CALLIDUS SOFTWARE INC - FORM 10-K

Attached files

file	filename
EX-10.16 - EXHIBIT 10.16 - CALLIDUS SOFTWARE INC	exhibit1016-coreytransitio.htm
EX-32.1 - EXHIBIT 32.1 - CALLIDUS SOFTWARE INC	exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - CALLIDUS SOFTWARE INC	exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - CALLIDUS SOFTWARE INC	exhibit311.htm
EX-23.1 - EXHIBIT 23.1 - CALLIDUS SOFTWARE INC	exhibit231.htm
EX-10.17 - EXHIBIT 10.17 - CALLIDUS SOFTWARE INC	exhibit1017-oulmanofferlet.htm
EX-10.2 - EXHIBIT 10.2 - CALLIDUS SOFTWARE INC	exhibit102.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K



(Mark One)
ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Or
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 (State or other jurisdiction of incorporation or organization)		77-0438629 (I.R.S. Employer Identification Number)

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)

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share Preferred Stock Purchase Rights		The NASDAQ Stock Market LLC The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o

Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

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 requirements for the past 90 days. Yes ý 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 ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ý

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 (Check one):



Large accelerated filer ý	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes o No ý

The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, based on the closing sale price of the Registrant's common stock on June 30, 2016, as reported on the NASDAQ Global Market, was approximately $1,157 million. Shares of common stock held by each executive officer and director and by each person who may be deemed to be an affiliate of the Registrant have been excluded from this computation. The determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes. As of February 16, 2017, the Registrant had 63,730,685 of its common stock, $0.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the information called for by Part III of this Form 10-K are hereby incorporated by reference from the definitive proxy statement for the Registrant's annual meeting of stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after the Registrant's fiscal year ended December 31, 2016.

CALLIDUS SOFTWARE INC.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2016

TABLE OF CONTENTS



PART I
Item 1.	Business	3
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	25
Item 2.	Properties	25
Item 3.	Legal Proceedings	25
Item 4.	Mine Safety Disclosures	25
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26
Item 6.	Selected Financial Data	27
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 8.	Financial Statements and Supplementary Data	45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	81
Item 9A.	Controls and Procedures	81
Item 9B.	Other Information	81
PART III
Item 10.	Directors, Executive Officers and Corporate Governance
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.	Certain Relationships and Related Transactions, and Director Independence
Item 14.	Principal Accountant Fees and Services
PART IV
Item 15.	Exhibits and Financial Statement Schedules	81
Signatures		84

©2017 Callidus Software Inc. All rights reserved. Callidus, Callidus Software, the Callidus Software logo, CallidusCloud, the CallidusCloud logo, Badgeville, BridgeFront, Clicktools, Datahug, iCentera, Lead to Money, LeadFormix, LeadRocket, Learnpass, Litmos, the Litmos logo, Producer Pro, SalesGenius, Surve, Syncfrog, Thunderbridge, and ViewCentral are trademarks, service marks, or registered trademarks of Callidus Software Inc. and its affiliates in the United States and other countries. All other brand, service or product names are tradenames or registered tradenames of their respective companies or owners.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in Item 7 of this report, and other materials accompanying this Annual Report on Form 10-K contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to our future plans, objectives, expectations, 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 revenue, changes in and expectations with respect to revenue, revenue growth and gross margins, anticipated growth and growth strategies, the impact of competition, our ability to sell products, future operating expense levels, future operating results, future cash flows, the impact of quarterly fluctuations of revenue and operating results, staffing and expense levels, expected cash and investment balances and the impact of foreign exchange rate fluctuations. Management believes that these forward-looking statements were reasonable when made. However, you should not 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. Callidus Software Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, occurring after the date of this Annual Report on Form 10-K. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. For a detailed discussion of these risks and uncertainties, see the "Business" and "Risk Factors" sections in Items 1 and 1A, respectively, of this Annual Report on Form 10-K.

PART I

Item 1. Business

Overview

CallidusCloud® is a global leader in cloud-based sales, marketing, learning and customer experience solutions. CallidusCloud enables its customers to sell more, faster with its Lead to Money suite of solutions that, among other things, identifies leads, trains personnel, implements territory and quota plans, enables sales forces, automates configuration pricing and quoting, manages contracts, streamlines sales compensation, captures customer feedback and provides rich predictive analytics for competitive advantage. Over 5,200 organizations, across a broad set of industries, rely on CallidusCloud 's Lead to Money solutions to sell more, faster.

Lead to Money is 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 economy. Buyers are researching and evaluating companies online and are completing a significant portion of their purchases digitally. In order to successfully compete in the evolving digital market and turn leads into money, sales, marketing, learning and customer experience teams must leverage software solutions that enhance productivity, improve collaboration and drive sales conversion.

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

We were incorporated in Delaware in 1996. Our principal executive office is located in Dublin, California and our principal website address is www.calliduscloud.com. The information on our website is not incorporated herein by reference and is not part of this Annual Report on Form 10-K.

Our Lead to Money Solutions

Our Lead to Money suite and technology solutions are detailed below.

Sales Performance Management

•

Commissions streamline the design and management of incentive compensation programs and commission payments. It drives sales performance while reducing errors in sales force payouts and shadow accounting by sales professionals, leading to more selling time and higher cross-sell and up-sell revenue. It also includes modules for Management by Objectives programs, channel and producer onboarding, reporting and basic workflows.


•	Incentive Compensation Management ("ICM") (Commissions) is designed specifically for customers in the insurance industry. It delivers automation in incentive and bonus plan configuration, plan payout and producer management. It is a highly configurable solution that can be rapidly deployed, is easy to use and optimizes the management of producer incentives, bonuses and commission programs.


•	Producer Pro is designed to provide a flexible central repository for producer data that can be tailored to customers. It is a powerful solution designed to help customers with large channels to manage their producer hierarchies, licenses, appointments, education, correspondence and book of business in order to optimize the effectiveness of channel programs.


•	Telco Dealer Pro is designed specifically for customers in the telecommunications industry. It is a solution for managing the direct sales channel that provides a unified and connected process for training, incentives, and on-boarding of agents and dealers. It provides customers with a single source of truth to manage their agents and dealers from demographic data to customer account information.


•	MySalesGame (Gamification) is a gamification platform for sales that uses points badges and leaderboards to drive behavior and improve sales performance. MySalesGame breaks down complex tasks into smaller easier to manage objectives, with clear communication of goals and instant recognition of achievements to drive enhanced completion.


•	Badgeville (Gamification) is a platform to layer gamification onto enterprise applications to engage and motivate people to achieve their goals and to drive success, increase collaboration, training and development, sales and support performance, customer self-service. It enables companies to reward behaviors and recognize social activities with points, leaderboards and badges.

Sales Enablement

•

Sales Enablement provides sales and channel partners with relevant sales content at each step of the sales cycle in a centralized solution. The content can be shared with customers through deal portals, providing customers with a richer buying experience. Enablement provides the sales force with analytics to accelerate sales cycles, and helps marketing personnel to capture field insights to enhance the content, messaging and tools being produced for the sales force.

•

Sales Performance Manager ("SPM") (Coaching) enables customers to set targeted coaching plans tailored to the individual sales professional. SPM provides managers a complete view of key performance indicators from multiple data sources across the enterprise, as well as skills evaluations observed in the field. The mobile interface makes it easy to capture detailed feedback and development actions needed to optimize the performance of the individual sales professionals.

•

Litmos Learning Management System (Learning) is a powerful, mobile-friendly platform for training. Administrators can package content into rich, interactive courses and deploy them to learners. Automatically generated reports provide management with important insight into the success of the training programs and how learners are engaging with the content to optimize how companies train their staff, partners and customers.


•	Litmos Content (Learning) is an expanding collection of packaged courses that cover compliance, sales, marketing and customer success. The collection can be consumed on any device and is designed to be highly engaging and deployed in a micro-learning style.


•	Litmos Training Operations (Learning) is a revenue management and e-commerce platform designed for selling and optimizing profitable training for customers and channels. It enables customers to monetize and facilitate the delivery of training and certification programs, enabling the customer to capture both incremental and recurring revenue.


•	Litmos Marketplace (Learning) is an app and content store for pre-packaged connectors into the Litmos platform allowing companies to embed learning into the workflow. These connectors include: Salesforce.com, ADP, Shopify, Namely, BambooHR, Zendesk, Servicenow, Freshdesk, Okta, Onelogin, Citrix Go to Training, Cisco Webex, Box, Dropbox and Ping Identity.

Sales Execution


•	Configure Price Quote ("CPQ") guides sales representatives through the quoting process, highlights opportunities for up-selling and cross-selling while ensuring the optimum configuration for the maximum deal size. CPQ eliminates errors, manages margins and generates appealing and insightful proposals in minutes, all from any device.

•

Contract Lifecycle Management ("CLM") streamlines the creation, negotiation and storage of contracts to accelerate the final part of the sales cycle. CLM provides customers a centralized repository for all contract data improving the tracking of key milestone dates, renewal alerts and internal compliance requirements to protect the bottom-line. Integration with e-signature solutions allows users to complete the contracting process in an entirely digital platform, saving time in the process.

Customer Engagement


•	Marketing Automation (LeadRocket) empowers customers to generate high-quality sales leads by capturing intelligence about buyers' behaviors and engaging them across multiple channels. LeadRocket tracks buyers through their journey identifying which are ready to buy, and which should continue to be nurtured before being engaged by the sales force.

•

Voice of the Customer (Clicktools) is a business to business “Voice of the Customer” solution that helps companies better understand and serve their customers and deliver an enhanced customer experience. Clicktools provides self-service tools to collect, centralize and act on customer feedback across all channels including surveys, forms and call scripts. Customer Relationship Management integration enables the synchronization of results with critical customer data.

Analytics and Technology


•	Big Data Sales Analytics (Thunderbridge Analytics) combines big data technology with predictive analytics and visualizations to enable real-time exploration of critical sales data to predict outcomes. Access to big sales data, and the ability to analyze it, is a key to improving sales and channel decision-making.


•	Predictive Pipeline (Datahug) provides powerful insights into sales forecasts that predict the likelihood of success in a sales cycle, as well as offering rich visualizations to show what has changed in the forecast in real time. The platform also enables managers to coach their teams on the best next steps in a deal to improve close rates and speed up sales cycles.


•	Workflow is a powerful business process automation solution that can be configured to optimize critical business processes and drive collaboration. Example workflows include commission plan and payment approvals, hiring and onboarding flows, deal collaboration and partner deal registration.

Services

We provide a broad range of services to our customers, including professional services, business process outsourcing services, maintenance and technical support services, and education services.

Professional Services. We provide integration and configuration services to our customers. Professional services typically include the identification and sourcing of legacy data, configuration of application rules to create compensation and coaching plans, set up of pre-defined reports and custom reports, and the ability to interface our hosted application with other applications used by our customers. Configuration and other professional services related to our software can be performed by us, our customers or third-party implementation providers. We also provide services to our implementation partners to aid them in certain projects and training programs. In addition, we provide strategic and expert services to help our customers optimize incentive compensation business processes and management capability.

Business Process Outsourcing Services. We provide a suite of value-added business outsourcing solutions designed to drive specific customer outcomes. Each solution includes clearly defined engagement plans, rapid deployment methods, and a proven track record of delivering value to customers. Business Process Outsourcing Services include Sales Operations Management to manage day-to-day operations and maintain the sales effectiveness system; Sales Performance Manager to design and deploy the right territory, quota, incentive plan, and coaching strategy to drive specific financial targets; Sales Performance Intelligence to analyze capacity, coverage, and incentive effectiveness; and Sales Performance Optimization to benchmark and tune the Sales Performance Manager system.

Maintenance and Technical Support Services. We have maintenance and technical support services from our centers in the United States and India. We offer standard and premium support, which are generally provided on an annual basis. Our standard and premium support services include online access through our website to our customer support community, along with online chat, telephone, and e-mail support. We also offer all product enhancements and new releases. For premium support, we offer customers access to our support team 24 hours a day, 7 days a week, as well as direct access to our support specialists, and enhanced service level agreements.

Education Services. We offer a comprehensive set of performance-oriented, role-based training courses for our customers, partners, and employees. Our education services include self-service web-based training, classroom training, virtual training with off-site instructors, on-site training, and customized training. Our professional certification is available for professionals who demonstrate the ability to implement our suite of products and promotes our standards of service.

Operations, Technology and Development

Most of our customers implement our solutions as an on-demand SaaS-based subscription. Our solutions can be configured with a selection of service levels and options to suit an organization's business objectives, requirements and resources. With our SaaS solutions, our customers rely on our operations and services staff to provide the infrastructure, and software required for improving their sales execution, sales performance management, and customer experience. In addition, our Business Process Outsourcing services provide business rule configuration, report development, payment cycle management, and production support. Customers that select these services do not need to build a full team to run and manage the application.

We have developed our on-demand infrastructure with the goal of maximizing the availability, performance, and security of our solutions through several hosting facilities. Our scalable hosting infrastructure and application architecture enable us to offer services to our global customers at mutually agreed service level arrangements. Our information security policies are modeled on the ISO 27002, Statement on Standards for Attestation Engagements ("SSAE") No.16, EU-U.S. Privacy Shield principles, and the European Commission's standard contractual clauses.

We organize our development staff along product lines, with development operations groups that provide centralized support for quality assurance and deployment. In 2016, 2015 and 2014, we recorded research and development expenses of $31.7 million, $26.1 million and $20.3 million, respectively. These expenses include stock-based compensation expenses.

Customers

We ended 2016 with over 5,200 customers. Our customers are diverse in size and type across a wide variety of industries, with a focus on telecommunications, insurance, banking, and technology markets. In 2016, 2015 and 2014, no single customer accounted for more than 10% of our revenue.

Sales and Marketing

We sell and market our software primarily through a direct sales force and in conjunction with our external partners. In the United States, we have sales and service offices in Dublin, California; Atlanta, Georgia; Birmingham, Alabama; Milwaukee, Wisconsin; New York, New York; Phoenix, Arizona; and Vancouver, Washington. Outside the United States, we have sales and service offices in Australia, Canada, Germany, Hong Kong, India, Ireland, Japan, Malaysia, Mexico, Serbia, Singapore, and the United Kingdom.

Sales. Our Enterprise direct sales force, which consist of account executives, technical pre-sales engineers and field management, is responsible for the sale of our products to global enterprises across multiple industries. Our Enterprise sales is organized along selected vertical industries and geographically to focus on market access. We also have an inside sales division that sells our learning, marketing and customer experience solutions to businesses of all sizes across all industries.

Marketing. Our marketing activities include product and customer marketing functions as well as marketing communications. The function of our product marketing is to define new product requirements, manage product life cycles, and generate content for sales collateral and marketing programs. The function of our customer marketing is to provide customer references and reviews and work with customers to produce case studies and testimonials. The function of our marketing communications is to focus on both primary demand generation efforts to increase awareness of sales effectiveness, product solutions and secondary demand generation efforts to drive sales leads for our solutions. This is done through multiple channels, including advertising, web casts, industry events, conferences, email marketing, web marketing and telemarketing. In addition, our corporate website is optimized to drive prospects to our Lead to Money solutions.

Alliances and Partnerships

We actively promote and maintain strategic relationships with systems integrators, consulting organizations, independent software vendors, value-added resellers, and technology providers. These relationships provide both customer referrals and co-marketing opportunities, which have contributed to the expansion of our customer base. We have established alliances with partners such as Accenture, Canidium, Cognizant Technology Solutions, Deloitte Consulting, OpenSymmetry, PricewaterhouseCoopers, and Tata Consulting Services to service our customers nationally and internationally. We have also expanded our relationship with technology partners such as Docusign, Microsoft, NetSuite, Salesforce, SAP and Workday that collaborate with us in selling our solutions.

Competition

Our principal competition comes from Oracle, International Business Machines ("IBM") and the internally-developed software solutions deployed at potential customers. We also compete with other software and consulting companies, which typically focus on specific industries or sectors, including:


•	Sales: Apttus, IBM Varicent, Pros, SAVO Group and Xactly Corporation

•Marketing: Marketo, Oracle and Pardot

•Learning: Adobe Systems, Cornerstone On-demand, SABA Software and SumTotal Systems

•Customer Experience: Allegiance, GetFeedback and Medallia

We believe that the principal competitive factors in our market are:

•ability to offer a broad suite of solutions across the Lead to Money cycle;

•industry-specific domain expertise;

•scalability and flexibility of solutions;

•quality of customer service;

•functionality of solutions;

•total cost of ownership; and

•ease of use.

We believe that we compete effectively with other established enterprise software companies due to our broad suite of solutions beyond core commission management, established market leadership, domain expertise, and our highly scalable architecture. Furthermore, we believe we have developed the domain expertise necessary to meet the dynamic requirements of our customers' complex and growing sales performance and sales effectiveness programs.

We believe that our products offer customers a more cost-effective and more extensive alternative to their internally-developed solutions, which are generally expensive, inflexible and difficult to maintain, particularly for companies with increasingly complex sales performance programs and sales channels. We also believe that our suite of SaaS-based solutions for the spectrum of Lead-to-Market functions has advantages over multiple single-point solutions, including cost-effectiveness, ease of implementation and ease of use.

With respect to our offerings in specific industry verticals, we believe that we have developed breadth and depth of functionality demanded by those specific markets, and we have differentiated our products by adding features that are specific to each target market and that scale to growing business needs.

Intellectual Property

Our ability to compete successfully depends in part on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing upon the proprietary rights of others. While we rely on a combination of patents, trademarks, copyrights, service marks, trade secrets, confidentiality procedures, contractual provisions and other similar measures to protect our proprietary information and intellectual property, we also believe that factors such as the technological and creative skills of our personnel, new product developments, product enhancements, and reliable product support are essential to establishing and maintaining a technology leadership position.

Our customer agreements include restrictions intended to protect and defend our intellectual property rights. We also require our employees, contractors and many others with whom we have business relationships to sign confidentiality agreements.

Some of our products include licensed third-party software, but we believe that such software is commercially available and that there are other commercially available substitutes that can be integrated with our products on reasonable terms. We also believe that in some cases, we could develop substitute technology to replace third-party software if the third-party licenses were no longer available on reasonable terms.

While our patents are an important part of our success, our business as a whole is not materially dependent on any one patent or on a combination of any or all of our patents.

Employees

As of December 31, 2016, we had 1,113 employees. None of our employees are represented by a labor union.

Segment and Geographic Information

We operate in one reportable segment, which is the development, marketing and sale of enterprise software and related services. See Note 13, Segment, Geographic and Customer Information, to our consolidated financial statements.

Executive Officers

The following table sets forth information about our executive officers as of December 31, 2016:



Name	Age	Position	Executive Officer Since
Leslie J. Stretch	55	President, Chief Executive Officer	2005
Roxanne Oulman	45	Executive Vice President, Chief Financial Officer	2016
Jimmy Duan	54	Executive Vice President, Chief Technology Officer	2008

Leslie J. Stretch has served as our President and CEO since 2007 and has served as a director on our Board of Directors since 2008. Mr. Stretch was our Senior Vice President, Global Sales, Marketing and On-Demand Business in 2007, and before that he served as our Senior Vice President, Worldwide Sales from 2006 to 2007 and Vice President, Worldwide Sales from 2005 to 2006. Mr. Stretch currently serves on the board of directors of QAD Inc., a provider of enterprise software and services for global manufacturers, and the advisory council of Warburg Pincus LLC, a private equity firm. Prior to joining Callidus, Mr. Stretch served as Interim Chief Executive Officer for The Hamsard Group, plc., a software solutions and services provider, in the United Kingdom. Previously, Mr. Stretch served in a variety of roles at Sun Microsystems, Inc. a computer networking company, most recently as Senior Vice President of Global Channel Sales. Prior to joining Sun Microsystems, Inc. (since acquired by Oracle Corporation), Mr. Stretch served in a variety of roles at Oracle Corporation, UK, an enterprise software provider. Mr. Stretch holds a B.A. in Economics and Economic History from the University of Strathclyde and a Postgraduate Diploma in Computer Systems Engineering from the University of Edinburgh.

Roxanne Oulman has served as our Chief Financial Officer since November 2016. Since joining Callidus in 2013, Ms. Oulman has served in a variety of executive management roles, including Senior Vice President of Finance and Accounting. From 2011 to 2013, Ms. Oulman served as an Interim Chief Financial Officer at Thoratec Corporation, a biomedical device company, and from 2004 to 2011 she held several other financial leadership positions at Thoratec Corporation. From 1999 to 2004, Ms. Oulman was a General Manager and Western Regional Controller at Zomax, Inc., a logistics and supply chain company. Ms. Oulman has a Bachelor’s of Science in Accounting from Minnesota State University, Mankato and a Masters of Business Administration from University of the Pacific—Eberhardt School of Business.

Jimmy Duan, Ph.D. has served as our Chief Technology Officer since 2013. Since joining Callidus in 2008, Dr. Duan has served in a variety of executive management roles, including Senior Vice President of Commissions Business and International Sales. From 2006 to 2008, Dr. Duan served as Vice President of Client Services at Xactly Corporation, a software company, where he was responsible for defining and setting up SaaS operations and managing customer success. Earlier in his career, Dr. Duan held professional services management positions at Quovera and Talus Solutions (acquired by Manugistics) and consulted with multi-national organizations in financial services, telecommunications, transportation and high-tech manufacturing. Dr. Duan holds a Ph.D. in industrial and systems engineering from Virginia Polytechnic Institute and State University (Virginia Tech). Dr. Duan holds a B.S. in Mining Engineering, from Central South University, China.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other periodic reports are available free of charge on our website (www.calliduscloud.com) as soon as reasonably practicable after we have electronically filed such materials with, or furnished such materials to the Securities and Exchange Commission. They are also available at www.sec.gov.

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 $19.0 million in 2016, $13.1 million in 2015, and $11.6 million in 2014. We had an accumulated deficit of $302.8 million as of December 31, 2016. 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 succeed 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 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, or termination of existing subscription agreements and maintenance agreements that occur in one quarter will be felt in both the immediate quarter and future quarters, both because we may be unable to generate sufficient new revenue to offset the decline and we may be unable to adjust our operating costs and capital expenditures to align with the revenue reductions. Our subscription model makes it more difficult for us to increase our revenue rapidly, because revenue from new customers is recognized over multiple periods. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as definitive indicators of future performance. 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 of subscription and maintenance agreements;


•	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 our 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 recurring revenue solutions. If we are unable to grow our recurring revenue, or to improve our recurring revenue 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 these 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 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 December 31, 2015 through December 31, 2016, our employee headcount increased from 901 to 1,113 employees, and our number of customers increased from approximately 4,600 to over 5,200. 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 could materially impact our future revenue or operating results.

Our customers have no obligation to renew their 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 for a number of reasons, including a change in corporate priorities or personnel. 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 be certain 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.

We compete principally with vendors of sales effectiveness software, incentive compensation management 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, 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 incentive compensation management 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 incentive compensation management 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 the 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 incentive compensation management 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 or delay 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.

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.

Potential changes in accounting principles generally accepted in the United States ("GAAP") could affect our reported financial results and require significant changes to our internal accounting systems and processes.

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. ("GAAP"). These principles are subject to interpretation by the Financial Accounting Standards Board ("FASB"), the Securities and Exchange Commission ("SEC"), and various other bodies formed to interpret and create appropriate accounting principles and guidance. The FASB is currently working with the International Accounting Standards Board ("IASB") to converge accounting principles, and facilitate more comparable financial reporting, between companies that are required to follow GAAP and those that are required to follow international financial reporting standards. In connection with that initiative, the FASB has issued new accounting standards for revenue recognition and accounting for leases, which we discuss in Note 1, The Company and Significant Accounting Policies, in the Notes to Consolidated Financial Statements under the heading “Effect of New Accounting Pronouncements.” These and other such standards could cause us to adopt new accounting principles, which could significantly impact our reported financial results or cause volatility of those financial results. In addition, we may need to change our customer and vendor contracts, financial accounting systems and other internal processes. The cost and effects of these changes could adversely affect our consolidated results of operations.

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.

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 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 is 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.

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 the acquisitions of DataHug Ltd., and of certain assets of Badgeville, Inc. and ViewCentral, LLC in 2016, the acquisition of BridgeFront LLC in 2015 and the acquisitions of 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:


•	anticipated benefits, such as increased revenue, may not materialize if, for example, a larger than expected number of customers choose not to renew their contracts 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, or by the complexity of overseeing geographically and culturally diverse locations;


•	we may find that the acquired businesses or assets do not further our business strategy, or that we overpaid for the businesses 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 expense and diversion of management attention.

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 third-party software, could result in higher costs, delayed sales, customer claims or termination of existing agreements.

We license technology and content from several software providers for our reporting, analytics, training, and integration applications, and we anticipate continuing to license technologies and content 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 cease 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 or content is developed or, if available, is identified, licensed and integrated. Acquisitions of third-party technologies or content 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 growth depends in part on the success of our strategic relationships with third parties.

We depend on strategic relationships with third parties, such as resellers, OEM partners, and technology or content providers, to extend the utility or reach of our products and increase our sales. Identifying potential strategic partners, then negotiating, documenting and implementing any resulting strategic relationships, requires us to commit significant time and resources with no guarantee that any resulting revenue will justify the investments. If we fail to establish or maintain effective relationships with third parties, our ability to compete in the marketplace successfully or to grow our revenues could be impaired, and our operating results could suffer. For example, if our solutions are not integrated with related solutions that are valued by potential customers, it may be more difficult for us to compete and we may lose customers and revenue. Even if we succeed in establishing and maintaining strategic relationships, we cannot assure you that they will result in increased sales of our solutions. In addition, the rate at which any strategic relationship will achieve its intended results, if at all, is outside of our control and difficult to predict.

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, therefore, may 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 and may not allow us to realize our growth and cost reduction goals, or produce effective new solutions.

We use offshore resources to perform new product development and provide support and professional services, which requires detailed technical and logistical coordination. We must ensure that our offshore resources 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 product development, support and professional services through our offshore resources, including our personnel and our third-party service providers, our attempts to reduce costs and drive growth through new products and through margin improvements in technical support and professional services may be negatively impacted, which may adversely affect our results of operations. The use of offshore resources, including third-party service 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 vote by the United Kingdom to leave the European Union could adversely affect us.

The United Kingdom vote authorizing its exit from the European Union (referred to as “Brexit”) could over time create uncertainty and disrupt our business. For example, our relationships with European customers or prospective customers in the United Kingdom, data centers and other vendors, and employees could change in unpredictable ways and have an adverse effect on our business, financial results and operations, and could also have an adverse impact on our bookings. The outcome of negotiations about the specific terms of the United Kingdom’s future relationship with the European Union are unpredictable. For example, important issues such as trade and tariff, immigration, intellectual property and commercial regulation may be modified during a transition period or permanently. These measures could potentially disrupt the markets we serve and the tax jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions, and may cause us to lose customers or prospective customers, vendors, and employees. In addition, Brexit could lead to legal uncertainty and divergent national laws and regulations where previously European Union laws and regulations prevailed, raising our cost of doing business. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, business opportunities, results of operations, financial condition and cash flows.

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 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 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 increased and intend to continue to increase 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.

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 control over financial reporting and to report any material weaknesses in such internal controls. Effective planning and management processes are necessary to meet these requirements. 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, the Securities and Exchange Commission or other regulatory authorities, which could be costly for us.

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

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 than 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. Our competitors or other third parties may also challenge the validity or scope of our intellectual property rights. We believe that claims of infringement are likely to increase as the functionalities 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:


•	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 occurring 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. Therefore, fluctuations in the exchange rate of foreign currencies may have a negative impact on our revenue and operating activities.

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 24% of our revenue in 2015 and 21% of our revenue in 2016. 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, personnel commitments, and mutual cooperation to achieve milestone and other commitments by both us and our customers. 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 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 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 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 ("Revolver") to us in an amount not to exceed $10.0 million, which was increased to $15.0 million in September 2014. We may draw upon the Revolver to finance our operations or for other corporate purposes. 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.

Changes in the terms of our current or future indebtedness or assessments of our creditworthiness 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 whether future indebtedness will be obtainable on favorable terms. 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, any future assessments by any rating agency of our creditworthiness 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.

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. For example, in April 2016, we stopped offering perpetual licenses for our commissions product. 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;


•	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.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease our headquarters in Dublin, California which consists of approximately 109,000 square feet of office space. We also lease facilities in Alabama, Arizona, Georgia, Illinois, New York, Wisconsin, Washington, Australia, Hong Kong, India, Ireland, Japan, Malaysia, Mexico, Serbia, Singapore, and United Kingdom. We believe that our properties are in good operating condition and adequately serve our current business operations. We also anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion. Refer to Note 7, Contractual Obligations, Commitments and Contingencies, to our consolidated financial statements for information regarding our lease obligations.

Item 3. Legal Proceedings

We are from time to time, a party to various litigation and customer disputes incidental to the conduct of our business. At the present time, we believe that none of these matters are material.

Item 4. Mine Safety Disclosures

None.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information for Common Stock

Our common stock trades on the NASDAQ Global Market ("NASDAQ") under the symbol "CALD". The following table sets forth, for the periods indicated, the high and low intra-day sales prices reported on NASDAQ.



	Fiscal Year Ended December 31, 2016								Fiscal Year Ended December 31, 2015
	Fourth Quarter		Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter
High	$	19.50	$	21.44	$	20.88	$	18.31	$	21.64	$	18.91	$	16.43	$	16.95
Low	$	15.15	$	17.25	$	15.52	$	11.48	$	16.10	$	14.25	$	12.26	$	12.46

Stockholders

As of February 16, 2017, there were 63,730,685 shares of our common stock outstanding held by 21 stockholders of record including The Depository Trust Company, which holds shares of our common stock on behalf of an indeterminate number of beneficial owners.

Dividends

We have never declared or paid cash dividends on our capital stock. We expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

Performance Graph

The following performance graph shall not be deemed to be incorporated by reference by means of any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those acts.

The graph compares the cumulative total return of our common stock from December 31, 2011 through December 31, 2016 with the performance of the NASDAQ Composite Index and the NASDAQ Computer Index over those periods.

The graph assumes that (i) $100 was invested in our common stock at the closing price of our common stock on December 31, 2011, (ii) $100 was invested in each of the NASDAQ Composite Index and the NASDAQ Computer Index at the closing price of the respective indices on that date and (iii) all dividends received were reinvested. To date, no cash dividends have been declared or paid on our common stock.



	12/31/2011		12/31/2012		12/31/2013		12/31/2014		12/31/2015		12/31/2016
Callidus Software Inc.	$	100	$	71	$	214	$	254	$	289	$	262
NASDAQ Composite	$	100	$	117	$	165	$	189	$	202	$	220
NASDAQ Computer	$	100	$	114	$	153	$	186	$	200	$	228

*We have not changed indices since 2011.

Securities Authorized for Issuance under Equity Compensation Plans

The information required by this item is incorporated by reference to our Proxy Statement for the 2017 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2016.

Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section and our consolidated financial statements and notes thereto included elsewhere in this annual report. The selected consolidated statements of operations data for each of the years in the three-year period ended December 31, 2016, and the consolidated balance sheet data as of December 31, 2016 and 2015, are derived from our audited consolidated financial statements that have been included in this annual report. The selected consolidated statement of operations data for the years ended December 31, 2013 and 2012 and the selected consolidated balance sheet data as of December 31, 2014, 2013 and 2012 are derived from our audited consolidated financial statements that have not been included in this Form 10-K.



	Year Ended December 31,
	2016			2015			2014			2013			2012
	(In thousands, except per share amounts)
Consolidated Statements of Operations Data:
Revenue:
Recurring	$	162,586		$	129,911		$	99,807		$	81,734		$	70,919
Services and license	44,132			43,176			36,811			30,603			24,033
Total revenue	206,718			173,087			136,618			112,337			94,952
Cost of revenue:
Recurring	42,719			34,306			31,282			28,741			30,039
Services and license	35,358			32,145			24,756			19,048			20,301
Total cost of revenue	78,077			66,451			56,038			47,789			50,340
Gross profit	128,641			106,636			80,580			64,548			44,612
Operating expenses:
Sales and marketing	78,601			58,785			47,040			34,916			32,442
Research and development	31,712			26,088			20,307			17,143			16,643
General and administrative	35,795			33,290			26,255			22,951			19,953
Income from settlement and patent licensing	(500		)	(500		)	(500		)	(500		)	—
Acquisition-related contingent consideration	—			—			—			—			(1,612		)
Restructuring	482			628			1,025			1,699			1,115
Total operating expenses	146,090			118,291			94,127			76,209			68,541
Loss from operations	(17,449		)	(11,655		)	(13,547		)	(11,661		)	(23,929		)
Interest income and other income (expense), net	(122		)	(522		)	3,504			264			70
Interest expense	(267		)	(180		)	(506		)	(3,183		)	(3,451		)
Debt conversion expense	—			—			—			(4,776		)	—
Loss before provision for income taxes	(17,838		)	(12,357		)	(10,549		)	(19,356		)	(27,310		)
Provision for income taxes	1,128			791			1,012			2,055			388
Net loss	$	(18,966	)	$	(13,148	)	$	(11,561	)	$	(21,411	)	$	(27,698	)
Net loss per share:
Basic and diluted	$	(0.32	)	$	(0.24	)	$	(0.24	)	$	(0.55	)	$	(0.78	)
Weighted average shares:
Basic and diluted	58,852			54,719			47,547			38,858			35,393



	As of December 31,
	2016		2015		2014			2013		2012
	(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	187,274	$	97,209	$	36,966		$	36,161	$	29,171
Total assets	386,501		241,642		176,298			134,193		124,743
Working capital	124,725		50,248		(2,905		)	7,161		2,425
Total liabilities	149,640		112,841		117,824			92,140		121,315
Total stockholders' equity	236,861		128,801		58,474			42,053		3,428

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

CallidusCloud® is a global leader in cloud-based sales, marketing, learning and customer experience solutions. CallidusCloud enables its customers to sell more, faster with its Lead to Money suite of solutions that, among other things, identifies leads, trains personnel, implements territory and quota plans, enables sales forces, automates configuration pricing and quoting, manages contracts, streamlines sales compensation, captures customer feedback and provides rich predictive analytics for competitive advantage. Over 5,200 organizations across a broad set of industries rely on CallidusCloud to help them optimize their Lead to Money process and close more deals, faster.

The Lead to Money process is designed to help companies respond to the changing role of sales and marketing in the redefined sales cycle of the modern economy. In the last decade, the ubiquity of social networks, mobile devices and e-commerce has transformed the traditional sales cycle into an increasingly buyer-led digital process. Buyers research and evaluate companies online, and complete a significant portion of their purchases digitally. To compete successfully in this evolving digital market, and turn their leads into money, a company’s sales, marketing, learning and customer experience teams must effectively leverage software solutions that enhance productivity, improve collaboration and drive sales conversion.

We provide a suite of Lead to Money solutions on a Software-as-a-Service ("SaaS") basis and generate revenue from subscriptions, services and to a much lesser degree, term licenses. Our SaaS customers typically purchase annual subscriptions, and some enter into multi-year subscription commitments. We are experiencing a decline in maintenance fee revenue primarily due to conversion of existing on-premise customers to our cloud-based commissions solution. In addition, we anticipate maintenance fee revenue to continue to decline through 2017 when we anticipate that we will stop providing maintenance and support on any remaining on-premise customers. We have discontinued selling new on-premise licenses and have stopped upgrading our on-premise software commissions products.

To grow our business, the key elements of our strategy include: (1) investing in sales and marketing to expand our customer base in what we believe is an under penetrated market; (2) cross-selling additional solutions to existing customers; (3) providing new solutions to customers; (4) working closely with our key customers to understand their needs and developing responsive solutions; (5) evaluating and integrating new acquisitions or investment opportunities in complementary businesses, joint ventures, services and technologies and intellectual property rights in an effort to expand our offerings; (6) expanding our sales efforts internationally; and (7) establishing new data centers to serve a growing business.

As a result of our execution of these strategic elements, we expect our revenue to increase over time and our revenue per customer to increase over time. We also expect our sales and marketing expenses and our research and development expenses to increase, with periodic fluctuations for many reasons, but to decline as a percentage of revenues over time. Other operating expenses are expected to increase more slowly. Acquisition and investment activities may influence particular periods but we do not believe they are a fundamental indicator of our results.

We believe that factors influencing our ability to succeed in our business strategy include: our prospective customers’ willingness to migrate to enterprise cloud computing solutions; the performance and security of our solutions; our ability to develop new and improved features that are in demand among our customers; our ability to successfully integrate acquired businesses and technologies; successful customer implementation and utilization of our solutions; our ability to penetrate markets where we have few customers; location and timing of new data centers; and our ability to attract new personnel and retain and motivate current personnel.

Revenue Increase and Customer Expansion

During 2016, we added approximately 600 net new customers and as of December 31, 2016 we had over 5,200 customers.

In 2016, total revenue was $206.7 million, an increase of $33.6 million, or 19.4%, from 2015. Total recurring revenue, which includes SaaS revenue and maintenance revenue, increased $32.7 million in 2016, as a result of higher SaaS revenue. SaaS revenue continued to drive the increase in both recurring revenue and total revenue, reflecting market acceptance of our solutions and our continued marketing and sales efforts. SaaS revenue was $151.5 million in 2016, an increase of $36.0 million or 31% from 2015. Maintenance revenue was $11.1 million, a decrease of 23% from 2015, as a result of customers converting from the on-premise solution to the cloud solution. In 2016, recurring revenue accounted for 79% of our total revenue, and we expect that percentage will increase going forward. The increase in SaaS revenue

contributed to the recurring revenue gross margins of 74% for both 2016 and 2015 and also contributed to the overall gross margins of 62% for both 2016 and 2015. Revenue related to Overages (customers using our products in excess of contracted usage) was not material during 2016 and 2015.

Follow-On Offering

On September 21, 2016, we completed a follow-on offering in which we issued 5.1 million shares of our common stock at a public offering price of $18.25 per share. We received net proceeds of $87.1 million after deducting underwriting discounts and commissions of $5.6 million and other offering expenses of $0.4 million.

On October 5, 2016 we received an additional $13.1 million, after deducting underwriting discounts and commissions of $0.8 million related to the underwriters' exercise of their over-allotment option and purchase of an additional 0.8 million shares at the public offering price of $18.25 per share.

Acquisitions

On November 7, 2016, we acquired DataHug Ltd. ("DataHug"), a privately-held company and provider of SaaS predictive forecasting and sales analytics, in order to utilize its patented technology to deliver predictive analysis of sales pipelines that is easy to understand and visualize. The purchase consideration was approximately $13.0 million which included approximately $11.7 million paid in cash and a $1.3 million indemnity holdback to be paid one year from the date of the agreement.

On June 24, 2016, we acquired certain assets of Badgeville, Inc. ("Badgeville"), a privately-held company and a leading technology provider in enterprise gamification and digital motivation in order to extend digital motivation as part of our Lead to Money suite. The purchase consideration was $7.5 million in cash.

On April 8, 2016, we acquired certain assets of ViewCentral LLC ("ViewCentral"), a privately-held company in the extended enterprise learning market in order to expand our Litmos mobile learning solution with a full revenue management and e-commerce platform designed for selling and optimizing profitable training for customers. The purchase consideration was $4.0 million in cash.

On July 22, 2015 we 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 price consideration was approximately $5.0 million plus potential earn-out payments.

Please refer to Note 2, Acquisitions, of the notes to our consolidated financial statements for further details regarding the above acquisitions, 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 that follows is based upon our consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The application of GAAP requires our 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. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with our Audit Committee.

We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, stock-based compensation, valuation of acquired intangible assets, goodwill impairment, long-lived asset impairment, contingent consideration and income taxes have the greatest potential impact on our 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. Historically, our assumptions, judgments and estimates in accordance with our critical accounting policies have not materially differed from actual results. For a more detailed discussion of these accounting policies and our use of estimates, refer to Note 1, The Company and Significant Accounting Policies, to our consolidated financial statements included in this report.

Revenue Recognition

We generate revenue by providing software as a service ("SaaS") solutions through on-demand subscription, on-premise perpetual and term licenses and related software maintenance, and 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 SaaS 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 licenses and receiving support for such on-premise solutions. We also recognize SaaS and maintenance 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 in the period incurred. Revenue related to Overages was immaterial for all years presented.

Service and License Revenue. Service and license revenue primarily consists of services revenue related to training, integration and configuration services. Generally, our professional services arrangements are billed 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 services arrangements, we recognize 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 estimated hours to complete the project. If we do 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, we defer the revenue until the acceptance criteria are 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 with some extending out to 10 years, and the professional services are performed within nine months of entering into a contract with the customer, depending on the size of integration.

Our SaaS agreements provide specified service level commitments, excluding scheduled maintenance. The failure to meet this level of service availability may require us to credit qualifying customers a portion of their subscription and support fees. Based on our historical experience meeting its service level commitments, we do not currently have any liabilities on our consolidated balance sheets for these commitments.

We recognize 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 we determine that any one of the four criteria is not met, we 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, we evaluate each element to determine whether it represents a separate unit of accounting. We determine the best estimated selling price of each deliverable in an arrangement based on a selling price hierarchy of methods contained in Finance 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. We have currently established VSOE for most deliverables, except for fixed fee service arrangements and on-premise software licenses.

We 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. We are 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, we recognize 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, we are able to establish VSOE because we have a sufficient history of selling these deliverables at an established price. Our revenue arrangements do not include a general right of return relative to the delivered products.

Generally, for our term-based licenses, if the only undelivered element is maintenance, the entire amount of revenue is recognized ratably over the maintenance period.

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

Refer to Note 1, The Company and Significant Accounting Policies, of the notes to our consolidated financial statements included in this report for further discussion on our revenue recognition policies.

Stock-based Compensation

Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized on a straight-line basis over the requisite service period, which is generally the vesting period. Stock-based compensation expense for restricted stock units is estimated based on the closing price of our common stock on the date of grant and the estimated forfeiture rate, which is based on historical forfeitures. We measure stock-based compensation for employee stock purchase plan shares using the Black-Scholes-Merton option pricing model, which include subjective variables such as the expected term of the plan, taking into account projected exercises; our expected stock price volatility over the expected term of the awards; the risk-free interest rate; and expected dividends. We estimate forfeiture rate based on an analysis of actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience and other factors. Changes in these variables could affect stock-based compensation expense in the future.

We granted performance-based restricted stock units ("PSUs") to select executives and other key employees. Vesting of our PSUs is based on achievement of specified Company or other goals. In 2016, we granted PSUs to our CEO with vesting contingent upon our relative total shareholder return over a three year period compared to our 2016 executive compensation peer group companies. In 2015, we granted PSUs with vesting contingent on our absolute SaaS revenue growth over the three-year period from July 1, 2015 to June 30, 2018. In 2014, we granted PSUs with vesting contingent on our absolute SaaS revenue growth over the three-year period from January 1, 2014 to December 31, 2016, and on our relative total shareholder return over the same three-year period compared to an index of 17 SaaS companies. These PSUs will, to the extent the performance criteria are achieved, vest on the third anniversary of the grant date. PSU awards based on total shareholder return is recognized as compensation costs over the requisite service period, if rendered, even if the market condition is never satisfied. In determining the fair value of PSUs based on total shareholder return we considered the achievement of the market condition in the estimated fair value.

Business Combinations

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, assumed equity awards, as well as to in-process research and development based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, deferred revenue obligations and equity assumed.

Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:


•	Future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents;


•	The acquired company's trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company's produce portfolio; and


•	Discount rates.

In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the deferred revenue obligations assumed. The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The estimated costs to fulfill the obligations are based on the historical costs related to fulfilling the obligations.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

Recent Accounting Pronouncements

Refer to Note 1, The Company and Significant Accounting Policies, of the notes to our consolidated financial statements included in this report for information regarding the effect of newly adopted accounting pronouncements on our financial statements.

Results of Operations

Comparison of the Years Ended December 31, 2016 and 2015

Revenue, Cost of Revenue and Gross Profit

The table below sets forth the changes in revenue, cost of revenue and gross profit in 2016 from 2015 (in thousands, except percentage data):



	Year Ended December 31, 2016		Percentage of Revenue	Year Ended December 31, 2015		Percentage of Revenue	Increase (Decrease)			Percentage Change
Revenue:
Recurring	$	162,586	79%	$	129,911	75%	$	32,675		25%
Services and license	44,132		21%	43,176		25%	956			2%
Total revenue	$	206,718	100%	$	173,087	100%	$	33,631		19%
Cost of revenue:
Recurring	$	42,719	26%	$	34,306	26%	$	8,413		25%
Services and license	35,358		80%	32,145		74%	3,213			10%
Total cost of revenue	$	78,077	38%	$	66,451	38%	$	11,626		17%
Gross profit:
Recurring	$	119,867	74%	$	95,605	74%	$	24,262		25%
Services and license	8,774		20%	11,031		26%	(2,257		)	(20)%
Total gross profit	$	128,641	62%	$	106,636	62%	$	22,005		21%

Revenue

Total Revenue. The increase in total revenue for 2016 compared to 2015 was primarily due to continued SaaS revenue growth. New customer adoption of our Lead to Money suite, continued cross-sell and up-sell from our current customer base, and acquisitions have contributed to our growth in revenue.

Recurring Revenue. Recurring revenue consists of SaaS revenue and maintenance revenue. SaaS revenue increased to $151.5 million in 2016, representing an increase of $36.0 million or 31% from 2015. The increase was primarily due to new bookings related to new customers and cross-sell and up-sell into our current customer base, reflecting the results of our investment in expanding the sales force in recent years. The increase in our SaaS revenue was partially offset by the decrease in maintenance revenue to $11.1 million in 2016 from $14.4 million in 2015, as a result of customers converting from on-premise maintenance license arrangements to cloud-based offerings.

Services and License Revenue. Services and license revenue consists of integration and configuration services ("consulting services"), training and perpetual licenses. Services revenue increased by $2.3 million in 2016 to $43.8 million due to services associated with increased sales of our SaaS offerings. This increase was partially offset by a decrease of $1.3 million in license revenue as we stopped selling to new on-premise customers in early 2016.

Cost of Revenue and Gross Profit

Cost of Recurring Revenue. The increase in cost of recurring revenue in 2016 over 2015 was driven by investing in our data centers which resulted in $4.5 million increase in depreciation, maintenance and equipment, by a $3.5 million increase in personnel costs and $0.4 million in travel and related expenses. We expect to continue to invest in hosting facilities to support our revenue growth and a larger and expanded customer base.

Cost of Services and License Revenue. The increase in cost of services and license revenue in 2016 over 2015 was primarily due to a $3.2 million increase in personnel costs and travel-related expenses.

Recurring Revenue Gross Profit. The improvement in our recurring revenue gross profit in 2016 over 2015 was primarily due to a $36.0 million increase in SaaS revenue, partially offset by a $3.3 million decrease in maintenance revenue, a $4.5 million increase in depreciation, maintenance and equipment, a $3.5 million increase in personnel costs and $0.4 million in travel and related expenses.

Services and License Revenue Gross Profit. The decrease in our services and license gross profit in 2016 over 2015 was primarily due to a $3.2 million increase in personnel and travel related expenses and a $1.3 million decrease in license revenue partially offset by a $2.3 million increase in service revenue. In 2016, we have become more focused on our partners implementing our products and in 2017 we expect this will continue.

Operating Expenses

The table below sets forth the changes in operating expenses in 2016 from 2015 (in thousands, except percentage data):



	Year Ended December 31, 2016			Percentage of Revenue	Year Ended December 31, 2015			Percentage of Revenue	Increase (Decrease)			Percentage Change
Operating expenses:
Sales and marketing	$	78,601		38%	$	58,785		34%	$	19,816		34%
Research and development	31,712			15%	26,088			15%	5,624			22%
General and administrative	35,795			17%	33,290			19%	2,505			8%
Income from settlement and patent licensing	(500		)	—%	(500		)	—%	—			—%
Restructuring and other	482			—%	628			—%	(146		)	(23)%
Total operating expenses	$	146,090		71%	$	118,291		68%	$	27,799		24%

Sales and Marketing. The increase in sales and marketing expense in 2016 over 2015 was primarily due to $12.7 million in higher personnel-related costs, which included an increase of $3.8 million in stock-based compensation expense and an increase of $1.7 million in commissions associated with increased bookings. In addition, sales and marketing costs increased by $2.9 million due to more marketing events and programs, $1.7 million related to third party commissions and $2.5 million in entertainment and travel related expenses associated with increased sales personnel.

Research and Development. The increase in research and development expenses in 2016 over 2015 was due to a $4.5 million increase in personnel-related costs, which included $2.1 million in stock-based compensation expense as we continue to invest in headcount to support product development, and a $1.1 million increase in maintenance agreement expense.

General and Administrative. The increase in general and administrative expenses in 2016 over 2015 was primarily due to a $3.9 million increase in personnel-related costs, which included $3.3 million in stock-based compensation expense, partially offset by the decrease of $0.8 million in professional services and $0.6 million in corporate expenses.

Income from Settlement and Patent Licensing. On November 25, 2013, we entered into a settlement agreement with Xactly Corporation and Xactly's President and Chief Executive Officer that, includes an agreement by Xactly to pay a $2.0 million license fee in four annual installments of $0.5 million commencing in November 2013 with the final payment in November 2016. In 2015 and 2016, we recorded $0.5 million of offset to legal fees under operating expenses regarding this settlement.

Restructuring and Other. Restructuring and other expenses decreased in 2016 over 2015, mainly as a result of a reduction in expenses associated with our consolidation of certain office locations.

Stock-Based Compensation

The following table summarizes our stock-based compensation expenses in 2016 and 2015 (in thousands, except percentage data).



	Year Ended December 31,				Increase (Decrease)		Percentage Change
	2016		2015		Increase (Decrease)		Percentage Change
Stock-based compensation:
Cost of recurring revenue	$	1,639	$	1,237	$	402	32%
Cost of services revenue	2,097		1,149		948		83%
Sales and marketing	9,244		5,488		3,756		68%
Research and development	5,147		3,031		2,116		70%
General and administrative	10,996		7,687		3,309		43%
Total stock-based compensation	$	29,123	$	18,592	$	10,531	57%

Total stock-based compensation expense increased in 2016 compared to 2015, primarily due to the timing of restricted stock unit grants, an increase in our stock price and an increase in employee stock purchase plan participation in 2016.

Other Items

The table below sets forth the changes in other items in 2016 and 2015 (in thousands, except percentage data):



	Year Ended December 31,						Increase (Decrease)			Percentage Change
	2016			2015			Increase (Decrease)			Percentage Change
Other income (expense), net:
Interest income and other income (expense), net	$	(122	)	$	(522	)	$	(400	)	(77)%
Interest expense	(267		)	(180		)	87			48%
Other income (expense), net	$	(389	)	$	(702	)	$	313		45%
Provision for income taxes	$	1,128		$	791		$	337		43%

Interest Income and Other Income (Expense), net

The decrease in the net expense associated with "interest income and other income (expense), net" in 2016 of $0.4 million was primarily due to a reduction in foreign exchange loss and an increase in interest income from holding larger balances in short-term investments.

Interest Expense

Interest expense increased in 2016 as compared to 2015 by $0.1 million because of increased interest expense on our capital financing arrangements.

Provision for Income Taxes

Provision for income tax increased in 2016 as compared to 2015 was primarily attributable to higher deferred tax liabilities from acquisitions in 2016, as well as an increase in sales to foreign customers subject to withholding taxes.

Results of Operations

Comparison of the Years Ended December 31, 2015 and 2014

Revenue, Cost of Revenue and Gross Profit

The table below sets forth the changes in revenue, cost of revenue and gross profit in 2015 from 2014 (in thousands, except percentage data):



	Year Ended December 31, 2015		Percentage of Revenue	Year Ended December 31, 2014		Percentage of Revenue	Increase (Decrease)			Percentage Change
Revenue:
Recurring	$	129,911	75%	$	99,807	73%	$	30,104		30%
Services and license	43,176		25%	36,811		27%	6,365			17%
Total revenue	$	173,087	100%	$	136,618	100%	$	36,469		27%
Cost of revenue:
Recurring	$	34,306	26%	$	31,282	31%	$	3,024		10%
Services and license	32,145		74%	24,756		67%	7,389			30%
Total cost of revenue	$	66,451	38%	$	56,038	41%	$	10,413		19%
Gross profit:
Recurring	$	95,605	74%	$	68,525	69%	$	27,080		40%
Services and license	11,031		26%	12,055		33%	(1,024		)	(8)%
Total gross profit	$	106,636	62%	$	80,580	59%	$	26,056		32%

Revenue

Total Revenue. The increase in total revenue for 2015 compared to 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 maintenance and license revenue. Our broad Lead to Money suite of one or more of our products, increased adoption from our customer base, as well as acquisitions in 2014 and 2015 contributed to the growth in revenue.

Recurring Revenue. Recurring revenue consists of SaaS revenue and maintenance revenue. SaaS revenue increased to $115.5 million in 2015, representing an increase of $31.8 million or 38% from 2014. The increase was primarily due to increased bookings. We believe our investment in expanding the sales force in recent years has positively impacted our SaaS revenue growth. The increase in SaaS revenue was partially offset by the decrease in maintenance revenue to $14.4 million in 2015 from $16.1 million in 2014, as a result of customers converting from on-premise license arrangements to our Lead to Money suite in the cloud.

Services and License Revenue. Services and license revenue consists of integration and configuration services ("consulting services"), training and perpetual licenses. Services revenue increased by $9.1 million in 2015 from $32.4 million in 2014 due to SaaS growth. This increase was partially offset by a decrease of $2.7 million in license revenue in 2015 from $4.4 million in 2014 as a result of the broader adoption of cloud services in the market.

Cost of Revenue and Gross Profit

Cost of Recurring Revenue. The increase in cost of recurring revenue in 2015 was driven by a $2.9 million increase in personnel costs, a $0.8 million increase in depreciation, maintenance and equipment, and $0.2 million in travel and other expenses, partially offset by a reduction in royalty expense of $0.9 million royalty expense related to the litigation settlement with Versata in 2014. We will continue to invest in hosting facilities to support our revenue growth and expanded customer base.

Cost of Services and License Revenue. The increase in cost of services and license revenue in 2015 was primarily due to increased personnel costs of $4.8 million, professional services costs of $2.2 million, along with entertainment and travel-related expenses of $0.3 million as compared to 2014.

Recurring Revenue Gross Profit. The improvement in our recurring revenue gross profit in 2015 was primarily due to increased SaaS revenue and economies of scale in our on-demand infrastructure costs, partially offset by a $0.9 million royalty expense related to the litigation settlement with Versata in 2014.

Services and License Revenue Gross Profit. The decrease in our services and license gross profit in 2015 was primarily due to a decrease in gross profit contribution from license fees revenue as a result of lower license fee, partially offset by increase in consulting services revenue and improved utilization of consulting personnel.

Operating Expenses

The table below sets forth the changes in operating expenses in 2015 from 2014 (in thousands, except percentage data):



	Year Ended December 31, 2015			Percentage of Revenue	Year Ended December 31, 2014			Percentage of Revenue	Increase (Decrease)			Percentage Change
Operating expenses:
Sales and marketing	$	58,785		34%	$	47,040		34%	$	11,745		25%
Research and development	26,088			15%	20,307			15%	5,781			28%
General and administrative	33,290			19%	26,255			19%	7,035			27%
Income from settlement and patent licensing	(500		)	—%	(500		)	—%	—			—%
Restructuring and other	628			—%	1,025			1%	(397		)	(39)%
Total operating expenses	$	118,291		68%	$	94,127		69%	$	24,164		26%

Sales and Marketing. The increase in sales and marketing expense in 2015 was primarily due to $9.4 million in personnel-related costs, which included an increase of $2.0 million in stock-based compensation expense and an increase of $2.2 million in commissions associated with increased bookings. In addition, sales and marketing costs increased by $0.5 million due to more marketing events and programs, $0.5 million in implementation of software enhancements, and $0.9 million in entertainment and travel related expenses associated with increased sales personnel.

Research and Development. The increase in research and development expenses in 2015 was due to a $4.1 million increase in personnel-related costs, which included $1.0 million in stock-based compensation expense as we continue to invest in headcount to support product development, $0.7 million increase in consulting costs, $0.3 million increase in maintenance costs and $0.5 million increase in entertainment and travel-related expenses.

General and Administrative. The increase in general and administrative expenses in 2015 was primarily due to a $5.9 million increase in personnel-related costs, which included $3.3 million in stock-based compensation expense, $2.8 million increase in costs related to business system enhancements to support the growth and scale of the Company, which includes our new corporate headquarters in Dublin, California. These increases were partially offset by a $1.9 million reduction related to the absence of litigation settlement amounts that occurred in 2014.

Income from Settlement and Patent Licensing. On November 25, 2013, we entered into a settlement agreement with Xactly Corporation and Xactly's President and Chief Executive Officer that includes an agreement by Xactly to pay a $2.0 million license fee in four annual installments of $0.5 million that began in November 2013. In 2014 and 2015, we recorded $0.5 million of offset to legal fees under operating expenses regarding this settlement.

Restructuring and Other. Restructuring and other expenses decreased in 2015 compared to 2014, included the departure of our former general counsel and the realignment of our organization and our consolidation of our office locations. This decrease was partially offset by a $0.3 million increase in impairment of intangible assets and consolidation of our offices in India during 2015.

Stock-Based Compensation

The following table summarizes our stock-based compensation expenses in 2015 and 2014 (in thousands, except percentage data).



	Year Ended December 31,				Increase (Decrease)		Percentage Change
	2015		2014		Increase (Decrease)		Percentage Change
Stock-based compensation:
Cost of recurring revenue	$	1,237	$	911	$	326	36%
Cost of services revenue	1,149		1,026		123		12%
Sales and marketing	5,488		3,518		1,970		56%
Research and development	3,031		2,012		1,019		51%
General and administrative	7,687		4,346		3,341		77%
Total stock-based compensation	$	18,592	$	11,813	$	6,779	57%

Total stock-based compensation expense increased in 2015 compared to 2014, primarily due to the timing of restricted stock unit grants, an increase in our stock price and an increase in employee stock purchase plan participation in 2015. We did not grant any stock options in 2015 and 2014.

Other Items

The table below sets forth the changes in other items in 2015 and 2014 (in thousands, except percentage data):



	Year Ended December 31,						Increase (Decrease)			Percentage Change
	2015			2014			Increase (Decrease)			Percentage Change
Other income (expense), net:
Interest income and other income (expense), net	$	(522	)	$	3,504		$	(4,026	)	(115)%
Interest expense	(180		)	(506		)	326			(64)%
Other income (expense), net	$	(702	)	$	2,998		$	(3,700	)	(123)%
Provision for income taxes	$	791		$	1,012		$	(221	)	(22)%

Interest Income and Other Income (Expense), net

The decrease in the net income associated with "interest income and other income (expense), net" in 2015 was primarily due to a $3.9 million gain on the sale of select domain names and trademarks in 2014 with no comparable gain in 2015 and an increase in foreign currency loss of $0.2 million in 2015.

Interest Expense

Interest expense decreased in 2015 as compared to 2014 by $0.3 million. In 2014, interest expense included the early conversion of our remaining $14.2 million 4.75% Convertible Senior Notes ("Convertible Notes") in June 30, 2014 with no comparable cost in 2015.

Provision for Income Taxes

Provision for income tax decreased in 2015 as compared to 2014. The decrease was primarily due to a decrease in foreign withholding taxes, in part offset by increase in income taxes in foreign jurisdictions.

Liquidity and Capital Resources

As of December 31, 2016, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $187.3 million, and accounts receivable of $55.5 million.

In September 2016, we completed a follow-on offering in which we issued 5.1 million shares of our common stock at a public offering price of $18.25 per share and we received net proceeds of $87.1 million after deducting underwriting discounts and commissions of $5.6 million and other offering expenses of $0.4 million. In October 2016, the underwriters exercised their over-allotment option and purchased an additional 0.8 million shares at the public offering price of $18.25 per share and we received net proceeds of $13.1 million after deducting underwriting discounts and commissions of $0.8 million.

In March 2015, we completed a public offering of approximately 5.3 million newly-issued shares of our common stock at a public offering price of $13.00 per share. We received net proceeds of $64.4 million from this offering, 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 our option, at a base rate plus an applicable margin. The applicable margin ranges between 0.75% and 2.25% depending on our leverage ratio. Interest is payable every three months. In September 2014, we exercised the accordion feature and increased the maximum borrowing amount to $15.0 million. As of December 31, 2016 and 2015, we have no outstanding borrowings under the Revolver.

During 2016, accounts receivable and deferred revenue increased significantly due to growth in SaaS revenue. We expect these trends to continue into 2017 and we expect to continue to achieve positive operating cash flows during 2017.

We believe our existing cash, cash equivalents and short-term investments and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs over the next 12 months.

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



	Year Ended December 31,
	2016			2015			2014
Net cash provided by operating activities	$	29,779		$	26,469		$	9,151
Net cash used in investing activities	(59,103		)	(35,680		)	(14,004		)
Net cash provided by financing activities	100,799			52,593			11,041

In 2016, cash and cash equivalents increased by approximately $70.8 million primarily due to $29.8 million of cash provided by our operating activities and $100.8 million of cash provided by our financing activities, partially offset by $59.1 million of cash used by our investing activities.

Year Ended December 31, 2016

Net cash provided by operating activities was $29.8 million in 2016, which was $3.3 million higher compared to $26.5 million in 2015. In 2016, the net loss of $19.0 million included non-cash charges of $14.5 million of depreciation and amortization expense, $29.1 million of stock-based compensation expense and $1.5 million in bad debt expense. Changes in working capital provided cash of $3.2 million, which included a $19.0 million increase in deferred revenue, a $5.3 million increase in accrued payroll and related expenses, partially offset by $12.4 million increase in accounts receivable, $6.1 million increase in prepaid expenses, $2.3 million decrease in accounts payable and accrued expenses and $0.4 million increase in other non-current assets.

Net cash used in investing activities was $59.1 million in 2016, which was $23.4 million higher compared to $35.7 million in 2015. Net cash used in investing activities in 2016 included net purchases of investments of $20.0 million, purchases of property and equipment of $15.6 million for our data center improvements and new facilities, $1.0 million for purchases of intangibles and $22.6 million for the acquisitions of ViewCentral LLC., Badgeville LLC., and DataHug Ltd.

Net cash provided by financing activities was $100.8 million in 2016, which was $48.2 million higher compared to $52.6 million in 2015. Net cash provided by financing activities in 2016 was due to $100.3 million in proceeds from the public offering of our common stock, $4.4 million of proceeds net of purchases from the issuance of common stock pursuant to exercise and release of stock awards, partially offset by $3.5 million restricted stock units acquired to settle employee withholding tax liability and $0.5 million payment of consideration related to acquisitions.

Year Ended December 31, 2015

Net cash provided by operating activities was $26.5 million in 2015, which was $17.3 million higher compared to $9.2 million in 2014. In 2015, the net loss of $13.1 million included $11.7 million of depreciation and amortization expense, $18.6 million of stock-based compensation expense and $1.9 million in bad debt expense. Changes in working capital provided cash of $7.4 million, which included $7.0 million increase in deferred revenue, $1.5 million increase in accounts payable and accrued expenses and $3.5 million in accrued payroll expense, partially offset by $2.9 million increase in accounts receivable, $1.0 million increase in prepaid expenses and $0.5 million increase in other non-current assets.

Net cash used in investing activities was $35.7 million in 2015, which was $21.7 million higher compared to $14.0 million in 2014. Net cash used in investing activities in 2015 included net purchases of investments of $17.4 million, purchases of property and equipment of $13.1 million for our data center improvements and new facilities, $0.8 million for purchases of intangibles and $4.4 million for the acquisition of BridgeFront.

Net cash provided by financing activities was $52.6 million in 2015, which was $41.6 million higher compared to $11.0 million in 2014. Net cash provided by financing activities in 2015 was due to $64.4 million in proceeds from the public offering of our common stock, $4.5 million of proceeds net of purchases from the issuance of common stock pursuant to exercise and release of stock awards, partially offset by the $10.5 million repayment of our Revolver, $3.1 million restricted stock units acquired to settle employee withholding tax liability, $1.8 million payment of consideration related to acquisitions, and $1.0 million in payment of principal under capital leases.

Contractual Obligations and Commitments

We have the following contractual cash obligations at December 31, 2016. Contractual cash obligations that are cancellable upon notice and without significant penalties are not included in the table. During 2016, we entered into various contractual obligations, including non-cancellable operating lease obligations and unconditional purchase commitments. Future minimum lease payments under non-cancellable operating leases (with initial or remaining lease terms in excess of one year) and non-cancellable purchase commitments as of December 31, 2016 are as follows (in thousands):



	Payments due by Year
Contractual Obligations	Unconditional Purchase Commitments (1)		Non-cancellable Operating Leases (2)
2017	$	18,189	$	3,504
2018	9,504		4,190
2019	6,004		3,880
2020	3,008		3,979
2021	—		3,737
Thereafter	—		2,693
Total	$	36,705	$	21,983

_______________________________________________________________________________


(1)	Primarily represents amounts associated with agreements that are enforceable, legally binding and specify terms, including: software purchases, data center equipment purchases and maintenance agreements. In addition, amounts include unconditional purchase agreements during the normal course of business with various vendors for future services.

(2)

We have facilities under non-cancellable operating lease agreements that expire at various dates through 2025. Our rent expense for 2016, 2015 and 2014 was $3.6 million, $3.0 million and $2.1 million, respectively. During 2016, we entered into an office lease expansion of our headquarters in Dublin, California, as well as office space leases for facilities in Hyderabad, India and Belgrade, Serbia.

Included in non-current deposits and other assets in the consolidated balance sheets at December 31, 2016 and 2015 is restricted cash and rental deposits totaling $0.2 million and $0.3 million, respectively, related to security deposits on leased facilities. The restricted cash represents investments in certificates of deposit required by landlords to meet security deposits for the leased facilities.

Unrecognized Tax Benefit

As of December 31, 2016, the total gross unrecognized tax benefit before the impact of the valuation allowance was $3.7 million, including immaterial interest and penalties. We have made an election to recognize the interest and penalties as a component of income tax expense. If recognized, the amount of the unrecognized tax benefit that would impact the tax expense is $0.5 million. It is possible that the amount of existing unrecognized tax benefits may decrease within 12 months as a result of statute of limitations lapses in some of the jurisdictions, however, an estimate of the range cannot be made.

Letter of Credit

We obtained a $1.4 million letter of credit in October 2016 for our leased space in Dublin, California. The letter of credit will expire on October 1, 2017. There is no balance outstanding under this line of credit.

Revolver Line of Credit

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 our option, at a base rate plus an applicable margin. The applicable margin ranges between 0.75% and 2.25% depending on our leverage ratio. Interest is payable every three months. In September 2014, we exercised the accordion feature and increased the maximum borrowing amount to $15.0 million. As of December 31, 2016 and 2015 we have no outstanding borrowings under the Revolver.

Off-Balance Sheet Arrangements

With the exception of items discussed under "Contractual Obligations and Commitments" above we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources that are material to investors.

Related Party Transactions

For information regarding related party transactions, refer to Note 14, Related Party Transactions, to our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Market Risk. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates, as well as fluctuations in interest rates and foreign exchange rates.

Our primary investment objectives are to preserve capital and maintain liquidity. We do not hold or issue financial instruments for trading purposes, and we invest in only investment grade securities. We limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines for our investment portfolios, which is approved by our Board of Directors. The guidelines establish, among others, credit quality standards, maturity constraints and limits on exposure to: i) any one security issue or issuer and ii) instrument type.

Financial instruments that are potentially subject us to market risk are trade receivables denominated in foreign currencies. We mitigate market risk by entering into foreign currency contracts, monitoring ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our on-going assessment of counterparty risk, we will adjust our exposure to various counterparties as necessary.

Interest Rate Risk. We invest our cash in a variety of financial instruments, consisting primarily of investments in money market accounts, certificates of deposit, high quality corporate debt obligations, and U.S. government obligations.

Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk. The fair market value of fixed-rate securities may be adversely affected by a rise in interest rates, while floating rate securities, which typically have a shorter duration, may produce less income than expected if interest rates fall. Due in part to these factors, our investment income may decrease in the future due to changes in interest rates. At December 31, 2016, the weighted average maturity of our investments was approximately three months, and all investment securities had remaining maturities of less than 24 months. The following table presents certain information about our financial instruments at December 31, 2016 that are sensitive to changes in interest rates (in thousands, except for interest rates):



	Expected Maturity
	1 Year or Less			More Than 1 Year			Total Principal Amount		Total Fair Value
Available-for-sale securities	$	32,252		$	7,015		$	39,267	$	39,266
Weighted average interest rate	1.74		%	1.36		%

Foreign Currency Exchange Risk. A portion of our business originates outside the U.S. and subjects us to fluctuations in the USD value of revenues, expenses, and cash flows as a result of changes in foreign exchange rates. For 2016 and 2015, approximately 22% and 23%, respectively, of our total revenue was generated outside the United States. At December 31, 2016 and 2015, approximately 14% and 15%, respectively, of our total accounts receivable was denominated in foreign currency. In addition, the Company maintains foreign subsidiaries which have the local currency as their functional currency and therefore the Company is subject to translation risk. While our exposure to foreign currency risk is concentrated primarily in British pound sterling, Euro and Australian dollars, our overall foreign exchange exposure has been minimal to date. For the years ended December 31, 2016 and 2015, we recognized losses on foreign exchange transactions of $0.3 million and $0.6 million, respectively. We expect to continue to transact a majority of our business in U.S. Dollars.

During the year ended December 31, 2016, we initiated a hedging program to limit the exposure of foreign currency risk resulting from the revaluation of foreign denominated assets and liabilities through the use of forward exchange contracts. For further information regarding our hedging program, refer to Note 5, Fair Value Measurements, to our consolidated financial statements.

Item 8. Consolidated Financial Statements and Supplementary Data

CALLIDUS SOFTWARE INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



	Page
Report of Independent Registered Public Accounting Firm	46
Consolidated Balance Sheets as of December 31, 2016 and 2015	47
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2016, 2015 and 2014	48
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2016, 2015 and 2014	49
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014	50
Notes to Consolidated Financial Statements	51
Supplementary Data (unaudited)	80

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Callidus Software Inc.:

We have audited the accompanying consolidated balance sheets of Callidus Software, Inc. and subsidiaries (the" Company") as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2016. We also have audited the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Callidus Software Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ KPMG LLP

Santa Clara, California

February 27, 2017

CALLIDUS SOFTWARE INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except per share data)



	December 31,
	2016			2015
ASSETS
Current assets:
Cash and cash equivalents	$	148,008		$	77,232
Short-term investments	39,266			19,977
Accounts receivable, net of allowances of $1,536 and $1,310 at December 31, 2016 and 2015, respectively	55,464			43,461
Prepaid and other current assets	18,275			11,385
Total current assets	261,013			152,055
Property and equipment, net	35,456			20,540
Goodwill	63,957			50,146
Intangible assets, net	21,659			14,885
Deposits and other assets	4,416			4,016
Total assets	$	386,501		$	241,642
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	3,573		$	3,636
Accrued payroll and related expenses	17,831			12,510
Accrued expenses	15,126			11,017
Deferred revenue	99,758			74,644
Total current liabilities	136,288			101,807
Deferred revenue, noncurrent	3,209			5,186
Deferred income taxes, noncurrent	1,541			1,477
Other liabilities	8,602			4,371
Total liabilities	149,640			112,841
Commitments and contingencies (Note 7)
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; 66,031 and 58,612 shares issued and 63,692 and 56,273 shares outstanding at December 31, 2016 and 2015, respectively	64			56
Additional paid-in capital	559,200			428,776
Treasury stock; 2,339 shares at December 31, 2016 and 2015	(14,430		)	(14,430		)
Accumulated other comprehensive loss	(5,141		)	(1,735		)
Accumulated deficit	(302,832		)	(283,866		)
Total stockholders' equity	236,861			128,801
Total liabilities and stockholders' equity	$	386,501		$	241,642

The accompanying notes are an integral part of these consolidated financial statements.

CALLIDUS SOFTWARE INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands except per share data)



	Year Ended December 31,
	2016			2015			2014
Revenue:
Recurring	$	162,586		$	129,911		$	99,807
Services and license	44,132			43,176			36,811
Total revenue	206,718			173,087			136,618
Cost of revenue:
Recurring	42,719			34,306			31,282
Services and license	35,358			32,145			24,756
Total cost of revenue	78,077			66,451			56,038
Gross profit	128,641			106,636			80,580
Operating expenses:
Sales and marketing	78,601			58,785			47,040
Research and development	31,712			26,088			20,307
General and administrative	35,795			33,290			26,255
Income from settlement and patent licensing	(500		)	(500		)	(500		)
Restructuring and other	482			628			1,025
Total operating expenses	146,090			118,291			94,127
Operating loss	(17,449		)	(11,655		)	(13,547		)
Interest income and other income (expense), net	(122		)	(522		)	3,504
Interest expense	(267		)	(180		)	(506		)
Loss before provision for income taxes	(17,838		)	(12,357		)	(10,549		)
Provision for income taxes	1,128			791			1,012
Net loss	$	(18,966	)	$	(13,148	)	$	(11,561	)
Net loss per share—basic and diluted:
Net loss per share	$	(0.32	)	$	(0.24	)	$	(0.24	)
Shares used in basic and diluted per share computation	58,852			54,719			47,547
Comprehensive loss:
Net loss	$	(18,966	)	$	(13,148	)	$	(11,561	)
Unrealized losses on available-for-sale securities	(1		)	(15		)	(7		)
Foreign currency translation adjustments	(3,405		)	(981		)	(897		)
Comprehensive loss	$	(22,372	)	$	(14,144	)	$	(12,465	)

The accompanying notes are an integral part of these consolidated financial statements.

CALLIDUS SOFTWARE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)



	Common Stock						Treasury Stock				Accumulated Other Comprehensive Income (Loss)
	Common Stock			Additional Paid-in Capital			Treasury Stock							Accumulated Deficit			Total Stockholders' Equity
	Shares	Amount		Additional Paid-in Capital			Shares	Amount						Accumulated Deficit			Total Stockholders' Equity
Balance as of December 31, 2013	47,817	$	45	$	315,430		2,339	$	(14,430	)	$	165		$	(259,157	)	$	42,053
Exercise of stock options under stock incentive plans	701	1		2,869			—	—			—			—			2,870
Issuance of common stock under stock purchase plans	319	—		1,983			—	—			—			—			1,983
Issuance of common stock upon vesting of restricted units, net of withholding taxes	607	1		(1,723		)	—	—			—			—			(1,722		)
Stock-based compensation	—	—		11,813			—	—			—			—			11,813
Conversion of debt to equity	1,841	2		13,940			—	—			—			—			13,942
Unrealized loss on investments	—	—		—			—	—			(7		)	—			(7		)
Cumulative translation adjustment	—	—		—			—	—			(897		)	—			(897		)
Net loss	—	—		—			—	—			—			(11,561		)	(11,561		)
Balance as of December 31, 2014	51,285	$	49	$	344,312		2,339	$	(14,430	)	$	(739	)	$	(270,718	)	$	58,474
Exercise of stock options under stock incentive plans	442	1		2,045			—	—			—			—			2,046
Issuance of common stock under stock purchase plans	256	—		2,439			—	—			—			—			2,439
Issuance of common stock upon vesting of restricted units, net of withholding taxes	1,339	1		(3,070		)	—	—			—			—			(3,069		)
Stock-based compensation	—	—		18,592			—	—			—			—			18,592
Issuance of stock for follow-on offering, net of issuance costs	5,290	5		64,367			—	—			—			—			64,372
Excess tax benefit	—	—		91			—	—			—			—			91
Unrealized loss on investments	—	—		—			—	—			(15		)	—			(15		)
Cumulative translation adjustment	—	—		—			—	—			(981		)	—			(981		)
Net loss	—	—		—			—	—			—			(13,148		)	(13,148		)
Balance as of December 31, 2015	58,612	$	56	$	428,776		2,339	$	(14,430	)	$	(1,735	)	$	(283,866	)	$	128,801
Exercise of stock options under stock incentive plans	198	—		1,330			—	—			—			—			1,330
Issuance of common stock under stock purchase plans	277	1		3,053			—	—			—			—			3,054
Issuance of common stock upon vesting of restricted units, net of withholding taxes	1,079	1		(3,480		)	—	—			—			—			(3,479		)
Stock-based compensation	—	—		29,123			—	—			—			—			29,123
Issuance of stock for follow-on offering, net of issuance costs	5,865	6		100,339			—	—			—			—			100,345
Excess tax benefit	—	—		59			—	—			—			—			59
Unrealized loss on investments	—	—		—			—	—			(1		)	—			(1		)
Cumulative translation adjustment	—	—		—			—	—			(3,405		)	—			(3,405		)
Net loss	—	—		—			—	—			—			(18,966		)	(18,966		)
Balance as of December 31, 2016	66,031	$	64	$	559,200		2,339	$	(14,430	)	$	(5,141	)	$	(302,832	)	$	236,861

The accompanying notes are an integral part of these consolidated financial statements.

CALLIDUS SOFTWARE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



	Year Ended December 31,
	2016			2015			2014
Cash flows from operating activities:
Net loss	$	(18,966	)	$	(13,148	)	$	(11,561	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation expense	8,041			6,011			5,503
Amortization of intangible assets	6,431			5,687			4,971
Provision for doubtful accounts	1,548			1,897			852
Stock-based compensation	29,123			18,592			11,813
Deferred income taxes	210			26			(86		)
Loss on foreign currency from mark-to-market derivative	23			—			—
Release of valuation allowance	—			—			(265		)
Excess tax benefits from stock-based compensation	(59		)	(91		)	—
Loss on disposal of property and equipment	23			10			43
Amortization of convertible notes issuance cost	—			—			58
Gain on sale of intangible assets	—			—			(3,862		)
Net amortization on investments	170			133			27
Changes in operating assets and liabilities:
Accounts receivable	(12,439		)	(2,944		)	(11,746		)
Prepaid and other current assets	(6,118		)	(972		)	(3,749		)
Other noncurrent assets	(426		)	(549		)	(1,088		)
Accounts payable	(1,088		)	1,413			(794		)
Accrued expenses and other liabilities	(1,237		)	67			6,696
Accrued payroll and related expenses	5,321			3,459			1,149
Accrued restructuring and other expenses	252			(131		)	(181		)
Deferred revenue	18,970			7,009			11,371
Net cash provided by operating activities	29,779			26,469			9,151
Cash flows from investing activities:
Purchases of investments	(37,409		)	(24,479		)	(2,784		)
Proceeds from maturities and sale of investments	17,441			7,119			7,850
Purchases of property and equipment	(15,599		)	(13,128		)	(7,121		)
Proceeds from sale of intangible assets, net of expenses	—			—			4,651
Purchases of intangible assets	(962		)	(827		)	(1,112		)
Acquisitions, net of cash acquired	(22,574		)	(4,365		)	(15,488		)
Net cash used in investing activities	(59,103		)	(35,680		)	(14,004		)
Cash flows from financing activities:
Proceed from follow-on offering, net of issuance costs	100,345			64,372			—
Proceeds from issuance of common stock	4,384			4,484			4,852
Restricted stock units acquired to settle employee withholding tax liability	(3,479		)	(3,070		)	(1,723		)
Excess tax benefits from stock-based compensation	59			91			—
Payment of consideration related to acquisitions	(510		)	(1,802		)	(630		)
Payment on debt conversion	—			—			(645		)
Proceeds (repayment) from Revolver line of credit	—			(10,481		)	10,481
Payment of principal under capital leases	—			(1,001		)	(1,294		)
Net cash provided by financing activities	100,799			52,593			11,041
Effect of exchange rates on cash and cash equivalents	(699		)	(350		)	(283		)
Net increase in cash and cash equivalents	70,776			43,032			5,905
Cash and cash equivalents at beginning of period	77,232			34,200			28,295
Cash and cash equivalents at end of period	$	148,008		$	77,232		$	34,200
Supplemental disclosures of cash flow information:
Cash paid for interest on convertible debt	$	—		$	—		$	277
Cash paid for interest on capital leases	$	—		$	18		$	59
Cash paid for interest on line of credit	$	68		$	104		$	—
Cash paid for income taxes	$	757		$	542		$	182
Noncash investing and financing activities:
Conversion of convertible 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	$	7,291		$	5,314		$	5,829

The accompanying notes are an integral part of these consolidated financial statements.

CALLIDUS SOFTWARE INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—The Company and Significant Accounting Policies

Description of Business

Callidus Software Inc. ("Callidus" or "CallidusCloud") is a global leader in cloud-based sales, marketing, learning and customer experience solutions. CallidusCloud enables its customers to sell more, faster with its Lead to Money suite of solutions that, among other things, identifies leads, trains personnel, implements territory and quota plans, enables sales forces, automates configuration pricing and quoting, manages contracts, streamlines sales compensation, captures customer feedback and provides rich predictive analytics for competitive advantage.

Principles of Consolidation

The consolidated financial statements include the accounts of Callidus Software Inc. and its wholly-owned subsidiaries (collectively, the "Company"), which include wholly-owned subsidiaries in Australia, Canada, Germany, Hong Kong, India, Ireland, Japan, Malaysia, Mexico, Netherlands, New Zealand, Serbia, Singapore, and the United Kingdom. All intercompany transactions and balances have been eliminated in the consolidation.

Use of Estimates

Preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principals ("GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("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 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, the allocation of the value of purchase consideration for business acquisitions and other contingencies, allowances for doubtful accounts, the useful lives of fixed assets and intangible assets, the attainment of performance-based restricted stock units, stock-based compensation forfeiture rates, accrued liabilities and uncertain tax positions. 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 consolidated financial statements in future periods.

Foreign Currency Translation

The Company transacts business in various foreign currencies. In general, the functional currency of a foreign operation is the local country’s currency. Accordingly, the foreign currencies are translated into U.S. Dollars using exchange rates in effect at period end for assets and liabilities and average rates during each reporting period for the results of operations. Adjustments resulting from the translation of the financial statements of the foreign subsidiaries are reported as a separate component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in interest income and other income (expense), net in the accompanying consolidated statements of comprehensive loss.

Cash and Cash Equivalents and Investments

The Company considers all highly liquid instruments with an original maturity on the date of purchase of three months or less to be cash equivalents. Cash equivalents as of December 31, 2016 and 2015 consisted of money market funds. The Company determines the appropriate classification of investment securities at the time of purchase and re-evaluates such designation as of each balance sheet date. As of December 31, 2016 and 2015, all investment securities were designated as "available-for-sale". The Company considers available-for-sale securities that have an original maturity date longer than three months on the date of purchase to be short-term investments, including those investments that have a maturity date of longer than one year that are highly liquid and for which the Company does not have a positive intent to hold to maturity. These securities are carried at estimated fair value based on quoted market prices or other readily available market information, with the unrealized gains and losses included in other comprehensive income (loss). Recognized gains and losses are included in the consolidated statement of comprehensive loss. When the Company has determined that an other-than-temporary decline in fair value has occurred, the amount of the decline is recognized in earnings. Gains and losses are determined using the specific identification method.

Fair Value of Financial Instruments and Concentrations of Credit Risk

The fair value of certain of the Company's financial instruments that are not measured at fair value, including accounts receivable and accounts payable, approximates the carrying amount due to their short maturity. See Note 5, Fair Value Measurements, for discussion regarding the valuation of the Company's investments. Financial instruments that potentially subject the Company to concentrations of credit risk are cash equivalents, short-term investments and trade receivables. The Company mitigates concentration of risk by monitoring the risk profiles of all bank counterparties on at least a quarterly basis. Based on the on-going assessment of counterparty risk, the Company will adjust its exposure to various counterparties.

The Company's customer base consists of businesses throughout the Americas, Europe, Middle East, Africa and Asia-Pacific. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. As of December 31, 2016 and 2015, the Company had no customers comprising greater than 10% of net accounts receivable or total revenue. Refer to Note 13, Segment, Geographic and Customer Information, for information regarding revenue by geographic areas.

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. In June 2015, the Company paid off the then outstanding amount of $10.5 million. As of December 31, 2016 and 2015, the Company had no borrowings under the Revolver.

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.

Derivative Financial Instruments

During 2016, the Company entered into foreign currency derivative contracts with financial institutions to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company uses forward currency derivative contracts to minimize the Company’s exposure to balances primarily denominated in Euros, Australian dollars and British pounds. The Company’s foreign currency derivative contracts, which are not designated as hedging instruments, are used to reduce the exchange rate risk associated primarily with cash, accounts receivable and intercompany receivables and payables. The Company’s derivative financial instruments program is not designated for trading or speculative purposes. As of December 31, 2016, the foreign currency derivative contracts that were not settled were recorded at fair value on the consolidated balance sheets.

Foreign currency derivative contracts are marked-to-market at the end of each reporting period with gains and losses recognized as other expense to offset the gains or losses resulting from the settlement or remeasurement of the underlying foreign currency denominated cash, receivables and payables. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties.

Allowance for Doubtful Accounts

The Company reduces gross trade accounts receivable with its allowance for doubtful accounts. The allowance for doubtful accounts is the Company's estimate of the amount of probable credit losses in existing accounts receivable. Management analyzes accounts receivable and historical bad debt experience, customer creditworthiness, current economic trends and changes in customer payment history when evaluating the adequacy of the allowance for doubtful accounts. Provisions to the allowance for doubtful accounts are recorded in general and administrative expenses in the Company's consolidated statements of comprehensive loss.

Below is a summary of the changes in the Company's allowance for doubtful accounts for 2016, 2015 and 2014 (in thousands):



	Balance at Beginning of Year		Additions		Deductions			Balance at End of Year
Allowance for doubtful accounts
Year ended December 31, 2016	$	1,310	$	1,194	$	(968	)	$	1,536
Year ended December 31, 2015	1,063		912		(665		)	1,310
Year ended December 31, 2014	650		996		(583		)	1,063

Property and Equipment, net

Property and equipment, net is stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally two to eight years. Leasehold improvements are amortized over the lesser of the assets' estimated useful lives or the related lease terms. Expenditures for maintenance and repairs are expensed as incurred. Cost and accumulated depreciation of assets sold or retired are removed from the respective property accounts and any resulting gain or loss is reflected in the consolidated statements of comprehensive loss.

Goodwill, Intangible Assets, Long-Lived Assets and Impairment Assessments

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in connection with business combinations. Goodwill is not amortized, but instead goodwill is required to be tested for impairment annually and more frequently under certain circumstances. The Company performs such testing of goodwill in the fourth quarter of each year, and earlier if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

The Company conducts a two-step test for impairment of goodwill. The first step of the test for goodwill impairment compares the fair value of the applicable reporting unit with its carrying value. If the fair value of a reporting unit is less than the reporting unit's carrying value, the Company will perform the second step of the test for impairment of goodwill. During the second step of the test for impairment of goodwill, the Company will compare the implied fair value of the reporting unit's goodwill with the carrying value of that goodwill. If the carrying value of the goodwill exceeds the calculated implied fair value, the excess amount will be recognized as an impairment loss. The Company has one reporting unit and evaluates goodwill for impairment at the entity level. Based upon the results of the step one testing, the Company concluded that no impairment existed as of December 31, 2016, and did not perform the second step of the goodwill impairment test.

Intangible assets with finite lives are amortized over their estimated useful lives of one to twelve years. Generally, amortization is based on the higher of a straight-line method or the pattern in which the economic benefits of the intangible asset will be consumed. In 2015, the Company recorded impairment expense of $0.3 million. In 2016 and 2014, there was no impairment expense related to intangible assets.

The Company also evaluates the recoverability of its long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. There were no other impairment charges recorded during the years ended December 31, 2016, 2015 and 2014.

Business Combinations

The Company recognizes assets acquired, liabilities assumed, and contingent consideration at their fair value on the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of assets acquired and liabilities assumed, with a corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company's consolidated statements of comprehensive loss. See Note 2, Acquisitions, for a discussion of the Company's acquisitions during 2016 and 2015.

In addition, uncertainties in income tax and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. The Company continues to gather information and evaluate these items and records any adjustments to the preliminary estimates to goodwill when the estimates are within the measurement

period. Subsequent to the measurement period, changes to these income tax uncertainties and tax related valuation allowances will affect the Company's provision for income taxes in its consolidated statements of comprehensive loss.

The Company estimates the fair value of an indemnity holdback payable, which relates to business combinations, based on the contract value. The terms of the holdback payable include standard representations and warranties.

The Company estimates the fair value of the contingent consideration issued in business combinations using a probability-based income approach. The fair value of the Company's liability-classified contingent consideration is remeasured at each reporting period, with any changes in the fair value recorded as income or expense. Contingent acquisition consideration payable is included in accrued liabilities on the Company's consolidated balance sheets.

Revenue Recognition

The Company generates revenue by providing software-as-a-service ("SaaS") solutions through 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 SaaS revenue and maintenance revenue, is recognized ratably over the stated contractual period. SaaS revenue consists of subscription fees from customers accessing the Company's cloud-based service offerings. Maintenance revenue consists of fees from customers purchasing licenses and receiving support for such on-premise solutions. The Company also recognizes SaaS and maintenance 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 in the period incurred. Revenue related to Overages was immaterial for all the years presented.

Service and License Revenue. Service and license revenue primarily consists of training, integration and configuration services. Generally, the Company's professional services arrangements are billed 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 services 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 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 are 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.

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 Finance 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 is able to establish VSOE because it has a sufficient history of selling these deliverables at an established price. The Company's revenue arrangements do not include a general right of return relative to the delivered products.

Generally, for the Company's term-based licenses, if the only undelivered element is maintenance, the entire amount of revenue is recognized ratably over the maintenance period.

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

Deferred Revenue

Deferred revenue consists of invoicing and payments received in advance of revenue recognition and is recognized as the revenue recognition criteria are met. The Company invoices its customers annually, quarterly, or in monthly installments. Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as non-current deferred revenue.

Cost of Revenue

Cost of recurring revenue consists primarily of salaries, benefits, allocated overhead costs related to on-demand operations and technical support personnel, as well as allocated amortization of purchased technology. Cost of services revenue consists primarily of salaries, benefits, travel and allocated overhead costs related to consulting, training and other professional services personnel, including cost of services provided by third-party consultants engaged by the Company. Cost of license revenue consists primarily of amortization of purchased technology.

Deferred Commissions

The asset balance for deferred commissions on the Company's consolidated balance sheets totaled $11.5 million and $7.1 million at December 31, 2016 and 2015, respectively. As of December 31, 2016 and 2015, $9.5 million and $6.0 million, respectively, of deferred commissions are included in prepaid and other current assets in total current assets, with the remaining amounts included in deposits and other assets in long-term assets in the consolidated balance sheets. The deferred costs mainly represent commission payments to the Company's direct sales force and third parties for on-demand subscription and maintenance agreements, which the Company amortizes as sales and marketing expense over the non-cancellable term of the contract as the related revenue is recognized. The commission payments are a direct and incremental cost of the revenue arrangements.

Restructuring and Other Expenses

Restructuring and other expenses are comprised primarily of employee termination costs related to headcount reductions, costs related to properties abandoned in connection with facilities consolidation including estimated losses related to excess facilities based upon the Company's contractual obligations, net of estimated sublease income and related write-downs of leasehold improvements and impairment of intangible assets. The Company reassesses the liability for excess facilities periodically based on market conditions. Restructuring and other expense was $0.5 million, $0.6 million and $1.0 million during the years 2016, 2015 and 2014, respectively.

Research and Development

The Company expenses the cost of research and development as incurred. Research and development expenses consist primarily of expenses for research and development staff, the cost of certain third-party service providers and allocated overhead.

Stock-Based Compensation

Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized on a straight-line basis over the requisite service period, which is generally the vesting period. Stock-based compensation expense for restricted stock units is estimated based on the closing price of the Company's common stock on the date of grant and the estimated forfeiture rate, which is based on historical forfeitures. The Company measures stock-based compensation expense for employee stock purchase plan shares using the Black-Scholes-Merton option pricing model. These variables include: the expected term of the plan, taking into account projected exercises; the Company's expected stock price volatility over the expected term of the awards; the risk-free interest rate; and expected dividends. The Company estimates forfeiture rate based on an analysis of actual forfeitures and they will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience and other factors. Changes in these variables could affect stock-based compensation expense in the future.

The Company granted performance-based restricted stock units ("PSUs") to select executives and other key employees. Vesting of the Company's PSUs is based on achievement of specified company or other goals. In 2016, the Company granted PSUs to its CEO with vesting contingent upon the Company's relative total shareholder return over a three year period compared to the Company's 2016 executive compensation peer group companies. In 2015, the Company granted PSUs with vesting contingent on its absolute SaaS revenue growth over the three-year period from July 1, 2015 to June 30, 2018. In 2014, the Company granted PSUs with vesting contingent on its absolute SaaS revenue growth over the three-year period from January 1, 2014 to December 31, 2016, and on our relative total shareholder return over the same three-year period compared to an index of 17 SaaS companies. These PSUs will, to the extent the performance criteria are achieved, vest on the third anniversary of the grant date. PSU awards based on total shareholder return is recognized as compensation costs over the requisite service period, if rendered, even if the market condition is never satisfied. In determining the fair value of PSUs based on total shareholder return the Company considered the achievement of the market condition in the estimated fair value.

Income Taxes

The Company is subject to income and foreign withholding taxes in both the United States and foreign jurisdictions and the Company uses estimates in determining its provision for income taxes. This process involves estimating actual current tax assets and liabilities together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the consolidated balance sheets. Net deferred tax assets are recorded to the extent the Company believes that it is more-likely-than-not to be realized. In making such determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. Except for the net deferred tax assets of two of the Company's foreign subsidiaries, the Company maintained a full valuation allowance against its net deferred tax assets at December 31, 2016 because the Company believes that it is not more-likely-than-not that the gross deferred tax assets will be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event the Company was able to determine that it would be able to realize the deferred tax assets in the future, an adjustment to the deferred tax assets would increase net income in the period such determination was made.

The Company regularly reviews its tax positions and benefits to be realized. The Company recognizes tax liabilities based upon its estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company recognizes interest and penalties related to income tax matters as income tax expense. Interest or penalties associated with unrecognized tax benefits was immaterial for all the years presented.

Advertising Costs

The Company expenses advertising costs in the period incurred. Advertising expense was $3.8 million, $2.1 million, and $1.2 million for 2016, 2015 and 2014, respectively.

Comprehensive Income (Loss)

Comprehensive income (loss) is the total of net income (loss), unrealized gains and losses on investments and foreign currency translation adjustments. Unrealized gains and losses on investments and foreign currency translation adjustment amounts are excluded from net loss and are reported in accumulated other comprehensive income (loss) in the accompanying consolidated financial statements.

Recent Accounting Pronouncements

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. This guidance improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under current U.S. GAAP, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to an outside party. Under the new standard, an entity will recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Two common examples of assets included in the scope of this update are intellectual property and property, plant and equipment. The amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for certain cash receipts and cash payments. The amendments in this guidance are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Entities are permitted to adopt the standard early in any interim or annual period, and a retrospective application is required. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which simplifies various aspects related to the accounting and presentation of share-based payments. The amendments require entities to record all tax effects related to share-based payments at settlement or expiration through the income statement and the windfall tax benefit to be recorded when it arises, subject to normal valuation allowance considerations. All tax-related cash flows resulting from the share-based payments are required to be reported as operating activities in the statement of cash flows. The updates relating to the income tax effects of the share-based payments including the cash flow presentation must be adopted either prospectively or retrospectively. Further, the amendments allow the entities to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. If an election is made, the change to recognize forfeitures as they occur must be adopted using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted.

The Company will adopt the updated standard in the first quarter of fiscal 2017. The Company believes that the new standard may cause volatility in its tax provision. The volatility in future periods will depend on the Company's stock price at the awards' vest dates and the number of awards that vest in each period. Further, the Company will not elect an accounting policy change to record forfeitures as they occur and will continue to estimate forfeitures at each period.

In February 2016, the FASB issued ASU 2016-02, Leases, which requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. For leases with a term of 12 months or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and provide additional information about the nature of an organization’s leasing activities. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a

modified retrospective approach. The transition guidance also provides specific guidance for sale and leaseback transactions, build-to-suit leases and amounts previously recognized in accordance with the business combinations guidance for leases. The updated standard is effective for the Company beginning in the first quarter of fiscal 2019. The Company is currently evaluating its expected adoption method and timeline, and the impact of this new standard on its consolidated financial statements. As the Company has not yet selected a transition method, it cannot reasonably estimate the impact that the adoption of this standard will have on its financial statements.

In May 2014, August 2015, April 2016 and May 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, ASU 2015-14, Revenue from Contracts with Customers, Deferral of the Effective Date, ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, respectively, (collectively referred to as "Topic 606"). Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, and supersedes most current revenue recognition guidance, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016, but the Company has elected not to early adopt. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company will adopt the guidance on January 1, 2018 and currently intends to elect the modified retrospective transition approach. The Company is in the process of evaluating the impact of the adoption of Topic 606 on its consolidated financial statements.

Except for the updated standards discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to the Company's consolidated financial statements.

Note 2—Acquisitions

DataHug Ltd.

On November 7, 2016, the Company acquired DataHug Ltd. ("DataHug"), a privately-held company and provider of SaaS predictive forecasting and sales analytics. The Company's purchase of DataHug is intended to utilize its unique, patented technology to deliver predictive analysis of sales pipelines that is easy to understand and visualize. The purchase consideration was $13.0 million which included $11.7 million paid in cash and a $1.3 million indemnity holdback to be paid one year from the date of the agreement.

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



	Fair Value
Net liabilities assumed	$	(600	)
Intangible assets	5,350
Goodwill	8,138
Total purchase price, net of cash acquired	$	12,888

Under the acquisition method of accounting, the Company allocated the purchase price to the identifiable assets and liabilities based on their estimated fair value at the date of acquisition. The fair value of the intangible assets at the date of acquisition require significant judgment, and were measured primarily based on inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, Fair Value Measurements. The methodologies used in valuing the intangible assets include, but are not limited to, multiple period excess earnings method for developed technology, with and without method for customer contracts and related relationships, the relief-from-royalty method for trademarks, tradenames and domain names and the multiple period excess earnings method for order backlog. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Annual Report on Form 10-K, and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of December 31, 2016, the primary areas that are not yet finalized due to information that may become available subsequently and may result in changes in the values assigned to

various assets and liabilities, include the fair values of intangible assets and deferred tax liabilities as well as assumed tax assets and liabilities.

The excess of the purchase price over the total net identifiable assets has been recorded as goodwill which includes synergies expected from the expanded service capabilities and the value of the assembled workforce in accordance with generally accepted accounting principles. The goodwill balance is primarily attributed to the extension of the predictive analysis of the sales pipeline to the Company's Lead to Money suite. The goodwill balance is not deductible for income tax purposes. The Company did not record any in-process research and development intangible assets in connection with the acquisition.

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives, as of the date of the DataHug acquisition (in thousands):



	Fair Value		Weighted Average Useful Life	Consolidated statements of comprehensive loss Classification:Amortization expense
Developed technology	$	3,800	4 years	Cost of sales
Customer contracts and related relationships	1,250		6 years	Sales and marketing expense
Order backlog	150		2 years	Cost of sales
Trademarks/trade names/domain names	150		3 years	General and administrative
Total intangible assets subject to amortization	$	5,350

The financial results of DataHug are included in the Company's consolidated financial statements from the date of acquisition through December 31, 2016.

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

Badgeville, Inc.

On June 24, 2016, the Company acquired certain assets of Badgeville, Inc. ("Badgeville"), a privately-held company and a leading technology provider in enterprise gamification and digital motivation. The Company's purchase of Badgeville is intended to extend digital motivation as part of the Company's Lead to Money suite. The purchase consideration was $7.5 million in cash.

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



	Fair Value
Net liabilities assumed	$	(1,791	)
Intangible assets	5,200
Goodwill	4,091
Total purchase price	$	7,500

digital motivation to the Company's Lead to Money suite. The goodwill balance is deductible for income tax purposes. The Company did not record any in-process research and development intangible assets in connection with the acquisition.

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives, as of the date of the Badgeville acquisition (in thousands):



	Fair Value		Weighted Average Useful Life	Consolidated statements of comprehensive loss Classification:Amortization expense
Developed technology	4,300		5 years	Cost of sales
Customer contracts and related relationships	$	700	3 years	Sales and marketing expense
Trademarks / trade names / domain names	200		7 years	General and administrative
Total intangible assets subject to amortization	$	5,200

The financial results of Badgeville are included in the Company's consolidated financial statements from the date of acquisition through December 31, 2016.

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

ViewCentral LLC

On April 8, 2016, the Company acquired certain assets of ViewCentral LLC ("ViewCentral"). The acquisition is intended to augment the Company's Litmos mobile learning solution with a full revenue management and e-commerce platform designed for selling and optimizing profitable training for customers. The purchase consideration was $4.0 million in cash.

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



	Fair Value
Net liabilities assumed	$	(1,568	)
Intangible assets	1,700
Goodwill	3,868
Total purchase price	$	4,000

The excess of the purchase price over the total net identifiable assets has been recorded as goodwill which includes synergies expected from the expanded service capabilities and the value of the assembled workforce in accordance with generally accepted accounting principles. The goodwill balance is primarily attributed to the anticipated synergies from the expanded market opportunities for the Company's Litmos mobile learning applications. The goodwill balance is deductible for income tax purposes. The Company did not record any in-process research and development intangible assets in connection with the acquisition.

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives, as of the date of the ViewCentral acquisition (in thousands):



	Fair Value		Weighted Average Useful Life	Consolidated statements of comprehensive loss Classification:Amortization expense
Customer contracts and related relationships	$	850	6 years	Sales and marketing expense
Developed technology	700		3 years	Cost of sales
Order backlog	150		1.8 years	Cost of sales
Total intangible assets subject to amortization	$	1,700

The financial results of ViewCentral are included in the Company's consolidated financial statements from the date of acquisition through December 31, 2016.

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

BridgeFront LLC

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 $5.0 million, which included $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 $0.4 million indemnity holdback payable upon the one-year closing anniversary, which was paid during 2016. As of December 31, 2016, the $0.1 million held back to cover stakeholder representatives remained outstanding.

The terms of the BridgeFront acquisition also provided for potential earn-out payments of up to an aggregate of $0.6 million. Although earn-out payments based on achievement of targets are normally treated as purchase price because of the service conditions, $0.5 million of the $0.6 million was treated as compensation expense and is recognized over the term of the payments in 2015 and 2016. The remaining balance of $0.1 million was recorded as contingent consideration. As of December 31, 2015, the fair value of this contingent consideration, which included compensation expense from July 23, 2015 to December 31, 2015, was $0.3 million, which was paid in 2016. As of December 31, 2016, the second earnout for $0.4 million was not achieved and the related compensation expense was reversed.

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



	Fair Value
Net liabilities assumed	$	(849	)
Intangible assets	2,100
Goodwill	3,750
Total purchase price	$	5,001

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable assets acquired and a working capital adjustment for $0.1 million. 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 consolidated financial statements from the date of acquisition to December 31, 2015 and for the year ended December 31, 2016.

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

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 higher of the straight-line method or the pattern in which the economic benefits of the intangible assets will be consumed. The classification of their amortized expense in the consolidated statements of comprehensive loss (in thousands):



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

Note 3—Goodwill and Intangible Assets

Goodwill

The changes in the carrying amount of goodwill for the fiscal years ended December 31, 2016 and 2015 are as follows (in thousands):



	Goodwill
Balance as of December 31, 2014	$	46,970
Acquisitions	3,750
Foreign currency translation impact	(574		)
Balance as of December 31, 2015	50,146
Acquisitions	16,097
Working capital adjustment	(157		)
Foreign currency translation impact	(2,129		)
Balance as of December 31, 2016	$	63,957

In April 2016, the Company recorded goodwill of $3.9 million related to the acquisition of ViewCentral. In June 2016, the Company recorded goodwill of $4.1 million related to the acquisition of Badgeville. In November 2016, the Company recorded goodwill of $8.1 million related to the acquisition of DataHug. Refer to Note 2, Acquisitions, for further details.

In July 2015, the Company recorded goodwill of $3.8 million related to the acquisition of BridgeFront. Refer to Note 2, Acquisitions, for further details.

Based on the Company's annual impairment review in the fourth quarter of 2016, 2015 and 2014, goodwill was not impaired in any of the years presented.

Intangible assets

Intangible assets consisted of the following as of December 31, 2016 and 2015 (in thousands):



	December 31, 2015 Cost		December 31, 2015 Net		Net Additions (1)		Foreign Currency Translation Impact			Amortization Expense			December 31, 2016 Net		Weighted Average Amortization Period (Years)
Developed technology	$	27,500	$	9,172	$	9,790	$	(328	)	$	(4,220	)	$	14,414	2.1
Customer contracts and relationships	9,714		3,075		2,800		(91		)	(1,435		)	4,349		4.9
Tradenames	2,208		755		375		(55		)	(339		)	736		2.9
Patents and licenses	3,279		1,883		145		—			(373		)	1,655		5.8
Other	195		—		569		—			(64		)	505		1.1
Intangible assets, net	$	42,896	$	14,885	$	13,679	$	(474	)	$	(6,431	)	$	21,659

(1) Included in the additions are the intangibles acquired for ViewCentral of $1.7 million, Badgeville of $5.2 million and DataHug of $5.4 million as discussed in Note 2, Acquisitions, to the consolidated financial statements.



	December 31, 2014 Cost		December 31, 2014 Net		Net Additions (1)		Foreign Currency Translation Impact			Amortization Expense (2)			December 31, 2015 Net		Weighted Average Amortization Period (Years)
Developed technology	$	25,093	$	10,251	$	2,407	$	(32	)	$	(3,450	)	$	9,172	3.5
Customer contracts and relationships	9,414		4,270		300		(39		)	(1,456		)	3,075		3.0
Tradenames	2,208		1,191		—		(37		)	(399		)	755		2.8
Patents and licenses	3,059		2,045		220		—			(382		)	1,883		5.4
Other	195		—		—		—			—			—		N/A
Intangible assets, net	$	39,969	$	17,757	$	2,927	$	(108	)	$	(5,687	)	$	14,885


(1)	Included in the additions are the intangibles acquired in 2015 for BridgeFront of $2.1 million as discussed in Note 2, Acquisitions, to the consolidated financial statements.

(2) Included in amortization expense is $0.3 million of impairment on intangibles.

Amortization expense related to intangible assets was $6.4 million, $5.7 million and $5.0 million in 2016, 2015 and 2014, respectively, and was charged to cost of revenue for purchased technology, tradenames and patents and licenses; sales and marketing expense for customer relationships; and general and administrative expense for the favorable lease and other. Additionally, in 2016 and 2014 there was no impairment expense related to intangible assets and in 2015 the Company recorded impairment expense of $0.3 million. The Company's intangible assets are amortized over their estimated useful lives of one to twelve years. Total future expected amortization is as follows (in thousands):



	Developed Technology		Customer Contracts and Relationships		Tradenames		Patents and Licenses		Other		Total
Year Ending December 31,
2017	$	5,261	$	1,475	$	268	$	378	$	271	$	7,653
2018	4,302		1,077		161		347		186		6,073
2019	2,535		497		147		212		45		3,436
2020	1,241		354		64		201		3		1,863
2021	557		320		41		200		—		1,118
2022 and beyond	518		626		55		317		—		1,516
Total expected amortization expense	$	14,414	$	4,349	$	736	$	1,655	$	505	$	21,659

Note 4—Financial Instruments

As of December 31, 2016, all marketable debt securities are classified as available-for-sale and carried at estimated fair value, which is determined based on the inputs described in Note 5, Fair Value Measurements, to the consolidated financial statements.

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 an original maturity date longer than three months to be short-term investments, including those investments with a maturity date of longer than one year that are highly liquid and for which the Company does not have a positive intent to hold to maturity.

Interest income is included within interest income and other income (expense), net in the accompanying consolidated statements of comprehensive loss. Realized gains and losses are calculated using the specific identification method. As of December 31, 2016 and 2015, the Company had no short-term investments in an unrealized loss position for a duration greater than 12 months.

The components of the Company's marketable debt securities classified as available-for-sale were as follows at December 31, 2016 (in thousands):



December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair value
Cash	$	147,680	$	—	$	—		$	147,680
Cash equivalents:
Money market funds	328		—		—			328
Total cash equivalents	328		—		—			328
Total cash and cash equivalents	$	148,008	$	—	$	—		$	148,008
Short-term investments:
Certificate of deposits	$	1,200	$	—	$	—		$	1,200
U.S. government and agency obligations	19,351		19		(18		)	19,352
Corporate notes and obligations	18,716		18		(20		)	18,714
Total short-term investments	$	39,267	$	37	$	(38	)	$	39,266

For investments in securities classified as available-for-sale, market value and the amortized cost of debt securities have been classified in accordance with the following maturity groupings based on the contractual maturities of those securities as of December 31, 2016 (in thousands):



Contractual Maturity	Amortized Cost		Estimated Fair Value
Less than 1 year	$	32,252	$	32,262
Between 1 and 2 years	7,015		7,004
Total	$	39,267	$	39,266

The components of the Company's marketable debt securities classified as available-for-sale were as follows at December 31, 2015 (in thousands):



December 31, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair value
Cash	$	77,191	$	—	$	—		$	77,191
Cash equivalents:
Money market funds	41		—		—			41
Total cash equivalents	41		—		—			41
Total cash and cash equivalents	$	77,232	$	—	$	—		$	77,232
Short-term investments:
Certificate of deposits	$	1,500	$	—	$	—		$	1,500
U.S. government and agency obligations	7,423		—		(16		)	7,407
Corporate notes and obligations	11,087		—		(17		)	11,070
Total short-term investments	$	20,010	$	—	$	(33	)	$	19,977

For investments in securities classified as available-for-sale, estimated fair value and the amortized cost of debt securities have been classified in accordance with the following maturity groupings based on the contractual maturities of those securities as of December 31, 2015 (in thousands):



Contractual Maturity	Amortized Cost		Estimated Fair Value
Less than 1 year	$	15,151	$	15,133
Between 1 and 2 years	4,859		4,844
Total	$	20,010	$	19,977

The Company had no realized losses on sales of its investments during the years ended December 31, 2016, 2015 and 2014. In 2016 and 2015, the Company had purchases, net of proceeds from investments, of $20.0 million and $17.4 million, respectively.

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 December 31, 2016 and 2015 for which the fair value declined significantly below amortized cost and were considered other-than-temporary impairments.

Note 5—Fair Value Measurements

Valuation of Investments

Level 1 and Level 2

The Company's available-for-sale securities include money market funds, U.S. Treasury bills, corporate notes and obligations, and U.S. government and 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 instruments or pricing models, with all significant inputs derived from or corroborated by observable market data. The Company also classifies the foreign currency derivative contracts as Level 2.

Level 3

The contingent consideration are related liabilities defined as earn-out payments that the Company may pay in connection with the acquisition of BridgeFront. Contingent consideration and related liabilities were classified as Level 3 liabilities because the Company used unobservable inputs to value them, which is a probability-based income approach. Subsequent changes to the fair value of contingent consideration and related liabilities will be recorded in the Company's consolidated statements of comprehensive loss. The Company had no level 3 inputs as of December 31, 2016.

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

The Company measures financial assets and liabilities at fair value on an ongoing basis. The estimated fair value of the Company's financial assets was determined using the following inputs at December 31, 2016 and 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
December 31, 2016	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds (1)	$	328	$	328	$	—	$	—
Certificates of deposit (2)	1,200		—		1,200		—
U.S. government and agency obligations (2)	19,352		—		19,352		—
Corporate notes and obligations (2)	18,714		—		18,714		—
Foreign currency derivative contracts (3)	76				76
Total	$	39,670	$	328	$	39,342	$	—
Liabilities:
Foreign currency derivative contracts (4)	$	53	$	—	$	53	$	—
Total	$	53	$	—	$	53	$	—



	Fair Value Measurements at Reporting Date Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2015	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds (1)	$	41	$	41	$	—	$	—
Certificates of deposit (2)	1,500		—		1,500		—
U.S. government and agency obligations (2)	7,407		—		7,407		—
Corporate notes and obligations (2)	11,070		—		11,070		—
Total	$	20,018	$	41	$	19,977	$	—
Liabilities:
Contingent consideration and related liabilities (4)	$	324	$	—	$	—	$	324
Total	$	324	$	—	$	—	$	324

_____________________________________________________________________________

(1) Included in cash and cash equivalents on the consolidated balance sheets.

(2) Included in short-term investments on the consolidated balance sheets.

(3) Included in prepaid and other current assets on the consolidated balance sheets.

(4) Included in accrued expenses on the consolidated balance sheets.

Derivative Financial Instruments

Details on outstanding foreign currency derivative contracts related primarily to receivables and payables are presented below (in thousands):



		As of December 31,
		2016		2015
Notional amount of foreign currency derivative contracts		$	3,850	$	—
Fair value of foreign currency derivative contracts		$	3,873	$	—

The fair value of the Company’s outstanding derivative instruments are summarized below (in thousands):
		Fair Value of Derivative Instruments
		As of December 31,
	Balance Sheet Location	2016		2015
Derivative Assets
Derivatives not designated as hedging instruments:
Foreign currency derivative contracts	Prepaid expenses and other current assets	$	75	$	—

Derivative Liabilities
Derivatives not designated as hedging instruments:
Foreign currency derivative contracts	Accrued expenses	$	52	$	—

The Company accounts for the derivative instruments at fair value with changes in the fair value recorded as a component of interest income and other income (expense), net. During the year ended December 31, 2016, such changes were immaterial.

Note 6—Balance Sheet Components

Property and equipment consisted of the following (in thousands):



	Estimated Useful Life	As of December 31,
	Estimated Useful Life	2016		2015
Equipment	3-8 years	$	38,770	$	27,481
Purchased software	3 years	15,588		6,860
Furniture and fixtures	5 years	2,499		2,220
Leasehold improvements	Lease term up to 5 years	5,316		4,305
Construction in progress		1,462		2,190
Property and equipment, gross		63,635		43,056
Less: Accumulated depreciation		28,179		22,516
Property and equipment, net		$	35,456	$	20,540

Depreciation expense for the years ended December 31, 2016, 2015 and 2014 was $8.0 million, $6.0 million and $4.8 million, respectively.

During the year ended December 31, 2016, the Company significantly improved and expanded its data processing centers and incurred equipment and purchased software costs. The Company entered into an equipment financing agreement related to these purchases with the final installment due on November 1, 2018. The outstanding balance under this agreement is recorded in the Company’s consolidated balance sheet under accrued expenses and other liabilities for the current and non-current portions of this obligation, respectively.

Total prepaid and other current assets consisted of the following (in thousands):



	As of December 31,
	2016		2015
Deferred commissions	$	9,477	$	5,971
Prepaid expenses	7,378		4,894
Other current assets	1,420		520
Total prepaid and other current assets	$	18,275	$	11,385

Accrued payroll and related expenses consisted of the following (in thousands):



	As of December 31,
	2016		2015
Commissions	$	6,909	$	3,362
Vacation accrual	3,641		3,189
Bonus	3,599		3,173
ESPP	1,723		1,109
Accrued payroll related expenses	1,959		1,677
Total accrued payroll related expenses	$	17,831	$	12,510

Accrued expenses consisted of the following (in thousands):



	As of December 31,
	2016		2015
Equipment financing arrangement	$	2,586	$	—
Holdback payable	1,300		403
Customer payments	1,078		1,046
Versata litigation settlement	465		1,963
Other accrued expenses	9,697		7,605
Total accrued expenses	$	15,126	$	11,017

Note 7—Contractual Obligations, Commitments and Contingencies

Contractual Obligations and Commitments

During the year ended December 31, 2016, the Company entered into various contractual obligations, long-term operating lease obligations and unconditional purchase commitments. Future minimum lease payments under non-cancellable operating leases (with initial or remaining lease terms in excess of one year) and purchase commitments as of December 31, 2016 are as follows (in thousands):



	Unconditional Purchase Commitments (1)		Operating Lease Commitments (2)
	Unconditional Purchase Commitments (1)		Operating Lease Commitments (2)
Year Ending December 31:
2017	$	18,189	$	3,504
2018	9,504		4,190
2019	6,004		3,880
2020	3,008		3,979
2021	—		3,737
2022 and beyond	—		2,693
Future minimum payments	$	36,705	$	21,983


(1)	Primarily represents amounts associated with agreements that are enforceable, legally binding and specify terms, including: software purchases, data center equipment purchases and maintenance agreements. In addition, amounts include unconditional purchase agreements during the normal course of business with various vendors for future services.

(2)

The Company has facilities under several non-cancellable operating lease agreements that expire at various dates through 2025. The Company's rent expense for the years ended December 31, 2016, 2015 and 2014 was $3.6 million, $3.0 million and $2.1 million, respectively. During the year ended December 31, 2016, the Company entered into an office lease expansion of its headquarters in Dublin, California, as well as office space leases for facilities in Hyderabad, India and Belgrade, Serbia.

Contractual cash obligations that are cancellable upon notice and without significant penalties are not included in the table above.

In October 2014, the Company entered into a sublease agreement ("Sublease") with Oracle America, Inc. (“Sublandlord”) for office space located at 4140 Dublin Boulevard, Dublin, California 94568 ("Subleased Premises"). The term of the Sublease commenced in February 2015, when the Sublandlord delivered possession of the Subleased Premises to the Company, and expires on May 15, 2022. In July 2016, the Company entered into an amended coterminous agreement to include additional office space, in the building.

Unrecognized Tax Benefit

As of December 31, 2016, the total gross unrecognized tax benefit before the impact of the valuation allowance was $3.7 million, including immaterial interest and penalties. The Company has made an election to recognize the interest and penalties as a component of income tax expense. If recognized, the amount of the unrecognized tax benefit that would impact the tax expense is $0.5 million. It is possible that the amount of existing unrecognized tax benefits may decrease within 12 months as a result of statute of limitations lapses in some of the jurisdictions, however, an estimate of the range cannot be made.

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 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 September 2014, the Company exercised the accordion feature and increased the maximum borrowing amount to $15.0 million. As of December 31, 2016 and 2015, the Company have no outstanding borrowings under the Revolver.

Letter of Credit

The Company obtained a $1.4 million letter of credit in October 2016 for its leased space in Dublin, California. The letter of credit will expire on October 1, 2017. As of December 31, 2016, there was no balance outstanding under this line of credit.

Warranties and Indemnification

The Company generally warrants that its software will perform to standard documentation. Under the Company's standard warranty, should a software product not perform as specified in the documentation within the warranty period, it will repair or replace the software or refund the license fee paid. To date, the Company has not incurred any 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 its intellectual property. To date, the Company has not incurred and has not accrued for any costs related to such indemnification provisions.

Intellectual Property Litigation

Versata Software, Inc., Versata Development Group, Inc. and Versata Inc. v. Callidus Software Inc. - Settled

On July 19, 2012, Versata Software, Inc. and Versata Development Group, Inc. (collectively, “Versata”) filed suit against the Company in the United States District Court for the District of Delaware (“Delaware District Court”). The suit asserted that the Company infringed U.S. Patent Nos. 7,904,326, 7,908,304 and 7,958,024. On May 30, 2013, the Company answered the complaint and filed a counterclaim in the Delaware District Court. The Company's counterclaim asserted that Versata infringed U.S. Patent Nos. 6,269,355, 6,850,924 and 6,473,748. On August 30, 2013, the Company filed petitions with the United States Patent and Trademark Office Patent Trial and Appeal Board (“PTAB”) for covered business method (“CBM”) patent review of U.S. Patent Nos. 7,904,326, 7,908,304 and 7,958,024, which Versata filed responses to on December 12, 2013. The Company also filed a motion with the Delaware District Court on August 30, 2013 to stay the litigation pending completion of the patent review proceedings with the PTAB (“Motion to Stay”). On January 8, 2014, the Company was granted leave by the Delaware District Court to add Versata Inc. (included in the above definition of “Versata”) as a counterclaim defendant. On March 4, 2014, the PTAB instituted covered business method patent review of each of Versata’s patents, namely, U.S. Patent Nos. 7,904,326, 7,908,304 and 7,958,024, finding it more likely than not that the Company would prevail in establishing that the challenged claims were not patentable. After requesting the PTAB to reconsider its decision to institute, which was denied, Versata filed a petition for writ of mandamus with the Court of Appeals for the Federal Circuit (“CAFC”) on April 11, 2014 asking that Court to deny institution of CBM patent review by the PTAB. The CAFC denied Versata’s petition for writ of mandamus on May 5, 2014. On April 17, 2014, the Company filed additional petitions with the PTAB for CBM patent review to address all of the remaining claims not previously covered in the prior petitions with respect to U.S Patent Nos. 7,908,304 and 7,958,024. On May 8, 2014, the Delaware District Court: (i) granted our Motion to Stay in part with respect to U.S. Patent No. 7,904,326, and (ii) denied the Company's Motion to Stay in part with respect to U.S. Patent Nos. 7,908,304 and 7,958,024. On May 8, 2014, the Company appealed to the CAFC the Delaware District Court’s denial of the Motion to Stay

with respect to U.S. Patent Nos. 7,908,304 and 7,958,024. On October 2, 2014, the PTAB instituted covered business method patent review of the remaining claims covered in the second set of petitions for U.S Patent Nos. 7,908,304 and 7,958,024. On October 21, 2014, the Company engaged in a mediation with Versata and on November 13, 2014, entered into an agreement with Versata to settle and dismiss the pending district court litigation and patent office proceedings, to extend patent cross-licenses and covenants not to sue to one another, and the Company was appointed as an authorized reseller of certain Versata products. Under the agreement, each party covenanted not to sue the other (and its related entities) for infringement of any patents now owned (including pending patents) or later acquired by either party. In addition, each party granted to the other a fully paid-up, irrevocable, nonexclusive, worldwide license to certain patents (including the patents asserted in the pending district court litigation) for specified products of each party. The agreement also contained a release for any past infringement or claim between the parties and dismissal of the civil pending in the Delaware District Court, as well as the five covered business method patent review proceedings then-pending before the PTAB. Pursuant to the agreement, the Company agreed to pay to Versata $4.5 million in nine equal quarterly installments, commencing on January 31, 2015. The fair value of these payments was $4.3 million, of which the Company recognized a charge to earnings for $2.9 million in 2014 and capitalized $1.4 million for the value of the patent license. The $1.4 million will be amortized to expense over the average life span of the associated patents of approximately 9.5 years. The difference between the installment payment and the fair value will be charged to interest as incurred.

Callidus Software Inc. v. Xactly Corporation - Settled

On August 31, 2012, the Company filed suit against Xactly Corporation (“Xactly”) in the United States District Court for the Central District of California. The suit alleged that Xactly infringed U.S. Patents 8,046,387 and 7,774,378. On October 24, 2012, the Company amended its complaint to add Xactly's President and Chief Executive Officer as a defendant and to add claims for trademark infringement, false advertising, false and misleading advertising, trade libel, defamation, intentional interference with prospective economic advantage, intentional interference with contractual relations, breach of contract and unfair competition, in addition to patent infringement. On January 28, 2013, the Company further amended its complaint to allege that Xactly also infringed U.S. Patent 6,473,748 and dismissed its intentional interference with contractual relations claim. On March 14, 2013, the case was transferred to the United States District Court in the Northern District of California. On May 31, 2013, the Company and Xactly entered into a stipulated dismissal of the Company's trademark infringement claim whereby Xactly agreed that it would not use the Company's trademarks-in-suit in certain of Xactly's marketing and advertising activities going forward. On November 25, 2013, Callidus, Xactly and Xactly's President and Chief Executive Officer entered into a Settlement, Release, and License Agreement that, among other things, included an agreement by Xactly to pay the Company $2.0 million in license fee, which will be paid in four equal annual installments of $0.5 million beginning November 2013 and with the final payment in November 2016.

Other matters

In addition to the above litigation matters, the Company from time to time is a party to other various litigation and customer disputes incidental to the conduct of its business. At the present time, the Company believes that none of these matters are likely to have a material adverse effect on the Company's future financial results.

The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews the need for any such liability on a quarterly basis and records any necessary adjustments to reflect the effect of ongoing negotiations, contract disputes, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case in the period they become known. At December 31, 2016, the Company has not recorded any such liabilities in accordance with accounting for contingencies. However, litigation is subject to inherent uncertainties and the Company's view on these matters may change in the future.

Note 8—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 upon the conversion of the Convertible Notes, the exercise of outstanding common stock options, the release of restricted stock, and purchases of shares under the Employee Stock Purchase Plan ("ESPP") to the extent these shares are dilutive. For 2016, 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):



	Year Ended December 31,
	2016	2015	2014
Restricted stock	3,667	2,728	2,379
Stock options	548	883	1,630
ESPP	66	10	39
Convertible notes	—	—	829
Total	4,281	3,621	4,877

The weighted average exercise price of stock options excluded for 2016, 2015 and 2014 was $6.66, $6.21 and $4.09, respectively.

Note 9—Stock-Based Compensation

Stockholder-Approved Stock Option and Incentive Plans

In June 2013, the 2013 Stock Incentive Plan ("2013 Plan") became effective upon the approval of the Company's Board of Directors and stockholders. The Company initially reserved 3,469,500 shares of common stock for issuance under the 2013 Plan and, in 2015, the Company reserved an additional 5,000,000 shares of common stock for issuance under the 2013 Plan. Under the 2013 Plan, the Company's Board of Directors (or an authorized subcommittee) may grant stock options or other types of stock awards, such as restricted stock, performance-based restricted stock units ("PSU"), restricted stock units ("RSU"), stock bonus awards or stock appreciation rights. Incentive stock options may be granted only to the Company's employees. Nonstatutory stock options and other stock-based awards may be granted to employees, consultants or non-employee directors. These options vest as determined by the Board of Directors (or an authorized subcommittee), generally over four years. No stock options were granted in 2016, 2015 and 2014. The restricted stock units and performance-based stock units also vest as determined by the board, generally over three years.

Shares Available for Grant

A summary of the Company's shares available for grant and the status of options and awards are as follows:



	Year Ended December 31,
	2016		2015		2014
	(Number of Shares)
Beginning Available	4,358,989		770,511		2,478,798
Authorized	—		5,000,000		—
Granted	(2,160,627	)	(1,865,864	)	(1,913,499	)
Cancelled	317,234		454,342		383,549
Expired	—		—		(178,337	)
Ending Available	2,515,596		4,358,989		770,511

Expense Summary

Stock-based compensation expenses of $29.1 million, $18.6 million and $11.8 million was recorded during the years ended December 31, 2016, 2015 and 2014, in the consolidated statement of comprehensive loss. The table below sets forth a

summary of stock-based compensation expense as follows (in thousands).



	Year Ended December 31,
	2016		2015		2014
Stock-based compensation:
Stock Options	$	579	$	613	$	790
Restricted Stock Units ("RSU")	20,452		13,524		7,705
Performance-based Restricted Stock Units ("PSU")	6,517		3,505		2,370
Employee Stock Purchase Plan ("ESPP")	1,575		950		948
Total stock-based compensation	$	29,123	$	18,592	$	11,813

The table below sets forth the functional classification of stock-based compensation expense as follows (in thousands):



	Year Ended December 31,
	2016		2015		2014
Stock-based compensation:
Cost of recurring revenue	$	1,639	$	1,237	$	911
Cost of services and other revenue	2,097		1,149		1,026
Sales and marketing	9,244		5,488		3,518
Research and development	5,147		3,031		2,012
General and administrative	10,996		7,687		4,346
Total stock-based compensation	$	29,123	$	18,592	$	11,813

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 PSU granted during 2016 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-Merton valuation model. No stock options were granted during 2016, 2015 and 2014. The fair value of each ESPP share is estimated on the beginning date of the offering period using the Black-Scholes-Merton valuation model and the assumptions noted in the following table.



	Year Ended December 31,
	2016	2015	2014
Employee Stock Purchase Plan:
Expected life (in years)	0.5 to 1.0	0.5 to 1.0	0.5 to 1.0
Risk-free interest rate	0.45% to 0.57%	0.25% to 0.38%	0.05% to 0.12%
Volatility	33% to 43%	39% to 40%	47% to 50%
Dividend Yield	—	—	—

Expected Dividend Yield—The Company has never paid dividends and does not expect to pay dividends.

Risk-Free Interest Rate—The risk-free interest rate was based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term.

Expected Term—Expected term represents the period that the Company's stock-based awards are expected to be outstanding. The Company's assumptions about the expected term have been based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards. The expected term for stock options was estimated using the simplified method allowed under SEC guidance.

Expected Volatility—Expected volatility is based on the historical volatility over the expected term.

Stock Options

As of December 31, 2016, the Company had $0.3 million of unrecognized compensation expense, net of forfeitures, which it expects to recognize over a weighted average period of 0.6 years. No stock options were granted during the years ended December 31, 2016, 2015 and 2014. The total intrinsic value of stock options exercised was $2.2 million, $4.9 million and $5.9 million for 2016, 2015 and 2014, respectively. The total cash received from employees as a result of stock option exercises was $1.3 million, $2.0 million and $2.9 million for 2016, 2015 and 2014, respectively.

Stock option activity is summarized below:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2013	1,948,214		$	5.34
Exercised	(701,220	)	4.09			$	5,940
Forfeited	(44,407	)	7.40
Expired	(26,626	)	10.17
Outstanding as of December 31, 2014	1,175,961		5.89
Exercised	(452,554	)	4.63			4,913
Forfeited	(50,760	)	6.21
Outstanding as of December 31, 2015	672,647		6.63
Exercised	(197,879	)	6.73			2,232
Forfeited	(45,000	)	5.74
Outstanding as of December 31, 2016	429,768		$	6.68	6.47	$	4,287
Vested and Expected to Vest as of December 31, 2016	428,099		$	6.67	6.47	$	4,271
Exercisable as of December 31, 2016	349,185		$	6.60	6.46	$	3,507

As of December 31, 2016, the range of exercise prices and weighted average remaining contractual life of outstanding options are as follows:



		Options Outstanding			Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
$4.31 - $4.31	4,688	6.33	$	4.31	2,604	$	4.31
$5.27 - $5.27	15,000	5.43	5.27		15,000	5.27
$6.01 - $6.01	122,000	6.41	6.01		109,291	6.01
$6.25 - $6.25	15,000	6.43	6.25		15,000	6.25
$6.42 - $6.42	3,200	5.00	6.42		3,200	6.42
$6.59 - $6.59	111,574	6.49	6.59		88,045	6.59
$6.67 - $6.67	40,000	6.58	6.67		34,166	6.67
$7.69 - $7.69	113,681	6.66	7.69		79,004	7.69
$9.17 - $9.17	1,625	6.75	9.17		500	9.17
$10.35 - $10.35	3,000	6.83	10.35		2,375	10.35
$4.31 - $10.35	429,768	6.47	$	6.68	349,185	6.60

Restricted Stock Units and Performance-based Restricted Stock Units

As of December 31, 2016, the Company had $26.7 million of unrecognized compensation expense, net of forfeitures, for time-based restricted stock units, which it expects to recognize over a weighted-average period of 1.8 years, and $5.1 million of unrecognized compensation expense, net of forfeitures, for performance-based restricted stock units, which it expects to recognize over a weighted-average period of 0.9 years.

Restricted unit and performance-based restricted stock unit activity is summarized below:



	Restricted Stock Units					Performance-based Restricted Stock Units
	Number of Shares		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands)		Number of Shares		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands)
Unreleased as of December 31, 2013	1,525,381					182,033
Granted	1,441,699					471,800
Released	(653,412	)				(82,857	)
Forfeited	(138,745	)				(44,862	)
Unreleased as of December 31, 2014	2,174,923					526,114
Granted	1,446,908					418,956
Released	(1,453,595	)				(89,314	)
Forfeited	(169,472	)				(58,997	)
Unreleased as of December 31, 2015	1,998,764					796,759
Granted	2,098,302					62,325
Released	(1,293,244	)				—
Forfeited	(87,856	)				—
Unreleased as of December 31, 2016	2,715,966		0.78	$	45,221	859,084		0.91	$	14,304
Vested and Expected to Vest as of December 31, 2016	2,547,930		0.79	$	42,423	812,919		0.88	$	13,535

Restricted stock units and performance-based restricted stock units granted to employees are not considered outstanding at the time of grant, as the holders of these units are not entitled to dividends and voting rights. Unvested restricted stock units are not considered outstanding in the computation of basic net loss per share.

Performance-based Restricted Stock Units

In 2016, the Company granted performance-based restricted stock units with vesting contingent on attainment of pre-set SaaS revenue growth and recurring revenue gross profit target over the three-year period from January 1, 2016 through December 31, 2019 and performance-based restricted stock units with vesting contingent upon the Company's relative total shareholder return over the same three-year period compared to an index of 17 SaaS companies. In 2016, $0.4 million of expense, net of forfeiture, was recognized.

In 2015, the Company granted performance-based restricted stock units with vesting contingent on successful attainment of pre-set SaaS revenue growth and recurring revenue gross profit target over the three-year period from July 1, 2015 through June 30, 2018. The Company records stock-based compensation expense on a straight-line basis over the requisite service period. In 2016 and 2015, $3.1 million and $0.7 million, respectively of expense, net of forfeiture, was recognized.

In 2014, the Company granted performance-based restricted stock units with vesting contingent on absolute SaaS revenue growth over the three-year period from January 1, 2014 through December 31, 2016, and on the Company's relative total shareholder return over the same three-year period compared to an index of 17 SaaS companies. The Company records stock-based compensation expense on a straight-line basis over the requisite service period. In 2016, 2015 and 2014, $3.0 million, $2.8 million and $1.9 million, respectively of expense, net of forfeiture, was recognized.

Employee Stock Purchase Plan

The Company's ESPP, which was adopted in 2003 and amended and restated in 2013, qualifies as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. The ESPP is designed to enable eligible employees to purchase shares of the Company's common stock at a discount on a periodic basis through payroll deductions. Each offering period under the ESPP covers 12 months and consists of two consecutive six-month purchase periods. The purchase price for shares of common stock purchased under the ESPP is 85% of the lesser of the fair market value of the Company's common stock on the first day of the applicable offering period and the fair market value of the Company's common stock on the last day of each purchase period. The Company issued approximately 277,000, 256,000 and 319,000 shares under the ESPP during the years ended December 31, 2016, 2015 and 2014, respectively. The weighted-average fair value of stock purchase rights granted under the ESPP during 2016, 2015 and 2014 was $4.54, $4.61 and, $3.59 per share respectively.

As of December 31, 2016, the Company had $0.3 million of unrecognized compensation expense related to ESPP subscriptions that will be recognized over 0.1 years.

Note 10—Stockholders' Equity

Preferred Stock

The Company's certificate of incorporation authorizes 5,000,000 shares of undesignated preferred stock with a par value of $0.001, of which no shares were outstanding as of December 31, 2016 and 2015.

Common Stock

In March 2015, the Company completed a public offering of approximately $5.3 million newly-issued shares of its common stock at a public offering price of $13.00 per share. The Company 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 September 2016, the Company completed a follow-on offering in which the Company issued 5.1 million shares of its common stock at a public offering price of $18.25 per share. The Company received net proceeds of $87.1 million after deducting underwriting discounts and commissions of $5.6 million and other offering expenses of $0.4 million. In October 2016, the Company received an additional $13.1 million, after deducting underwriting discounts and commissions of $0.8 million, related to the underwriters' purchase of an additional 0.8 million shares at the public offering price of $18.25 per share.

Note 11—Income Taxes

The following is a geographical breakdown of consolidated income (loss) before income taxes by income tax jurisdiction (in thousands):



	Year Ended December 31,
	2016			2015			2014
United States	$	(19,164	)	$	(13,000	)	$	(11,557	)
Foreign	1,326			643			1,008
Total	$	(17,838	)	$	(12,357	)	$	(10,549	)

The provision for income taxes consists of the following (in thousands):



	Year Ended December 31,
	2016			2015			2014
Current:
Federal	$	(20	)	$	4		$	(25	)
State	(4		)	3			3
Foreign	973			992			1,138
Deferred:
Federal	272			148			78
State	21			1			(89		)
Foreign	(114		)	(357		)	(93		)
Provision for income taxes	$	1,128		$	791		$	1,012

The increase in provision for income tax in 2016 from 2015 was primarily attributable to higher deferred tax liabilities from acquisitions in 2016, as well as an increase in sales to foreign customers subject to withholding taxes. Provision for income tax decreased in 2015 as compared to 2014 as a result of a decrease in foreign withholding taxes, in part offset by an increase in income taxes in foreign jurisdictions.

The provision for income taxes differs from the expected tax benefit computed by applying the statutory federal income tax rates to consolidated loss before income taxes as follows (in thousands):



	Year Ended December 31,
	2016			2015			2014
Federal tax at statutory rate	$	(6,065	)	$	(4,200	)	$	(3,587	)
State taxes, net of benefit	—			4			3
Non-deductible expenses	1,946			600			453
Foreign taxes	408			415			703
Current year net operating losses and other deferred tax assets for which no benefit has been recognized	5,476			4,423			4,828
Research and experimentation credit	(637		)	(451		)	(1,239		)
Tax benefit due to the recognition of acquired deferred tax liabilities	—			—			(149		)
Provision for income taxes	$	1,128		$	791		$	1,012

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.

Deferred tax accounts consist of the following (in thousands):



	As of December 31,
	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	58,215		$	57,058
Accrued expenses	1,600			4,743
Unrealized gain/loss on investments	72			263
Research and experimentation credit carryforwards	15,086			13,682
Capitalized research and experimentation costs	19,558			16,660
Deferred stock compensation	7,717			4,775
Gross deferred tax assets	102,248			97,181
Less valuation allowance	(101,698		)	(96,608		)
Total deferred tax assets, net of valuation allowance	550			573
Deferred tax liabilities:
Goodwill	(1,479		)	(1,174		)
Property and equipment and intangibles	(574		)	(816		)
Gross deferred tax liabilities	(2,053		)	(1,990		)
Net deferred tax liabilities	$	(1,503	)	$	(1,417	)

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the level of historical taxable income and projections for future taxable income over the period in which the temporary differences are deductible, the Company recorded a valuation allowance against the deferred tax assets for which it believes it is not more likely than not to be realized. As of December 31, 2016 and 2015, a valuation allowance has been recorded on all deferred tax assets, except the deferred tax assets related to three of its foreign subsidiaries, based on the analysis of profitability for those subsidiaries.

The net changes for valuation allowance for years ended December 31, 2016 and 2015 were an increase of $5.1 million and $6.0 million, respectively.

As of December 31, 2016, the Company had net operating loss carryforwards for federal and California income tax purposes of $191.6 million and $40.8 million, respectively, available to reduce future income subject to income taxes. The federal net operating loss carryforwards, if not utilized, will expire over 20 years beginning in 2017. The California net operating loss carryforward, began to expire in 2017.

Not included in the deferred income tax asset balance at December 31, 2016 is approximately $14.0 million, which pertains to certain net operating loss carryforwards resulting from the exercise of employee stock options.

The Company also has research credit carryforwards for federal and California income tax purposes of approximately $9.8 million and $10.6 million, respectively, available to reduce future income taxes. The federal research credit carryforward, if not utilized, will expire over 20 years beginning in 2019. The California research credit carries forward indefinitely.

Federal and California tax laws impose restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an ownership change, as defined in Section 382 of the Internal Revenue Code. The Company's ability to utilize its net operating loss and tax credit carryforwards are subject to limitations under these provisions.

The Company has not provided for federal income taxes on all of the non-U.S. subsidiaries' undistributed earnings as of December 31, 2016 of $5.3 million, because such earnings are intended to be indefinitely reinvested. The residual U.S. tax liability, if such amounts were remitted, would be nominal.

The activity related to the Company's unrecognized tax benefits is set forth below (in thousands):



	Year Ended December 31,
	2016			2015			2014
Beginning balance	$	3,213		$	3,037		$	2,843
Decreases related to prior year tax positions	(31		)	(59		)	(44		)
Increases related to current year tax positions	313			239			270
Reductions to unrecognized tax benefits as a result of a lapse of applicable statute of limitations	(28		)	(4		)	(32		)
Ending balance (1) (2) (3)	$	3,467		$	3,213		$	3,037

(1) 2014 ending balance consists of $2.7 million of the unrecognized tax benefits which reduced deferred tax assets, and $0.3 million was included in other liabilities on the consolidated balance sheet.

(2) 2015 ending balance consists of $2.9 million of the unrecognized tax benefits which reduced deferred tax assets, and $0.4 million was included in other liabilities on the consolidated balance sheet.

(3) 2016 ending balance consists of $3.1 million of the unrecognized tax benefits which reduced deferred tax assets, and $0.4 million was included in other liabilities on the consolidated balance sheet.

If recognized, $0.4 million of the unrecognized tax benefits at December 31, 2016 would reduce the Company's annual effective tax rate. The Company also accrued potential penalties and interest of $15,000 related to these unrecognized tax benefits during 2016, and in total, as of December 31, 2016, the Company recorded a liability for potential penalties and interest of $0.2 million. The Company recognized interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statement of comprehensive loss. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. The Company classified the unrecognized tax benefits as a noncurrent liability, as it does not expect any payment of incremental taxes over the next 12 months. The Company also does not expect its unrecognized tax benefits to change significantly over the next 12 months.

The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. All tax years generally remain subject to examination by federal and most state tax authorities. In foreign jurisdictions, the 2009 through 2016 tax years generally remain subject to examination by their respective tax authorities.

Note 12—Employee Benefit Plan

In 1999, the Company established a 401(k) tax-deferred savings plan ("401(k) Plan"), whereby eligible employees may contribute a percentage of their eligible compensation up to the maximum allowed under IRS rules. Beginning January 1, 2012, the Company contributed 50% of each dollar that an employee contributed to their 401(k) Plan up to a maximum of $1,000 annually per participating employee, and the vesting of the Company's contributions is based on an employee's years of service. During the years ended December 31, 2016 and 2015, the Company recognized approximately $0.6 million and $0.4 million, respectively, in expense related to the 401(k) Plan match.

Note 13—Segment, Geographic and Customer Information

The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who in the Company's case is the chief executive officer, in deciding how to allocate resources and assess performance. The Company's chief executive officer ("CEO") is considered to be the chief operating decision maker. 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 the Company's cloud-based sales, marketing, learning and customer experience solutions.

The following table summarizes revenue by geographic areas (in thousands):



	Year Ended December 31,
	2016		2015		2014
United States and Canada	$	168,957	$	142,276	$	110,707
EMEA	22,888		17,695		15,162
Asia Pacific	10,265		9,627		8,400
Other	4,608		3,489		2,349
	$	206,718	$	173,087	$	136,618

No individual country outside of the U.S. accounted for more than 10% of the Company's property, plant and equipment as of December 31, 2016 and 2015.

As of December 31, 2016, the Company's goodwill balance was $64.0 million, of which $15.4 million was located in the U.K. and Ireland (EMEA) and the Company's intangible asset balance of $21.7 million, of which $5.7 million was located in the U.K. and Ireland (EMEA). No other individual country outside the U.S. accounted for more than 10% of goodwill and intangible asset balance as of December 31, 2016.

In 2016, 2015 and 2014, no single customer accounted for more than 10% of the Company's total revenue.

Note 14—Related Party Transactions

Lithium Technologies, Inc.

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. On August 31, 2016, that member of the Company's Board of Directors ceased to be the Chief Financial Officer of Lithium Technologies, Inc.

In 2015, Lithium entered into a three-year SaaS subscription agreement with the Company in the amount of $0.1 million per year, from which the company recognized $0.1 million in SaaS revenue during the year ended December 31, 2016. In addition, during 2015, the Company entered into various agreements with Lithium for professional services, and recognized $29,000 in professional services revenue during the year ended December 31, 2016.

In 2016, the Company purchased a one-year consulting and services contract for Community Optimization, Social Response, Training & Certification, and platform optimization from Lithium for $60,000, which was paid in full in August 2016. As of December 31, 2016 approximately $32,000 was included in prepaid and other current assets. In addition, the Company purchased a one-year subscription for Lithium's Customer Community platform for $0.2 million, which was paid in full in April 2016. As of December 31, 2016, approximately $75,000 was included in prepaid and other current assets.

TIBCO Software Inc.

During 2016, the Company renewed an annual subscription services agreement for $0.1 million with TIBCO Software Inc. ("TIBCO"), whose chief executive officer and director is a member of the Company's Board of Directors. The original agreement had been entered into between TIBCO and ViewCentral prior to the Company's acquisition of the assets of ViewCentral, and the renewal was at the same terms as the original agreement. During 2016, the Company recognized $75,000 of revenue in connection with the arrangement.

Supplementary Data (unaudited)

The following tables set forth unaudited supplementary quarterly financial data for the two-year period ended December 31, 2016. In management's opinion, the unaudited data has been prepared on the same basis as the audited information and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the data for the periods presented.



	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Year ended December 31, 2016
Total revenue	$	48,378		$	49,751		$	52,507		$	56,082		$	206,718
Gross profit	$	30,155		$	31,282		$	32,330		$	34,874		$	128,641
Net loss	$	(4,535	)	$	(5,687	)	$	(3,947	)	$	(4,797	)	$	(18,966	)
Basic and diluted net loss per share	$	(0.08	)	$	(0.10	)	$	(0.07	)	$	(0.08	)	$	(0.32	)
Weighted average common shares (basic and diluted)	56,690			57,098			58,009			63,663			58,852



	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Year ended December 31, 2015
Total revenue	$	39,745		$	41,614		$	44,944		$	46,784		$	173,087
Gross profit	$	23,726		$	25,711		$	27,592		$	29,607		$	106,636
Net loss	$	(4,043	)	$	(4,724	)	$	(2,243	)	$	(2,138	)	$	(13,148	)
Basic and diluted net loss per share	$	(0.08	)	$	(0.08	)	$	(0.04	)	$	(0.04	)	$	(0.24	)
Weighted average common shares (basic and diluted)	50,709			55,595			56,104			56,390			54,719

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

(a) Disclosure Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

Our management, including our Chief Executive Officer and Chief Financial Officer, do 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. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. 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 our company have been detected.

(b) Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control—Integrated Framework (2013). Our management has concluded that, as of December 31, 2016, our internal control over financial reporting is effective based on these criteria. In addition, our independent registered public accounting firm has issued an attestation report on the Company's internal control over financial reporting as of the reporting date.

There were no changes in our internal control over financial reporting during the fourth quarter of 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

PART III

The information required by Part III of Form 10-K is incorporated by reference to our Proxy Statement for the 2017 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2016.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Consolidated financial statements, consolidated financial statements schedule and exhibits

1. Consolidated financial statements. The consolidated financial statements as listed in the accompanying "Index to Consolidated Financial Information" are filed as part of this Annual Report on Form 10-K.

2. All schedules not listed in the accompanying index have been omitted as they are either not required or not applicable, or the required information is included in the consolidated financial statements or the notes thereto.

3. Exhibits. The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report on Form 10-K.

EXHIBIT INDEX



Exhibit Number		Description
2.1		Agreement, dated September 15, 2014, between the vendors set forth therein, Callidus Software Inc. and Dorset Acquisition Corp (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K (File No. 000-50463) filed with the Commission on September 17, 2014).
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-109059) filed with the Commission on September 23, 2003, and declared effective on November 19, 2003).
3.2		Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant's Form 10-Q (File No. 000-50463) filed with the Commission on November 5, 2010)
4.1		Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 4, filed with the Commission on November 7, 2003, to the Registrant's Registration Statement on Form S-1 (File No. 333-109059) filed with the Commission on September 23, 2003, and declared effective on November 19, 2003)
10.1		Sublease between Oracle America, Inc. and Callidus Software Inc. dated October 3, 2014 (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 2, 2015)
#10.2		First Amendment to Sublease between Oracle America, Inc. and Callidus Software Inc. dated August 8, 2016.
10.3+		1997 Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1 (File No. 333-109059) filed with the Commission on September 23, 2003, and declared effective on November 19, 2003)
10.4+		Amended and Restated 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.3.1 to the Company's Form 10-Q (File No. 000-50463) filed with the Commission on August 9, 2010)
10.5+		Forms of Stock Option Agreement and Restricted Stock Unit Agreement under the 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 10, 2014)
10.6+		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 (File No. 000-50463) filed with the Commission on April 28, 2015, 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)
10.7+		Amended and Restated Employee Stock Purchase Plan, and enrollment forms (incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 10, 2014)
10.8+		Executive Incentive Bonus Plan, effective January 27, 2014 (incorporated by reference to Exhibit 99.1 to the Registrant's Form 8-K (File No. 000-50463) filed with the Commission on January 31, 2014)
10.9		Form of Non-Employee Director Offer Letter (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q (File No. 000-50463) filed with the Commission on August 4, 2014)
10.10+		Form of Executive Change of Control Agreement (incorporated by reference to Exhibit 10.12 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 2, 2015)
10.11+		Form of Director Change of Control Agreement (incorporated by reference to Exhibit 10.13 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 2, 2015)
10.12		Form of Indemnification Agreement (incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 2, 2015)
10.13		Amendment dated November 20, 2007 to Offer Letter Between Callidus Software Inc. and Leslie J. Stretch (incorporated by reference to Exhibit 10.16 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 10, 2014)
10.14+		Offer Letter between Callidus Software Inc. and Jimmy Duan dated September 24, 2008 (incorporated by reference to Exhibit 10.16 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 2, 2015)
10.15+		Employment Agreement between Callidus Software Inc. and Bob L. Corey dated April 30, 2013 (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q (File No. 000-50463) filed with the Commission on November 7, 2013)
#10.17+		Transition and Retirement Agreement between Callidus Software Inc. and Bob L. Corey dated November 14, 2016.
#10.18+		Offer Letter between Callidus Software Inc. and Roxanne Oulman dated November 14, 2016.
10.19		Credit Agreement by and among Wells Fargo Bank, National Association, as administrative agent, the lender that is a party thereto, and Callidus Software Inc., dated as of May 13, 2014 (incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K (File No. 000-50463) filed with the Commission on May 13, 2014)
10.20		Amendment Number One, dated August 29, 2014, to Credit Agreement by and among Wells Fargo Bank, National Association, as administrative agent, the lender that is a party thereto, and Callidus Software Inc., dated as of May 13, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q (File No. 000-50463) filed with the Commission on August 6, 2015)



10.21		Amendment Number Two, dated September 11, 2014, to Credit Agreement by and among Wells Fargo Bank, National Association, as administrative agent, the lender that is a party thereto, and Callidus Software Inc., dated as of May 13, 2014 (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q (File No. 000-50463) filed with the Commission on August 6, 2015)
10.22		Amendment Number Three, dated September 16, 2014, to Credit Agreement by and among Wells Fargo Bank, National Association, as administrative agent, the lender that is a party thereto, and Callidus Software Inc., dated as of May 13, 2014 (incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-Q (File No. 000-50463) filed with the Commission on August 6, 2015)
10.23		Agreement between Callidus Software Inc. and Versata Software, Inc., Versata Development Group, Inc., and Versata, Inc. dated November 13, 2014 (incorporated by reference to Exhibit 10.19 to the Registrant's Form 10-K/A (File No. 000-50463) filed with the Commission on May 1, 2015)
#23.1		Consent of Independent Registered Public Accounting Firm
#31.1		Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted by Section 302 of the of the Sarbanes-Oxley Act of 2002
#31.2		Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted by Section 302 of the of the Sarbanes-Oxley Act of 2002
#32.1		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
#101		Interactive Data Files Pursuant to Rule 405 of Regulations S-T (XBRL)

_________________________________________________________________________________________________________________

# Filed herewith

+ Management contract or compensatory plan or arrangement

;

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 27, 2017.



	CALLIDUS SOFTWARE INC.

	By:	/s/ ROXANNE OULMAN
		Roxanne Oulman, Executive Vice President, Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below.



Signature	Title	Date

/s/ LESLIE J. STRETCH		February 27, 2017
Leslie J. Stretch	President, Chief Executive Officer and Director (Principal Executive Officer)

/s/ ROXANNE OULMAN		February 27, 2017
Roxanne Oulman	Executive Vice President, Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer)

/s/ CHARLES M. BOESENBERG		February 27, 2017
Charles M. Boesenberg	Chairman of the Board

/s/ MARK A. CULHANE		February 27, 2017
Mark A. Culhane	Director

/s/ KEVIN M. KLAUSMEYER		February 27, 2017
Kevin M. Klausmeyer	Director

/s/ NINA L. RICHARDSON		February 27, 2017
Nina L. Richardson	Director

/s/ MURRAY D. RODE		February 27, 2017
Murray D. Rode	Director

/s/ JAMES D. WHITE		February 27, 2017
James D. White	Director

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