents	6,310		—		—			6,310
Total cash and cash equivalents	$	34,200	$	—	$	—		$	34,200

Short-term investments:
Corporate notes and U.S. government agency obligations	$	2,773	$	—	$	(7	)	$	2,766
Total short-term investments	$	2,773	$	—	$	(7	)	$	2,766

The market value and the amortized cost of available-for-sale debt securities by contractual maturities as of September 30, 2015 were as follows (in thousands):



Contractual maturity	Amortized Cost		Estimated Fair value
Less than 1 year	$	7,755	$	7,755
Between 1 and 2 years	10,843		10,842
Total	$	18,598	$	18,597

The Company had no realized gains or losses on sales of its investments for the three and nine months ended September 30, 2015 and 2014. The Company had net purchases of investments of $15.9 million during the nine months ended September 30, 2015 and net proceeds from maturities and sales of investments of $5.1 million during the nine months ended September 30, 2014.

The short-term investments in highly rated credit securities generally have minor to moderate fluctuations in the fair values from period to period. The Company monitors credit ratings, downgrades and significant events surrounding these securities in order to assess whether any of the impairments will be considered other-than-temporary. The Company did not identify any securities held as of September 30, 2015 or as of December 31, 2014 for which the fair value declined significantly below amortized cost and were considered other-than-temporary impairments.

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Note 4—Fair Value Measurements

The Company measures financial assets at fair value on an ongoing basis. The estimated fair value of the Company’s financial assets was determined using the following inputs at September 30, 2015 (in thousands):



	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
September 30, 2015	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds (1)	$	1,458	$	1,458	$	—	$	—
Certificates of deposit (2)	1,500		—		1,500		—
Corporate notes and U.S. government agency obligations (2)	17,097		—		17,097		—
Total	$	20,055	$	1,458	$	18,597	$	—
Liabilities:
Contingent consideration and related liabilities (3)	$	202	$	—	$	—	$	202
Total	$	202	$	—	$	—	$	202

_____________________________________________________________________________

(1) Included in cash and cash equivalents on the unaudited condensed consolidated balance sheet.

(2) Included in short-term investments on the unaudited condensed consolidated balance sheet.

(3) Included in accrued expenses on the unaudited condensed consolidated balance sheet.

The estimated fair value of the Company’s financial assets was determined using the following inputs at December 31, 2014 (in thousands):



	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2014	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds (1)	$	6,310	$	6,310	$	—	$	—
Corporate notes and U.S. government agency obligations (2)	2,766		—		2,766		—
Total	$	9,076	$	6,310	$	2,766	$	—

_____________________________________________________________________________

(1) Included in cash and cash equivalents on the unaudited condensed consolidated balance sheet.

(2) Included in short-term investments on the unaudited condensed consolidated balance sheet.

Valuation of Investments

Level 1 and Level 2

The Company’s available-for-sale securities include money market funds, certificates of deposit, corporate notes and U.S. government agency obligations. The Company values these securities using a pricing matrix from a pricing service provider, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs). The Company classifies all of its available-for-sale securities, except for money market funds, as having Level 2 inputs. The Company validates the estimated fair value of certain securities from a pricing service provider on a quarterly basis. The valuation techniques used to measure the fair value of the financial instruments having Level 2 inputs, all of which have counterparties with high credit ratings, were derived from the following: non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar

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instruments or pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data.

Level 3

Contingent consideration and related liabilities are defined as earn-out payments which the Company may pay in connection with the acquisition of BridgeFront. Contingent consideration and related liabilities are classified as level 3 liabilities, as the Company uses unobservable inputs to value them, which is a probability-based income approach. Subsequent changes in the fair value of contingent consideration and related liabilities will be recorded in the Company's unaudited condensed consolidated statements of operations.

The Company did not have any transfers between Level 1, Level 2 and Level 3 fair value measurements during the periods presented as there were no changes in the composition in Level 1, 2 or 3.

Note 5—Commitments and Contingencies

Except as discussed below, there were no material changes in the Company's commitments under contractual obligations as disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2014.

Letter of Credit

The Company obtained a $1.1 million letter of credit in October 2014 for leased space in Dublin, California. The letter of credit expired on October 1, 2015 and was automatically renewed for one year to October 1, 2016. There is no balance outstanding under this line of credit.

Revolver Line of Credit

In May 2014, the Company entered into a credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under which Wells Fargo agreed to make a revolving loan ("Revolver") to the Company in an amount not to exceed $10.0 million, with an accordion feature that allows the Company to increase the maximum borrowing amount by not less than $5.0 million and not more than $10.0 million. In September 2014, the Company increased the maximum borrowing amount to $15.0 million. The Revolver matures in May 2019. During the quarter ended June 30, 2015, the Company paid off the outstanding amount of $10.5 million.

Pursuant to the agreement, the Company is required to maintain a leverage ratio of 3.00:1.00 and minimum liquidity of $7.5 million. The Company has met these leverage and liquidity covenants.

Outstanding borrowings under the Revolver bear interest, at the Company's option, at a base rate plus an applicable margin. The applicable margin ranges between 0.75% and 2.25% depending on the Company's leverage ratio. A fee of 0.25% per annum is payable with respect to the unused portion of the commitment. Interest is payable every three months.

Warranties and Indemnification

The Company generally warrants that its software will perform in accordance with its standard documentation. Under the Company’s standard warranty, should a software product not perform as specified in the documentation within the warranty period, the Company will repair or replace the software or refund the license fee paid. To date, the Company has not incurred any incremental costs related to warranty obligations for its software.

The Company’s product license and on-demand agreements typically include a limited indemnification provision for claims by third parties relating to the Company’s intellectual property. To date, the Company has not incurred material costs, and has not accrued any costs, related to such indemnification provisions.

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Note 6—Restructuring and Other

Restructuring and other expenses primarily consist of costs associated with exit from excess facilities, employee terminations and incremental depreciation expense as a result of the change in the estimated useful life of assets to be abandoned.

The Company incurred no restructuring and other expenses during the three months and $0.2 million during the nine months ended September 30, 2015. The Company incurred restructuring and other expenses of $0.3 million and $0.7 million during the three and nine months ended September 30, 2014, respectively.

The following tables set forth a summary of accrued restructuring and other expenses for the nine months ended September 30, 2015 and 2014 (in thousands):



	December 31, 2014		Additions		Adjustments		Cash Payments			September 30, 2015
Severance and termination-related costs	$	—	$	227	$	—	$	(227	)	$	—
Facilities-related costs	194		7		—		(152		)	49
Total accrued restructuring and other expenses	$	194	$	234	$	—	$	(379	)	$	49



	December 31, 2013		Additions		Adjustments		Cash Payments			September 30, 2014
Severance and termination-related costs	$	141	$	70	$	—	$	(211	)	$	—
Facilities related costs	234		162		20		(139		)	277
Total accrued restructuring and other expenses	$	375	$	232	$	20	$	(350	)	$	277

During the three and nine months ended September 30, 2014, the Company also incurred $0.3 million and $0.5 million of non-cash expense, respectively, primarily related to incremental depreciation expense as a result of the change in the estimated useful life of assets at its offices in Pleasanton, California.

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Note 7—Net Loss Per Share

Basic net loss per share is calculated by dividing net loss for the period by the weighted average common shares outstanding during the period. Diluted net loss per share is calculated by dividing the net loss for the period by the weighted average common shares outstanding, adjusted for all dilutive potential common shares, which includes shares issuable for the period of time the Company's 4.75% Convertible Senior Notes ("Convertible Notes") were outstanding, the exercise of outstanding common stock options, the release of restricted stock units, and purchases of shares pursuant to the Company's employee stock purchase plan ("ESPP"), to the extent these shares are dilutive. For the three and nine months ended September 30, 2015 and 2014, the diluted net loss per share calculation was the same as the basic net loss per share calculation as all potential common shares were anti-dilutive.

Diluted net loss per share does not include the effect of the following potential weighted average common shares because to do so would be anti-dilutive for the periods presented (in thousands):



	Three Months Ended September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014
Restricted Stock Units	3,120	2,526	2,803	2,340
Stock Options	806	1,557	945	1,745
ESPP Shares	13	18	4	6
Convertible Notes	—	—	—	1,108
Total	3,939	4,101	3,752	5,199

The weighted average exercise price of stock options excluded for the three and nine months ended September 30, 2015 was $6.35 and $6.12, respectively, and for the three and nine months ended September 30, 2014 was $5.51 and $5.39, respectively.

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Note 8—Stock-based Compensation

Expense Summary

Stock-based compensation expense is measured based on the grant-date fair value of the stock-based awards. The Company recognizes stock-based compensation expense, for the portion of the awards that are ultimately expected to vest, on a ratable basis, over the requisite service period for those awards with graded vesting and service conditions.

The table below sets forth a summary of stock-based compensation expense for the three and nine months ended September 30, 2015 and 2014 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Stock Options	$	147	$	200	$	464	$	613
Restricted Stock Units
Performance-based Awards	986		440		2,370		1,267
Service-based Awards	2,651		2,064		10,379		5,354
ESPP Shares	231		288		711		682
Total stock-based compensation	$	4,015	$	2,992	$	13,924	$	7,916

As of September 30, 2015, there were $0.9 million, $7.2 million, $17.9 million and $0.8 million of total unrecognized compensation expense related to stock options, performance-based awards, service-based awards and ESPP shares, respectively. The expenses related to stock options, performance-based awards, service-based awards and ESPP shares are expected to be recognized over a weighted average period of 1.8 years, 2.1 years, 2.1 years and 0.6 years, respectively.

The table below sets forth the functional classification of stock-based compensation expense for the three and nine months ended September 30, 2015 and 2014 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Cost of recurring revenue	$	269	$	226	$	806	$	600
Cost of services and other revenue	277		265		856		735
Sales and marketing	1,316		925		3,931		2,327
Research and development	745		481		2,192		1,393
General and administrative	1,408		1,095		6,139		2,861
Total stock-based compensation	$	4,015	$	2,992	$	13,924	$	7,916

Performance-based Awards

The Company includes performance-based award activity with restricted stock units.

During the nine months ended September 30, 2015, the Company granted performance awards with vesting contingent on annual SaaS revenue growth at a specified level over the three-year period beginning July 1, 2015 through June 30, 2018.

During the nine months ended September 30, 2014, the Company granted performance awards with vesting contingent on absolute SaaS revenue growth over the three-year period from 2014 through 2016, and the Company’s relative total stockholder return over the three-year period from 2014 through 2016 versus an index of 17 SaaS companies.

Determination of Fair Value

The fair value of service-based awards is estimated based on the market value of the Company’s stock on the date of grant. A portion of the performance awards granted during 2014 are based on relative stockholder return and therefore, are subject to a market condition. As a result, the fair value of performance awards is calculated using a Monte Carlo simulation model that estimates the distribution of the potential outcomes of the grants of performance awards based on simulated future index of the peer companies.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model. No stock options were granted during the nine months ended September 30, 2015 and September 30, 2014.

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The fair value of each ESPP share is estimated on the enrollment date of the offering period using the Black-Scholes valuation model and the assumptions noted in the following table:



	Nine Months Ended September 30,
	2015	2014
Employee Stock Purchase Plan
Expected life (in years)	0.50 to 1.00	0.50 to 1.00
Risk-free interest rate	0.25% to 0.38%	0.05% to 0.12%
Volatility	38.7% to 39.3%	47% to 50%
Dividend yield	None	None

Note 9—Income Taxes

Income tax expense for the three months ended September 30, 2015 was $0.2 million compared to $0.3 million for the same period in 2014 and for the nine months ended September 30, 2015 was $0.6 million, compared to $0.9 million for the same period in 2014. In both periods the decrease in taxes was attributable to less sales to foreign customers subject to withholding taxes and less income in the foreign jurisdictions subject to income taxes.

Note 10—Segment, Geographic and Customer Information

The accounting principles guiding disclosures about segments of an enterprise and related information establish standards for the reporting by business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method of determining which information is reported is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company’s chief operating decision maker is considered to be the Company’s chief executive officer ("CEO"). The CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. By this definition, the Company operates in one business segment, which is the development, marketing and sale of sales and marketing effectiveness cloud software and related services.

The following table summarizes revenue for the three and nine months ended September 30, 2015 and 2014 by geographic areas (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
United States	$	34,342	$	26,352	$	96,499	$	76,845
EMEA	4,570		4,098		13,031		10,845
Asia Pacific	2,389		2,551		7,360		5,793
Other	3,643		1,999		9,413		5,009
	$	44,944	$	35,000	$	126,303	$	98,492

Substantially all of the Company’s long-lived assets are located in the United States and United Kingdom. Long-lived assets located outside the United States and United Kingdom are immaterial.

During the three and nine months ended September 30, 2015 and 2014, no customer accounted for more than 10% of total revenue.

Note 11—Related-Party Transactions

In June 2013, in the normal course of business, the Company entered into agreements with Lithium Technologies, Inc. (“Lithium”), whose Chief Financial Officer is a member of the Company's Board of Directors. In 2014 and 2015, the Company renewed its annual subscription for Lithium's social media management solutions in the amounts of $120,000 and $155,000, respectively, which were paid in full during 2014 and 2015, respectively.

In 2014, the Company purchased an annual subscription from Lithium for Community Administration for $45,000, which amount was paid in full in January 2015. In addition, in 2014, the Company purchased a one-time annual subscription for consulting and training services for Social Services from Lithium for $40,000, which amount was paid in full in 2014. In 2015, the Company incurred $30,000 for redesigning the user interface for Community Administration, which was paid in full as of September 30, 2015. Also, in 2015, the Company incurred expenses of $60,000 for Social Services, which was included in accrued expenses as of September 30, 2015.

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In 2013, Lithium entered into a two-year on-demand services agreement with the Company for an annual amount of $113,000. During the three and nine months ended September 30, 2015, the Company recognized approximately $35,000 and $92,000, respectively, in revenue under this annual hosting agreement and $3,000 and $115,500, respectively, in service revenue.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of financial condition and results of operations should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014 and with the unaudited condensed consolidated financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. This section of this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to our future plans, objectives, expectations, prospects, intentions and financial performance and the assumptions that underlie these statements. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” "may," “will,” and similar expressions and the negatives thereof identify forward-looking statements, which generally are not historical in nature. These forward-looking statements include, but are not limited to, statements concerning the following: levels of recurring revenue, levels of SaaS revenue, changes in and expectations with respect to revenue, revenue growth and gross profits, operating expense levels, the impact of quarterly fluctuations of revenue and operating results, staffing and expense levels, expected cash and investment balances, the impact of foreign exchange rates and interest rate fluctuations, projected future financial performance, our anticipated growth and trends in our businesses, our business strategy, and other characterizations of future events or circumstances. As and when made, management believes that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made and may be based on assumptions that do not prove to be accurate. In addition, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Many of these risks and uncertainties are described in “Risk Factors” set forth in our Annual Report on Form 10-K for the year ended December 31, 2014 and in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or circumstances occurring after the date of this Quarterly Report on Form 10-Q, except as required by law.

Overview

CallidusCloud^® is a global leader in cloud-based sales, marketing, learning and customer experience solutions. CallidusCloud enables its customers to accelerate their Lead to Money process with a suite of solutions that can, among other things, identify leads, implement territory and quota plans, enable sales forces, automate bid configuration pricing and quoting, manage contracts, streamline sales compensation and capture customer feedback for competitive advantage. Over 4,400 organizations, across a broad set of industries, rely on CallidusCloud to optimize the Lead to Money process and close more deals, faster.

Lead to Money is a process designed to help companies respond to the changing role of sales and marketing in the redefined buying cycle. In the last decade, the ubiquity of social networks, mobile devices and e-commerce has transformed the traditional sales cycle into a buyer-led digital journey. Buyers are researching and evaluating companies online and are completing a significant portion of their purchases digitally. In order to successfully turn leads into money, sales, marketing, learning and customer experience teams must work together.

We provide a suite of Software-as-a-Service ("SaaS") solutions which generate revenue from cloud subscriptions, sales operation services and term licenses. Our SaaS customers typically purchase annual subscriptions, but occasionally will purchase multi-year subscriptions.

Revenue Growth and Customer Expansion

For the three months ended September 30, 2015, we added approximately 400 net new customers, including customers added from our acquisition of BridgeFront LLC ("BridgeFront"), and as of September 30, 2015, we had over 4,400 customers.

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For the three months ended September 30, 2015, total revenue was $44.9 million, an increase of $9.9 million, or 28%, from the three months ended September 30, 2014. Total recurring revenue, which includes SaaS and maintenance revenue, increased by 34% in the three months ended September 30, 2015 from the same period in 2014. SaaS revenue increased to $30.8 million in the three months ended September 30, 2015, representing an increase of $9.2 million, or 43%, from the same period in 2014. Recurring revenue gross margins were 74% and 73% in the three and nine months ended September 30, 2015, respectively, compared to 65% and 67% for the three and nine months ended September 30, 2014, respectively. The improvement is primarily associated with higher SaaS revenue and cost savings associated with data center infrastructure consolidation. Overall gross margins were 61% in both the three and nine months ended September 30, 2015, compared to 55% and 58% for the three and nine months ended September 30, 2014, respectively. Revenue related to overages (customers using our products in excess of contracted usage) was immaterial during the three and nine months ended September 30, 2015 and September 30, 2014.

SaaS revenue continued to drive the increases in both recurring revenue and total revenue, reflecting continued market acceptance of our Lead to Money^TM solutions.

Acquisition

On July 22, 2015, the Company acquired BridgeFront, a leading provider of cloud-based education content for the healthcare sector, most notably in the compliance and revenue cycle domains. The purchase consideration was approximately $5.1 million. Please refer to Note 2 of our notes to the unaudited condensed consolidated financial statements for further details regarding the acquisition, which did not have a material impact on our financial position or results of operations.

Application of Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations which follows is based upon our unaudited condensed consolidated financial statements prepared in accordance with the generally accepted accounting principles in the United States of America ("GAAP"). The application of GAAP requires management to make assumptions, judgments and estimates that affect our reported amounts of assets, liabilities, revenue and expenses, and the related disclosures regarding these items. We base our assumptions, judgments and estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our future financial condition or results of operations will be affected. We evaluate our assumptions, judgments and estimates on a regular basis. We also discuss our critical accounting policies and estimates with the Audit Committee of our Board of Directors.

We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, uncertain tax liabilities, allowances for doubtful accounts, the useful lives of fixed assets and intangible assets, goodwill and intangible asset impairments, stock-based compensation forfeiture rates, accrued liabilities, the allocation of the value of purchase consideration for business acquisitions, and other contingencies have the greatest potential impact on our unaudited condensed consolidated financial statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates and we consider these to be our critical accounting policies. There were no significant changes in our critical accounting policies and estimates during the three and nine months ended September 30, 2015 as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Recent Accounting Pronouncements

Please refer to Note 1 of our notes to unaudited condensed consolidated financial statements for information regarding the effect of recent accounting pronouncements on our financial statements.

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Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2015 and 2014

The table below reflects the BridgeFront acquisition from July 23, 2015 through September 30, 2015.

Revenue, Cost of Revenue and Gross Profit

The following table sets forth the changes in revenue, cost of revenue and gross profit for the three and nine months ended September 30, 2015, compared to the same periods in 2014 (in thousands, except for percentage data):



	Three Months Ended September 30, 2015		Percentage of Revenue	Three Months Ended September 30, 2014		Percentage of Revenue	Increase (Decrease)			Percentage Change
Revenue:
Recurring	$	34,301	76%	$	25,547	73%	$	8,754		34%
Services and license	10,643		24%	9,453		27%	1,190			13%
Total revenue	$	44,944	100%	$	35,000	100%	$	9,944		28%

Cost of revenue:
Recurring	$	9,034	26%	$	8,916	35%	$	118		1%
Services and license	8,318		78%	6,730		71%	1,588			24%
Total cost of revenue	$	17,352	39%	$	15,646	45%	$	1,706		11%

Gross profit:
Recurring	$	25,267	74%	$	16,631	65%	$	8,636		52%
Services and license	2,325		22%	2,723		29%	(398		)	(15)%
Total gross profit	$	27,592	61%	$	19,354	55%	$	8,238		43%



	Nine Months Ended September 30, 2015		Percentage of Revenue	Nine Months Ended September 30, 2014		Percentage of Revenue	Increase (Decrease)			Percentage Change
Revenue:
Recurring	$	93,907	74%	$	71,481	73%	$	22,426		31%
Services and license	32,396		26%	27,011		27%	5,385			20%
Total revenue	$	126,303	100%	$	98,492	100 %	$	27,811		28%

Cost of revenue:
Recurring	$	25,233	27%	$	23,706	33%	$	1,527		6%
Services and license	24,041		74%	17,468		65%	6,573			38%
Total cost of revenue	$	49,274	39%	$	41,174	42%	$	8,100		20%

Gross profit:
Recurring	$	68,674	73%	$	47,775	67%	$	20,899		44%
Services and license	8,355		26%	9,543		35%	(1,188		)	(12)%
Total gross profit	$	77,029	61%	$	57,318	58%	$	19,711		34%

Revenue

Total Revenue. The increase in total revenue for the three and nine months ended September 30, 2015 compared to the same periods in 2014 was primarily due to continued SaaS revenue growth from increased bookings and the associated professional services revenue, offset in part by a decline in license revenue. Our broad Lead to Money suite, increased adoption from our current customer base and acquisitions in 2014 and 2015 contributed to the growth in revenue.

Recurring Revenue. Recurring revenue consists of SaaS and maintenance revenue. For the three months ended September 30, 2015 compared to the same period in 2014, SaaS revenue increased $9.2 million due to increased bookings

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offset by a decrease in maintenance revenue of $0.4 million resulting from customers converting from license to SaaS arrangements. For the nine months ended September 30, 2015 compared to the same period in 2014, SaaS revenue increased $23.6 million due to increased bookings, which was offset by a maintenance revenue decrease of $1.2 million, resulting from customers converting from license to SaaS arrangement.

Services and License Revenue. Services and license revenue consists of integration and configuration services, training, on-premise perpetual and term-based licenses. Services and license revenue for the three months ended September 30, 2015 increased by $1.2 million compared to the same period in 2014. The increase was due to approximately $1.7 million in service revenue attributed to increased SaaS growth, offset by an approximately $0.5 million decrease in license revenue. Services and license revenue for the nine months ended September 30, 2015 increased by $5.4 million compared to the same period in 2014 due to an increase in service revenue of $8.1 million offset by a $2.7 million decrease in license revenue.

Cost of Revenue and Gross Profit

Cost of Recurring Revenue. The increase in cost of recurring revenue for the three months ended September 30, 2015 compared to the same period in 2014 is primarily due to a $0.8 million increase in personnel related costs and $0.4 million increase in depreciation, maintenance and equipment as we continue to invest in hosting facilities to support our revenue growth and expanded customer base. This was offset by a royalty expense of $1.2 million related to a litigation settlement recorded in the third quarter of 2014 with no comparable cost for the same period in 2015. The increase for the nine months ended September 30, 2015 as compared to the same period in 2014 is primarily due to a $2.1 million increase in personnel related costs and a $0.6 million increase in depreciation, partially offset by a 2014 royalty expense of $1.2 million related to a litigation settlement recorded in 2014 with no comparable cost for the same period in 2015.

Cost of Services and License Revenue. During the three months ended September 30, 2015, to support growth in professional services, we spent an additional $1.1 million on personnel related costs, $0.3 million on outside consultants and $0.2 million on travel and other expenses as compared to the same period in 2014. During the nine months ended September 30, 2015, we spent an additional $3.8 million on personnel related costs, $2.4 million on professional services and $0.3 million on travel and other expenses as compared to the same period in 2014.

Recurring Revenue Gross Profit. The improvement in our recurring revenue gross profit for the three months ended September 30, 2015 compared to the same period in 2014 reflects increased revenue of $8.8 million and decreased royalty expense of $1.2 million, partially offset by $0.8 million increase in personnel costs and a $0.4 million increase in depreciation and maintenance and equipment. The improvement in our recurring revenue gross profit for the nine months ended September 30, 2015 compared to the same period in 2014 reflects increased revenue of $22.4 million and a $1.2 million decrease in royalty expense partially offset by increase in expenses of $2.1 million related to personnel costs and a $0.6 million increase in depreciation as we continue to invest in our hosting facilities while demonstrating leverage in our business.

Services and License Revenue Gross Profit. The decrease in services and license revenue gross profit for the three months ended September 30, 2015 compared to the same period in 2014 was attributable to increases of $1.1 million in personnel related costs, $0.3 million in outside consultant expenses, and $0.2 million in travel and other expenses, as well as a $0.5 million decrease in license revenue, partially offset by $1.7 million in increased service revenues. The decrease in services and license revenue gross profit for the nine months ended September 30, 2015 was attributable to an increase of $3.8 million in personnel related costs, $2.4 million in professional services and $0.3 million in travel and other expenses as well as a $2.7 decrease in license revenue partially offset by an increase in service revenue of $8.1 million.

Operating Expenses

The following table outlines the changes in operating expenses for the three and nine months ended September 30, 2015, compared to the same periods in 2014 (in thousands, except percentage data):



	Three Months Ended September 30, 2015		Percentage of Revenue	Three Months Ended September 30, 2014		Percentage of Revenue	Increase (Decrease)			Percentage Change
Operating expenses:
Sales and marketing	$	14,855	33%	$	11,153	32%	$	3,702		33%
Research and development	6,846		15%	4,920		14%	1,926			39%
General and administrative	7,883		18%	7,892		23%	(9		)	—%
Restructuring and other expenses	—		—%	305		1%	(305		)	(100)%
Total operating expenses	$	29,584	66%	$	24,270	69%	$	5,314		22%

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	Nine Months Ended September 30, 2015		Percentage of Revenue	Nine Months Ended September 30, 2014		Percentage of Revenue	Increase (Decrease)			Percentage Change
Operating expenses:
Sales and marketing	$	43,377	34%	$	33,688	34%	$	9,689		29%
Research and development	18,886		15%	14,838		15%	4,048			27%
General and administrative	24,413		19%	18,113		18%	6,300			35%
Restructuring and other expenses	234		—%	709		1%	(475		)	(67)%
Total operating expenses	$	86,910	69%	$	67,348	68%	$	19,562		29%

Sales and Marketing. The increase for the three months ended September 30, 2015 compared to the same period in 2014 was primarily due to a $2.4 million increase in personnel related costs, which includes an increase of $0.4 million in stock-based compensation expense and a $0.7 million increase in commissions. In addition, sales and marketing expense increased by $0.5 million related to our marketing events and $0.8 million in travel and other expenses. The increase for the nine months ended September 30, 2015 compared to the same period in 2014 was primarily due to a $7.1 million increase in personnel related costs, which includes a $1.6 million increase in stock-based compensation, and a $1.3 million increase in commissions. In addition, sales and marketing expense increased by $1.1 million related to our C3 user conference and other marketing events and a $1.4 million increase in travel and other expenses.

Research and Development. The increase for the three months ended September 30, 2015 compared to the same period in 2014 was primarily due to a $1.1 million increase in personnel related costs which includes $0.3 million in stock-based compensation expense, an increase of $0.5 million in consulting costs and an increase of $0.2 million in maintenance agreements, as we continue to invest in headcount to support continued product development. The increase for the nine months ended September 30, 2015 compared to the same period in 2014 was primarily due to a $3.0 million increase in personnel related costs which includes $0.8 million in stock-based compensation expense, an increase of $0.3 million in consulting costs, an increase of $0.2 million in maintenance agreements, and an increase of $0.5 million in travel and other expenses.

General and Administrative. The decrease for the three months ended September 30, 2015 compared to the same period in 2014 was primarily driven by the reduction in expenses of $1.8 million related to the Versata litigation settlement in the third quarter of 2014 partially offset by the $1.0 million increase in personnel related costs, which includes $0.3 million in stock-based compensation expense, a $0.7 million increase in corporate expenses related to building a scalable operating platform which includes implementation of Salesforce.com, Zuora and Netsuite enhancements, along with our new corporate headquarters. The increase for the nine months ended September 30, 2015 compared to the same period in 2014 was primarily due to $5.1 million increase in personnel related costs, which includes $3.3 million in share-based compensation expense and increased corporate expenses of $3.0 million related to building a scalable operating platform in support our growth, partially offset by a reduction of $1.8 million related to the Versata litigation settlement incurred in 2014.

Restructuring and other. The decrease for the three and nine months ended September 30, 2015 as compared to the same period in 2014 was due to lower restructuring and other activity in 2015 as compared to 2014. In 2014, the Company initiated restructuring plans to realign the Company's resources to improve cost efficiencies.

Stock-based Compensation

The following table sets forth a summary of our stock-based compensation expenses for the three and nine months ended September 30, 2015, compared to the same periods in 2014 (in thousands, except percentage data):



	Three Months Ended September 30, 2015		Three Months Ended September 30, 2014		Increase (Decrease)		Percentage Change
Stock-based compensation:
Cost of recurring revenue	$	269	$	226	$	43	19%
Cost of services revenue	277		265		12		5%
Sales and marketing	1,316		925		391		42%
Research and development	745		481		264		55%
General and administrative	1,408		1,095		313		29%
Total stock-based compensation	$	4,015	$	2,992	$	1,023	34%

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	Nine Months Ended September 30, 2015		Nine Months Ended September 30, 2014		Increase (Decrease)		Percentage Change
Stock-based compensation:
Cost of recurring revenue	$	806	$	600	$	206	34%
Cost of services revenue	856		735		121		16%
Sales and marketing	3,931		2,327		1,604		69%
Research and development	2,192		1,393		799		57%
General and administrative	6,139		2,861		3,278		115%
Total stock-based compensation	$	13,924	$	7,916	$	6,008	76%

The increase for the three and nine September 30, 2015 compared to the same periods in 2014 was primarily due to the timing of restricted stock unit grants, an increased stock price and increased employee stock purchase plan participation.

Other Items

The following table sets forth changes in other items for the three and nine months ended September 30, 2015, compared to the same periods in 2014 (in thousands, except percentage data):



	Three Months Ended September 30, 2015			Three Months Ended September 30, 2014			Increase (Decrease)			Percentage Change
Other income (expense), net
Interest income and other income (expense), net	$	(38	)	$	(20	)	$	(18	)	90%
Interest expense	(26		)	(38		)	(12		)	32%
	$	(64	)	$	(58	)	$	(6	)	10%
Provision for income taxes	$	187		$	261		$	(74	)	(28)%



	Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014			Increase (Decrease)			Percentage Change
Other income (expense), net
Interest income and other income (expense), net	$	(414	)	$	3,948		$	(4,362	)	(110)%
Interest expense	(149		)	(429		)	(280		)	65%
	$	(563	)	$	3,519		$	(4,642	)	(132)%
Provision for income taxes	$	566		$	941		$	(375	)	(40)%

Interest Income and Other Income (Expense), Net

Interest income and other income (expense) during the three months ended September 30, 2015 is comparable with the same period in 2014. The decrease in interest income and other income (expense) during the nine months ended September 30, 2015, compared to the same period in 2014, was primarily due to an increase in foreign exchange losses in 2015 and a $3.9 million gain on the sale of select domain names and trademarks in 2014.

Interest Expense

Interest expense for the three months ended September 30, 2015 was generally comparable to the same period in 2014. The decrease in interest expense for the nine months ended September 30, 2015, compared to same periods in 2014, was primarily due to the early conversion of $45.0 million of our 4.75% Convertible Senior Notes ("Convertible Notes") during the three months ended December 31, 2013 and conversion of the remaining $14.2 million of Convertible Notes during the three months ended June 30, 2014.

Provision for Income Taxes

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Liquidity and Capital Resources

As of September 30, 2015, our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $95.7 million and accounts receivable of $37.9 million, compared to $37.0 million and $41.6 million at December 31, 2014, respectively.

In March 2015, we completed a stock offering in which we issued 5.3 million shares of our common stock at a public offering price of $13.00 per share. We received net proceeds of $64.4 million after deducting underwriting discounts and commissions of $4.1 million and other offering expenses of $0.3 million.

In May 2014, we entered into a credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under which Wells Fargo agreed to make a revolving loan ("Revolver") to us in an amount not to exceed $10.0 million, with an accordion feature that allows us to increase the maximum borrowing amount by not less than $5.0 million and not more than $10.0 million. The Revolver matures in May 2019. Outstanding borrowings under the Revolver bear interest, at the Company's option, at a base rate plus an applicable margin. The applicable margin ranges between 0.75% and 2.25% depending on the Company's leverage ratio. Interest is payable every three months. In June 2015, we paid the outstanding amount of the Revolver.

Cash provided by operating activities during the nine months ended September 30, 2015 improved significantly compared to cash provided by operating activities during the nine months ended September 30, 2014, primarily due to a decrease in accounts receivable, decrease in prepaid and other assets and an increase in deferred revenue.

The following table summarizes, for the periods indicated, selected items in our condensed consolidated statements of cash flows (in thousands):



	Nine Months Ended September 30,
	2015			2014
Net cash provided by operating activities	$	20,522		$	10,116
Net cash used in investing activities	$	(30,327	)	$	(11,709	)
Net cash provided by financing activities	$	52,919		$	10,913

Cash Flows During the Nine Months Ended September 30, 2015

Net cash provided by operating activities was $20.5 million in the nine months ended September 30, 2015 compared to $10.1 million provided in the nine months ended September 30, 2014. During the nine months ended September 30, 2015, net loss was $11.0 million, which included $13.9 million in stock-based compensation and $8.5 million in depreciation and amortization expense. Changes in operating assets and liabilities provided $8.3 million in cash during the first nine months of 2015, primarily driven by a decrease in accounts receivable of $3.4 million, a decrease in prepaid and other assets of $0.6 million, and an increase in deferred revenue of $4.4 million.

Net cash used in investing activities was $30.3 million during the nine months ended September 30, 2015, compared to cash used in investing activities of $11.7 million in the nine months ended September 30, 2014. During the nine months ended September 30, 2015, net cash used in investing activities includes $15.9 million for net investment purchases and $9.5 million in purchases of property and equipment and leasehold improvements for our corporate headquarters and data center investments. In addition cash used in the acquisition of BridgeFront was $4.4 million.

Net cash provided by financing activities was $52.9 million during the nine months ended September 30, 2015, compared to $10.9 million cash provided by financing activities in the nine months ended September 30, 2014. During the nine months ended September 30, 2015, the increase in cash provided by financing activities was primarily due to $64.4 million of net proceeds from our common stock follow-on offering and $4.2 million of proceeds from the issuance of common stock, partially offset by $10.5 million for the repayment of the revolving line of credit, $2.7 million for the repurchase of restricted stock from employees for payment of taxes on vesting of restricted stock units, a $1.8 million holdback payment related to our Clicktools Ltd. and LeadRocket Inc. acquisitions and $0.8 million of principal payments for capital leases.

Forward-Looking Cash Commitments

Our future capital requirements depend on many factors, including the amount of revenue we generate, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of new product introductions and enhancements to existing products, our ability to offer SaaS service on a consistently profitable basis, the continuing market acceptance of our products and future acquisitions or other capital expenditures we may make. However, based upon our current business plan and revenue projections, we believe that our current working capital and anticipated cash flows from operations will be adequate to meet our cash needs for daily operations and capital expenditures for at least the next

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twelve months, and we intend to continue to manage our cash in a manner designed to ensure that we have adequate cash and cash equivalents to fund our operations as well as future commitments.

Contractual Obligations and Commitments

Please refer to Note 5 of our notes to condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q for further information. For additional information on existing unconditional purchase commitments, please refer to our Annual Report on Form 10-K for the year ended December 31, 2014.

Off-Balance Sheet Arrangements

With the exception of the above contractual obligations, we have no material off-balance sheet arrangements that have not been recorded in our unaudited condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the three and nine months ended September 30, 2015, there were no significant changes to our quantitative and qualitative disclosures about market risk. Please refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended December 31, 2014 for a more complete discussion on the market risks we encounter.

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Item 4. Controls and Procedures

Evaluation of Disclosures Controls and Procedures

Our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended, Rules 13a-15(e) or 15d-15(e)) as of September 30, 2015, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures.

Changes in Internal Control Over Financial Reporting

In connection with their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our CEO and CFO did not identify any changes in our internal control over financial reporting during the three months ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls 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. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Factors That Could Affect Future Results

You should carefully consider the risks below, as well as other information included or incorporated by reference in this report before making an investment decision. We operate in a dynamic and rapidly changing environment that involves many risks and uncertainties that could cause actual results to differ materially from results contemplated by forward-looking statements in this report. Because of the factors discussed below, other information included or incorporated by reference in this report and other factors affecting our operating results, past performance should not be considered a reliable indicator of future performance. The risks discussed in this report are not the only risks we face. Risks and uncertainties of which we are not currently aware, or which we currently deem to be immaterial, may also adversely affect our business, financial condition or operating results.

Risks Related to Our Business

We have a history of losses, and we intend to continue to invest in our business, so we cannot assure you that we will achieve profitability.

We incurred net losses of $11.0 million during the nine months ended September 30, 2015, $11.6 million in 2014, $21.4 million in 2013, and $27.7 million in 2012. We had an accumulated deficit of $281.7 million as of September 30, 2015. We intend to continue to invest in our business, including with respect to our employee base; sales and marketing efforts; development of new products, services, and features; and improvement of our existing products, services, and features. Therefore, to achieve profitability, we must increase our revenue, particularly our recurring revenue by entering into more and larger sales transactions while limiting customer churn, and manage our cost structure in line with our revenue. If we fail to do so, our future results and financial condition will be adversely affected and we may be unable to continue operating.

We continue to monitor and manage our costs in an effort to optimize our performance for the long term. However, there is no assurance that we will be successful and; unforeseen expenses, difficulties or delays may prevent us from realizing our goals. From time to time, we incur restructuring expenses or expenses related to other cost reduction efforts, but we can offer no assurance that these or other actions will enable us to achieve or sustain profitability in the future. In addition, we cannot be certain that steps we have taken to control our costs will not adversely affect our prospects for long-term revenue growth. If we cannot increase our revenue, improve gross margins and control costs, our future results and financial condition will be negatively affected.

Our revenue and operating results have fluctuated in the past and are likely to fluctuate in the future, and because we recognize revenue from subscriptions over a period of time, downturns in revenue may not be immediately reflected in our operating results.

Because we recognize recurring revenue and maintenance revenue ratably over the terms of the related subscription agreements and maintenance support agreements, most of our revenue each quarter results from recognition of deferred revenue related to agreements entered into during previous quarters. Consequently, declines in new or renewed subscription agreements and maintenance agreements that occur in one quarter will largely be felt in future quarters, both because we may be unable to generate sufficient new revenue to offset the decline and because we may be unable to adjust our operating costs and capital expenditures to align with the changes in revenue. Our subscription model makes it more difficult for us to increase our revenue rapidly in any period, because revenue from new customers must be recognized over the applicable subscription term. Furthermore, although our business model is primarily focused on recurring revenue, we anticipate continuing to recognize license revenue, particularly with international customers. License revenue is difficult to forecast and is likely to fluctuate due to many factors that are beyond our control including transition of license customers to recurring revenue models. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as definitive indicators of future performance.

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Other factors that may cause our revenue and operating results to fluctuate include:


•	timing of customer budget cycles;


•	the priority our customers place on our products compared to other business investments;


•	size, timing and contract terms of new customer contracts, and unpredictable and often lengthy sales cycles;


•	reduced renewals;


•	competitive factors, including new product introductions, upgrades and discounted pricing or special payment terms offered by our competitors, as well as strategic actions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;


•	technical difficulties, errors or service interruptions in our solutions that may cause customer dissatisfaction with solutions;


•	consolidation among our customers, which may alter their buying patterns, or business failures that may reduce demand for our solutions;


•	operating expenses associated with expansion of our sales force or business, and our product development efforts;


•	cost, timing and management efforts related to the introduction of new features to our solutions;


•	our ability to obtain, maintain and protect our intellectual property rights and adequately safeguard the information imported into our solutions or otherwise provided to us by our customers;


•	changes in the regulatory environment, including with respect to security, or privacy laws and regulations, or their enforcement; and


•	extraordinary expenses such as impairment charges, litigation or other payments related to settlement of disputes.

Any of these developments may adversely affect our revenue, operating results and financial condition. Furthermore, we maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In such cases, we may be required to defer revenue recognition on sales to affected customers. In the future, we may have to record additional reserves or write-offs, or defer revenue on sales transactions, which could negatively impact our financial results.

If we are unable to maintain the profitability of our recurring revenue solutions, our operating results could be adversely affected.

We have invested, and expect to continue to invest, substantial resources to expand, market and refine our solutions. If we are unable to grow the volume of our recurring revenue, or to improve our gross margins, we may not be able to achieve profitability and our operating results and financial condition could be adversely affected. Factors that could harm our ability to improve our gross margins include:


•	customer attrition as customers decide not to renew for any reason;


•	our inability to maintain or increase the prices customers pay for our solutions, due to competitive pricing pressures or limited demand;


•	our inability to reduce operating costs through technology-based efficiencies and streamlined processes;


•	increased direct and indirect cost of third-party services, including hosting facilities and professional services contractors performing implementation and support services;


•	higher personnel and personnel-related costs;


•	increased costs to integrate products or personnel that we acquire, including time and expense associated with new

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sales personnel reaching full productivity; and


•	increased costs to license and maintain and replace third-party software embedded in our solutions or to create alternatives to such third-party software.

Our business and operations have experienced rapid growth in recent periods, and if we do not effectively manage any future growth or are unable to improve our systems and processes, our operating results will be adversely affected.

We have experienced rapid growth and increased demand for our products over the last few years. Our employee headcount and number of customers have increased significantly, and we expect to continue to grow our headcount significantly in future periods. For example, from the end of fiscal 2013 to the end of fiscal 2014, our employee headcount increased from 612 to 741 employees, and our number of customers increased from more than 2,200 to over 3,700. As of September 30, 2015 our employee headcount was 874 employees and our number of customers was over 4,400. We anticipate that we will continue to significantly expand our operations and headcount in the near term, and that our customer base will continue to expand. The growth and expansion of our business and our product and service offerings place a significant strain on our management, operations, sales and marketing, and financial resources. To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems, our sales and marketing teams and our ability to manage headcount, capital, and business processes in an efficient manner.

We may not be able to implement improvements to our systems and processes in an efficient or timely manner, and we may discover deficiencies in our existing systems and processes. We may experience difficulties in managing improvements to our systems and processes, which could disrupt existing customer relationships, cause us to lose customers, limit sales of our products, or increase our technical support costs. Our failure to improve our systems and processes, or the failure of those systems and processes to operate in the intended manner, may result in our inability to manage the growth of our business and accurately forecast our revenue and expenses. Our productivity and the quality of our solutions may be adversely affected if we do not integrate and train new employees quickly and effectively. Any future growth would add complexity to our organization and require effective coordination throughout our organization. Failure to manage any future growth effectively could result in increased costs, negatively impact our customers' satisfaction with our solutions, and harm our operating results.

Decreases in retention rates for customer SaaS subscriptions or on-premise maintenance arrangements could materially impact our future revenue or operating results.

Our customers have no obligation to renew our SaaS subscriptions or maintenance support arrangements after the expiration of the subscription or maintenance period, which is typically 12 to 24 months. Customers may elect not to renew, or may renew for fewer seat licenses or shorter contract terms. In addition, we offer a pay-as-you-go model, whereby customers can pay for our SaaS services on a monthly basis without a long-term commitment, which may unexpectedly increase the rate of customer non-renewals and thus negatively and unpredictably affect our recurring revenue. If our customer renewal rates decline, which may occur as a result of many factors, including reduced budgets, insourcing decisions or dissatisfaction with our service, our revenue will be adversely affected and our business will suffer.

Most of our revenue is derived from our Lead to Money solutions, and a decline in sales of those solutions could adversely affect our operating results and financial condition.

We derive a majority of our revenue from our Lead to Money solutions. If demand for those solutions declines significantly and we are unable to replace the revenue with revenue from our other offerings, our business and operating results will be adversely affected. We cannot assure you that our current levels of market penetration and revenue from these solutions will continue. If conditions in the market for these solutions change as a result of increased competition or new product offerings by our competitors or consolidation among our competitors, or if we are unable to timely introduce successful new solutions to keep pace with technological advancements, our revenue may decline and our financial results and financial condition would be harmed.

If we do not compete effectively, our revenue may not grow and could decline.

We experience intense competition from other software companies, as well as from customers' internal development teams. We believe one of our key challenges is to demonstrate the benefits of our solutions to prospective customers so that they will prioritize purchases of our solutions over other options. Our financial performance depends in large part on continued growth in the number of organizations adopting our sales effectiveness solutions to manage the performance of their sales organizations, yet the market for sales effectiveness solutions may not develop as we expect, or at all.

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We compete principally with vendors of sales effectiveness software, incentive compensation management ("ICM") software, enterprise resource planning software and customer relationship management software. Our competitors may be more successful than we are in capturing the market by, for example, announcing new products, services or enhancements that better meet the needs of prospective customers or our current customers or changing industry standards. In addition, if one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. Increased competition may cause price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, results of operations and financial condition.

Many of our competitors, particularly our enterprise resource planning competitors, have longer operating histories with significantly greater financial, technical, marketing, service and other resources. Many also have a larger installed base of users, larger marketing budgets and broader relationships, established distribution agreements, and greater name recognition. Some of our competitors' products may also be more effective at performing particular sales effectiveness or ICM system functions or may be more customized for particular customer needs in any given market. Even if our competitors provide products with less sales performance management or ICM system functionality than our solutions, their products may incorporate other capabilities, such as recording and accounting for transactions, customer orders or inventory management. A product that performs these functions, along with functions of our solutions, may appeal to some customers by reducing the number of software applications they use in their business. Our competitors, especially larger competitors, may also bundle ICM or other functionalities with their other offerings, rendering our software less competitive from a pricing perspective.

Our products generally must be integrated with software provided by existing or potential competitors. These competitors could alter their software products in ways that inhibit integration with ours, or they could deny or delay our access to advance software releases, which would restrict our ability to adapt our products for integration with their new releases and could result in the loss of both sales opportunities and renewals of on-demand services and maintenance.

Some potential customers have already made substantial investments in third-party or internally-developed solutions designed to model, administer, analyze and report on sales effectiveness programs. These companies may be reluctant to abandon such investments in favor of our solutions. In addition, information technology departments of some potential customers may resist purchasing our solutions for a variety of reasons, including concerns that hosted solutions are not sufficiently customizable for their needs or that they pose data security concerns for their enterprises.

If we change prices, alter our payment terms or modify our products or services in order to compete, our margins and operating results may be adversely affected.

The intensely competitive market in which we do business may require us to change our prices or modify our pricing strategies for our solutions in ways that adversely affect our operating results. If our competitors offer discounts on competitive products or services, we may need to lower prices or offer other terms more favorable to existing and prospective customers in order to compete successfully. If we raise prices based upon our own evaluation of the value of our products, those increases might not be well received by customers, which may hurt our sales. Some of our competitors may bundle their products with other solutions for promotional purposes or as a pricing strategy, or provide guarantees of prices and product implementations. These practices could, over time, limit the prices that we can charge for our solutions or cause us to modify our existing market strategies accordingly. If we cannot offset price reductions and other terms that are more favorable to our customers with a corresponding increase in sales or decrease in spending, then the reduced revenue resulting from lower prices would adversely affect our gross margins and operating results.

If we experience service interruptions in our offerings to customers, our business and financial results could be harmed.

Our business is primarily conducted over the Internet, so we depend on our ability to protect our computer equipment and stored data against damage from natural disasters, human error, power loss, telecommunications failures, cyber-attacks or other unauthorized intrusion and other events. Moreover, our headquarters are located in the San Francisco Bay Area, a region known for seismic activity. Although we have redundant facilities to support our operations, our systems, procedures and controls might not be adequate for all eventualities, which could prolong the adverse impact.

There can be no assurance that our disaster preparedness will prevent significant interruption of our operations, which could be lengthy, or reduce the speed or functionality of our services. Service interruptions, no matter how prolonged or frequent, may result in material liability claims from customers for breach of service-level commitments, customer terminations and damage to our reputation and business prospects.

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In addition, third-party service providers for hosting facilities or other critical infrastructure could be interrupted in the event of a natural disaster, facility closings or other unanticipated problems. Third-party telecommunications providers of Internet and other telecommunication services may fail to perform adequately, or their systems may fail to operate properly or be disabled, causing business interruption, system damage or significant expense for us to replace, and could harm our revenue, increase costs, cause regulatory intervention or damage to our reputation.

Software errors could be costly and time-consuming for us to correct, and could harm our reputation and impair our ability to sell our solutions.

Our solutions are based on complex software that may contain errors, or "bugs," that could be costly to correct, harm our reputation and impair our ability to sell our solutions to new customers. Moreover, customers relying on our solutions to implement their incentive compensation arrangements may be more sensitive to such errors, and the attendant potential security vulnerabilities and business interruptions for these applications. If we incur substantial costs to correct any errors of this nature, our operating margins could be adversely affected. Because our customers depend on our solutions for critical business functions, any service interruptions could result in lost or delayed market acceptance and lost sales, higher service-level credits and warranty costs, diversion of development resources and product liability suits.

Security breaches or loss of customer data could create the perception that our solutions are not secure, causing customers to discontinue or reject the use of our solutions and potentially subjecting us to significant liability. Implementing, monitoring and maintaining adequate security safeguards may be costly.

Our solutions allow our customers to access and transmit confidential data, including personally identifiable information of their employees, agents and customers over the Internet, and we store our customers' data on servers. We may also have access to confidential data in connection with the activities of our professional services organization, including implementation, maintenance and support activities for our customers.

Moreover, many of our customers are subject to heightened security obligations regarding the personally identifiable information of their downstream customers. In the United States, these heightened obligations particularly affect the financial services, healthcare and insurance sectors, which are subject to controls over personal information under various state and federal laws and regulations. Other directives, such as the European Union Directive on Data Protection and accompanying laws and regulations of the Member States of the European Union implementing the directive, create international obligations on the protection of personal data that typically exceed security requirements mandated in the United States. Implementation of security measures to satisfy customer and regulatory requirements may be substantial and costly.

Our security measures to protect customer information may be inadequate or breached by third-party action, including intentional misconduct or malfeasance, system error, employee error or otherwise, resulting in unauthorized access to or disclosure of our customers' data, including intellectual property and other confidential business information. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and are often not recognized until launched against a target, we may be unable to anticipate them or to implement adequate preventative measures. Because we do not control our customers or third-party technology providers that our customers may authorize to access their data, we cannot ensure the integrity or security of their activities. In addition, malicious third parties may conduct attacks designed to temporarily deny customers access to our services.

If we do not adequately safeguard the information that customers import into our solutions or otherwise provide to us, or if third parties penetrate our solutions and misappropriate customers' confidential information, our reputation may be damaged, resulting in a loss of confidence in our solutions, negatively impacting our brand and future sales, and we may be sued and incur substantial damages. Even if it is determined that our security measures were adequate, the damage to our reputation may cause customers and potential customers to reconsider the use of our solutions, which may have a material adverse effect on our results of operations.

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Our business depends in part on a strong and trusted brand, and any failure to maintain, protect, and enhance our brand could harm our business.

We have developed a strong and trusted brand that is associated with our solutions and services and that brand has contributed to the success of our business. Our brand is based on customer trust in our solutions and the implementations of our solutions in their businesses, across a broad range of industries. To continue to expand our customer base, it is important that we maintain, protect and enhance our brand. Our ability to achieve that goal depends largely on our ability to maintain our customers’ trust and continue to provide high-quality and secure solutions. Negative publicity could harm our reputation and customer confidence in and use of our solutions, whether that negative publicity relates to our industry or our company, the quality and reliability of our solutions, our risk management processes, our privacy and security practices, or other issues experienced by our customers. Accordingly, harm to our brand can stem from many sources, such as if we fail to satisfy expectations of service and quality, inadequately protect sensitive information, or experience compliance failures. If we do not successfully maintain a strong and trusted brand, our business and financial results may be harmed.

Legal and regulatory changes related to data protection and privacy could create unexpected costs, require changes to our business, impact the use and adoption of our solutions or to require us to agree to onerous terms and conditions, which could have an adverse effect on our future revenue, operating results or customer retention.

Legal and regulatory frameworks for data protection and privacy issues are evolving worldwide, and various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices. We expect federal, state and foreign governments to expand data protection and privacy regulation and we expect more public scrutiny, enforcement and sanctions in this area. In addition, foreign court judgments and regulatory actions may affect our ability to transfer, process and receive data transnationally, including data that is critical to our operations or core to the functionality of our solutions. New laws, regulations, judgments or actions may, relate to the solicitation, collection, processing, use, and disclosure of personal information, including cross-border transfers of personal information, in a way that could affect demand for our solutions or cause us to change our platform or business model and increase our costs of doing business.

Our customers can use our solutions to store compensation and other personal identifying information about their sales personnel that are or may be considered personal data in some jurisdictions and, therefore, may be subject to this evolving legislation, regulation or heightened public scrutiny. In addition to the potential adoption of new laws and regulations in the United States and internationally, evolving definitions and norms regarding personal data may require us to adapt our business practices, or limit or inhibit our ability to operate or expand our business.

In order to comply with new United States or international laws, regulations or judgments, including adopting new and potentially onerous customer contractual clauses, we may incur substantial costs or change our business practices in a manner that could reduce our revenue or compromise our ability to effectively pursue our growth strategy. Furthermore, to comply with any new non-U.S. laws, regulations, or judgments, we may have to create expensive duplicative information technology infrastructure and business operations, which could hinder our expansion plans or render them commercially infeasible, increase our costs of doing business, and harm our financial results.

In addition, customers may experience higher compliance costs as a result of laws, regulations and judgments, which may limit the use and adoption of our solutions and reduce overall demand, or lead to significant fines, penalties or liabilities for any noncompliance. As a result, some industries may not adopt our solutions based on perceived privacy concerns, regardless of the validity of such concerns.

While we take measures to protect the security of information that we collect, use and disclose in the operation of our business, and we offer privacy protections for this information, these measures may not always be effective. Furthermore, although we strive to comply with applicable laws and regulations relating to privacy and data collection, use and disclosure, these laws and regulations are continually evolving, not always clear, and not always consistent across the jurisdictions in which we do business. Any proceedings brought against us relating to compliance with these laws and regulations could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, adversely affect the demand for our solutions and ultimately result in the imposition of monetary liability or restrictions on our ability to conduct our business. There is no assurance that contractual indemnity or insurance would be available to offset any portion of these costs.

In addition, if we are perceived as not operating in accordance with industry best privacy practices, we may be subject to negative publicity, government investigation, litigation or investigation by accountability groups. Any action against us could be costly and time consuming, require us to change our business practices, expose us to substantial monetary liability and result in damage to our reputation and business.

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Acquisitions of, and investments in, other businesses present many risks. We may not realize the anticipated financial and strategic benefits of these transactions, and we may not be able to manage our operations with the acquired businesses efficiently or profitably.

As part of our business strategy, we evaluate opportunities to expand and enhance our product and service offerings to meet customer needs, increase our market opportunities and grow revenue through internal development efforts and external acquisitions and partnerships. We have completed a number of acquisitions in recent years, including BridgeFront in 2015 and LeadRocket, Inc. and Clicktools Ltd. in 2014. We may continue to acquire or make investments in other companies, products, services and technologies in the future. Acquisitions and investments may cause disruptions in or add complexity to our operations and involve a number of risks, including the following:


•	the anticipated benefits, such as an increase in revenue, may not materialize if, for example, a larger number of customers than expected choose not to renew or if we are unable to cross-sell the acquired company's solutions to our existing customer base;


•	we may have difficulty integrating and managing the acquired technologies or products with our existing product lines, and maintaining uniform standards, controls, procedures and policies across locations;


•	we may experience challenges in, and have difficulty penetrating, new markets where we have little or no prior experience and where competitors have stronger market positions;


•	integrating the financial systems and personnel of the acquired business and retaining key employees may be difficult, and, to the extent we issue shares of stock or other rights to purchase stock to such individuals, existing stockholders may be diluted;


•	our ongoing business and management's attention may be disrupted or diverted by transition or integration issues and the complexity of overseeing geographically and culturally diverse locations;


•	we may find that the acquired business or assets do not further our business strategy, or that we overpaid for the business or assets, or that we do not realize the expected operating efficiencies or product integration benefits;


•	our use of cash consideration for one or more significant acquisitions may require us to use a substantial portion of our available cash or incur substantial debt, and if we incur substantial debt, it could result in material limitations on the conduct of our business;


•	we may fail to uncover or realize the significance of, or otherwise become exposed to, liabilities and other issues assumed from an acquired business, such as claims from terminated employees or third-parties and unfavorable revenue recognition or other accounting practices; and


•	we may experience customer confusion as a result of product overlap, particularly when we offer, price and support various product lines differently.

These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows. Furthermore, during periods of operational expansion, we often need to increase the size of our staff, our related operations and third party partnerships, and potentially amplify our financial and accounting controls to ensure they remain effective. Such changes may increase our expenses, and there is no assurance that our infrastructure will be sufficiently scalable to efficiently manage any growth that we may experience. If we are unable to leverage our operating cost investments as a percentage of revenue, our ability to generate or increase profits will be adversely impacted. In addition, from time to time, we may enter into negotiations for acquisitions and other investments that are not ultimately consummated, which could result in significant diversion of management time, as well as out-of-pocket expenses.

Some of our products rely on third-party software licenses to operate, and the loss of or inability to maintain these licenses, or errors, discontinuations or updates to that software, could result in higher costs, delayed sales, customer claims, or termination of existing agreements.

We license technology from several software providers for our reporting, analytics and integration applications, and we anticipate continuing to license technologies from these or other providers in connection with our current and future products. We also rely on generally available third-party software to run our applications. Any of these software applications may not

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continue to be available on commercially reasonable terms, if at all, or new versions may be released that are incompatible with our offerings. Some of the products could be difficult to replace, and developing or integrating new software with our products could require months or years of design and engineering work. Modification or loss of access to any of these technologies could result in delays in providing our products until equivalent technology is developed or, if available, is identified, licensed and integrated. Acquisitions of third-party technologies by other companies, including our competitors, may have a material adverse impact on us if the acquirer seeks to cancel or change the terms of our license.

In addition, we depend upon the successful operation of third-party products in conjunction with our products or services. As a result, undetected errors in those third-party products could prevent the implementation, or impair the functionality of, our products, delay new product introductions, limit the availability of our products via our on-demand service, and injure our reputation. Our use of additional or alternative third-party products could result in new or higher royalty payments by us if we are required to enter into license agreements for such products.

Our success depends upon our ability to develop new solutions and enhance our existing solutions rapidly and cost-effectively. Failure to introduce new or enhanced solutions that meet customer needs may adversely affect our operating results.

The markets for sales effectiveness solutions and cloud computing are generally characterized by:


•	rapid technological advances,


•	changing customer needs, and


•	frequent new product introductions and enhancements.

To keep pace with technological developments, satisfy increasingly sophisticated customer requirements, achieve market acceptance and effectively respond to competition, we must quickly identify emerging trends and requirements, accurately define and design enhancements and improvements for existing solutions, and introduce new solutions that satisfy our customers' changing demands. Accelerated introductions for new solutions require high levels of expenditures for research and development that could adversely affect our operating results. Further, any new solutions we develop may not be introduced in a timely manner or be available in a distribution model favored by our target markets, and may therefore not achieve the broad market acceptance necessary to generate significant revenue. If we are unable to quickly and successfully develop or acquire and distribute new products and services cost-effectively, or enhance existing solutions, or if we fail to position and price our solutions to meet market demand, our business and operating results will be adversely affected.

Our offshore product development, support and professional services may prove difficult to manage or may not allow us to realize our cost reduction goals, produce effective new solutions and provide professional services to drive growth.

We use offshore resources to perform new product and services development and provide support and professional consulting efforts, which requires detailed technical and logistical coordination. We must ensure that our international resources and personnel are aware of and understand development specifications and customer support, as well as implementation and configuration requirements, and that they can meet applicable timelines. If we are unable to maintain acceptable standards of quality in support, product development and professional services through our international third-party service providers, our attempts to reduce costs and drive growth through new products and margin improvements in technical support and professional services may be negatively impacted, which would adversely affect our results of operations. Outsourcing services to offshore providers may expose us to misappropriation of our intellectual property or that of our customers, or make it more difficult to defend intellectual property rights in our technology.

The loss of key personnel, higher than normal employee attrition in key departments or the inability of replacement personnel to quickly and successfully perform in their new roles could adversely affect our business.

Our success depends to a significant extent on the abilities and effectiveness of our personnel, and, in particular, our chief executive officer and other executive officers. All of our existing personnel, including our executive officers, are employed on an "at-will" basis. If we lose or terminate the services of one or more of our current executives or key employees or if one or more of our current or former executives or key employees joins a competitor or otherwise competes with us, or if we do not have an effective succession or development plan in place for such individuals, our ability to successfully implement our business plan could be impaired. Likewise, if a number of employees from specific departments were to depart, our business may be adversely affected. If we are unable to quickly identify, hire, develop and retain qualified replacements for our executives, other key positions or employees within specific departments, our ability to execute our business plan and continue

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to maintain and grow our business could be harmed. Competition for highly skilled personnel is intense in the San Francisco Bay Area where our headquarters are located, so we may need to invest heavily to attract and retain new personnel, and we may never realize returns on those investments. Even if we can quickly hire qualified replacements, we would expect to experience operational disruptions and inefficiencies during any transition.

If we are unable to hire and retain qualified employees and contractors, including sales, professional services and engineering personnel, our growth may be impaired.

To scale our business successfully, increase productivity, maintain a high level of quality and meet customers' needs, we need to recruit, retain and motivate highly skilled employees and contractors in all areas of our business, including sales, professional services and engineering. In particular, if we are unable to hire or contract for and retain talented personnel with the skills, and in the locations, we require, we might need to redeploy existing personnel or increase our reliance on contractors. Furthermore, we have been, and intend to continue, increasing our sales force and, if we are not successful in attracting and retaining qualified personnel, or if new sales personnel are unable to achieve desired productivity levels within a reasonable time period, we may not be able to increase our revenue and realize the anticipated benefits of these investments.

As our customer base increases and as we continue to evaluate and modify our organizational structure to increase efficiency, we are likely to experience staffing constraints in connection with the deployment of trained and experienced professional services and support resources capable of implementing, configuring, maintaining and supporting our products and related services. Moreover, as a company focused on the development of complex products and the provision of online services, we are often in need of additional software developers and engineers. We have relied on our ability to grant equity compensation as one mechanism for recruiting, retaining and motivating such highly skilled personnel. Our ability to provide equity compensation depends, in part, upon receiving stockholder approval for an increase in shares authorized for issuance pursuant to our equity compensation plan. If we are not able to secure such approval from our stockholders, our ability to recruit, retain and motivate our personnel may be adversely impacted, which would negatively impact our operating results.

Our credit agreement contains restrictive covenants and financial covenants that may limit our operational flexibility. Furthermore, if we default on our obligations under the credit agreement, our operations may be interrupted and our business and financial results could be adversely affected.

In May 2014, we entered into a credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under which Wells Fargo agreed to provide a revolving loan to us in an amount not to exceed $10.0 million, with an accordion feature that allows us to increase the maximum borrowing amount by not less than $5.0 million and not more than $10.0 million ("Revolver"). We may draw upon the Revolver to finance our operations or for other corporate purposes. In September 2014, we increased the maximum borrowing amount to $15.0 million. The Revolver contains a number of restrictive covenants, and its terms may restrict our current and future operations, including:


•	our flexibility to plan for, or react to, changes in our business and industry conditions;


•	our ability to use our cash flows, or obtain additional financing, for future working capital, capital expenditures, acquisitions or other general corporate purposes;


•	place us at a competitive disadvantage compared to our less leveraged competitors; and


•	increase our vulnerability to the impact of adverse economic and industry conditions.

In addition, if we fail to comply with the covenants or payment obligations specified in the Revolver, we may trigger an event of default and Wells Fargo would have the right to: (i) terminate its commitment to provide additional loans under the Revolver, and (ii) declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, Wells Fargo would have the right to proceed against the Revolver collateral, which consists of substantially all of our assets. If the debt under the Revolver were to be accelerated, we may not have sufficient cash or be able to sell sufficient collateral to repay this debt, which would have an immediate material adverse effect on our business, results of operations and financial condition.

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Changes in the terms of our current or future indebtedness or our credit rating may adversely affect our financial condition and results of operations.

We cannot provide assurances that additional borrowing capacity will be available under the Revolver, including pursuant to the accordion feature, or that future indebtedness will be obtainable on terms as favorable as the Revolver. As a result, in the future, we may be subject to higher interest rates and our interest expense may increase, which may have an adverse effect on our financial results. Furthermore, changes by any rating agency to our outlook or credit rating could negatively affect the value of both our debt and equity securities and increase the interest amounts we pay on outstanding or future debt. These risks could adversely affect our financial condition and results.

If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our common stock may be negatively affected.

We are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Effective planning and management processes are necessary to meet these requirements, and we expect that we will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively in the future. We are also required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the trading price of our common stock could be negatively affected, and we could become subject to investigations by The Nasdaq Stock Market LLC, the Securities and Exchange Commission or other regulatory authorities, which could require additional financial and management resources.

If we fail to adequately protect our proprietary rights and intellectual property, we may lose valuable assets, experience reduced revenue and incur costly litigation to protect our rights.

Our success and ability to compete depends on our internally developed technology and expertise, including the proprietary technology embedded in our solutions, as well as our ability to obtain and protect intellectual property rights. We rely on a combination of patents, trademarks, copyrights, service marks, trade secrets, contractual provisions and other similar measures to establish and protect our proprietary rights. We cannot protect our intellectual property if we are unable to enforce our rights or if we do not detect its unauthorized use. Despite our precautions, unauthorized third parties may be able to copy or reverse engineer our solutions and use information that we regard as proprietary to create products and services that compete with ours. Provisions in our agreements prohibiting unauthorized use, copying, transfer and disclosure of our licensed programs and services may be unenforceable under the laws of some jurisdictions. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States, and the outcome of any actions taken in any foreign jurisdiction to enforce our rights may be different that if such actions were determined under the laws of the United States. To the extent that we engage in international activities, our exposure to unauthorized copying and use of our products, services and proprietary information increases.

We enter into various restrictive agreements with our employees and consultants, as well as with customers and third parties with whom we have strategic relationships. We cannot ensure that these agreements will be effective in controlling access to and distribution of our products, services and proprietary information. These agreements also do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our solutions. Litigation may be necessary to enforce our intellectual property rights and protect our trade secrets. Litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management resources, either of which could seriously harm our business.

Our results of operations may be adversely affected if we are subject to a protracted infringement claim or one that results in a significant damage award.

From time to time, we receive claims that our products, services offerings or business infringe or misappropriate the intellectual property rights of third parties, and we have in the past, and may continue in the future, to assert claims of infringement against third parties on such bases, including the lawsuit we settled with Versata Software, Inc., Versata Development Group, Inc. and Versata, Inc. in November 2014. Our competitors or other third parties may also challenge the validity or scope of our intellectual property rights. For more information, see "Item 3. Legal Proceedings." We believe that claims of infringement are likely to increase as the functionality of our solutions expand and we introduce new solutions, including technology acquired or licensed from third parties. Any infringement claim, whether offensive or defensive, could:

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•	require costly litigation to resolve;


•	absorb significant management time;


•	cause us to enter into unfavorable royalty or license agreements;


•	require us to discontinue the sale of, or materially modify, all or a portion of our products or services;


•	require us to indemnify our customers or third-party service providers; and


•	require us to expend additional development resources to redesign our products or services.

Inclusion of open source software in our products may expose us to liability or require release of our source code.

We currently use open source software in our products and may use more in the future. We could be subject to suits by parties claiming ownership of what we believe to be open source software that has been incorporated into our products. In addition, some open source software is provided under licenses which require that proprietary software, when combined in specific ways with open source software, become subject to the open source license and thus freely available. While we take steps to minimize the risk that our products, when incorporated with open source software, would become subject to such provisions, few courts have interpreted open source licenses. As a result, the enforcement of these licenses is unclear. If our products became subject to open source licenses, our ability to continue commercializing our solutions, along with our operating results, would be materially and adversely affected.

Sales to customers in international markets pose risks and challenges for which we may not achieve the expected results.

We continue to invest substantial time and resources to grow our international operations. If we fail to do so successfully, our business and operating results could be seriously harmed. Such expansion may require substantial financial resources and management attention. International operations involve a variety of risks, particularly:


•	greater difficulty in supporting and localizing our solutions;


•	complying with numerous regulatory requirements, taxes, trade and export laws and tariffs that may conflict or change unexpectedly, including labor, tax, privacy and data protection;


•	using international resellers and complying with anti-bribery and anti-corruption laws;


•	greater difficulty in establishing, staffing and managing foreign operations;


•	greater difficulty in maintaining acceptable quality standards in support, product development and professional services by our international third-party service providers;


•	differing abilities to protect our intellectual property rights; and


•	possible political and economic instability.

We may be affected by fluctuations in currency exchange rates.

We are potentially exposed to adverse movements in currency exchange rates. Although most of our revenue and expenses occur in U.S. Dollars, some occur in local currencies and the amounts in local currencies may increase as we expand our international operations. An increase in the value of the U.S. Dollar could increase the real cost to our customers of our products in those markets outside the U.S., and a weakened U.S. Dollar could increase the cost of our expenses, as well as overseas capital expenditures. We have not engaged in hedging transactions to reduce the exposure to foreign currency fluctuations.

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Our services revenue produces substantially lower gross margins than our recurring revenue, and periodic variations in the proportional relationship between services revenue and higher margin recurring revenue may harm our overall gross margins.

Our services revenue, which includes fees for consulting, implementation and training, represented 27% of our revenue for the nine months ended September 30, 2014 and 26% of our revenue for the nine months ended September 30, 2015. Our services revenue has a substantially lower gross margin than our recurring revenue.

The percentage of total revenue represented by services revenue has varied significantly from period to period principally because the number of new recurring revenue customer transactions varies from quarter to quarter.

Deployment of solutions may require substantial technical implementation and support by us or third-party service providers. We may lose sales opportunities and our business may be harmed if we do not meet these implementation and support requirements, which may cause a decline in revenue and an increase in our expenses.

We deploy solutions, such as large enterprise-wide deployments, that require a substantial degree of technical and logistical expertise. It may be difficult for us to manage these deployments, including the timely allocation of personnel and resources by us and our customers. Failure to successfully manage the process could harm our reputation, both generally and with specific customers, harming our sales and causing customer disputes, which could adversely affect our revenue and increase our technical support and litigation costs. If actual remediation services exceed our accrued estimates, we could be required to take additional charges, which could be material.

We engage third-party partners, systems integrators and software vendors to provide customer referrals, cooperate with us in the design, sales and marketing of our solutions, provide insights into market demands, and provide our customers with systems implementation services or overall program management. In some cases, we may not have formal agreements governing such relationships, and the agreements we do have generally do not include specific obligations with respect to exclusivity, generating sales opportunities or cooperating on future business.

From time to time, we also consider new or unusual strategic relationships, which can pose additional risks. For example, while reseller arrangements offer the advantage of leveraging larger sales organizations than our own to sell our products, they also require considerable time and effort on our part to train and support the reseller's personnel, and require the reseller to properly motivate and incentivize its sales force. Also, if we enter into an exclusive reseller arrangement, the exclusivity may prevent us from pursuing the applicable market ourselves, and if the reseller is not successful in the particular location, our results of operations may be adversely affected.

Should any of these third-parties go out of business, perform unsatisfactory services or choose not to work with us, we may be forced to develop new capabilities internally, which may cause significant delays and expense, thereby adversely affecting our operating results. These third-party providers may offer products of other companies, including products competitive with ours. If we do not successfully or efficiently establish, maintain and expand our industry relationships with influential market participants, we could lose sales and service opportunities, which would adversely affect our results of operations.

Our solutions have unpredictable sales cycles, making it difficult to plan our expenses and forecast our results.

It is difficult to determine how long the sales cycles for our solutions will be, thereby making it difficult to predict the quarter in which a particular sale will close and to plan expenditures accordingly. Moreover, to the extent that sales are completed in the final two weeks of a quarter, the impact of recurring revenue transactions is typically not reflected in our financial statements until subsequent quarters. The period between our initial contact with a potential customer and ultimate sale of our solutions is relatively long due to several factors, which may include:


•	the complex nature of some of our products;


•	the need to educate potential customers about the uses and benefits of our solutions;


•	budget cycles of our potential customers that affect the timing of purchases;


•	the expiration date of existing point solutions that we seek to replace;


•	customer requirements for competitive evaluation and often lengthy internal approval processes and protracted

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contract negotiations (particularly of large organizations) before purchasing our solutions; and


•	potential delays of purchases due to announcements or planned introductions of new solutions by us or our competitors.

The length and unpredictability of our sales cycle make it difficult for us to project revenues and plan for levels of expenditures to support our solutions appropriately. If we do not manage our sales cycle successfully, we may misallocate resources and our financial results may be harmed.

Our latest product features and functionality may require existing on-premise license customers to migrate to our SaaS solutions. Moreover, we may choose or be compelled to discontinue maintenance support for older versions of our software products, forcing our on-premise customers to upgrade their software in order to continue receiving maintenance support. If existing on-premise license customers fail to migrate or delay migration to our on-demand solution, our revenue may be harmed.

We continue to promote our on-demand product offerings to existing customers who currently have on-premise perpetual and term licenses. Customers with on-premise licenses may need to migrate to our on-demand solutions to take full advantage of the features and functionality in those solutions. We expect to periodically terminate maintenance support on older versions of our on-premise products for various reasons including, without limitation, termination of support by third-party software vendors whose products complement ours or upon which we are dependent. Regardless of the reason, a migration is likely to involve additional cost, which our customers may delay or decline to incur. If a sufficient number of customers do not migrate to our on-demand product offerings, our continued maintenance support opportunities and our ability to sell additional products to these customers, and as a result, our revenue and operating income, may be harmed.

Risks Related to Our Stock

Our stock price is likely to remain volatile.

The trading price of our common stock has in the past, and may in the future, be subject to wide fluctuations in response to many factors, including those described in this section. The volume of trading in our common stock is limited, which may increase volatility. Investors should consider an investment in our common stock as risky and should purchase our common stock only if they can withstand significant losses. Other factors that affect the volatility of our stock include:


•	our actual and anticipated operating performance and the performance of other similar companies;


•	actual and anticipated fluctuations in our financial results;


•	failure of securities analysts to maintain coverage of us;


•	ratings changes by any securities analysts who follow us;


•	failure to meet our projected results or the published operating estimates or expectations of securities analysts and investors;


•	failure to achieve revenue or earnings expectations;


•	price and volume fluctuations in the overall stock market, including as a result of trends in the global economy;


•	significant sales by existing investors, coupled with limited trading volume for our stock;


•	announcements by us or our competitors of significant contracts, results of operations, projections, or new technologies;


•	lawsuits threatened or filed against us;


•	adverse publicity;


•	acquisitions, commercial relationships, joint-ventures or capital commitments;

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•	changes in our management team or board of directors;


•	publication of research reports, particularly those that are inaccurate or unfavorable, about us or our industry by securities analysts; and


•	other events or factors, including those resulting from war, incidents or terrorism or responses to these events.

Additionally, some companies with volatile market prices for their securities have been the subject of securities class action lawsuits. Any such suit could have a material adverse effect on our business, results of operations, financial condition and price of our common stock.

Future sales of substantial amounts of our common stock, including securities convertible into or exchangeable for shares of our common stock could cause our stock price to fall.

We may issue additional shares of our common stock, including securities convertible into or exchangeable for, or that represent the right to receive, shares of our common stock. Such issuances will dilute the ownership interest of our stockholders and could adversely affect the market price of our common stock. We cannot predict the effect that future sales of shares of our common stock or other equity-related securities would have on the market price of our common stock. In addition, sales by existing stockholders of a large number of shares of our common stock in the public trading market (or in private transactions), including sales by our executive officers, directors or institutional investors, or the perception that such additional sales could occur, could cause the market price of our common stock to drop. We have stock options and restricted stock units outstanding for shares of our common stock. Our stockholders may incur dilution upon exercise of an outstanding stock option or vesting of outstanding restricted stock units.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

Provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.

Our certificate of incorporation and bylaws contain provisions that could make it harder for a third-party to acquire us without the consent of our board of directors. For example, if a potential acquirer were to make a hostile bid for us, the acquirer would not be able to call a special meeting of stockholders to remove our board of directors or act by written consent without a meeting. In addition, our board of directors has staggered terms, which means that replacing a majority of our directors would require at least two annual meetings. A potential acquirer would also be required to provide advance notice of its proposal to replace directors at any annual meeting, and would not be able to accumulate votes at a meeting, which would require such potential acquirer to hold more shares to gain representation on the board of directors than if cumulative voting were permitted. Furthermore, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% stockholders that have not been approved by the board of directors. All of these factors make it more difficult for a third-party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by some stockholders. Our board of directors could choose not to negotiate with a potential acquirer that it does not believe is in our strategic interests. If a potential acquirer is discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by these or other measures, under some circumstances, the market price of our common stock could be reduced.

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Item 6. Exhibits

Please refer to the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		CALLIDUS SOFTWARE INC.

Date:	November 5, 2015	By:	/s/ BOB L. COREY
			Bob L. Corey
			Executive Vice President, Chief Financial Officer
			(duly authorized officer)

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EXHIBIT INDEX TO

CALLIDUS SOFTWARE INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015



Exhibit Number		Description
10.1		2013 Stock Incentive Plan and Forms of Restricted Stock Unit Agreement and Stock Option Agreement (incorporated by reference to Appendix B of the Registrant’s Schedule 14A Proxy Statement filed with the Commission on April 28, 2014, Exhibit 99.1 to the Registrant's Form S-8 (File No. 333-189416) filed with the Commission on June 18, 2013 and Exhibit 4.5 to the Registrant’s Form S-8 (File No. 333-205389) filed with the Commission on July 1, 2015)
31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
101		Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, (ii) Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2015 and 2014, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 and (iv) Notes to Condensed Consolidated Financial Statements

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