CALLIDUS SOFTWARE INC - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - CALLIDUS SOFTWARE INC	q22017exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - CALLIDUS SOFTWARE INC	q22017exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - CALLIDUS SOFTWARE INC	q22017exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - CALLIDUS SOFTWARE INC	exhibit101amendment.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2017

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

For the transition period from to .

Commission file number: 000-50463

Callidus Software Inc.

(Exact name of registrant as specified in its charter)



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

Callidus Software Inc.

4140 Dublin Boulevard, Suite 400

Dublin, California 94568

(Address of principal executive offices, including zip code)

(925) 251-2200

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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



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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 x

There were 67,642,666 shares of the registrant’s common stock, par value $0.001, outstanding on July 26, 2017, the latest practicable date prior to the filing of this report.

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TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION	Page
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	28
Item 4. Controls and Procedures	29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 6. Exhibits	44
Signatures	45
Exhibit Index	46

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CALLIDUS SOFTWARE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)



	June 30, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	132,206		$	148,008
Short-term investments	40,240			39,266
Accounts receivable, net of allowances of $1,364 and $1,536 at June 30, 2017 and December 31, 2016, respectively	55,807			55,464
Prepaid and other current assets	20,281			18,275
Total current assets	248,534			261,013
Property and equipment, net	42,243			35,456
Goodwill	75,049			63,957
Intangible assets, net	23,761			21,659
Deposits and other non-current assets	4,209			4,416
Total assets	$	393,796		$	386,501
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,850		$	3,573
Accrued payroll and related expenses	13,427			17,831
Accrued expenses	22,742			15,126
Deferred revenue	106,023			99,758
Total current liabilities	148,042			136,288
Deferred revenue, non-current	1,511			3,209
Deferred income taxes, non-current	2,137			1,541
Other non-current liabilities	8,363			8,602
Total liabilities	160,053			149,640
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $0.001 par value; 100,000 shares authorized; 67,618 and 66,031 shares issued and 65,279 and 63,692 shares outstanding at June 30, 2017 and December 31, 2016, respectively	65			64
Additional paid-in capital	568,128			559,200
Treasury stock, 2,339 shares at June 30, 2017 and December 31, 2016	(14,430		)	(14,430		)
Accumulated other comprehensive loss	(2,943		)	(5,141		)
Accumulated deficit	(317,077		)	(302,832		)
Total stockholders’ equity	233,743			236,861
Total liabilities and stockholders’ equity	$	393,796		$	386,501

See accompanying notes to unaudited condensed consolidated financial statements.

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CALLIDUS SOFTWARE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands, except per share data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenue:
Recurring	$	48,605		$	39,290		$	94,802		$	76,896
Services and license	12,658			10,461			24,602			21,233
Total revenue	61,263			49,751			119,404			98,129
Cost of revenue:
Recurring	13,535			10,137			26,557			20,099
Services and license	10,919			8,332			20,859			16,593
Total cost of revenue	24,454			18,469			47,416			36,692
Gross profit	36,809			31,282			71,988			61,437

Operating expenses:
Sales and marketing	21,983			19,682			44,674			38,585
Research and development	9,277			7,248			18,578			14,490
General and administrative	12,356			9,296			21,722			17,551
Restructuring and other	375			86			972			402
Total operating expenses	43,991			36,312			85,946			71,028
Operating loss	(7,182		)	(5,030		)	(13,958		)	(9,591		)
Interest income and other income (expense)	271			(277		)	336			(52		)
Interest expense	(23		)	(39		)	(42		)	(82		)
Loss before provision for income taxes	(6,934		)	(5,346		)	(13,664		)	(9,725		)
Provision for income taxes	413			341			581			497
Net loss	$	(7,347	)	$	(5,687	)	$	(14,245	)	$	(10,222	)
Net loss per share
Basic and diluted	$	(0.11	)	$	(0.10	)	$	(0.22	)	$	(0.18	)

Weighted average shares used in computing net loss per share:
Basic and diluted	65,079			57,098			64,726			56,894

Comprehensive loss:
Net loss	$	(7,347	)	$	(5,687	)	$	(14,245	)	$	(10,222	)
Unrealized (loss) gain on available-for-sale securities	(18		)	11			(21		)	59
Foreign currency translation adjustments	1,621			(1,140		)	2,219			(1,535		)
Comprehensive loss	$	(5,744	)	$	(6,816	)	$	(12,047	)	$	(11,698	)

See accompanying notes to unaudited condensed consolidated financial statements.

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CALLIDUS SOFTWARE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



	Six Months Ended June 30,
	2017			2016
Cash flows from operating activities:
Net loss	$	(14,245	)	$	(10,222	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense	5,600			3,582
Amortization of intangible assets	3,991			2,835
Provision for doubtful accounts	567			891
Stock-based compensation	18,191			14,065
Loss on foreign currency from mark-to-market derivative	249			—
Deferred income taxes	(9		)	51
Excess tax benefit from stock-based compensation	—			(11		)
Loss on disposal of property and equipment	3			4
Amortization of premium on investments	103			91
Changes in operating assets and liabilities:
Accounts receivable	(361		)	(3,268		)
Prepaid and other current assets	(1,913		)	(846		)
Other non-current assets	220			251
Accounts payable	2,349			462
Accrued expenses	(624		)	1,412
Accrued payroll and related expenses	(4,404		)	(1,996		)
Accrued restructuring and other expenses	220			(285		)
Deferred revenue	3,757			5,959
Net cash provided by operating activities	13,694			12,975
Cash flows from investing activities:
Purchases of investments	(6,456		)	(8,483		)
Proceeds from maturities and sale of investments	5,360			8,751
Purchases of property and equipment	(7,661		)	(3,924		)
Purchases of intangible assets	(458		)	(444		)
Acquisitions, net of cash acquired	(11,477		)	(11,500		)
Net cash used in investing activities	(20,692		)	(15,600		)
Cash flows from financing activities:
Proceeds from issuance of common stock	2,603			1,951
Restricted stock units acquired to settle employee withholding liability	(11,864		)	(1,821		)
Excess tax benefit from stock-based compensation	—			11
Payment of consideration related to acquisitions	(100		)	(104		)
Net cash (used in) provided by financing activities	(9,361		)	37
Effect of foreign currency exchange rates on cash and cash equivalents	557			(313		)
Net (decrease) in cash and cash equivalents	(15,802		)	(2,901		)
Cash and cash equivalents at beginning of period	148,008			77,232
Cash and cash equivalents at end of period	$	132,206		$	74,331
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	385		$	475
Cash paid for interest on line of credit	$	37		$	18
Non-cash investing and financing activities:
Purchases of property and equipment through accounts payable and other current and non-current accrued liabilities	$	4,093		$	4,856

See accompanying notes to unaudited condensed consolidated financial statements.

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CALLIDUS SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Summary of Significant Accounting Policies

Basis of Presentation and Summary of Accounting Policies

All amounts included herein related to these condensed consolidated financial statements as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 are unaudited and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2016 for Callidus Software Inc., doing business as CallidusCloud ("Company"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the Securities and Exchange Commission ("SEC") rules and regulations regarding interim financial statements.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all necessary adjustments for the fair presentation of the Company’s financial position, results of operations and cash flows. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the full fiscal year ending December 31, 2017.

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

Use of Estimates

Preparation of the unaudited condensed consolidated financial statements in conformity with GAAP and the rules and regulations of the SEC requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, the reported amounts of revenue and expenses during the reporting period and the accompanying notes. Estimates are used for, but not limited to, 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.

Revenue Recognition

The Company generates revenue by providing software as a service ("SaaS") solutions through on-demand subscription 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 during the three and six month periods ended June 30, 2017 and 2016.

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

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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. Revenue related to perpetual licenses was immaterial during the three and six month periods ended June 30, 2017 and 2016.

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.

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

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

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

• Persuasive evidence of an arrangement exists;

• Delivery has occurred or services have been rendered;

• The fees are fixed or determinable; and

• Collection of the fees is reasonably assured.

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

Multiple-deliverable arrangements with on-demand subscription. For on-demand subscription agreements with multiple deliverables, the Company evaluates each element to determine whether it represents a separate unit of accounting. The Company determines the best estimated selling price of each deliverable in an arrangement based on a selling price hierarchy of methods contained in Finance Accounting Standards Board ("FASB") issued 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.

Multiple-deliverable arrangements with on-premise license. For arrangements with multiple deliverables, including license, professional services and maintenance, the Company recognizes license revenue using the residual method of accounting pursuant to the requirements of the guidance contained in ASC 985-605, "Software Revenue Recognition." Under the residual method, revenue is recognized when VSOE for fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. If evidence of fair value cannot be established for the undelivered elements, all of the revenue is deferred until evidence of fair value can be established, or until the items for which evidence of fair value cannot be established are delivered. For maintenance and certain professional services, the Company has established VSOE 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.

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

Recently Adopted Accounting Pronouncements

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 stock-based payments. The amendments require entities to record all tax effects related to stock-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 stock-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 stock-based payments including the cash flow presentation was adopted prospectively. Further, the amendments allow the entities to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. The Company adopted this guidance during the first quarter of 2017. Adoption of the new standard did not have a material impact to the Company's condensed financial statements and resulted in the recognition of excess tax benefits to the Company's income taxes rather than paid-in capital. The Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.

Recently Issued Accounting Pronouncements

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for stock-based payment arrangements, provides guidance on the types of changes to the terms or conditions of stock-based payment awards to which an entity would be required to apply modification accounting under ASC 718, Compensation- Stock Compensation. This ASU is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently evaluating the impact this ASU will have on its unaudited condensed consolidated financial statements.

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 unaudited condensed 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 unaudited condensed consolidated financial statements.

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 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 2019. The Company is currently evaluating its

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expected adoption method and timeline, and the impact of this new standard on its unaudited condensed consolidated 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 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 unaudited condensed 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 unaudited condensed consolidated financial statements.

Note 2—Acquisitions

Learning Heroes Ltd.

On June 2, 2017, the Company acquired Learning Heroes Ltd. ("Learning Heroes"), a privately-held company that is a provider of innovative education content. The purchase of Learning Heroes enhances the Company's mobile learning platform, and accelerates its creation of high quality, engaging and impactful learning experiences. Learning Heroes' creates courses that run on any Learning Management System. The purchase consideration was $10.3 million, which included $8.8 million in cash and 1.2 million Pound Sterling indemnity holdback to be paid one year from the date of the agreement.

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



	Fair Value
Net liabilities assumed	$	(1,170	)
Intangible assets	3,250
Goodwill	7,512
Total purchase price, net of cash acquired	$	9,592

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, the multiple period excess earnings method for customer contracts and related relationships, and the relief-from-royalty method for education content. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of June 30, 2017, 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 June 30, 2017, 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 learning capabilities and the value of the assembled workforce in accordance with GAAP. The goodwill balance is primarily attributed to the expansion of the learning library. The goodwill balance is not

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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 Leaning Heroes acquisition (in thousands):



	Fair Value		Weighted Average Useful Life	Consolidated statements of comprehensive loss Classification: Amortization expense
Customer contracts and related relationships	$	1,840	7 years	Sales and marketing expense
Education course content	1,410		5 years	Cost of sales
Total intangible assets subject to amortization	$	3,250

The financial results of Leaning Heroes are included in the Company's unaudited condensed consolidated financial statements from the date of acquisition through June 30, 2017.

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

RevSym Inc.

On May 18, 2017, the Company acquired RevSym Inc. ("RevSym"), a privately-held company focused on innovative cloud-based solutions for the management of revenue. RevSym is a cloud solution that takes into account the new accounting guidance of Topic 606. The Company purchased RevSym, a cloud solution, in order to integrate with the Company's leading commissions, Configure Price Quote and Contract Lifecycle Management solutions, to enable customers to optimize their critical revenue and commissions processes to streamline compliance under Topic 606. The purchase consideration was $5.5 million, which included $3.0 million in cash and an indemnity holdback with the first payment of $1.0 million to be paid six months from the date of the agreement and the remaining balance of $1.5 million to be paid one year from the date of the agreement.

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



	Fair Value
Net assets assumed	$	13
Intangible assets	2,890
Goodwill	2,516
Total purchase price, net of cash acquired	$	5,419

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, cost method for customer contracts and related relationships, and the relief-from-royalty method for trademarks, tradenames and domain names. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of June 30, 2017, 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 June 30, 2017, 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 GAAP. The goodwill balance is primarily attributed to new accounting guidance under Topic 606 and how it integrates the powerful combination of RevSym and the Company's leading commissions solutions. The goodwill balance is deductible for U.S. income tax purposes. The Company did not record any in-process research and development intangible assets in connection with the acquisition.

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



	Fair Value		Weighted Average Useful Life	Consolidated statements of comprehensive loss Classification: Amortization expense
Developed technology	$	2,700	3 years	Cost of sales
Customer contracts and related relationships	100		3 years	Sales and marketing expense
Trademarks/tradenames/ domain names	90		3 years	General and administrative
Total intangible assets subject to amortization	$	2,890

The financial results of RevSym are included in the Company's unaudited condensed consolidated financial statements from the date of acquisition through June 30, 2017.

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

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, the multiple period excess earnings method for developed technology, the 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 December 31, 2016, 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 June 30, 2017, 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 GAAP. 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.

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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
Trademarks/tradenames/ domain names	150		3 years	General and administrative
Order backlog	150		2 years	Cost of sales
Total intangible assets subject to amortization	$	5,350

The financial results of DataHug are included in the Company's unaudited condensed consolidated financial statements from the date of acquisition through June 30, 2017.

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

Note 3—Financial Instruments

As of June 30, 2017 and December 31, 2016, all investment debt securities were classified as available-for-sale and carried at estimated fair value, which is determined based on the inputs discussed in Note 4.

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

Realized gains and losses are calculated using the specific identification method. As of June 30, 2017 and December 31, 2016, the Company had no short-term investments in a material unrealized loss position.

The components of the Company’s cash, cash equivalents, and investments classified as available-for-sale were as follows at June 30, 2017 and December 31, 2016 (in thousands):



June 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash	$	92,098	$	—	$	—		$	92,098
Cash equivalents:
Money market funds	40,108		—		—			40,108
Total cash equivalents	40,108		—		—			40,108
Total cash and cash equivalents	$	132,206	$	—	$	—		$	132,206

Short-term investments:
Certificates of deposits	$	950	$	—	$	—		$	950
U.S. government and agency obligations	20,628		13		(22		)	20,619
Corporate notes and obligations	18,672		14		(15		)	18,671
Total short-term investments	$	40,250	$	27	$	(37	)	$	40,240

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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

The market value and the amortized cost of available-for-sale debt securities by contractual maturities as of June 30, 2017 were as follows (in thousands):



Contractual maturity	Amortized Cost		Estimated Fair value
Less than 1 year	$	35,595	$	35,570
Between 1 and 2 years	4,655		4,670
Total	$	40,250	$	40,240

The Company had no realized gains or losses on sales of its investments for the three and six months ended June 30, 2017 and 2016. The Company had $1.1 million net purchases from investments during the six months ended June 30, 2017 and $0.3 million net proceeds from investments during the six months ended June 30, 2016.

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 June 30, 2017 or as of December 31, 2016 for which the fair value declined significantly below amortized cost and were considered other-than-temporary impairments.

Note 4—Fair Value Measurements

Valuation of Investments

Level 1 and Level 2

The Company’s available-for-sale securities include money market funds, certificates of deposits, corporate notes, 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, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data.

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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 June 30, 2017 and December 31, 2016 (in thousands):



	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
June 30, 2017	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds (1)	$	40,108	$	40,108	$	—	$	—
Certificates of deposit (2)	950		—		950		—
U.S. government and agency obligations (2)	20,619		—		20,619		—
Corporate notes and obligations (2)	18,671		—		18,671		—
Foreign currency derivative contracts (3)	37		—		37		$	—
Total	$	80,385	$	40,108	$	40,277	$	—
Liabilities:
Foreign currency derivative contracts (4)	$	285	$	—	$	285	$	—
Total	$	285	$	—	$	285	$	—



	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	$	—

_____________________________________________________________________________

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

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

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

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

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Derivative Financial Instruments

The Company entered into foreign currency derivative contracts with a financial institution to reduce the risk that its 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 Australian, Canadian, Euros and Pound Sterling. Foreign currency derivative contracts are mark-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.

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



		June 30, 2017		December 31, 2016
Notional amount of foreign currency derivative contracts		$	6,622	$	3,850
Fair value of foreign currency derivative contracts		$	6,374	$	3,873

The fair value of the Company’s outstanding derivative instruments are summarized below (in thousands):
		Fair Value of Derivative Instruments

	Balance Sheet Location	June 30, 2017		December 31, 2016
Derivative Assets
Derivatives not designated as hedging instruments:
Foreign currency derivative contracts	Prepaid expenses and other current assets	$	37	$	75

Derivative Liabilities
Derivatives not designated as hedging instruments:
Foreign currency derivative contracts	Accrued expenses	$	285	$	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). During both the three and six months ended June 30, 2017 and June 30, 2016 such changes were immaterial.

The Company did not have any transfers of its fair value measurement between Level 1, Level 2 and Level 3 during the periods presented.

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Note 5—Commitments and Contingencies

Except as discussed below, there were no material changes in the Company's commitments under contractual obligations as disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2016.

During the six months ended June 30, 2017, 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 June 30, 2017 are as follows (in thousands):



	Unconditional Purchase Commitments (1)		Operating Lease Commitments (2)
Years ending:
Remainder of 2017	$	11,482	$	2,142
2018	14,774		4,689
2019	10,305		4,385
2020	3,008		4,425
2021	—		4,049
2022 and beyond	—		2,693
Future minimum payments	$	39,569	$	22,383


(1)	Primarily represents amounts associated with agreements that are enforceable, legally binding and specific 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 non-cancellable operating lease agreements that expire at various dates through 2022.

Letter of Credit

The Company obtained a $1.4 million letter of credit on October 1, 2016 for its leased space in Dublin, California. The letter of credit will expire on October 1, 2017. As of June 30, 2017 there was no balance outstanding under this letter of credit.

Revolver Line of Credit

In May 2014, the Company entered into a credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under which Wells Fargo agreed to make a revolving loan ("Revolver") to the Company in an amount not to exceed $15.0 million. The Revolver matures in May 2019. Since the Revolver was paid in June 2015 there has not been a balance outstanding. There was no balance outstanding as of June 30, 2017.

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

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

Warranties and Indemnification

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

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

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Note 6—Restructuring and Other

Restructuring and other expenses primarily consist of costs associated with exit from excess facilities, streamlining operations and employee terminations.

The Company incurred restructuring and other expenses of $0.4 million and $0.1 million during the three months ended June 30, 2017 and June 30, 2016, respectively, and $1.0 million and $0.4 million during the six months ended June 30, 2017 and June 30, 2016, respectively.

The following tables set forth a summary of accrued restructuring and other expenses for the six months ended June 30, 2017 and 2016 (in thousands):



	December 31, 2016		Additions		Adjustments		Cash Payments			June 30, 2017
Severance and termination related costs	$	—	$	872	$	—	$	(577	)	$	295
Facilities related costs	269		100		—		(179		)	190
Total accrued restructuring and other expenses	$	269	$	972	$	—	$	(756	)	$	485



	December 31, 2015		Additions		Adjustments		Cash Payments			June 30, 2016
Facilities related costs	$	17	$	405	$	—	$	(120	)	$	302
Total accrued restructuring and other expenses	$	17	$	405	$	—	$	(120	)	$	302

Note 7—Net Loss Per Share

Basic net loss per share is calculated by dividing net loss for the period by the weighted average common shares outstanding during the period. Diluted net loss per share is calculated by dividing the net loss for the period by the weighted average common shares outstanding, adjusted for all dilutive potential common shares, which includes shares issuable upon the exercise of outstanding common stock options, the release of restricted stock units and purchases of shares pursuant to the Company's employee stock purchase plan ("ESPP"), to the extent these shares are dilutive. For the three and six months ended June 30, 2017 and 2016, the diluted net loss per share calculation was the same as the basic net loss per share calculation as all potential common shares were anti-dilutive.

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



	Three Months Ended June 30,		Six Months Ended June 30,
	2017	2016	2017	2016
Restricted Stock Units	3,582	3,893	3,666	3,655
Stock Options	366	586	382	611
ESPP Shares	108	131	94	114
Total	4,056	4,610	4,142	4,380

The weighted average exercise price per share of stock options excluded for the three months ended June 30, 2017 and June 30, 2016 was $6.69 and $6.72, respectively and six months ended June 30, 2017 and June 30, 2016 was $6.68 and $6.12, respectively.

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Note 8—Stock-based Compensation

Expense Summary

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

The table below sets forth a summary of stock-based compensation expense for the three and six months ended June 30, 2017 and 2016 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Stock options	$	136	$	144	$	281	$	289
Restricted stock units
Performance-based awards	1,771		1,269		3,191		2,449
Service-based awards	7,646		5,696		13,984		10,454
ESPP shares	388		503		735		873
Total stock-based compensation	$	9,941	$	7,612	$	18,191	$	14,065

As of June 30, 2017, there was total unrecognized compensation expense of $36.0 million, $7.5 million, $45 thousand, and $0.8 million related to service-based awards, performance-based awards, stock options, and ESPP shares, respectively, which were expected to be recognized over weighted average periods of 2.0 years, 1.8 years, 0.2 years, and 0.4 years, respectively.

The table below sets forth the functional classification of stock-based compensation expense for the three and six months ended June 30, 2017 and 2016 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Cost of recurring revenue	$	412	$	453	$	835	$	962
Cost of services and license	559		524		1,190		1,036
Sales and marketing	2,027		2,144		4,564		4,298
Research and development	1,765		1,171		3,397		2,340
General and administrative	5,178		3,320		8,205		5,429
Total stock-based compensation	$	9,941	$	7,612	$	18,191	$	14,065

Performance-based Awards

In 2017, the Company granted performance-based restricted stock units with vesting contingent on successful attainment of pre-set SaaS revenue growth and pre-set operating margin targets over the three-year period from January 1, 2017 through December 31, 2019. During the three and six months ended June 30, 2017, expense of $0.5 million and $0.8 million, respectively, net of forfeiture, was recognized.

In 2016, the Company granted performance-based restricted stock units with vesting contingent on attainment of pre-set SaaS revenue growth and pre-set recurring revenue gross margin target over the three-year period from January 1, 2016 through December 31, 2018 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 the Company's executive compensation peer group. During the three and six months ended June 30, 2017, expense of $0.1 million and $0.2 million, respectively, 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 target over the three-year period from July 1, 2015 through June 30, 2018. During the three and six months ended June 30, 2017, expense of $0.8 million and $1.5 million, respectively, 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

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total shareholder return over the same three-year period compared to an index of 17 SaaS companies. These performance shares vested in February 2017. During the first quarter of 2017, expense of $0.4 million, net of forfeiture was recognized. There was no expenses recorded in the second quarter of 2017.

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. Fair value of the performance-based awards, that are subject to SaaS revenue growth and Non-GAAP operating margin is estimated based on the market value of the awards at the date of the grant, adjusted by the respective SaaS revenue growth and Non-GAAP operating margin probability assessment. Fair value of the performance awards that are subject to relative stockholder return and market conditions, is calculated using a Monte Carlo simulation model that estimates the distribution of the potential outcomes of the grants of performance awards based on simulated future index of the peer companies.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model. No stock options were granted during the three and six months ended June 30, 2017 and June 30, 2016.

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



	Six Months Ended June 30,
Employee Stock Purchase Plan	2017	2016
Expected life (in years)	0.50 to 1.00	0.50 to 1.00
Risk-free interest rate	0.65% to 0.82%	0.42% to 0.51%
Volatility	33.0% to 33.1%	45% to 51%
Dividend yield	None	None

Note 9—Income Taxes

Income tax expense for the three months ended June 30, 2017 and June 30, 2016 was $0.4 million and $0.3 million, respectively, and for the six months ended June 30, 2017 and June 30, 2016 was $0.6 million and $0.5 million, respectively. For both the three and six months ended June 30, 2017 and 2016, the income tax expense is mainly attributable to withholding taxes associated with some foreign customers and income in foreign jurisdictions subject to income tax.

In addition, at the beginning of 2017, the Company adopted FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which resulted in the recognition of excess tax benefits in the Company's provision for income taxes rather than paid-in capital. Given the Company's current valuation allowance position in the United States jurisdiction, the adoption of this guidance did not have a material impact on its unaudited condensed consolidated financial statements.

Note 10—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 for the three and six months ended June 30, 2017 and 2016 by geographic areas (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
United States and Canada	$	49,953	$	40,732	$	97,478	$	80,617
EMEA	6,784		5,452		13,268		10,328
Asia Pacific	3,145		2,442		6,110		4,985
Other	1,381		1,125		2,548		2,199
	$	61,263	$	49,751	$	119,404	$	98,129

As of June 30, 2017, the Company's goodwill balance was $75.0 million, of which $24.3 million was located in the U.K. and Ireland (EMEA) and the Company's intangible asset balance was $23.8 million, of which $8.5 million was located in the U.K. and Ireland (EMEA). No other individual country outside the U.S. accounted for more than 10% of the goodwill and intangible asset balances as of June 30, 2017.

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During the three and six months ended June 30, 2017 and 2016, no customer accounted for more than 10% of total revenue.

Note 11—Related-Party Transactions

Lithium Technologies, Inc.

In the normal course of business, the Company entered into agreements with Lithium Technologies, Inc. (“Lithium”), whose then-current Chief Financial Officer was 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 SaaS revenue of $34,377 and $68,442 during the three and six months ended June 30, 2017, respectively, and $49,903 and $87,516 during the three and six months ended June 30, 2016, respectively. In addition, the Company entered into various agreements with Lithium and recognized professional services revenue of $3,238 and $5,701 during the three and six months ended June 30, 2017, respectively, and $13,035 and $17,325 during the three and six months ended June 30, 2016, respectively.

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 for SaaS revenue prior to the Company's acquisition of the assets of ViewCentral, and the renewal was at the same terms as the original agreement. In connection with this agreement, the Company recognized SaaS revenue of $29,825 and $59,323 during the three and six months ended June 30, 2017, respectively, and none during the three and six months ended June 30, 2016. Further, the Company paid $39,000 for TIBCO Jaspersoft subscription fee in April 2017.

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

This section should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations section, and the Consolidated Financial Statements and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2016, and with the unaudited condensed consolidated financial statements and notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. This section contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, which relate to our future plans, objectives, expectations, prospects, intentions and financial performance and the assumptions that underlie these statements. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” "may," “will,” and similar expressions and the negatives thereof identify forward-looking statements, which generally are not historical in nature. These forward-looking statements include, but are not limited to, statements concerning the following: levels of recurring revenue, levels of SaaS revenue, changes in and expectations with respect to revenue, revenue growth and gross profits, operating expense levels, the impact of quarterly fluctuations of revenue and operating results, staffing and expense levels, expected cash and investment balances, the impact of foreign exchange rates and interest rate fluctuations, projected future financial performance, our anticipated growth and trends in our businesses, our business strategy, and other characterizations of future events or circumstances. As and when made, management believes that these forward-looking statements are reasonable. Caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made and may be based on assumptions that do not prove to be accurate. In addition, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Many of these risks and uncertainties are described in the “Risk Factors” section of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or circumstances occurring after the date of this report, except as required by law.

Overview

CallidusCloud® is a global leader in cloud-based sales, marketing, learning and customer experience solutions. CallidusCloud enables our 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. Approximately 5,700 organizations across a broad set of industries rely on CallidusCloud to help optimize their Lead to Money process, train their personnel 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 related maintenance 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) retaining along with cross-selling and up-selling to our customer base; (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

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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;our ability to attract new personnel and retain and motivate current personnel and our ability to retain along with cross-selling and up-selling to our customer base.

Customer Expansions and Revenue Growth

For the three months ended June 30, 2017, we added approximately 300 net new customers, for a total of approximately 5,700 customers in the period.

For the three months ended June 30, 2017, SaaS revenue was $47.7 million, representing an increase of $11.6 million, or 32% compared to the same period in 2016. Total recurring revenue, which includes SaaS and maintenance revenue, increased by $9.3 million or 24% compared to the same period in 2016 as a result of higher SaaS revenue. Total revenue was $61.3 million an increase of $11.5 million or 23% compared to the same period in 2016. Recurring revenue gross profit was 72% and 74%, for the three months ended June 30, 2017 and June 30, 2016, respectively. Overall gross profit was 60% for the three months ended June 30, 2017 compared to 63% for the three months ended June 30, 2016.

Revenue related to Overages (customers using our products in excess of contracted usage) was immaterial during the three and six months ended June 30, 2017 and June 30, 2016.

SaaS revenue continued to drive the increases in both recurring revenue and total revenue, reflecting continued market acceptance of our Lead to Money solutions. We have discontinued selling on-premise software for our commissions product, sales of which included license fees and on-going maintenance fees paid for support and upgrades during the life of the product. We will no longer realize license fee revenue. We plan to support most of our existing maintenance fee contracts through 2017. We are experiencing a decline in maintenance fee revenue due to conversion of existing customers to our cloud-based commissions product.

Acquisitions

On June 2, 2017, the Company acquired Learning Heroes Ltd. ("Learning Heroes"), a privately-held company that is a provider of innovative education content. The purchase of Learning Heroes enhances the Company's mobile learning platform, and accelerates its creation of high quality, engaging and impactful learning experiences. Learning Heroes' creates courses that can run on any Learning Management System. The purchase consideration was $10.3 million, which included $8.8 million in cash and 1.2 million Pound Sterling indemnity holdback to be paid one year from the date of the agreement.

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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 unaudited condensed 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 there are material differences between these estimates and actual results, our future financial condition or results of operations will be affected. We evaluate our assumptions, judgments and estimates on a regular basis. We also discuss our critical accounting policies and estimates with the Audit Committee of our Board of Directors.

We believe that the assumptions, judgments and estimates involved in accounting for revenue recognition, stock-based compensation, valuation of acquired intangible assets, goodwill impairment, long-lived assets impairment, contingent consideration and income taxes have the greatest potential impact on our unaudited condensed consolidated financial statements. These areas are key components of our results of operations and are based on complex rules that 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 our actual results. There were no significant changes in our critical accounting policies and estimates during the three and six months ended June 30, 2017 compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.

Recently Issued Accounting Pronouncements

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

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2017 and 2016

Revenue, Cost of Revenue and Gross Profit

The following table sets forth the changes in revenue, cost of revenue and gross profit for the three and six months ended June 30, 2017, compared to the same period in 2016 (in thousands, except for percentage data):



	Three Months Ended June 30, 2017		Percentage of Revenues	Three Months Ended June 30, 2016		Percentage of Revenues	Increase (Decrease)			Percentage Change
Revenue:
Recurring	$	48,605	79%	$	39,290	79%	$	9,315		24%
Services and license	12,658		21%	10,461		21%	2,197			21%
Total revenue	$	61,263	100%	$	49,751	100%	$	11,512		23%

Cost of revenue:
Recurring	$	13,535	28%	$	10,137	26%	$	3,398		34%
Services and license	10,919		86%	8,332		80%	2,587			31%
Total cost of revenue	$	24,454	40%	$	18,469	37%	$	5,985		32%

Gross profit:
Recurring	$	35,070	72%	$	29,153	74%	$	5,917		20%
Services and license	1,739		14%	2,129		20%	(390		)	(18)%
Total gross profit	$	36,809	60%	$	31,282	63%	$	5,527		18%

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	Six Months Ended June 30, 2017		Percentage of Revenues	Six Months Ended June 30, 2016		Percentage of Revenues	Increase (Decrease)			Percentage Change
Revenue:
Recurring	$	94,802	79%	$	76,896	78%	$	17,906		23%
Services and license	24,602		21%	21,233		22%	3,369			16%
Total revenue	$	119,404	100%	$	98,129	100%	$	21,275		22%

Cost of revenue:
Recurring	$	26,557	28%	$	20,099	26%	$	6,458		32%
Services and license	20,859		85%	16,593		78%	4,266			26%
Total cost of revenue	$	47,416	40%	$	36,692	37%	$	10,724		29%

Gross profit:
Recurring	$	68,245	72%	$	56,797	74%	$	11,448		20%
Services and license	3,743		15%	4,640		22%	(897		)	(19)%
Total gross profit	$	71,988	60%	$	61,437	63%	$	10,551		17%

Revenue

Total Revenue. The increases in total revenue for the three and six months ended June 30, 2017 compared to the same periods in 2016 were due to continued SaaS revenue growth and corresponding services growth. New customer adoption of our Lead to Money suite, continued cross-sell and up-sell from our current customer base, and acquisitions also contributed to our growth in revenue.

Recurring Revenue. Recurring revenue consists of SaaS revenue and maintenance revenue. For the three months ended June 30, 2017, SaaS revenue increased by $11.6 million or 32%, from the same period in 2016. This increase was offset in part by a decrease in maintenance revenue of $2.3 million. For the six months ended June 30, 2017, SaaS revenue increased by $22.2 million, or 31%. This increase was offset in part by a decrease in maintenance revenue of $4.3 million. The increases in SaaS revenues were primarily due to net new bookings related to new customers, along with cross-sell and up-sell into our current customer base, which resulted from our sales force investment in response to our position as a market leader in the Sales Performance Management suite. The decrease in maintenance revenue was as a result of customers continuing to convert 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 $2.2 million for the three months ended June 30, 2017 compared to the same period in 2016, and by $3.4 million for the six months ended June 30, 2017 compared to the same period in 2016. The increases in services revenue are associated with increased sales of our SaaS offerings. During the three and six months ended June 30, 2017 license revenue was immaterial because we stopped selling on-premise products in early 2016.

Cost of Revenue and Gross Profit

Cost of Recurring Revenue. The increase in cost of recurring revenue for the three months ended June 30, 2017 compared to the same period in 2016 was primarily due to a $3.1 million increase in depreciation, maintenance, equipment and other related expenses as we invested in our state of the art data centers and a $0.3 million increase in personnel related costs. The increase in cost of recurring revenue for the six months ended June 30, 2017 compared to the same period in 2016 was primarily due to a $5.0 million increase in depreciation, maintenance, equipment and other related expenses as we invested in our state of the art data centers and a $1.5 million increase in personnel related costs.

Cost of Services and License Revenue. The increase in cost of services and license revenue during the three months ended June 30, 2017 compared to the same period in 2016 was primarily due to $2.0 million increase in personnel-related costs and $0.6 million increase in outside consultants to increase service capacity to support increases in revenue. The increase in cost of services during the six months ended June 30, 2017 compared to the same period in 2016 was primarily due to $3.1 million increase in personnel related costs and $1.2 million in outside consultants to increase service capacity to support increases in revenue.

Recurring Revenue Gross Profit. The increase in recurring revenue gross profit for the three months ended June 30, 2017, compared to the same period in 2016, reflects increased SaaS revenue of $11.6 million due to net new bookings growth. This increase was partially offset by a decrease of $2.3 million in maintenance revenue, and a $3.1 million increase in depreciation and maintenance, equipment and other related expenses, as a result of our investment in data center costs and a

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$0.3 million increase in personnel related costs. The increase in recurring revenue gross profit for the six months ended June 30, 2017, compared to the same period in 2016, reflects increased SaaS revenue of $22.2 million. This increase was partially offset by a decrease of $4.3 million in maintenance revenue, a $5.0 million increase in depreciation, maintenance, equipment and other related expenses as we invested in our state of the art data centers and a $1.5 million increase in personnel related costs.

Services and License Revenue Gross Profit. The decrease in services and license revenue gross profit for the three months ended June 30, 2017, compared to the same period in 2016, was attributable to an increase of $2.0 million in personnel related costs, and $0.6 million in outside consulting costs. This decrease was partially offset by an increase in service revenues of $2.2 million. The higher service expenses over revenue is primarily due to our investments in personnel and consulting costs to increase service capacity as we prepare for growth in our service revenue associated with increased SaaS offerings in 2017. The decrease in services and license revenue gross profit for the six months ended June 30, 2017, compared to the same period in 2016, was attributable to $3.1 million increase in personnel related costs and $1.2 million in outside consultants to increase service capacity to support increase in revenue, partially offset by an increase in services revenue of $3.4 million.

Operating Expenses

The following table outlines the changes in operating expenses for the three and six months ended June 30, 2017, compared to the same periods in 2016 (in thousands, except percentage data):



	Three Months Ended June 30, 2017		Percentage of Total Revenues	Three Months Ended June 30, 2016		Percentage of Total Revenues	Increase (Decrease)		Percentage Change
Operating expenses:
Sales and marketing	$	21,983	36%	$	19,682	40%	$	2,301	12%
Research and development	9,277		15%	7,248		15%	2,029		28%
General and administrative	12,356		20%	9,296		19%	3,060		33%
Restructuring and other expenses	375		1%	86		—%	289		—%
Total operating expenses	$	43,991	72%	$	36,312	73%	$	7,679	21%



	Six Months Ended June 30, 2017		Percentage of Total Revenues	Six Months Ended June 30, 2016		Percentage of Total Revenues	Increase (Decrease)		Percentage Change
Operating expenses:
Sales and marketing	$	44,674	37%	$	38,585	39%	$	6,089	16%
Research and development	18,578		16%	14,490		15%	4,088		28%
General and administrative	21,722		18%	17,551		18%	4,171		24%
Restructuring and other expenses	972		1%	402		—%	570		142%
Total operating expenses	$	85,946	72%	$	71,028	72%	$	14,918	21%

Sales and Marketing. The increase in sales and marketing expenses for the three months ended June 30, 2017 compared to the same period in 2016 was primarily due to an increase in sales capacity and headcount, resulting in a $3.8 million increase in personnel related costs, which includes an increase of $1.4 million in commissions and a decrease of $0.1 million in stock-based compensation expense. This increase in expense was partially offset by a decrease of $1.5 million in marketing events costs due to the timing of our C3 user conference from the second quarter in 2016 to the third quarter in 2017. The increase in sales and marketing expenses for the six months ended June 30, 2017 compared to the same period in 2016 was primarily due to an increase of $7.5 million in personnel related costs, which includes an increase of $2.7 million in commissions and $0.3 million in stock-based compensation expense. This increase in expense was partially offset by a $1.4 million decrease in marketing events due to the timing of our C3 user conference from the second quarter in 2016 to the third quarter in 2017.

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Research and Development. The increase in research and development expenses for the three months ended June 30, 2017 compared to the same period in 2016 was primarily due to a $1.6 million increase in personnel related costs, which includes an increase of $0.6 million of stock-based compensation expense as well as an increase of $0.4 million in consulting expense. The increase in research and development expenses for the six months ended June 30, 2017 compared to the same period in 2016 was primarily due to $3.8 million in personnel related costs, which includes an increase of $1.1 million in stock-based compensation expense.

General and Administrative. The increase in general and administrative expenses for the three months ended June 30, 2017 compared to the same period in 2016 was primarily due to a $3.1 million increase in personnel related costs, which includes $1.9 million in stock-based compensation expense. The increase in general and administration expenses for the six months ended June 30, 2017 compared to the same period in 2016 was primarily due to $4.2 million increase in personnel related costs, which includes $2.8 million in stock-based compensation expense. The increase in stock-based compensation expense primarily relates to the former CFO who retired on June 30, 2017.

Restructuring and Other. Restructuring and other expense for the three and six months ended June 30, 2017 was primarily related to severance costs for the elimination of positions at our headquarters, India and Serbia offices, and the relocation of our United Kingdom office. For the same periods in 2016, we incurred relocation costs of our Birmingham, Alabama offices.

Stock-based Compensation

The following table sets forth a summary of our stock-based compensation expenses for the three and six months ended June 30, 2017, compared to the same period in 2016 (in thousands, except percentage data):



	Three Months Ended June 30, 2017		Three Months Ended June 30, 2016		Increase (Decrease)			Percentage Change
Stock-based compensation:
Cost of recurring revenue	$	412	$	453	$	(41	)	(9)%
Cost of services revenue	559		524		35			7%
Sales and marketing	2,027		2,144		(117		)	(5)%
Research and development	1,765		1,171		594			51%
General and administrative	5,178		3,320		1,858			56%
Total stock-based compensation	$	9,941	$	7,612	$	2,329		31%



	Six Months Ended June 30, 2017		Six Months Ended June 30, 2016		Increase (Decrease)			Percentage Change
Stock-based compensation:
Cost of recurring revenue	$	835	$	962	$	(127	)	(13)%
Cost of services revenue	1,190		1,036		154			15%
Sales and marketing	4,564		4,298		266			6%
Research and development	3,397		2,340		1,057			45%
General and administrative	8,205		5,429		2,776			51%
Total stock-based compensation	$	18,191	$	14,065	$	4,126		29%

The increase for the three and six months ended June 30, 2017 compared to the same periods in 2016 was primarily due to the timing of restricted stock and performance share unit grants, an increased stock price, and increased employee stock purchase plan participation. In addition, the increase in stock-based compensation expense charged to general and administrative primarily relates to stock-based compensation expense of the former CFO who retired on June 30, 2017.

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Other Items

The following table sets forth changes in other items for the three and six months ended June 30, 2017, compared to the same period in 2016 (in thousands, except percentage data):



	Three Months Ended June 30, 2017			Three Months Ended June 30, 2016			Increase (Decrease)		Percentage Change
Other income (expense)
Interest income and other income (expense)	$	271		$	(277	)	$	548	(198)%
Interest expense	(23		)	(39		)	16		(41)%
	$	248		$	(316	)	$	564	(178)%
Provision for income taxes	$	413		$	341		$	72	21%



	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016			Increase (Decrease)		Percentage Change
Other income (expense)
Interest income and other income (expense)	$	336		$	(52	)	$	388	(746)%
Interest expense	(42		)	(82		)	40		49%
	$	294		$	(134	)	$	428	(319)%
Provision for income taxes	$	581		$	497		$	84	17%

Interest Income and Other Income (Expense)

Interest income and other expense increased during the three months ended June 30, 2017 compared to the same period in 2016 because of higher interest income of $0.1 million from increasing our money market and short-term investment balance and a change of $0.4 million from foreign currency gains during the three months ended June 30, 2017 compared to foreign currency losses during the three months ended June 30, 2016. Interest income and other expense increased during the six months ended June 30, 2017 compared to the same period in 2016 because of higher interest income of $0.3 million from increasing our money market and short-term investment balance and a change of $0.1 million from foreign currency gains during the six months ended June 30, 2017 compared to foreign currency losses during the six months ended June 30, 2016.

Interest Expense

Interest expense for the three and six months ended June 30, 2017 was similar to interest expense for the same periods in 2016.

Provision for Income Taxes

Income tax expense for the three months ended June 30, 2017 and June 30, 2016 was $0.4 million and $0.3 million, respectively and for the six months ended June 30, 2017 and June 30, 2016 was $0.6 million and $0.5 million, respectively. For both the three and six months ended June 30, 2017 and 2016, the income tax expense is mainly attributable to withholding taxes associated with some foreign customers and income in foreign jurisdictions subject to income tax.

Liquidity and Capital Resources

As of June 30, 2017, our principal sources of liquidity were cash and cash equivalents and short-term investments of $172.4 million and accounts receivable of $55.8 million, compared to $187.3 million and $55.5 million at December 31, 2016, respectively.

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 to us in an amount not to exceed $15 million. The Revolver matures in May 2019. Outstanding borrowings under the Revolver bear interest, at a base rate plus an applicable margin that ranges between 0.75% and 2.25% depending on our leverage ratio. Interest is payable every three months. Since the Revolver was paid in June 2015 there has not been a balance outstanding. As of June 30, 2017 we had no outstanding borrowings under the Revolver.

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



	Six Months Ended June 30,
	2017			2016
Net cash provided by operating activities	$	13,694		$	12,975
Net cash used in investing activities	$	(20,692	)	$	(15,600	)
Net cash (used in) provided by financing activities	$	(9,361	)	$	37

Cash Flows During the Six Months Ended June 30, 2017

Net cash provided by operating activities was $13.7 million for the six months ended June 30, 2017 compared to $13.0 million net cash provided in the six months ended June 30, 2016. During the six months ended June 30, 2017, net loss was $14.2 million, which included $18.2 million in stock-based compensation and $9.6 million in depreciation and amortization expense. Changes in operating assets and liabilities used $0.8 million in cash during the first half of 2017, primarily driven by a decrease in accrued payroll and related expenses of $4.4 million, an increase in prepaid and other assets of $1.7 million, and an increase in accounts receivable of $0.4 million, partially offset by an increase in deferred revenue of $3.8 million, an increase in accounts payable, accrued expenses and accrued restructuring of $1.9 million.

Net cash used in investing activities was $20.7 million during the six months ended June 30, 2017, compared to $15.6 million cash used in the six months ended June 30, 2016. During the six months ended June 30, 2017, net cash used in investing activities included $11.5 million used for the Learning Heroes Ltd. and RevSym Inc. acquisitions, as well as a payroll tax payment related to DataHug Ltd acquisition, $7.7 million for purchases of software and other equipment for our data center investments, $1.1 million for net purchases of short-term investments and $0.5 million for purchases of intangibles.

Net cash used in financing activities was $9.4 million during the six months ended June 30, 2017, compared to an immaterial amount of cash provided during the six months ended June 30, 2016. During the six months ended June 30, 2017, the net cash used in financing activities was primarily due to $11.9 million for the repurchase of performance-based and restricted stock units from employees for payment of taxes on vesting of the performance-based and restricted stock units and a $0.1 million stakeholder fund payment related to our BridgeFront acquisition, partially offset by $2.6 million of proceeds from the issuance of common stock.

Forward-Looking Cash Commitments

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

Contractual Obligations and Commitments

Please refer to Note 5 of our notes to unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q for further information. For additional information on existing unconditional purchase commitments, please refer to our Annual Report on Form 10-K for the year ended December 31, 2016.

Off-Balance Sheet Arrangements

With the exception of the contractual obligations referred to in Note 5 of our notes to unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q, we have no material off-balance sheet arrangements that have not been recorded in our unaudited condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the three and six months ended June 30, 2017, there were no significant changes to our quantitative and qualitative disclosures about market risk. Please refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended December 31, 2016 for a more complete discussion on the market risks we encounter.

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Item 4. Controls and Procedures

Evaluation of Disclosures Controls and Procedures

Our Chief Executive Officer ("CEO") and our CFO, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended, Rules 13a-15(e) or 15d-15(e)) as of June 30, 2017, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures.

Changes in Internal Control Over Financial Reporting

In connection with their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our CEO and CFO did not identify any changes in our internal control over financial reporting during the three months ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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 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 deciding whether to buy or sell shares of our common stock. 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 $14.2 million during the six months ended June 30, 2017, $19.0 million in 2016, $13.1 million in 2015 and $11.6 million in 2014. We had an accumulated deficit of $317.1 million as of June 30, 2017. We intend to continue to invest in our business, including with respect to our employee base, sales and marketing, new product development, and improvement of 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 by managing 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 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.

Period-to-period comparisons of our results of operations should not be relied upon as definitive indicators of future performance. 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 that quarter and future quarters. We may be unable to generate sufficient new revenue to offset revenue declines and we may be unable to adjust our operating expenses and capital expenditures to align with 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. Other factors that may cause our revenue and operating results to fluctuate include:


•	timing of customer budget cycles;

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


•	size, timing and contract terms of new customer contracts, and unpredictable or 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 solutions for which we recognize recurring revenue. 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

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•	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, 2016 through June 30, 2017, our employee headcount increased from 1,113 to 1,180 employees, and our number of customers increased from over 5,200 to 5,700. 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 36 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.

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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 and network equipment failures, cyber-attacks or other unauthorized intrusion and other events. Moreover, our headquarters are located in the San Francisco Bay Area, a region known for seismic activity. Although we have redundant facilities to support our operations, our systems, procedures and controls might not be adequate for all eventualities, which could prolong the adverse impact.

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

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

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 “Recently Issued 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 and standards regarding the personally identifiable information of their downstream customers. In the United States, these heightened obligations and standards 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 or take 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.

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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

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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 Learning Heroes Ltd. and RevSym Inc. in 2017, 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

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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

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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.

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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:

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•	require costly litigation to resolve;


•	absorb significant management time;


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


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


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


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

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

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

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

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


•	greater difficulty in supporting and localizing our solutions;


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


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


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


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


•	differing abilities to protect our intellectual property rights; and


•	possible political and economic instability.

We may be affected by fluctuations in currency exchange rates.

We are potentially exposed to adverse movements in currency exchange rates. Although most of our revenue and expenses occur in U.S. Dollars, some occur in local currencies and the amounts 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.

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

Our services revenue, which includes fees for consulting, implementation and training, represented 21% of our revenue in 2016 and 21% of our revenue during the six months ending June 30, 2017. 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;

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•	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

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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),

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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 6. Exhibits

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

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SIGNATURES

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



		CALLIDUS SOFTWARE INC.

Date:	August 4, 2017	By:	/s/ ROXANNE OULMAN
			Roxanne Oulman
			Executive Vice President, Chief Financial Officer
			(duly authorized officer)

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EXHIBIT INDEX TO

CALLIDUS SOFTWARE INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2017



Exhibit Number		Description
10.1		Amendment Number Seven, dated May 18, 2017, 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 May 13, 2014.
31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
101		Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016, (ii) Condensed Consolidated Statements of Comprehensive Loss for the three months and six months ended June 30, 2017 and 2016, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 and (iv) Notes to Condensed Consolidated Financial Statements.

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