10-K 1 cald-12312015x10k.htm 10-K 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
 
 
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
Or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            .
Commission file number: 000-50463
Callidus Software Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
77-0438629
(I.R.S. Employer
Identification Number)
4140 Dublin Boulevard, Suite 400
Dublin, California 94568
(Address of principal executive offices, including zip code)
(925) 251-2200
(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share
Preferred Stock Purchase Rights
 
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes o    No ý
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, based on the closing sale price of the Registrant's common stock on June 30, 2015, as reported on the NASDAQ Global Market, was approximately $842.0 million. Shares of common stock held by each executive officer and director and by each person who may be deemed to be an affiliate of the Registrant have been excluded from this computation. The determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes. As of February 1, 2016, the Registrant had 56,273,733 of its common stock, $0.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the information called for by Part III of this Form 10-K are hereby incorporated by reference from the definitive proxy statement for the Registrant's annual meeting of stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after the Registrant's fiscal year ended December 31, 2015.
 

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CALLIDUS SOFTWARE INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2015
TABLE OF CONTENTS
Item 10.
Directors, Executive Officers and Corporate Governance
 
Item 11.
Executive Compensation
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
Item 14.
Principal Accountant Fees and Services
 
Signatures
 

© 2016 Callidus Software Inc. All rights reserved. Callidus, Callidus Software, the Callidus Software logo, CallidusCloud, the CallidusCloud logo, 6FigureJobs, BridgeFront, Clicktools, iCentera, Lead to Money, LeadFormix, LeadRocket, Learnpass, Litmos, the Litmos logo,  Love Your LMS, Portals for Mortals, Producer Pro, SalesGenius, Surve, Syncfrog, Thunderbridge and TrueComp are trademarks, service marks, or registered trademarks of Callidus Software Inc. and its affiliates in the United States and other countries. All other brand, service or product names are trademarks or registered trademarks of their respective companies or owners.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
            This Annual Report on Form 10-K, including the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in Item 7 of this report, and other materials accompanying this Annual Report on Form 10-K contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "may," "will," and similar expressions and the negatives thereof identify forward-looking statements, which generally are not historical in nature. These forward-looking statements include, but are not limited to, statements concerning the following: levels of revenue, changes in and expectations with respect to revenue, revenue growth and gross margins, anticipated growth and growth strategies, the impact of competition, our ability to sell products, future operating expense levels, future operating results, future cash flows, the impact of quarterly fluctuations of revenue and operating results, staffing and expense levels, expected cash and investment balances and the impact of foreign exchange rate fluctuations. Management believes that these forward-looking statements were reasonable when made. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of the date when made and may be based on assumptions that do not prove to be accurate. Callidus Software Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, occurring after the date of this Annual Report on Form 10-K. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. For a detailed discussion of these risks and uncertainties, see the "Business" and "Risk Factors" sections in Items 1 and 1A, respectively, of this Annual Report on Form 10-K.
PART I
Item 1.    Business

Overview

CallidusCloud® is a global leader in cloud-based sales, marketing, learning and customer experience solutions. CallidusCloud enables its customers to accelerate their Lead to Money process with a suite of solutions that, among other things, identify leads, train personnel, implement territory and quota plans, enable sales forces, automate configuration pricing and quoting, manage contracts, streamline sales compensation and capture customer feedback for competitive advantage. Approximately 4,600 organizations, across a broad set of industries, rely on CallidusCloud to optimize the Lead to Money process and close more deals, faster.

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

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

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

Our Lead to Money Solutions

Our Lead to Money suite and technology solutions are detailed below.
Lead
•
Marketing Automation empowers customers to generate high-quality sales leads by capturing intelligence about buyers' behaviors and engaging them across multiple channels. Marketing Automation tracks buyers through their journey identifying which are ready to buy, and which should continue to be nurtured before being engaged by the sales force. Additionally, our Marketing Automation solution provides sales professionals the power of

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social media and marketing automation in an easy to use mobile friendly format. Sales professionals can listen and engage with their prospects across social media channels and create trackable email marketing campaigns that generate relevant alerts as the prospect engages.

Planning
•
Territory and Quota helps customers evaluate their territory, quota distribution plans and strategies for meeting corporate sales goals. Territory and Quota unites relevant data to improve decision-making by customers around buyers and sales opportunities, coupled with analytics to size and value territories.

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

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

•
Litmos Content enables course developers to collaboratively create courses that can be published to both desktop browsers and mobile devices in one joint package. It accelerates the production of powerful mobile-friendly training courses to reduce training costs.

•
Litmos Healthcare is a vertical Litmos Content solution which delivers educational and compliance content and services to healthcare, health plans, government and business institutions.  Litmos Healthcare is a cloud based solution allowing users to create compliance training plans and enables editing of off-the shelf course content to fit unique organization-specific policies, procedures, and practices. Customizable online training solutions reduce organizational risks and help maximize financial performance.

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

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

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

    

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

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

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

•
MySalesGame combines gamification and social technology to create an innovative platform that taps into the natural competitiveness of sales people and provides the tools necessary to drive performance-improving behavioral change. MySalesGame breaks down complex tasks into smaller easier to manage objectives, with clear communication of goals and instant recognition of achievements to drive enhanced completion.

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

Technology
•
Thunderbridge combines big data technology with predictive analytics and visualizations to enable real-time exploration of critical sales data to predict outcomes. Access to big sales data, and the ability to analyze it, is a key to improving sales and channel decision-making. This product is initially targeted for the insurance and telecom markets.

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

•
Data Hub enables customers to move data in real-time between popular third party applications and our solutions using an incredibly flexible, scalable, and powerful integration platform. Data Hub synchronizes data such as sales opportunities, product catalogs and human resource information across different applications to make sure critical business processes use the right data.

Services

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

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

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

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

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

Operations, Technology and Development

Most of our customers implement our solutions as an on-demand SaaS-based subscription, and some enter into an on-premise license arrangement. Our solutions can be configured with a selection of service levels and options to suit an organization's business objectives, requirements and resources. With our SaaS solutions, our customers rely on our Lead to Money SaaS operations services to provide the infrastructure operations and software required for improving their sales effectiveness and sales performance management. In addition, our Business Process Outsourcing services provide plan and reporting administration services, such as compensation plan maintenance, coaching plan management, portal management, report design and maintenance. Business Process Outsourcing services include customer service, issue resolution, and production support. Customers that select these services do not need to hire or train personnel to run and manage the application.
            
We have developed our on-demand infrastructure with the goal of maximizing the availability, performance, and security of our solutions through several hosting facilities. Our scalable hosting infrastructure and application architecture enable us to offer services to our global customers at mutually agreed service level arrangements. Our information security policies are modeled on the ISO 27002, Statement on Standards for Attestation Engagements (SSAE)16 and the European Commission's standard contractual clauses.

We organize our development staff along product lines, with development operations groups that provide centralized support for quality assurance and deployment. In 2015, 2014 and 2013, we recorded research and development expenses of $26.1 million, $20.3 million and $17.1 million, respectively. These expenses include stock-based compensation expenses.

Customers

We ended 2015 with approximately 4,600 customers. Our customers are diverse in size and type across a wide variety of industries, with a focus on telecommunications, insurance, banking, and technology markets. In 2015, 2014 and 2013, no single customer accounted for more than 10% of our revenue.

Sales and Marketing

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


            

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

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

Alliances and Partnerships

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

Competition

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

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

•Marketing: Marketo, Oracle and Pardot

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

•Customer Experience: Allegiance, GetFeedback and Medallia

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

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

•industry-specific domain expertise;

•scalability and flexibility of solutions;

•quality of customer service;

•functionality of solutions;

•total cost of ownership; and

•ease of use.

            




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We believe that we compete effectively with other established enterprise software companies due to our broad suite of solutions beyond core commission management, established market leadership, domain expertise, and our highly scalable architecture. Furthermore, we believe we have developed the domain expertise necessary to meet the dynamic requirements of our customers' complex and growing sales performance and sales effectiveness programs.
            
We believe that our products offer customers a more cost-effective and more extensive alternative to their internally-developed solutions, which are generally expensive, inflexible and difficult to maintain, particularly for companies with increasingly complex sales performance programs and sales channels. We also believe that our suite of SaaS-based solutions for the spectrum of Lead-to-Market functions has advantages over multiple single-point solutions, including cost-effectiveness, ease of implementation and ease of use.

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

Intellectual Property

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

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

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

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

Employees
    
As of December 31, 2015, we had 901 employees. None of our employees are represented by a labor union.

Segment and Geographic Information

We operate in one reportable segment, which is the development, marketing and sale of enterprise software and related services. See Note 14 to our consolidated financial statements.


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Executive Officers

The following table sets forth information about our executive officers as of December 31, 2015:
Name
 
Age
 
Position
 
Executive Officer Since
Leslie J. Stretch
 
54

 
President, Chief Executive Officer
 
2005
Bob L. Corey
 
64

 
Executive Vice President, Chief Financial Officer
 
2013
Jimmy Duan
 
53

 
Executive Vice President, Chief Technology Officer
 
2008
            

Leslie J. Stretch has served as our President and CEO since 2007 and has served as a director on our board of directors since July 2008. Mr. Stretch was our Senior Vice President, Global Sales, Marketing and On-Demand Business in 2007, our Senior Vice President, Worldwide Sales from 2006 to 2007 and Vice President, Worldwide Sales from 2005 to 2006. Mr. Stretch is currently on the board of directors of QAD Inc., a provider of enterprise software and services for global manufacturers, and serves on its audit committee. Prior to joining Callidus, Mr. Stretch served as interim Chief Executive Officer for The Hamsard Group, plc., a software solutions and services provider, in the United Kingdom during 2005. Previously, Mr. Stretch served in a variety of roles at Sun Microsystems, Inc. a computer networking company, most recently as Senior Vice President of Global Channel Sales. Prior to joining Sun Microsystems, Inc. (since acquired by Oracle Corporation), Mr. Stretch served in a variety of roles at Oracle Corporation, UK, an enterprise software provider. Mr. Stretch holds a B.A. in Economics and Economic History from the University of Strathclyde and a Postgraduate Diploma in Computer Systems Engineering from the University of Edinburgh.
        
Bob L. Corey has served as our Chief Financial Officer since May 2013. Prior to joining Callidus, Mr. Corey served as the Chief Financial Officer of FrontRange Solutions USA Inc., an enterprise software company, from May 2012 to May 2013. Prior to FrontRange, he served in various roles at Extreme Networks, Inc., an Ethernet solutions company from 2009 to 2011, including as its interim chief executive officer, executive vice president and chief financial officer. From 2003 to 2006, Mr. Corey held a variety of executive positions, including executive vice president and chief financial officer, at Thor Technologies, Inc., an enterprise software company. Mr. Corey currently serves as a member of the board of directors and as chairman of the audit committee for Apigee Corporation, a software development tools and services company. Mr. Corey holds a B.A. with a concentration in accounting from California State University at Fullerton.

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

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

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Table of Contents

Item 1A.    Risk Factors
Factors That Could Affect Future Results

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

We incurred net losses of $13.1 million in 2015, $11.6 million in 2014, and $21.4 million in 2013. We had an accumulated deficit of $283.9 million as of December 31, 2015. We intend to continue to invest in our business, including with respect to our employee base; sales and marketing efforts; development of new products, services, and features; and improvement of our existing products, services, and features. Therefore, to achieve profitability, we must increase our revenue, particularly our recurring revenue by entering into more and larger sales transactions while limiting customer churn, and manage our cost structure in line with our revenue. If we fail to do so, our future results and financial condition will be adversely affected and we may be unable to continue operating.

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

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

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

•
timing of customer budget cycles;

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


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

•
reduced renewals;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•
higher personnel and personnel-related costs;

•
increased costs to integrate products or personnel that we acquire, including time and expense associated with new sales personnel reaching full productivity; and

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



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

We have experienced rapid growth and increased demand for our products over the last few years. Our employee headcount and number of customers have increased significantly, and we expect to continue to grow our headcount significantly in future periods. For example, from the end of fiscal 2014 to the end of fiscal 2015, our employee headcount increased from 741 to 901 employees, and our number of customers increased from approximately 3,700 to 4,600. We anticipate that we will continue to significantly expand our operations and headcount in the near term, and that our customer base will continue to expand. The growth and expansion of our business and our product and service offerings place a significant strain on our management, operations, sales and marketing, and financial resources. To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems, our sales and marketing teams and our ability to manage headcount, capital, and business processes in an efficient manner.

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

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

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

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

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

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

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



        

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

Many of our competitors, particularly our enterprise resource planning competitors, have longer operating histories with significantly greater financial, technical, marketing, service and other resources. Many also have a larger installed base of users, larger marketing budgets and broader relationships, established distribution agreements, and greater name recognition. Some of our competitors' products may also be more effective at performing particular sales effectiveness or 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 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 our ability to adapt our products for integration with their new releases and could result in the loss of both sales opportunities and renewals of on-demand services and maintenance.

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

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

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

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

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




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

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

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

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

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

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

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

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

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




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

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

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

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

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

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

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

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

        

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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 BridgeFront LLC in 2015 and LeadRocket, Inc. and Clicktools Ltd. in 2014. We may continue to acquire or make investments in other companies, products, services and technologies in the future. Acquisitions and investments may cause disruptions in or add complexity to our operations and involve a number of risks, including the following:

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

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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;

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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;

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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;

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

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

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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;

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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

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

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


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

We license technology from several software providers for our reporting, analytics and integration applications, and we anticipate continuing to license technologies from these or other providers in connection with our current and future products. We also rely on generally available third-party software to run our applications. Any of these software applications may not continue to be available on commercially reasonable terms, if at all, or new versions may be released that are incompatible with our offerings. Some of the products could be difficult to replace, and developing or integrating new software with our products could require months or years of design and engineering work. Modification or loss of access to any of these technologies could result in delays in providing our products until equivalent technology is developed or, if available, is identified, licensed and integrated. Acquisitions of third-party technologies by other companies, including our competitors, may have a material adverse impact on us if the acquirer seeks to cancel or change the terms of our license.

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

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

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

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rapid technological advances,

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changing customer needs, and

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frequent new product introductions and enhancements.

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

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

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


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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 or contract for and retain talented personnel with the skills, and in the locations, we require, we might need to redeploy existing personnel or increase our reliance on contractors. Furthermore, we have been, and intend to continue increasing our sales force and, if we are not successful in attracting and retaining qualified personnel, or if new sales personnel are unable to achieve desired productivity levels within a reasonable time period, we may not be able to increase our revenue and realize the anticipated benefits of these investments.

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

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

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

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

We are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Effective planning and management processes are necessary to meet these requirements. 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

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requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the trading price of our common stock could be negatively affected, and we could become subject to investigations by The Nasdaq Stock Market LLC, the Securities and Exchange Commission or other regulatory authorities, which could require additional financial and management resources.

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

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

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

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

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

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require costly litigation to resolve;

•
absorb significant management time;

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cause us to enter into unfavorable royalty or license agreements;

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

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

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


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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:

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greater difficulty in supporting and localizing our solutions;

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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;

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

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greater difficulty in establishing, staffing and managing foreign operations;

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

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differing abilities to protect our intellectual property rights; and

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possible political and economic instability.

We may be affected by fluctuations in currency exchange rates.

We are potentially exposed to adverse movements in currency exchange rates. Although most of our revenue and expenses occur in U.S. Dollars, some occur in local currencies and the amounts in local currencies may increase as we expand our international operations. An increase in the value of the U.S. Dollar could increase the real cost to our customers of our products in those markets outside the U.S., and a weakened U.S. Dollar could increase the cost of our expenses, as well as overseas capital expenditures. Therefore, fluctuations in the translation of foreign currencies may have a negative impact on our revenue and operating activities.

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

Our services revenue, which includes fees for consulting, implementation and training, represented 24% of our revenue in both 2015 and 2014. 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.


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

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

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

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

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

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

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

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

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

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

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

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


21

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

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

•
the complex nature of some of our products;

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

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

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

•
customer requirements for competitive evaluation and often lengthy internal approval processes and protracted contract negotiations (particularly of large organizations) before purchasing our solutions; and

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

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

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

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


Risks Related to Our Stock

Our stock price is likely to remain volatile.

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

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

•
actual and anticipated fluctuations in our financial results;

•
failure of securities analysts to maintain coverage of us;

•
ratings changes by any securities analysts who follow us;


22

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

•
failure to achieve revenue or earnings expectations;

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

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

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

•
lawsuits threatened or filed against us;

•
adverse publicity;

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

•
changes in our management team or board of directors;

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

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

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

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

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

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

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

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

Our certificate of incorporation and bylaws contain provisions that could make it harder for a third-party to acquire us without the consent of our board of directors. For example, if a potential acquirer were to make a hostile bid for us, the acquirer would not be able to call a special meeting of stockholders to remove our board of directors or act by written consent without a meeting. In addition, our board of directors has staggered terms, which means that replacing a majority of our directors would require at least two annual meetings. A potential acquirer would also be required to provide advance notice of its proposal to replace directors at any annual meeting, and would not be able to accumulate votes at a meeting, which would require such potential acquirer to hold more shares to gain representation on the board of directors than if cumulative voting were permitted. Furthermore, Section 203 of the Delaware General Corporation Law limits

23

business combination transactions with 15% stockholders that have not been approved by the board of directors. All of these factors make it more difficult for a third-party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by some stockholders. Our board of directors could choose not to negotiate with a potential acquirer that it does not believe is in our strategic interests. If a potential acquirer is discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by these or other measures, under some circumstances, the market price of our common stock could be reduced.

Item 1B.    Unresolved Staff Comments
None.
Item 2.    Properties
We lease our headquarters in Dublin, California which consists of approximately 75,000 square feet of office space. We also lease facilities in Alabama, Arizona, Georgia, Illinois, New York, Wisconsin, Washington, Australia, Hong Kong, India, Malaysia, Mexico, Serbia, Singapore, Japan and United Kingdom. We believe that our properties are in good operating condition and adequately serve our current business operations. We also anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion. Refer to Note 8 to our consolidated financial statements for information regarding our lease obligations.
In 2016 we intend to expand our office space in Hyderabad, India and in Belgrade, Serbia to support our growth and enhance the work environment for our employees in those areas.
Item 3.    Legal Proceedings
We are from time to time, a party to various litigation and customer disputes incidental to the conduct of our business. At the present time, we believe that none of these matters are material.
    
Item 4.    Mine Safety Disclosures

None.

24

PART II
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock trades on the NASDAQ Global Market ("NASDAQ") under the symbol "CALD". The following table sets forth, for the periods indicated, the high and low intra-day sales prices reported on NASDAQ.
 
 
Fiscal Year Ended December 31, 2015
 
Fiscal Year Ended December 31, 2014
 
 
Fourth
Quarter
 
Third
Quarter
 
Second
Quarter
 
First
Quarter
 
Fourth
Quarter
 
Third
Quarter
 
Second
Quarter
 
First
Quarter
High
 
$
21.64

 
$
18.91

 
$
16.43

 
$
16.95

 
$
17.31

 
$
12.61

 
$
12.84

 
$
15.50

Low
 
$
16.10

 
$
14.25

 
$
12.26

 
$
12.46

 
$
11.28

 
$
10.41

 
$
9.15

 
$
10.99

Stockholders
As of February 1, 2016, there were 56,273,733 shares of our common stock outstanding held by 21 stockholders of record including The Depository Trust Company, which holds shares of our common stock on behalf of an indeterminate number of beneficial owners.
Dividends
We have never declared or paid cash dividends on our capital stock. We expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
Performance Graph
The following performance graph shall not be deemed to be incorporated by reference by means of any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those acts.

The graph compares the cumulative total return of our common stock from December 31, 2010 through December 31, 2015 with the performance of the NASDAQ Composite Index and the NASDAQ Computer Index over those periods.

The graph assumes that (i) $100 was invested in our common stock at the closing price of our common stock on December 31, 2010, (ii) $100 was invested in each of the NASDAQ Composite Index and the NASDAQ Computer Index at the closing price of the respective indices on that date and (iii) all dividends received were reinvested. To date, no cash dividends have been declared or paid on our common stock.


25

 
12/31/2010
 
12/31/2011
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
Callidus Software Inc. 
$
100

 
$
127

 
$
90

 
$
272

 
$
323

 
$
368

NASDAQ Composite
$
100

 
$
99

 
$
116

 
$
163

 
$
187

 
$
200

NASDAQ Computer
$
100

 
$
101

 
$
116

 
$
155

 
$
188

 
$
203

*We have not changed indices since 2010.

Securities Authorized for Issuance under Equity Compensation Plans

The information required by this item is incorporated by reference to our Proxy Statement for the 2016 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2015.
Item 6.    Selected Financial Data
The following selected consolidated financial data should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section and our consolidated financial statements and notes thereto included elsewhere in this annual report. The selected consolidated statements of operations data for each of the years in the three-year period ended December 31, 2015, and the consolidated balance sheet data as of December 31, 2015 and 2014, are derived from our audited consolidated financial statements that have been included in this annual report. The selected consolidated statement of operations data for the years ended December 31, 2012 and 2011 and the selected consolidated balance sheet data as of December 31, 2013, 2012 and 2011 are derived from our audited consolidated financial statements that have not been included in this Form 10-K.

26

 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(In thousands, except per share amounts)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Recurring
$
129,911

 
$
99,807

 
$
81,734

 
$
70,919

 
$
63,002

Services and license
43,176

 
36,811

 
30,603

 
24,033

 
20,769

Total revenue
173,087

 
136,618

 
112,337

 
94,952

 
83,771

Cost of revenue:
 
 
 
 
 
 
 
 
 
Recurring
34,306

 
31,282

 
28,741

 
30,039

 
32,820

Services and license
32,145

 
24,756

 
19,048

 
20,301

 
16,487

Patent settlement
—

 
—

 
—

 
—

 
701

Total cost of revenue
66,451

 
56,038

 
47,789

 
50,340

 
50,008

Gross profit
106,636

 
80,580

 
64,548

 
44,612

 
33,763

Operating expenses:
 
 
 
 
 
 
 
 
 
Sales and marketing
58,785

 
47,040

 
34,916

 
32,442

 
20,203

Research and development
26,088

 
20,307

 
17,143

 
16,643

 
12,025

General and administrative
33,290

 
26,255

 
22,951

 
19,953

 
17,726

Income from settlement and patent licensing
(500
)
 
(500
)
 
(500
)
 
—

 
—

Acquisition-related contingent consideration
—

 
—

 
—

 
(1,612
)
 
—

Restructuring
628

 
1,025

 
1,699

 
1,115

 
649

Total operating expenses
118,291

 
94,127

 
76,209

 
68,541

 
50,603

Loss from operations
(11,655
)
 
(13,547
)
 
(11,661
)
 
(23,929
)
 
(16,840
)
Interest income and other income (expense), net
(522
)
 
3,504

 
264

 
70

 
(333
)
Interest expense
(180
)
 
(506
)
 
(3,183
)
 
(3,451
)
 
(2,495
)
Debt conversion expense
—

 
—

 
(4,776
)
 
—

 
—

Gain on extinguishment of convertible notes
—

 
—

 
—

 
—

 
915

Loss before provision for income taxes
(12,357
)
 
(10,549
)
 
(19,356
)
 
(27,310
)
 
(18,753
)
Provision for (benefit from) income taxes
791

 
1,012

 
2,055

 
388

 
(2,919
)
Net loss
$
(13,148
)
 
$
(11,561
)
 
$
(21,411
)
 
$
(27,698
)
 
$
(15,834
)
Net loss per share:
 
 
 
 
 
 
 
 
 
Basic and diluted
$
(0.24
)
 
$
(0.24
)
 
$
(0.55
)
 
$
(0.78
)
 
$
(0.48
)
Weighted average shares:
 
 
 
 
 
 
 
 
 
Basic and diluted
54,719

 
47,547

 
38,858

 
35,393

 
32,809


 
As of December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(In thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and short-term investments
$
97,209

 
$
36,966

 
$
36,161

 
$
29,171

 
$
52,789

Total assets
241,642

 
176,298

 
134,193

 
124,743

 
133,607

Working capital
50,248

 
(2,905
)
 
7,161

 
2,425

 
28,440

Total liabilities
112,841

 
117,824

 
92,140

 
121,315

 
119,065

Total stockholders' equity
128,801

 
58,474

 
42,053

 
3,428

 
14,542


27


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
CallidusCloud® is a global leader in cloud-based sales, marketing, learning and customer experience solutions. CallidusCloud enables its customers to accelerate their Lead to Money process with a suite of solutions that, among other things, identify leads, implement territory and quota plans, enable sales forces, automate bid configuration pricing and quoting, manage contracts, streamline sales compensation and capture customer feedback for competitive advantage. Approximately 4,600 organizations, across a broad set of industries, rely on CallidusCloud to optimize the Lead to Money process and close more deals, faster.
Lead to Money is a process designed to help companies respond to the changing role of sales and marketing in the redefined buying cycle. In the last decade, the ubiquity of social networks, mobile devices and e-commerce has transformed the traditional sales cycle into a buyer-led digital journey. Buyers are researching and evaluating companies online and are completing a significant portion of their purchases digitally. In order to successfully turn leads into money, sales, marketing, learning and customer experience teams must work together.
We provide a suite of Software-as-a-Service ("SaaS") solutions which generate revenue from cloud subscriptions, sales and marketing operation services and term licenses. Our SaaS customers typically purchase annual subscriptions, but may agree to purchase multi-year commitments.
Revenue Increase and Customer Expansion
During 2015, we added approximately 900 net new customers; as of December 31, 2015 we had approximately 4,600 customers. Our SaaS Annual Contract Value (“ACV”) increase in 2015 and 2014 was 42% and 35% respectively. ACV represents, primarily, the aggregate value of the first 12 months of the contracted SaaS subscription. Our customer retention rate for our SaaS enterprise customers remained at 91% in 2015. We believe our high retention rates indicate the quality of our solutions and we strive to maintain these retention rates in a competitive environment.
In 2015, total revenue was $173.1 million, an increase of $36.5 million, or 26.7%, from 2014. Total recurring revenue, which includes SaaS revenue and maintenance revenue, increased by $30.1 million in 2015, primarily as a result of higher SaaS revenue. SaaS revenue continued to drive the increase in both recurring revenue and total revenue, reflecting market acceptance of our solutions and our continued marketing and sales efforts. SaaS revenue increased to $115.5 million in 2015, an increase of $31.8 million or 38.0% from 2014. Maintenance revenue declined to $14.4 million, a decrease of 11%, as a result of customers converting one or more of our products in our Lead to Money suite in the cloud. In 2015, recurring revenue accounted for 75% of our total revenue, and we expect that percentage will increase going forward. SaaS revenue contributed to an increase in recurring revenue gross margins to 74% in 2015 from 69% in 2014 and also contributed to an increase in overall gross margins to 62% in 2015 from 59% in 2014. Revenue related to Overages (customers using our products in excess of contracted usage) was not material during 2015 and 2014.
Acquisitions
On July 22, 2015 we acquired BridgeFront LLC ("BridgeFront"), a leading provider of cloud-based education content for the healthcare sector, most notably in the compliance and revenue cycle domains. The purchase price consideration was approximately $5.0 million plus potential earn-out payments. Please refer to Note 2, Acquisitions, of the notes to our consolidated financial statements for further details regarding the acquisition, which did not have a material impact on our financial position or results of operations.
BridgeFront financial results from July 22, 2015 to December 31, 2015 were included in our operating results.
On September 16, 2014, we acquired Clicktools Ltd. ("Clicktools"), a provider of premium cloud-based survey products and services for businesses. The purchase consideration was $16.4 million, which included $14.8 million paid in cash and an indemnity holdback of $1.6 million that was paid upon the one-year anniversary of the closing.
Clicktools financial results from September 16, 2014 to December 31, 2014 were included in our operating results.
On February 4, 2014, we acquired all of the common stock of LeadRocket, Inc. (“LeadRocket”), a provider of marketing automation and demand generation solutions that enable both marketing and sales users to identify and connect with leads efficiently. We acquired LeadRocket to strengthen our social engagement and digital marketing platform. The purchase consideration was $3.0 million, which included $2.5 million paid in cash and $0.5 million as indemnity holdback, of which $0.3 million was paid upon the one-year closing anniversary.

28

LeadRocket financial results for the period from February 4, 2014 to December 31, 2014 were included in our operating results.
Application of Critical Accounting Policies and Use of Estimates
The discussion and analysis of our financial condition and results of operations that follows is based upon our consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). The application of GAAP requires our management to make assumptions, judgments and estimates that affect our reported amounts of assets, liabilities, revenue and expenses, and the related disclosures regarding these items. We base our assumptions, judgments and estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our future financial condition or results of operations will be affected. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with our Audit Committee of the board of directors.
We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, stock-based compensation, valuation of acquired intangible assets, goodwill impairment, long-lived asset impairment, contingent consideration and income taxes have the greatest potential impact on our consolidated financial statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates. Historically, our assumptions, judgments and estimates in accordance with our critical accounting policies have not materially differed from actual results. For a more detailed discussion of these accounting policies and our use of estimates, refer to Note 1 to our consolidated financial statements included in this report.
Revenue Recognition
We derive our revenues from two sources: (i) recurring revenues and (ii) services and other revenue. Recurring revenue is comprised of SaaS revenue, maintenance revenue and term-based licenses. Services and other revenue primarily consist of training, integration, and configuration services.
We commence revenue recognition when all of the following conditions are met:
•there is persuasive evidence of an arrangement;
•the service has been or is being provided to the customer;
•the collection of the fees is reasonably assured; and
•the amount of fees to be paid by the customer is fixed or determinable.

We generally use a signed contract, order form, or a purchase order as evidence of an arrangement for a customer.
We provide multiple services to our customers. Determining whether delivery has occurred requires judgment based on the service that is being provided to the customer and method of delivery of that service.
We use judgment to assess collectability based on multiple factors such as past collection history and creditworthiness of the customer.
We assess whether a fee is fixed or determinable based on several factors, such as the payment terms associated with the transaction and whether the sales price is subject to refund or adjustments. Our arrangements do not include general rights of return.
Recurring Revenue. SaaS revenue consists of subscription fees from customers accessing our cloud-based service offerings. Maintenance revenue consists of fees from customers who are receiving support for on-premise licenses. We recognize both SaaS and maintenance revenue beginning on the date the services are first made available to the customer and continuing through the end of the contractual service term. 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. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Services and Other Revenue. Generally, the Company's professional services arrangements are on a time and materials basis. Time and material services are recognized as revenue as the services are rendered based on inputs to the project, such as billable hours incurred. For fixed fee professional service arrangements, the Company recognizes revenue under the proportional performance method of accounting and estimates the proportional performance on a monthly basis, utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If the Company does not have a

29

sufficient basis to measure progress toward completion, revenue is recognized upon completion. Service and other revenue also includes license revenue from perpetual licenses which are recognized upon delivery of the product, using the residual method (refer to Multiple-deliverable arrangements with on-premise license section below), assuming all the other conditions for revenue recognition have been met.
Multiple-deliverable arrangements. We enter into arrangements that can include various combinations of on-demand or on-premise services, professional services, and maintenance. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered.
Revenue recognition for multiple-deliverable arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.
Multiple-deliverable arrangements with on-demand subscription. For on-demand subscription agreements with multiple-deliverables, we: (1) evaluate each element to determine whether it represents a separate unit of accounting; (2) determine the selling price of each deliverable in an arrangement based on a hierarchy of vendor-specific objective evidence (“VSOE”), third-party evidence (“TPE”) or best-estimated selling price (“BESP”), as applicable; and (3) allocate the total price among the various elements using the relative selling price method.
The Company uses judgment when determining BESP for offerings that are not typically sold on a stand-alone basis, or for new offerings. We determine BESP by considering multiple factors including, but not limited to, the weighted average actual sales prices of professional services sold on a standalone basis for on-demand services; average billing rate for fixed fee service agreements when sold with on-demand services, cost plus a reasonable mark-up and other factors such as gross margin objectives, pricing practices and growth strategy. The Company is currently using cost plus a reasonable mark-up to establish ESP for fixed fee service. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, our assumptions and judgments regarding these services could differ from actual events, thus materially impacting our financial position and results of operations.
Multiple-deliverable arrangements with on-premise license. For on-premise perpetual license agreements with multiple-deliverables, we: (1) determine whether and when each element is delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered products and services; (3) determine the fair value of each undelivered element using VSOE; and (4) allocate the total price among the various elements. The Company recognizes license revenue using the residual method of accounting, and thus recognize revenue for delivered products meeting all revenue recognition criteria after allocating value based on VSOE to the undelivered elements have VSOE for fair value. Absent VSOE, revenue from delivered products is deferred until the earlier of the point at which VSOE of fair value exists for all undelivered elements or until all elements of the arrangement have been delivered.
Generally, VSOE is the price charged when the same element is sold separately for an element not yet being sold separately or the price established by management having the relevant authority; it must be probable that the price, once established will not change before introduction of the element into the marketplace. We determine VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range.
Refer to Note 1 of the notes to our consolidated financial statements included in this report for further discussion on our revenue recognition policies.
Stock-based Compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized on a straight-line basis over the requisite service period, which is generally the vesting period. Stock-based compensation expense for restricted stock units is estimated based on the closing price of our common stock on the date of grant and the estimated forfeiture rate, which is based on historical forfeitures. We measure the value of stock options and employee stock purchase plan shares using the Black-Scholes-Merton option pricing model. The determination of the fair value of our stock awards on the date of grant using an option pricing model is affected by our stock price as well as by assumptions regarding a number of subjective variables. These variables include: the expected term of the options, taking into account projected exercises; our expected stock price volatility over the expected term of the awards; the risk-free interest rate; and expected dividends. We estimate forfeiture rate based on an analysis of actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience and other factors. Changes in these variables could affect stock-based compensation expense in the future.

30

We granted performance-based restricted stock units ("PSUs") to select executives and other key employees.  Vesting of our PSUs is based on achievement of specified company or other goals. In 2015, we granted PSUs with vesting contingent on our absolute SaaS revenue growth over the three-year period from July 1, 2015 to June 30, 2018. In 2014, we granted PSUs with vesting contingent on our absolute SaaS revenue growth over the three-year period from January 1, 2014 to December 31, 2016, and on our relative total shareholder return over the same three-year period compared to an index of 17 SaaS companies. These PSUs will, to the extent the performance criteria are achieved, vest on the third anniversary of the grant date. PSU awards based on total shareholder return is recognized as compensation costs over the requisite service period, if rendered, even if the market condition is never satisfied. In determining the fair value of PSUs based on total shareholder return we considered the achievement of the market condition in the estimated fair value.
Goodwill, Intangible Assets, Long-Lived Assets and Impairment Assessments
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in connection with business combinations accounted for using the purchase method of accounting. Goodwill is not amortized, but instead goodwill is required to be tested for impairment annually and under certain circumstances. The Company performs such testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The Company conducts a two-step test for impairment of goodwill. The first step of the test for goodwill impairment compares the fair value of the applicable reporting unit with its carrying value. If the fair value of a reporting unit is less than the reporting unit's carrying value, the Company will perform the second step of the test for impairment of goodwill. During the second step of the test for impairment of goodwill, the Company will compare the implied fair value of the reporting unit's goodwill with the carrying value of that goodwill. If the carrying value of the goodwill exceeds the calculated implied fair value, the excess amount will be recognized as an impairment loss. The Company has one reporting unit and evaluates goodwill for impairment at the entity level. Based upon the results of the step one testing, the Company concluded that no impairment existed as December 31, 2015, and did not perform the second step of the goodwill impairment test.
Intangible assets with finite lives are amortized over their estimated useful lives. Refer to Note 4 to our consolidated financial statements included in this report for a detailed discussion on useful lives over which our intangible assets are amortized. Generally, amortization is based on the higher of a straight-line method or the pattern in which the economic benefits of the intangible asset will be consumed. In 2015, we recorded impairment expense related to intangible assets of $0.3 million and in 2014 and 2013 there was no impairment expense related to intangible assets.
The Company also evaluates the recoverability of its long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. There were no impairment charges recorded during 2015, 2014 and 2013.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, assumed equity awards, as well as to in-process research and development based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, deferred revenue obligations and equity assumed.
Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
•
Future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents;
•
Expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed;
•
The acquired company's trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company's produce portfolio; and
•
discount rates.
    
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the deferred revenue obligations assumed. The estimated fair value of the support obligations is determined utilizing a cost build-up

31

approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The estimated costs to fulfill the obligations are based on the historical costs related to fulfilling the obligations.
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the equity awards assumed. The estimated fair value is determined utilizing a modified binomial option pricing model which assumes employees exercise their stock options when the share price exceeds the strike price by a certain dollar threshold. If the acquired company has significant historical data on their employee’s exercise behavior, then this threshold is determined based upon the acquired company’s history. Otherwise, our historical exercise experience is used to determine the exercise threshold. Zero coupon yields implied by U.S. Treasury issuances, implied volatility for our common stock and our historical forfeiture rate are other inputs to the binomial model.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Contingent Consideration
We estimate the fair value of the contingent consideration issued in business combinations using a probability-based income approach. The fair value of our liability-classified contingent consideration is remeasured at each reporting period, with any changes in the fair value recorded as income or expense. Management makes assumptions, judgments and estimates to determine the inputs used in the valuation approach.     
Accounting for Income Taxes
Income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset.
Our assumptions, judgments and estimates relative to the current provision for income taxes and withholding taxes takes into account current tax laws, our interpretation of those laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures for tax positions that could be challenged by tax authorities. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of potential tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.
Recent Accounting Pronouncements
Refer to Note 1 of the notes to our consolidated financial statements included in this report for information regarding the effect of newly adopted accounting pronouncements on our financial statements.

32

Results of Operations
Comparison of the Years Ended December 31, 2015 and 2014
Revenue, Cost of Revenue and Gross Profit
The table below sets forth the changes in revenue, cost of revenue and gross profit in 2015 from 2014 (in thousands, except percentage data):
 
Year Ended December 31, 2015
 
Percentage
of Revenue
 
Year Ended December 31, 2014
 
Percentage
of Revenue
 
Increase
(Decrease)
 
Percentage
Change
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Recurring
$
129,911

 
75%
 
$
99,807

 
73%
 
$
30,104

 
30%
Services and license
43,176

 
25%
 
36,811

 
27%
 
6,365

 
17%
Total revenue
$
173,087

 
100%
 
$
136,618

 
100%
 
$
36,469

 
27%
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
Recurring
$
34,306

 
26%
 
$
31,282

 
31%
 
$
3,024

 
10%
Services and license
32,145

 
74%
 
24,756

 
67%
 
7,389

 
30%
Total cost of revenue
$
66,451

 
38%
 
$
56,038

 
41%
 
$
10,413

 
19%
Gross profit:
 
 
 
 
 
 

 
 
 
 
Recurring
$
95,605

 
74%
 
$
68,525

 
69%
 
$
27,080

 
40%
Services and license
11,031

 
26%
 
12,055

 
33%
 
(1,024
)
 
(8)%
Total gross profit
$
106,636

 
62%
 
$
80,580

 
59%
 
$
26,056

 
32%
Revenue
Total Revenue. The increase in total revenue for 2015 compared to 2014 was primarily due to continued SaaS revenue growth from increased bookings and the associated professional services revenue, offset in part by a decline in maintenance and license revenue. Our broad Lead to Money suite of one or more of our products, increased adoption from our customer base, as well as acquisitions in 2014 and 2015 contributed to the growth in revenue.
Recurring Revenue. Recurring revenue consists of SaaS revenue and maintenance revenue. SaaS revenue increased to $115.5 million in 2015, representing an increase of $31.8 million or 38% from 2014. The increase was primarily due to increased bookings. We believe our investment in expanding the sales force in recent years has positively impacted our SaaS revenue growth. The increase in SaaS revenue was partially offset by the decrease in maintenance revenue to $14.4 million in 2015 from $16.1 million in 2014, as a result of customers converting from on-premise license arrangements to our Lead to Money suite in the cloud.
Services and License Revenue. Services and license revenue consists of integration and configuration services ("consulting services"), training and perpetual licenses. Services revenue increased by $9.1 million in 2015 from $32.4 million in 2014 due to SaaS growth. This increase was partially offset by a decrease of $2.7 million in license revenue in 2015 from $4.4 million in 2014 as a result of the broader adoption of cloud services in the market.
Cost of Revenue and Gross Profit
Cost of Recurring Revenue. The increase in cost of recurring revenue in 2015 was driven by a $2.9 million increase in personnel costs, an $0.8 million increase in depreciation, maintenance and equipment, and $0.2 million in travel and other expenses, partially offset by a reduction in royalty expense of $0.9 million royalty expense related to the litigation settlement with Versata in 2014. We will continue to invest in hosting facilities to support our revenue growth and expanded customer base.
Cost of Services and License Revenue. The increase in cost of services and license revenue in 2015 was primarily due to increased personnel costs of $4.8 million, professional services costs of $2.2 million, along with entertainment and travel-related expenses of $0.3 million as compared to 2014.
Recurring Revenue Gross Profit. The improvement in our recurring revenue gross profit in 2015 was primarily due to increased SaaS revenue and economies of scale in our on-demand infrastructure costs, partially offset by a $0.9 million royalty expense related to the litigation settlement with Versata in 2014.

33

Services and License Revenue Gross Profit. The decrease in our services and license gross profit in 2015 was primarily due to a decrease in gross profit contribution from license fees revenue as a result of lower license fee, partially offset by increase in consulting services revenue and improved utilization of consulting personnel.
Operating Expenses
The table below sets forth the changes in operating expenses in 2015 from 2014 (in thousands, except percentage data):
 
Year Ended December 31, 2015
 
Percentage
of Revenue
 
Year Ended December 31, 2014
 
Percentage
of Revenue
 
Increase
(Decrease)
 
Percentage
Change
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
$
58,785

 
34%
 
$
47,040

 
34%
 
$
11,745

 
25%
Research and development
26,088

 
15%
 
20,307

 
15%
 
5,781

 
28%
General and administrative
33,290

 
19%
 
26,255

 
19%
 
7,035

 
27%
Income from settlement and patent licensing
(500
)
 
—%
 
(500
)
 
—%
 
—

 
—%
Restructuring and other
628

 
—%
 
1,025

 
1%
 
(397
)
 
(39)%
Total operating expenses
$
118,291

 
68%
 
$
94,127

 
69%
 
$
24,164

 
26%
Sales and Marketing. The increase in sales and marketing expense in 2015 was primarily due to $9.4 million in personnel-related costs, which included an increase of $2.0 million in stock-based compensation expense and an increase of $2.2 million in commissions associated with increased bookings.  In addition, sales and marketing costs increased by $0.5 million due to more marketing events and programs, $0.5 million in implementation of software enhancements, and $0.9 million in entertainment and travel related expenses associated with increased sales personnel.
Research and Development. The increase in research and development expenses in 2015 was due to a $4.1 million increase in personnel-related costs, which included $1.0 million in stock-based compensation expense as we continue to invest in headcount to support product development, $0.7 million increase in consulting costs, $0.3 million increase in maintenance costs and $0.5 million increase in entertainment and travel-related expenses.
General and Administrative.   The increase in general and administrative expenses in 2015 was primarily due to a $5.9 million increase in personnel-related costs, which included $3.3 million in stock-based compensation expense, $2.8 million increase in costs related to business system enhancements to support the growth and scale of the Company, which includes our new corporate headquarters in Dublin, California. These increases were partially offset by a $1.9 million reduction related to the absence of litigation settlement amounts that occurred in 2014.
Income from Settlement and Patent Licensing. On November 25, 2013, we entered into a settlement agreement with Xactly Corporation and Xactly's President and Chief Executive Officer that, includes an agreement by Xactly to pay a $2.0 million license fee in four annual installments of $0.5 million that began in November 2013. In 2014 and 2015, we recorded $0.5 million of offset to legal fees under operating expenses regarding this settlement.
Restructuring and Other. Restructuring and other expenses decreased in 2015 compared to 2014, included the departure of our former general counsel and the realignment of our organization and our consolidation of our office locations. This decrease was partially offset by a $0.3 million increase in impairment of intangible assets and consolidation of our offices in India during 2015.

34

Stock-Based Compensation
The following table summarizes our stock-based compensation expenses in 2015 and 2014 (in thousands, except percentage data).
 
Year Ended December 31,
 
Increase
(Decrease)
 
Percentage
Change
 
2015
 
2014
 
 
Stock-based compensation:
 
 
 
 
 
 
 
Cost of recurring revenue
$
1,237

 
$
911

 
$
326

 
36%
Cost of services revenue
1,149

 
1,026

 
123

 
12%
Sales and marketing
5,488

 
3,518

 
1,970

 
56%
Research and development
3,031

 
2,012

 
1,019

 
51%
General and administrative
7,687

 
4,346

 
3,341

 
77%
Total stock-based compensation
$
18,592

 
$
11,813

 
$
6,779

 
57%
Total stock-based compensation expense increased in 2015 compared to 2014, primarily due to the timing of restricted stock unit grants, an increase in our stock price and an increase in employee stock purchase plan participation in 2015. We did not grant any stock options in 2015.
Other Items
The table below sets forth the changes in other items in 2015 and 2014 (in thousands, except percentage data):
 
Year Ended December 31,
 
Increase
(Decrease)
 
Percentage
Change
 
2015
 
2014
 
 
Other income (expense), net
 
 
 
 
 
 
 
Interest income and other income, net
$
(522
)
 
$
3,504

 
$
(4,026
)
 
(115)%
Interest expense
(180
)
 
(506
)
 
326

 
(64)%
Other income (expense), net
$
(702
)
 
$
2,998

 
$
(3,700
)
 
(123)%
Provision for income taxes
$
791

 
$
1,012

 
$
(221
)
 
(22)%
Interest Income and Other Income (Expense), net
The decrease in interest income and other income in 2015 was primarily due to a $3.9 million gain on the sale of select domain names and trademarks in 2014 with no comparable gain in 2015 and an increase in foreign currency loss of $0.2 million in 2015.
Interest Expense
Interest expense decreased in 2015 as compared to 2014 by $0.3 million. In 2014, interest expense included the early conversion of our remaining $14.2 million 4.75% Convertible Senior Notes ("Convertible Notes") in June 30, 2014 with no comparable cost in 2015.
Provision for Income Taxes
Provision for income tax decreased in 2015 as compared to 2014. The decrease was primarily due to a decrease in foreign withholding taxes, in part offset by increase in income taxes in foreign jurisdictions.

35

Comparison of the Years Ended December 31, 2014 and 2013
Revenue, Cost of Revenue and Gross Profit
The table below sets forth the changes in revenue, cost of revenue and gross profit in 2014 from 2013 (in thousands, except percentage data):
 
Year Ended December 31, 2014
 
Percentage
of Revenue
 
Year Ended December 31, 2013
 
Percentage
of Revenue
 
Increase
(Decrease)
 
Percentage
Change
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Recurring
$
99,807

 
73%
 
$
81,734

 
73%
 
$
18,073


22%
Services and license
36,811

 
27%
 
30,603

 
27%
 
6,208


20%
Total revenue
$
136,618

 
100%
 
$
112,337

 
100%
 
$
24,281

 
22%
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
Recurring
$
31,282

 
31%
 
$
28,741

 
35%
 
$
2,541

 
9%
Services and license
24,756

 
67%
 
19,048

 
62%
 
5,708

 
30%
Total cost of revenue
$
56,038

 
41%
 
$
47,789

 
43%
 
$
8,249

 
17%
Gross profit:
 
 
 
 
 
 
 
 
 
 
 
Recurring
$
68,525

 
69%
 
$
52,993

 
65%
 
$
15,532

 
29%
Services and license
12,055

 
33%
 
11,555

 
38%
 
500

 
4%
Total gross profit
$
80,580

 
59%
 
$
64,548

 
57%
 
$
16,032

 
25%
Revenue
Total Revenue. The increase in total revenue for 2014 compared to 2013 was due to higher volume of recurring revenue generated by our SaaS business driven by increased bookings, increased professional services revenue and acquisitions in 2014. This increase was partially offset by a decrease in license revenue.
Recurring Revenue. Recurring revenue consists of SaaS revenue and maintenance revenue. SaaS revenue increased to $83.7 million in 2014, representing an increase of $17.8 million or 27% from 2013. During the fourth quarter of 2014 our SaaS revenue increased $7.2 million or 42%. The increase in SaaS revenue was primarily due to continued ACV growth and revenue from our acquisitions. We believe our investment in expanding the sales force in recent years has positively impacted SaaS revenue growth. Maintenance revenue increased slightly in 2014 to $16.1 million from $15.8 million in 2013.
Services and License Revenue. Services and license revenue consists of integration and configuration services ("consulting services"), training and perpetual licenses. Services revenue increased by $10.0 million or 45% due to increased consulting services resulting from higher SaaS bookings. This increase was partially offset by license revenue which decreased by $3.8 million or 47%, as we closed a smaller number of on-premise license contracts in 2014.
Cost of Revenue and Gross Profit
Cost of Recurring Revenue. The increase in cost of recurring revenue in 2014 was primarily driven by a $1.0 million royalty expense related to a litigation settlement with Versata, increased maintenance costs and depreciation on capital equipment purchases for our hosting facility to support our larger customer base.
Cost of Services and License Revenue. The increase in cost of services and license revenue in 2014 was primarily due to increased personnel and expanded use of third-party consultants required to meet customer demand for consulting services.
Recurring Revenue Gross Profit. The improvement in our recurring revenue gross profit in 2014, was primarily due to increased SaaS revenue and economies of scale in our on-demand infrastructure costs, offset by $1.0 million royalty expense related to a litigation settlement with Versata.
Services and License Revenue Gross Profit. The increase in our services and license gross profit in 2014 was primarily due to increased consulting services revenue and improved utilization of consulting personnel, partially offset by a decrease in gross profit contribution from license fees resulting from lower license fee revenue.



36

Operating Expenses
The table below sets forth the changes in operating expenses in 2014 from 2013 (in thousands, except percentage data):
 
Year Ended December 31, 2014
 
Percentage
of Revenue
 
Year Ended December 31, 2013
 
Percentage
of Revenue
 
Increase
(Decrease)
 
Percentage
Change
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
$
47,040

 
34%
 
$
34,916

 
31%
 
$
12,124

 
35%
Research and development
20,307

 
15%
 
17,143

 
15%
 
$
3,164

 
18%
General and administrative
26,255

 
19%
 
22,951

 
20%
 
$
3,304

 
14%
Income from settlement and patent licensing
(500
)
 
—%
 
(500
)
 
—%
 
$
—

 
—%
Restructuring and other
1,025

 
1%
 
1,699

 
2%
 
$
(674
)
 
(40)%
Total operating expenses
$
94,127

 
69%
 
$
76,209

 
68%
 
$
17,918

 
24%
Sales and Marketing. Higher sales and marketing expense in 2014 was primarily due to additional costs of $7.5 million associated with personnel costs related to sales and marketing, increased marketing events of $2.6 million such as our C3 conferences in Las Vegas, Japan and EMEA, and increased stock-based compensation expense of $1.1 million.
Research and Development. The increase in research and development expenses in 2014, was driven primarily by a $2.8 million increase in personnel related costs as we continue to invest in headcount to support product development.
General and Administrative.   The increase in general and administrative expenses in 2014 was primarily due to a $2.2 million litigation related Versata settlement and a $2.3 million increase to support our continued business growth, including an increase in personnel related costs as well as corporate insurance and maintenance expenses. This was in part offset by reduction in severance and recruiting fees of $1.2 million due to the departure and replacement of our chief financial officer in 2013.
Income from Settlement and Patent Licensing. On November 25, 2013, we entered into a settlement agreement with Xactly Corporation and Xactly's President and Chief Executive Officer that, among other things, includes an agreement by Xactly to pay us $2.0 million in license fee, which will be paid in four annual installments of $0.5 million that began in November 2013. Upon receipt of installment payments, we recorded the amount under operating expenses as an offset to legal fees. In each of 2013 and 2014, we recorded $0.5 million of offset to legal fees under operating expenses regarding this settlement.
Restructuring and Other. The decrease in restructuring and other expenses in 2014 was due to a larger scale of restructuring activities in 2013, which included the departure of our former general counsel and the realignment of our organization, including consolidation of our office locations. This decrease was partially offset by an increase in 2014 depreciation expense as a result of the change in estimated useful life of assets at our then-current headquarters in Pleasanton, California.
Stock-Based Compensation
The following table summarizes our stock-based compensation expenses in 2014 and 2013 (in thousands, except percentage data).
 
Year Ended December 31,
 
Increase
(Decrease)
 
Percentage
Change
 
2014
 
2013
 
 
Stock-based compensation:
 
 
 
 
 
 
 
Cost of recurring revenue
$
911

 
$
783

 
$
128

 
16%
Cost of services revenue
1,026

 
1,060

 
(34
)
 
(3)%
Sales and marketing
3,518

 
2,420

 
1,098

 
45%
Research and development
2,012

 
1,797

 
215

 
12%
General and administrative
4,346

 
4,335

 
11

 
—%
Total stock-based compensation
$
11,813

 
$
10,395

 
$
1,418

 
14%

37

Total stock-based compensation expense increased in 2014 compared to 2013, due to a higher number of restricted stock units granted in 2014. We did not grant any stock options in 2014.
Other Items
The table below sets forth the changes in other items in 2014 and 2013 (in thousands, except percentage data):
 
Year Ended December 31,
 
Increase
(Decrease)
 
Percentage
Change
 
2014
 
2013
 
 
Other income (expense), net
 
 
 
 
 
 
 
Interest income and other income, net
$
3,504

 
$
264

 
$
3,240

 
1,227%
Interest expense
(506
)
 
(3,183
)
 
2,677

 
(84)%
  Debt conversion expense
—

 
(4,776
)
 
4,776

 
(100)%
Other income (expense), net
$
2,998

 
$
(7,695
)
 
$
10,693

 
(139)%
Provision for income taxes
$
1,012

 
$
2,055

 
$
(1,043
)
 
(51)%
Interest Income and Other Income (Expense), net
The increase in interest income and other income in 2014 was primarily due to a $3.9 million gain on the sale of select domain names and trademarks offset by $0.3 million of foreign currency loss.
Interest Expense
Interest expense decreased in 2014 due to the debt conversion described below.
Debt Conversion Expense
During the fourth quarter of 2013, noteholders converted approximately $45.0 million principal amount of our 4.75% Convertible Senior Notes that were set to mature in July 2016 with an early call option in June 2014. In 2013, with the approval of our Board of Directors, management negotiated inducements with three noteholders to provide certainty of conversion and to strengthen the balance sheet. As an inducement for early conversion for 100% of our 4.75% the Convertible Senior Notes, we incurred $4.8 million of debt conversion expense, consisting of $4.4 million in cash and $0.4 million in stock premium. In 2014, noteholders converted the remaining $14.2 million after we exercised the call provisions of these notes and we did not incur an inducement for early conversion.
Provision for Income Taxes
Provision for income tax decreased in 2014 as compared to 2013. The decrease was primarily due to a decrease in foreign withholding taxes, and income taxes in foreign jurisdictions.
Liquidity and Capital Resources
As of December 31, 2015, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $97.2 million, and accounts receivable of $43.5 million.
In March 2015, we completed a public offering of approximately 5.3 million newly-issued shares of our common stock at a public offering price of $13.00 per share. We received net proceeds of $64.4 million from this offering, after deducting underwriting discounts and commissions of $4.1 million and other offering expenses of $0.3 million.
In May 2014, we entered into a credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under which Wells Fargo agreed to make a revolving loan ("Revolver") to us in an amount not to exceed $10.0 million, with an accordion feature that allows us to increase the maximum borrowing amount by not less than $5.0 million and not more than $10.0 million. The Revolver matures in May 2019. Outstanding borrowings under the Revolver bear interest, at our option, at a base rate plus an applicable margin. The applicable margin ranges between 0.75% and 2.25% depending on our leverage ratio. Interest is payable every three months. In September 2014, we exercised the accordion feature and increased the maximum borrowing amount to $15.0 million. As of December 31, 2015 we have no outstanding borrowings under the Revolver.
During 2015, accounts receivable and deferred revenue increased significantly due to growth in SaaS revenue. We expect these trends to continue into 2016 as we expect to continue to achieve positive operating cash flows during 2016.
We believe our existing cash, cash equivalents and short-term investments and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs over the next 12 months.

38

The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
Net cash (used in) provided by operating activities
$
26,469

 
$
9,151

 
$
13,749

Net cash provided by (used in) investing activities
(35,680
)
 
(14,004
)
 
2,474

Net cash (used in) provided by financing activities
52,593

 
11,041

 
(4,264
)
In 2015, cash and cash equivalents increased by approximately $43.0 million primarily due to $26.5 million of cash provided by our operating activities and $52.6 million of cash provided by our financing activities, partially offset by $35.7 million of cash used by our investing activities.
Fiscal 2015
Net cash provided by operating activities was $26.5 million in 2015, which was $17.3 million higher compared to $9.2 million in 2014. In 2015, the net loss of $13.1 million included $11.7 million of depreciation and amortization expense, $18.6 million of stock-based compensation expense and $1.9 million in bad debt expense. Changes in working capital provided cash of $7.4 million, which included $7.0 million increase in deferred revenue, $1.5 million increase in accounts payable and accrued expenses and $3.5 million in accrued payroll expense, partially offset by $2.9 million increase in accounts receivable, $1.0 million increase in prepaid expenses and $0.5 million increase in non-current other assets.
Net cash used in investing activities was $35.7 million in 2015, which was $21.7 million higher compared to $14.0 million in 2014. Net cash used in investing activities in 2015 included net purchases of investments of $17.4 million, purchases of property and equipment of $13.1 million for our data center improvements and new facilities, $0.8 million for purchases of intangibles and $4.4 million for the acquisition of BridgeFront.
Net cash provided by financing activities was $52.6 million in 2015, which was $41.6 million higher compared to $11.0 million in 2014. Net cash provided by financing activities in 2015 was due to $64.4 million in proceeds from the public offering of our common stock, $4.5 million of proceeds net of purchases from the issuance of common stock pursuant to exercise and release of stock awards, partially offset by the $10.5 million repayment of our Revolver, $3.1 million restricted stock units acquired to settle employee withholding tax liability, $1.8 million payment of consideration related to acquisitions, and $1.0 million in payment of principal under capital leases.
Fiscal 2014
Net cash provided by operating activities was $9.2 million in 2014, which was $4.6 million lower compared to $13.8 million in 2013. In 2014, the net loss of $11.6 million included a gain on sale of intangible assets of $3.9 million, offset by adjustments to net loss of $19.1 million, primarily driven by $10.5 million of depreciation and amortization expense, and $11.8 million of stock-based compensation expense. Changes in working capital provided cash of $1.7 million, which includes $11.4 million increase in deferred revenue, $6.7 million increase in accrued expenses and $1.1 million in accrued payroll expense, partially offset by $11.7 million increase in accounts receivable, $3.8 million increase in prepaid expenses, $1.1 million increase in non-current other assets, $0.8 million decrease in accounts payable and $0.2 million decrease in accrued restructuring and other expenses.
Net cash used in investing activities was $14.0 million in 2014, which was $16.5 million lower compared to $2.5 million in 2013. The decrease in net cash used in investing activities was primarily due acquisitions of $15.5 million for LeadRocket, Inc. and Clicktools Ltd. and purchases of property and equipment of $7.1 million for our data center improvements and new facilities, partially offset by the net proceeds from maturities and sale of investments of $5.1 million and proceeds from sale of our domain name from LeadRocket, included in intangible assets, for $4.7 million.
Net cash provided by financing activities was $11.0 million in 2014, which was $15.3 million higher compared to $4.3 million in 2013. The increase in net cash provided by financing activities was primarily due to $10.5 million proceeds from our Revolver and $3.1 million of proceeds net of purchases from the issuance of common stock pursuant to exercise and release of stock awards, partially offset by the $0.6 million payment on debt conversion, $0.6 million in payment of consideration related to acquisitions, and $1.3 million in payment of principal under capital leases.


39


Contractual Obligations and Commitments
We have the following contractual cash obligations at December 31, 2015. Contractual cash obligations that are cancellable upon notice and without significant penalties are not included in the table.
 
Payments due by Year (in thousands)
Contractual Obligations
2016
 
2017
 
2018
 
2019
 
2020
 
2021 and beyond
 
Total
Settlement agreement (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal payment
$
1,968

 
$
466

 
$
—

 
$
—

 
$
—

 
$
—

 
$
2,434

Interest payments
34

 
34

 
—

 
—

 
—

 
—

 
68

Operating lease commitments (2)
3,187

 
2,861

 
2,846

 
2,725

 
2,796

 
4,989

 
19,404

Unconditional purchase commitments (3)
1,224

 
800

 
—

 
—

 
—

 
—

 
2,024

_______________________________________________________________________________

(1)
In November 2014, we entered into a settlement agreement with Versata and agreed to make payments of $0.5 million starting on January 31, 2015 and every three months thereafter until January 2017.
(2)
We have facilities under several non-cancellable operating lease agreements that expire at various dates through 2018. Our rent expense for the years ended December 31, 2015, 2014 and 2013 was $3.0 million, $2.1 million and $1.9 million, respectively.
(3) Unconditional purchase commitments includes the contingency and earnout payment to Bridgefront of $0.6 million in 2016 and $0.5 million in 2017. In addition, the unconditional purchase commitments include amounts payable to certain vendors.

The Company obtained a $1.1 million letter of credit in October 2014 for its leased space in Dublin, California. The letter of credit will expire on October 1, 2016. There is no balance outstanding under this line of credit.
Included in non-current deposits and other assets in the consolidated balance sheets at December 31, 2015 and 2014 is restricted cash and rental deposits totaling $0.3 million and $0.2 million, related to security deposits on leased facilities and a customer letter of credit, respectively. The restricted cash represents investments in certificates of deposit and secured letters of credit required by landlords to meet security deposit requirements for the leased facilities.
As of December 31, 2015, the liability for uncertain tax positions was $3.4 million including interest. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.
In May 2014, we entered into a credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under which Wells Fargo agreed to make a revolving loan ("Revolver") to us in an amount not to exceed $10.0 million, with an accordion feature that allows us to increase the maximum borrowing amount by not less than $5.0 million and not more than $10.0 million. The Revolver matures in May 2019. Outstanding borrowings under the Revolver bear interest, at our option, at a base rate plus an applicable margin. The applicable margin ranges between 0.75% and 2.25% depending on our leverage ratio. Interest is payable every three months. In September 2014, we exercised the accordion feature and increased the maximum borrowing amount to $15.0 million. As of December 31, 2015 we have no outstanding borrowings under the Revolver.
In October 2014, we entered into a sublease agreement ("Sublease") with Oracle America, Inc. (“Sublandlord”) for office space located at 4140 Dublin Boulevard, Dublin, California 94568 ("Subleased Premises"). The term of the Sublease commenced in February 2015, when the Sublandlord delivered possession of the Subleased Premises to us and expires on May 15, 2022. Base rent will be abated from the commencement of the Sublease until November 30, 2015. Thereafter, monthly base rent was $149,928 for 2015 and increase annually as set forth in the Sublease, up to $184,411 in 2022. The total cash obligation for base rent over the term of the Sublease is approximately $15.1 million, without rent abatement, and is included in the operating lease commitment in the table above. In addition to base rent, we will be required to pay our pro rata share of building operating costs including utilities, insurance, repair and personnel costs, along with real estate taxes in excess of the amounts for certain base years.


40

Off-Balance Sheet Arrangements
With the exception of items discussed under "Contractual Obligations and Commitments" above we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources that are material to investors.
Related Party Transactions
For information regarding related party transactions, refer to Note 15 to our consolidated financial statements.
Item 7A.    Quantitative and Qualitative Disclosures about Market Risk
Market Risk. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates, as well as fluctuations in interest rates and foreign exchange rates.
Our primary investment objectives are to preserve capital and maintain liquidity. We do not hold or issue financial instruments for trading purposes, and we invest in only investment grade securities. We limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines for our investment portfolios, which is approved by our Board of Directors. The guidelines establish, among others, credit quality standards, maturity constraints and limits on exposure to: i) any one security issue or issuer and ii) instrument type.
Financial instruments that potentially subject us to market risk are trade receivables denominated in foreign currencies. We also mitigate market risk by monitoring ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our on-going assessment of counterparty risk, we will adjust our exposure to various counterparties as necessary.
Interest Rate Risk. We invest our cash in a variety of financial instruments, consisting primarily of investments in money market accounts, certificates of deposit, high quality corporate debt obligations, and U.S. government obligations.
Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk. The fair market value of fixed-rate securities may be adversely affected by a rise in interest rates, while floating rate securities, which typically have a shorter duration, may produce less income than expected if interest rates fall. Due in part to these factors, our investment income may decrease in the future due to changes in interest rates. At December 31, 2015, the average maturity of our investments was approximately three months, and all investment securities had remaining maturities of less than 24 months. The following table presents certain information about our financial instruments at December 31, 2015 that are sensitive to changes in interest rates (in thousands, except for interest rates):

 
Expected Maturity
 
 
 
 
 
1 Year
or Less
 
More Than
1 Year
 
Total Principal
Amount
 
Total Fair Value
Available-for-sale securities
$
15,151

 
$
4,859

 
$
20,010

 
$
19,977

Weighted average interest rate
0.54
%
 
0.82
%
 
 

 
 

Foreign Currency Exchange Risk. A portion of our business originates outside the U.S. and subjects the Company to fluctuations in the USD value of revenues, expenses, and cash flows as a result of changes in foreign exchange rates. For 2015 and 2014, approximately 23% and 20%, respectively, of our total revenue was generated outside the United States. At December 31, 2015 and 2014, approximately 15% and 13%, respectively, of our total accounts receivable was denominated in foreign currency. In addition, the Company maintains foreign subsidiaries which have the local currency as their functional currency and therefore the Company is subject to translation risk. While our exposure to foreign currency risk is concentrated primarily in British pound sterling and in Euro, our overall foreign exchange exposure has been minimal to date. For the years ended December 31, 2015 and 2014, we recognized losses on foreign exchange transactions of $0.6 million and $0.4 million, respectively. We expect to continue to transact a majority of our business in U.S. Dollars.

41



Item 8.    Financial Statements and Supplementary Data

CALLIDUS SOFTWARE INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



42

Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Callidus Software, Inc.:
We have audited the accompanying consolidated balance sheets of Callidus Software, Inc. (the Company) and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. We also have audited the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Callidus Software, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Callidus Software, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on Internal Control - Integrated Framework (2013) issued by COSO.
/s/ KPMG LLP
Santa Clara, California
February 25, 2016

43

CALLIDUS SOFTWARE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
 
December 31,
 
2015
 
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
77,232

 
$
34,200

Short-term investments
19,977

 
2,766

Accounts receivable, net of allowances of $1,310 and $1,063 at December 31, 2015 and 2014, respectively
43,461

 
41,623

Prepaid and other current assets
11,385

 
10,384

Total current assets
152,055

 
88,973

Property and equipment, net
20,540

 
18,755

Goodwill
50,146

 
46,970

Intangible assets, net
14,885

 
17,757

Deposits and other assets
4,016

 
3,843

Total assets
$
241,642

 
$
176,298

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,636

 
$
2,056

Accrued payroll and related expenses
12,510

 
9,051

Accrued expenses
11,017

 
18,343

Deferred revenue
74,644

 
61,427

Capital lease obligations
—

 
1,001

Total current liabilities
101,807

 
91,878

Deferred revenue, noncurrent
5,186

 
10,195

Deferred income taxes, noncurrent
1,477

 
561

Other liabilities
4,371

 
4,709

Revolving line of credit
—

 
10,481

Total liabilities
112,841

 
117,824

Commitments and contingencies (Note 8)

 

Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding
—

—

—

Common stock, $0.001 par value; 100,000 shares authorized; 58,612 and 51,285 shares issued and 56,273 and 48,946 shares outstanding at December 31, 2015 and 2014, respectively
56

 
49

Additional paid-in capital
428,776

 
344,312

Treasury stock; 2,339 shares at December 31, 2015 and 2014
(14,430
)
 
(14,430
)
Accumulated other comprehensive loss
(1,735
)
 
(739
)
Accumulated deficit
(283,866
)
 
(270,718
)
Total stockholders' equity
128,801

 
58,474

Total liabilities and stockholders' equity
$
241,642

 
$
176,298

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

44

CALLIDUS SOFTWARE INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands except per share data)
 
Year Ended December 31,
 
2015
 
2014
 
2013
Revenue:
 
 
 
 
 
Recurring
$
129,911

 
$
99,807

 
$
81,734

Services and license
43,176

 
36,811

 
30,603

Total revenue
173,087

 
136,618

 
112,337

Cost of revenue:
 
 
 
 
 
Recurring
34,306

 
31,282

 
28,741

Services and license
32,145

 
24,756

 
19,048

Total cost of revenue
66,451

 
56,038

 
47,789

Gross profit
106,636

 
80,580

 
64,548

Operating expenses:
 
 
 
 
 
Sales and marketing
58,785

 
47,040

 
34,916

Research and development
26,088

 
20,307

 
17,143

General and administrative
33,290

 
26,255

 
22,951

Income from settlement and patent licensing
(500
)
 
(500
)
 
(500
)
Restructuring and other
628

 
1,025

 
1,699

Total operating expenses
118,291

 
94,127

 
76,209

Operating loss
(11,655
)
 
(13,547
)
 
(11,661
)
Interest income and other income (expense), net
(522
)
 
3,504

 
264

Interest expense
(180
)
 
(506
)
 
(3,183
)
Debt conversion expense
—

 
—

 
(4,776
)
Loss before provision for income taxes
(12,357
)
 
(10,549
)
 
(19,356
)
Provision for income taxes
791

 
1,012

 
2,055

Net loss
$
(13,148
)
 
$
(11,561
)
 
$
(21,411
)
Net loss per share—basic and diluted
 
 
 
 
 
Net loss per share
$
(0.24
)
 
$
(0.24
)
 
$
(0.55
)
Shares used in basic and diluted per share computation
54,719

 
47,547

 
38,858

Comprehensive loss
 
 
 
 
 
Net Loss
$
(13,148
)
 
$
(11,561
)
 
$
(21,411
)
Unrealized losses on available-for-sale securities
(15
)
 
(7
)
 
(11
)
Foreign currency translation adjustments
(981
)
 
(897
)
 
(63
)
Comprehensive loss
$
(14,144
)
 
$
(12,465
)
 
$
(21,485
)
The accompanying notes are an integral part of these consolidated financial statements.

45

CALLIDUS SOFTWARE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
 
 
Common Stock
 
 
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
 
 
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Stockholders'
Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of December 31, 2012
 
38,538

 
$
34

 
$
255,331

 
2,339

 
$
(14,430
)
 
$
239

 
$
(237,746
)
 
$
3,428

Exercise of stock options under stock incentive plans
 
1,429

 
1

 
5,054

 
—

 
—

 
—

 
—

 
5,055

Issuance of common stock under stock purchase plans
 
435

 
1

 
1,573

 
—

 
—

 
—

 
—

 
1,574

Restricted stock units acquired to settle employee withholding liability
 
1,544

 
3

 
(1,300
)
 
—

 
—

 
—

 
—

 
(1,297
)
Stock-based compensation
 
—

 
—

 
10,395

 
—

 
—

 
—

 
—

 
10,395

Conversion of debt to equity
 
5,871

 
6

 
44,377

 
—

 
—

 
—

 
—

 
44,383

Unrealized gain on investments
 
—

 
—

 
—

 
—

 
—

 
(11
)
 
—

 
(11
)
Cumulative translation adjustment
 
—

 
—

 
—

 
—

 
—

 
(63
)
 
—

 
(63
)
Net loss
 
—

 
—

 
—

 
—

 
—

 
—

 
(21,411
)
 
(21,411
)
Balance as of December 31, 2013
 
47,817

 
$
45

 
$
315,430

 
2,339

 
$
(14,430
)
 
$
165

 
$
(259,157
)
 
$
42,053

Exercise of stock options under stock incentive plans
 
701

 
1

 
2,869

 
—

 
—

 
—

 
—

 
2,870

Issuance of common stock under stock purchase plans
 
319

 
—

 
1,983

 
—

 
—

 
—

 
—

 
1,983

Restricted stock units acquired to settle employee withholding liability
 
607

 
1

 
(1,723
)
 
—

 
—

 
—

 
—

 
(1,722
)
Stock-based compensation
 
—

 
—

 
11,813

 
—

 
—

 
—

 
—

 
11,813

Conversion of debt to equity
 
1,841

 
2

 
13,940

 
—

 
—

 
—

 
—

 
13,942

Unrealized loss on investments
 
—

 
—

 
—

 
—

 
—

 
(7
)
 
—

 
(7
)
Cumulative translation adjustment
 
—

 
—

 
—

 
—

 
—

 
(897
)
 
—

 
(897
)
Net loss
 
—

 
—

 
—

 
—

 
—

 
—

 
(11,561
)
 
(11,561
)
Balance as of December 31, 2014
 
51,285

 
$
49

 
$
344,312

 
2,339

 
$
(14,430
)
 
$
(739
)
 
$
(270,718
)
 
$
58,474

Exercise of stock options under stock incentive plans
 
442

 
1

 
2,045

 
—

 
—

 
—

 
—

 
2,046

Issuance of common stock under stock purchase plans
 
256

 
—

 
2,439

 
—

 
—

 
—

 
—

 
2,439

Restricted stock units acquired to settle employee withholding liability
 
1,339

 
1

 
(3,070
)
 
—

 
—

 
—

 
—

 
(3,069
)
Stock-based compensation
 
—

 
—

 
18,592

 
—

 
—

 
—

 
—

 
18,592

Issuance of stock for follow-on offering, net of issuance costs
 
5,290

 
5

 
64,367

 
—

 
—

 
—

 
—

 
64,372

Excess tax benefit
 
—

 
—

 
91

 
—

 
—

 
—

 
—

 
91

Unrealized loss on investments
 
—

 
—

 
—

 
—

 
—

 
(15
)
 
—

 
(15
)
Cumulative translation adjustment
 
—

 
—

 
—

 
—

 
—

 
(981
)
 
—

 
(981
)
Net loss
 
—

 
—

 
—

 
—

 
—

 
—

 
(13,148
)
 
(13,148
)
Balances as of December 31, 2015
 
58,612

 
$
56

 
$
428,776

 
2,339

 
$
(14,430
)
 
$
(1,735
)
 
$
(283,866
)
 
$
128,801

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

46

CALLIDUS SOFTWARE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Year Ended December 31,
 
2015
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(13,148
)
 
$
(11,561
)
 
$
(21,411
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation expense
6,011

 
5,503

 
4,458

Amortization of intangible assets
5,687

 
4,971

 
4,825

Provision for doubtful accounts
1,897

 
852

 
999

Stock-based compensation
18,592

 
11,813

 
10,395

Deferred income taxes
26

 
(86
)
 
237

Release of valuation allowance
—

 
(265
)
 
—

Excess tax benefits from stock-based compensation
(91
)
 
—

 
—

Loss on disposal of property and equipment
10

 
43

 
3

Amortization of convertible notes issuance cost
—

 
58

 
485

Gain on sale of intangible assets
—

 
(3,862
)
 
—

Net amortization on investments
133

 
27

 
79

Debt conversion expense
—

 
—

 
4,776

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(2,944
)
 
(11,746
)
 
(7,648
)
Prepaid and other current assets
(972
)
 
(3,749
)
 
486

Other noncurrent assets
(549
)
 
(1,088
)
 
(1,276
)
Accounts payable
1,413

 
(794
)
 
(1,702
)
Accrued expenses and other liabilities
67

 
6,696

 
106

Accrued payroll and related expenses
3,459

 
1,149

 
1,971

Accrued restructuring and other expenses
(131
)
 
(181
)
 
(503
)
Deferred revenue
7,009

 
11,371

 
17,469

Net cash provided by operating activities
26,469

 
9,151

 
13,749

Cash flows from investing activities:
 
 
 
 
 
Purchases of investments
(24,479
)
 
(2,784
)
 
(7,434
)
Proceeds from maturities and sale of investments
7,119

 
7,850

 
12,250

Purchases of property and equipment
(13,128
)
 
(7,121
)
 
(1,704
)
Proceeds from sale of intangible assets, net of expenses
—

 
4,651

 
—

Purchases of intangible assets
(827
)
 
(1,112
)
 
(638
)
Acquisitions, net of cash acquired
(4,365
)
 
(15,488
)
 
—

Net cash provided by (used in) investing activities
(35,680
)
 
(14,004
)
 
2,474

Cash flows from financing activities:
 
 
 
 
 
Proceed from follow-on offering, net of issuance costs
64,372

 
—

 
—

Proceeds from issuance of common stock
4,484

 
4,852

 
6,629

Restricted stock units acquired to settle employee withholding liability
(3,070
)
 
(1,723
)
 
(1,297
)
Excess tax benefits from stock-based compensation
91

 
—

 
—

Payment of consideration related to acquisitions
(1,802
)
 
(630
)
 
(2,903
)
Payment on debt conversion
—

 
(645
)
 
(4,374
)
Proceeds from Revolver line of credit
(10,481
)
 
10,481

 
—

Payment of principal under capital leases
(1,001
)
 
(1,294
)
 
(2,319
)
Net cash provided by (used in) financing activities
52,593

 
11,041

 
(4,264
)
Effect of exchange rates on cash and cash equivalents
(350
)
 
(283
)
 
(64
)
Net increase in cash and cash equivalents
43,032

 
5,905

 
11,895

Cash and cash equivalents at beginning of period
34,200

 
28,295

 
16,400

Cash and cash equivalents at end of period
$
77,232

 
$
34,200

 
$
28,295

Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid for interest on convertible debt
$
—

 
$
277

 
$
2,604

Cash paid for interest on capital leases
$
18

 
$
59

 
$
100

Cash paid for interest on line of credit
$
104

 
$
—

 
$
—

Cash paid for income taxes
$
542

 
$
182

 
$
162

Noncash investing and financing activities:
 
 
 
 
 
   Conversion of convertible debt to equity
$
—

 
$
14,197

 
$
45,018

   Reclassification of unamortized debt issuance cost to additional paid-in capital as a result of debt conversion
$
—

 
$
253

 
$
1,037

   Common stock issued as a premium of debt conversion
$
—

 
$
—

 
$
402

   Fixed assets acquired under capital lease
$
—

 
$
—

 
$
3,851

Purchases of property and equipment through accounts payable and other accrued liabilities                
$
5,314

 
$
5,829

 
$
157

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

47

CALLIDUS SOFTWARE INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—The Company and Significant Accounting Policies
Description of Business
Callidus Software Inc. (referred to herein as "CallidusCloud", "Callidus", "we" and "our") is a provider of sales and marketing effectiveness software. The Company provides organizations with a complete suite of Lead-to-Money solutions that identify the right leads, ensure proper territory and quota distribution, train sales forces, automate quote and proposal generation, and streamline sales compensation.
Principles of Consolidation
The consolidated financial statements include the accounts of Callidus Software, Inc. and its wholly-owned subsidiaries (collectively, the Company), which include wholly-owned subsidiaries in Australia, Canada, Germany, Hong Kong, India, Malaysia, Mexico, Netherlands, New Zealand, Serbia, Singapore, Japan and the United Kingdom. All intercompany transactions and balances have been eliminated in the consolidation.
Use of Estimates
The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") as set forth in the Financial Accounting Standards Board’s ("FASB") Accounting Standards Codification ("ASC") and consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission ("SEC"). These accounting principles require us to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon which the Company relies are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are differences between these estimates, judgments or assumptions and actual results, the Company's consolidated financial statements will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result.
In addition, illiquid credit markets, volatile equity and foreign currency markets by companies have contributed to the increase in uncertainty in management estimates and assumptions. Also, future events, such as changes in economic environment, cannot be determined with precision, which would cause actual results to differ materially from management's estimates. Such changes in estimates will be reflected in the consolidated financial statements in future periods.
Foreign Currency Translation
The Company transacts business in various foreign currencies. In general, the functional currency of a foreign operation is the local country’s currency. Accordingly, the foreign currencies are translated into U.S. Dollars using exchange rates in effect at period end for assets and liabilities and average rates during each reporting period for the results of operations. Adjustments resulting from the translation of the financial statements of the foreign subsidiaries are reported as a separate component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in interest and other income (expense), net in the accompanying consolidated statements of comprehensive loss.
Cash and Cash Equivalents and Investments
The Company considers all highly liquid instruments with an original maturity on the date of purchase of three months or less to be cash equivalents. Cash equivalents as of December 31, 2015 and 2014 consisted of money market funds. The Company determines the appropriate classification of investment securities at the time of purchase and re-evaluates such designation as of each balance sheet date. As of December 31, 2015 and 2014, all investment securities were designated as "available-for-sale". The Company considers available-for-sale securities that have an original maturity date longer than three months to be short-term investments, including those investments that have a maturity date of longer than one year that are highly liquid and for which the Company does not have a positive intent to hold to maturity. These securities are carried at estimated fair value based on quoted market prices or other readily available market information, with the unrealized gains and losses included in other comprehensive income (loss). Recognized gains and losses are included in the consolidated statement of comprehensive loss. When the Company has determined that an other-than-temporary decline in fair value has occurred, the amount of the decline is recognized in earnings. Gains and losses are determined using the specific identification method.

48

Fair Value of Financial Instruments and Concentrations of Credit Risk
The fair value of certain of the Company's financial instruments that are not measured at fair value, including accounts receivable and accounts payable, approximates the carrying amount due to their short maturity. See Note 5, Fair Value Measurements, for discussion regarding the valuation of the Company's investments. Financial instruments that potentially subject us to concentrations of credit risk are cash equivalents, short-term investments and trade receivables. The Company mitigates concentration of risk by monitoring the risk profiles of all bank counterparties on at least a quarterly basis. Based on the on-going assessment of counterparty risk, the Company will adjust its exposure to various counterparties.
The Company's customer base consists of businesses throughout the Americas, Europe, Middle East, Africa and Asia-Pacific. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. As of December 31, 2015 and 2014, the Company had no customers comprising greater than 10% of net accounts receivable or total revenue. Refer to Note 14, Segment, Geographic and Customer Information, for information regarding revenue by geographic areas.
In May, 2014, the Company entered into a credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under which Wells Fargo agreed to make a revolving loan ("Revolver") to the Company in an amount not to exceed $10.0 million, with an accordion feature that allows the Company to increase the maximum borrowing amount by not less than $5.0 million and not more than $10.0 million. In September 2014, the Company increased the maximum borrowing amount to $15.0 million. The Revolver matures in May 2019. In June 2015, the Company paid off the then outstanding amount of $10.5 million. As of December 31, 2015 the Company had no borrowings under the Revolver.
Outstanding borrowings under the Revolver bear interest, at the Company's option, at a base rate plus an applicable margin. The applicable margin ranges between 0.75% and 2.25% depending on the Company's leverage ratio. Interest is payable every three months.
Holdback Payable
The Company estimates the fair value of an indemnity holdback payable, which relates to business combinations, based on the contract value. The terms of the holdback payable include standard representations and warranties.
Contingent Consideration
The Company estimates the fair value of the contingent consideration issued in business combinations using a probability-based income approach. The fair value of the Company liability-classified contingent consideration is remeasured at each reporting period, with any changes in the fair value recorded as income or expense. Contingent acquisition consideration payable is included in accrued liabilities on the Company's consolidated balance sheets.
Allowance for Doubtful Accounts
The Company reduces gross trade accounts receivable with its allowance for doubtful accounts. The allowance for doubtful accounts is the Company's estimate of the amount of probable credit losses in existing accounts receivable. Management analyzes accounts receivable and historical bad debt experience, customer creditworthiness, current economic trends and changes in customer payment history when evaluating the adequacy of the allowance for doubtful accounts. Provisions to the allowance for doubtful accounts are recorded in general and administrative expenses in the Company's consolidated statements of comprehensive loss.
Below is a summary of the changes in the Company's allowance for doubtful accounts for 2015, 2014 and 2013 (in thousands):
 
Balance at Beginning of Year
 
Additions
 
Deductions
 
Balance at
End of Year
Allowance for doubtful accounts
 
 
 
 
 
 
 
Year ended December 31, 2015
$
1,063

 
$
912

 
$
(665
)
 
$
1,310

Year ended December 31, 2014
650

 
996

 
(583
)
 
1,063

Year Ended December 31, 2013
481

 
830

 
(661
)
 
650




49


Prepaid and Other Current Assets and Deposits and Other Assets
Included in prepaid and other current assets and in deposits and other assets in the consolidated balance sheets at December 31, 2015 and 2014 is restricted cash totaling $0.3 million and $0.2 million, respectively, primarily related to security deposits on leases of the Company's facilities. The restricted cash represents investments in certificates of deposit required by landlords to meet security deposit requirements for the leased facilities. Restricted cash is included in prepaid and other current assets and in deposits and other assets based on the contractual term for the release of the restriction.
Property and Equipment, net
Property and equipment, net is stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized over the lesser of the assets' estimated useful lives or the related lease terms. Expenditures for maintenance and repairs are expensed as incurred. Cost and accumulated depreciation of assets sold or retired are removed from the respective property accounts and any resulting gain or loss is reflected in the consolidated statements of comprehensive loss.
Goodwill, Intangible Assets, Long-Lived Assets and Impairment Assessments
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in connection with business combinations. Goodwill is not amortized, but instead goodwill is required to be tested for impairment annually and more frequently under certain circumstances. The Company performs such testing of goodwill in the fourth quarter of each year, and earlier if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The Company conducts a two-step test for impairment of goodwill. The first step of the test for goodwill impairment compares the fair value of the applicable reporting unit with its carrying value. If the fair value of a reporting unit is less than the reporting unit's carrying value, the Company will perform the second step of the test for impairment of goodwill. During the second step of the test for impairment of goodwill, the Company will compare the implied fair value of the reporting unit's goodwill with the carrying value of that goodwill. If the carrying value of the goodwill exceeds the calculated implied fair value, the excess amount will be recognized as an impairment loss. The Company has one reporting unit and evaluates goodwill for impairment at the entity level. Based upon the results of the step one testing, the Company concluded that no impairment existed as of December 31, 2015, and did not perform the second step of the goodwill impairment test.
Intangible assets with finite lives are amortized over their estimated useful lives of one to nine years. Generally, amortization is based on the higher of a straight-line method or the pattern in which the economic benefits of the intangible asset will be consumed. In 2015, we recorded impairment expense of $0.3 million and in 2014 and 2013 there was no impairment expense related to intangible assets.
The Company also evaluates the recoverability of its long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. There were no other impairment charges recorded during the years ended December 31, 2015, 2014 and 2013.
Business Combinations
The Company recognizes assets acquired, liabilities assumed, and contingent consideration at their fair value on the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of assets acquired and liabilities assumed, with a corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company's consolidated statements of comprehensive loss. See Note 2 to the Company's consolidated financial statements, for a discussion of the Company's acquisitions during 2015 and 2014.
In addition, uncertainties in income tax and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. The Company continues to gather information and evaluate these items and records any adjustments to the preliminary estimates to goodwill when the estimates are within the measurement period. Subsequent to the measurement period, changes to these income tax uncertainties and tax related valuation allowances will affect the Company's provision for income taxes in its consolidated statements of comprehensive loss.


50


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

Recurring Revenue. Recurring revenue, which includes software-as-a-service revenue and maintenance revenue, is recognized ratably over the stated contractual period. SaaS revenue consists of subscription fees from customers accessing our cloud-based service offerings. Maintenance revenue consists of fees from customers purchasing 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 years ended December 31, 2015, 2014 and 2013.

Service and License Revenue. Service and license revenue primarily consist of training, integration and configuration services. Generally, the Company's professional services arrangements are on a time-and-materials basis. Time and material services are recognized as the services are rendered based on inputs to the project, such as billable hours incurred. For fixed-fee professional service arrangements, the Company recognizes revenue under the proportional performance method of accounting and estimates the proportional performance on a monthly basis, utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If the Company does not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion. Service and license revenue also includes revenue from perpetual licenses, which is recognized upon delivery of the product, using the residual method, assuming all the other conditions for revenue recognition have been met.

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

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

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

The Company recognizes revenue when all of the following conditions are met:
        
• Persuasive evidence of an arrangement exists;
• Delivery has occurred or services have been rendered;
• The fees are fixed or determinable; and    
• Collection of the fees is reasonably assured.

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

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

51


The Company considered all of the following factors to establish the ESP for fixed fee service arrangements when sold with its on-demand services: the weighted average actual sales prices of professional services sold on a stand-alone basis for on-demand services; average billing rates for fixed fee service agreements when sold with on-demand services, cost plus a reasonable mark-up and other factors such as gross margin objectives, pricing practices and growth strategy. The Company is currently using cost plus a reasonable mark-up to establish ESP for fixed fee service arrangements.
        
Multiple-deliverable arrangements with on-premise license. For arrangements with multiple-deliverables, including license, professional services and maintenance, the Company recognizes license revenue using the residual method of accounting pursuant to the requirements of the guidance contained in ASC 985-605, Software Revenue Recognition. Under the residual method, revenue is recognized when VSOE for fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. If evidence of fair value cannot be established for the undelivered elements, all of the revenue is deferred until evidence of fair value can be established, or until the items for which evidence of fair value cannot be established are delivered. For maintenance and certain professional services, the Company has established VSOE as a high number of stand-alone sales of this deliverable have been priced within a reasonably narrow range. The Company's revenue arrangements do not include a general right of return relative to the delivered products.

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

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

Deferred Revenue

Deferred revenue consists of invoicing and payments received in advance of revenue recognition and is recognized as the revenue recognition criteria are met. The Company invoices its customers annually, quarterly, or in monthly installments. Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as current deferred revenue, and the remaining portion is recorded as non-current deferred revenue.
Cost of Revenue
Cost of recurring revenue consists primarily of salaries, benefits, allocated overhead costs related to on-demand operations and technical support personnel, as well as allocated amortization of purchased technology. Cost of services revenue consists primarily of salaries, benefits, travel and allocated overhead costs related to consulting, training and other professional services personnel, including cost of services provided by third-party consultants engaged by the Company. Cost of license revenue consists primarily of amortization of purchased technology.
Deferred Commissions
The asset balance for deferred commissions on the Company's consolidated balance sheets totaled $7.1 million and $5.6 million at December 31, 2015 and December 31, 2014, respectively. As of December 31, 2015 and 2014 $6.0 million and $4.2 million respectively, deferred commissions are included in prepaid and other current assets in short-term assets, with the remaining amounts included in deposits and other assets in long-term assets in the consolidated balance sheets. The deferred costs mainly represent commission payments to the Company's direct sales force for on-demand subscription and maintenance agreements, which the Company amortizes as sales and marketing expense over the non-cancellable term of the contract as the related revenue is recognized. The commission payments are a direct and incremental cost of the revenue arrangements.
Restructuring and Other Expenses
Restructuring and other expenses are comprised primarily of employee termination costs related to headcount reductions, costs related to properties abandoned in connection with facilities consolidation including estimated losses related to excess facilities based upon the Company's contractual obligations, net of estimated sublease income and related write-downs of leasehold improvements and impairment of intangible assets. The Company reassess the liability for excess facilities periodically based on market conditions.
Research and Development
The Company expenses the cost of research and development as incurred. Research and development expenses consist primarily of expenses for research and development staff, the cost of certain third-party service providers and allocated overhead.


52


Stock-Based Compensation
The Company measures and recognizes compensation expense for stock-based awards made to employees and directors including employee stock options and employee stock purchases under the Company's Employee Stock Purchase Plan ("ESPP") based on estimated fair values on the date of grant using the Black-Scholes option pricing model. Stock-based compensation expense for restricted stock units, relating to both performance and time-based awards, is estimated based on the market value of the Company's stock on the date of grant.
The Company granted performance-based restricted stock units ("PSUs") to select executives and other key employees.  Vesting of the Company's PSUs is based on achievement of specified company or other goals. In 2015, the Company granted PSUs with vesting contingent on its absolute SaaS revenue growth over the three-year period from July 1, 2015 through June 30, 2018.  

In 2014, the Company granted PSUs with vesting contingent on its absolute SaaS revenue growth over the three-year period from January 1, 2014 through December 31, 2016, and on the Company's relative total shareholder return over the same three-year period compared to an index of 17 SaaS companies. The fair value of the performance awards is calculated using a Monte Carlo simulation model that estimates the potential outcomes of grants of performance awards based on a simulated future index of peer companies.
    
PSU awards based on SaaS revenue growth will, to the extent the performance criteria are achieved, vest on the third anniversary of the grant date. PSU awards based on total shareholder return is recognized as compensation costs over the requisite service period, if rendered, even if the market condition is never satisfied. In determining the fair value of PSUs based on total shareholder return the Company considered the achievement of the market condition in the estimated fair value.
Income Taxes
The Company is subject to income and foreign withholding taxes in both the United States and foreign jurisdictions and the Company uses estimates in determining its provision for income taxes. This process involves estimating actual current tax assets and liabilities together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the consolidated balance sheets. Net deferred tax assets are recorded to the extent the Company believes that it is more-likely-than-not realized. In making such determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. With the exception of the net deferred tax assets of three of the Company's foreign subsidiaries, it maintained a full valuation allowance against its net deferred tax assets at December 31, 2015 because the Company believes that it is not more-likely-than-not that the gross deferred tax assets will be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event the Company was able to determine that it would be able to realize the deferred tax assets in the future, an adjustment to the deferred tax assets would increase net income in the period such determination was made.
The Company regularly reviews its tax positions and benefits to be realized. The Company recognizes tax liabilities based upon its estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company recognizes interest and penalties related to income tax matters as income tax expense. In 2015, 2014 and 2013, the Company incurred $35,000, $24,000 and $27,000, respectively, for interest or penalties associated with unrecognized tax benefits.
Advertising Costs
The Company expenses advertising costs in the period incurred. Advertising expense was $2.1 million, $1.2 million, and $0.2 million for 2015, 2014 and 2013, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income (loss), unrealized gains and losses on investments and foreign currency translation adjustments. Unrealized gains and losses on investments and foreign currency translation adjustment amounts are excluded from net loss and are reported in accumulated other comprehensive income (loss) in the accompanying consolidated financial statements.

53

Recent Accounting Pronouncements
In November 2015, the FASB issued ASU No. 2015-17 (ASU 2015-17), “Balance Sheet Classification of Deferred Taxes,” which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company early adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of the Company's net current deferred tax liabilities to net non-current deferred tax liabilities in its consolidated balance sheets as of December 31, 2015. No prior periods were adjusted retrospectively.
In May 2014, the FASB issued ASU No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 may also impact how the Company accounts for certain direct costs associated with its revenues. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted one year earlier. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. The Company has not elected a transition method and is currently in the process of evaluating the impact of the adoption of ASU 2014-09 on the consolidated financial statements and does not plan to early adopt this standard.
Note 2—Acquisitions
BridgeFront LLC
On July 22, 2015, the Company acquired BridgeFront LLC ("BridgeFront"), a leading provider of cloud-based education content for the healthcare sector, most notably in the compliance and revenue cycle domains. The purchase consideration was approximately $5.0 million, which included approximately $4.4 million paid in cash, $0.1 million held back to cover expenses of the stakeholder representative which is payable in early 2017, and an approximately $0.4 million indemnity holdback payable upon the one-year closing anniversary, which remained outstanding as of December 31, 2015.

The terms of the BridgeFront acquisition also provided for potential earn-out payments of up to an aggregate of $0.6 million. Although earn-out payments based on achievement of targets are normally treated as purchase price because of the service conditions, $0.5 million of the $0.6 million was treated as compensation expense and is recognized over the term of the payments in 2015 and 2016. The remaining balance of $0.1 million was recorded as contingent consideration. As of December 31, 2015, the fair value of this contingent consideration, which included compensation expense from July 23, 2015 to December 31, 2015, was $0.3 million.

The purchase price allocation for BridgeFront is summarized as follows (in thousands):
 
Fair Value
Net liabilities assumed
$
(849
)
Intangible assets
2,100

Goodwill
3,750

Total purchase price
$
5,001


Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable assets acquired and a working capital adjustment for $0.1 million. The goodwill balance is primarily attributed to the anticipated synergies from the acquisition and the expanded market opportunities of our Litmos mobile learning applications in the healthcare industry.

The financial results of BridgeFront are included in the Company's consolidated financial statements from the date of acquisition to December 31, 2015.

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

54

The following table sets forth the components of identifiable intangible assets acquired, their weighted-average useful lives over which they will be amortized using the higher of the straight-line method or the pattern in which the economic benefits of the intangible assets will be consumed. The classification of their amortized expense in the consolidated statements of comprehensive loss (in thousands):

 
Fair Value
Weighted -Average Useful life
Consolidated statements of comprehensive loss
 Classification: Amortization Expense
Developed technology
$
1,800

5 years
Cost of sales
Customer relationships
300

5 years
Sales and marketing expense
Total intangible assets subject to amortization
$
2,100

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

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

•
Customer relationships - Multi-period excess earnings method under the income approach using inputs such as probability-weighted revenue attributable to existing customer relationships, customer attrition, estimated expenses, effective income tax rate, and discount rate.
    
The amortization expense of $0.2 million was included in the consolidated statements of comprehensive loss. The acquisition-related costs incurred during the year ended December 31, 2015 of $0.5 million were included in general and administration expense in the consolidated statements of comprehensive loss.
Clicktools Ltd.
On September 16, 2014, the Company acquired Clicktools Ltd. (“Clicktools”), a provider of premium, cloud-based survey products and services for businesses. The purchase consideration was $16.4 million, which included $14.8 million paid in cash and a one million British Pounds indemnity holdback, which was paid in full in 2015.
The purchase price allocation for Clicktools is summarized as follows (in thousands):
 
Fair Value
Net liabilities assumed
$
(1,270
)
Intangible assets
3,000

Goodwill
14,675

Total purchase price
$
16,405

The excess of purchase consideration over the fair value of net tangible liabilities assumed and identifiable intangible assets acquired was recorded as goodwill. The estimated fair values of assets acquired and liabilities assumed, specifically current and noncurrent income taxes payable and deferred taxes, may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth above are subject to change.
Goodwill is primarily attributed to the anticipated synergies from the acquisition and expanded market opportunities with respect to the integration of Clicktools' business-to-business survey management platform with the Company's other solutions. The goodwill balance is not deductible for U.S. or U.K income tax purposes.
    
    



55

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of the Clicktools acquisition (in thousands). The intangible assets are reported in British Pounds and was translated to U.S. Dollars at December 31, 2015.
 
Fair Value
 
Useful Life
Developed technology
$
1,300

 
3 years
Domain names and trademarks
600

 
3 years
Customer relationships
1,100

 
3 years
Total intangible assets subject to amortization
$
3,000

 
 
Pro forma results of operations for the Clicktools acquisition have not been presented because the acquisition is not material.
LeadRocket, Inc.
On February 4, 2014, the Company acquired all of the common stock of LeadRocket, Inc. (“LeadRocket”), a privately-held company providing marketing automation and demand generation solutions that enable both marketing and sales users to identify and connect with leads efficiently. The Company acquired LeadRocket to strengthen its social engagement and digital marketing platform. The purchase consideration was $3.0 million, which included $2.5 million paid in cash and $0.5 million as indemnity holdback, of which $0.3 million was paid upon the one-year closing anniversary.
The purchase price allocation for LeadRocket is summarized as follows (in thousands):
 
Fair Value
Net liabilities assumed
$
(1,224
)
Intangible assets
2,640

Goodwill
1,584

Total purchase price
$
3,000

The excess of purchase consideration over the fair value of net tangible liabilities assumed and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The estimated fair values of assets acquired and liabilities assumed, specifically current and noncurrent income taxes payable and deferred taxes, may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth above are subject to change.
The goodwill balance is primarily attributed to the anticipated synergies from the acquisition and expanded market opportunities with respect to the integration of LeadRocket’s digital marketing platform with the Company's other solutions. The goodwill balance is not deductible for U.S. income tax purposes.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of the LeadRocket acquisition (in thousands):
 
Fair Value
 
Useful Life
Developed technology
$
570

 
2-4 years
Patents
1,060

 
10 years
Domain names and trademarks
850

 
5 years
Customer relationships
160

 
3 years
Total intangible assets subject to amortization
$
2,640

 
 
Pro forma results of operations for the LeadRocket acquisition have not been presented because the acquisition is not material.

56

Note 3—Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the fiscal years ended December 31, 2015 and 2014 are as follows (in thousands):
 
Goodwill
Balance as of December 31, 2013
$
31,207

Acquisitions
16,259

Foreign currency translation impact
$
(496
)
Balance as of December 31, 2014
$
46,970

Acquisitions
3,750

Foreign currency translation impact
(574
)
Balance as of December 31, 2015
$
50,146

In July 2015, the Company recorded goodwill of $3.8 million related to the acquisition of BridgeFront. Refer to Note 2, Acquisitions for further details.
In 2014, the Company recorded goodwill of $1.6 million and $14.7 million related to the acquisitions of LeadRocket and Clicktools, respectively. Refer to Note 2, Acquisitions for further details.
Based on the Company's annual impairment review in the fourth quarter of 2015, 2014 and 2013, goodwill was not impaired in any of the years presented.
Intangible assets
Intangible assets consisted of the following as of December 31, 2015 and 2014 (in thousands):
 
December 31,
2014 Cost
 
December 31, 2014 Net
 
Net Additions (1)
 
Foreign Currency Translation Impact
 
Amortization Expense (2)
 
December 31,
2015 Net
 
Weighted
Average
Amortization
Period (Years)
Developed technology
$
25,093

 
$
10,251

 
$
2,407

 
$
(34
)
 
$
(3,452
)
 
$
9,172

 
3.5
Customer relationships
9,414

 
4,270

 
300

 
(39
)
 
(1,456
)
 
3,075

 
3.0
Tradenames
2,208

 
1,191

 
—

 
(37
)
 
(399
)
 
755

 
2.8
Favorable lease
53

 
—

 
—

 
—

 
—

 
—

 
N/A
Patents and licenses
3,059

 
2,045

 
220

 
—

 
(382
)
 
1,883

 
5.4
Other
142

 
—

 
—

 
—

 
—

 
—

 
N/A
Total
$
39,969

 
17,757

 
$
2,927

 
$
(110
)
 
$
(5,689
)
 
$
14,885

 
 
(1) Included in the additions are the intangibles acquired for BridgeFront of $2.1 million as discussed in Note 2 to the consolidated financial statements and other purchased technology as part of the normal course of operations.
(2) Included in amortization expense is $0.3 million of impairment on intangible assets.

57


 
December 31,
2013 Cost
 
December 31, 2013 Net
 
Net Additions
 
Foreign Currency Translation Impact
 
Amortization Expense
 
December 31,
2014 Net
 
Weighted
Average
Amortization
Period (Years)
Developed technology
$
21,187

 
$
9,669

 
$
3,906

 
$
(53
)
 
$
(3,271
)
 
$
10,251

 
4.1
Customer relationships
8,154

 
4,076

 
1,260

 
(41
)
 
(1,025
)
 
4,270

 
3.6
Tradenames
1,522

 
828

 
686

 
(25
)
 
(298
)
 
1,191

 
3.6
Favorable lease
53

 
—

 
—

 
—

 
—

 
—

 
N/A
Patents and licenses
3,059

 
2,393

 
—

 
—

 
(348
)
 
2,045

 
6.7
Other
142

 
29

 
—

 
—

 
(29
)
 
—

 
N/A
Total
$
34,117

 
$
16,995

 
$
5,852

 
$
(119
)
 
$
(4,971
)
 
$
17,757

 
 

(1) Included in the additions are the intangibles acquired in 2015 for BridgeFront and in 2014 for Clicktools of $3.0 million and LeadRocket of $2.6 million as discussed in Note 2 to the consolidated financial statements and other purchased technology as part of the normal course of operations.
Amortization expense related to intangible assets was $5.7 million, $5.0 million and $4.8 million in 2015, 2014 and 2013, respectively, and was charged to cost of revenue for purchased technology, tradenames and patents and licenses; sales and marketing expense for customer relationships; and general and administrative expense for the favorable lease and other. Additionally, in 2015, the Company recorded impairment expense of $0.3 million and in 2014 and 2013 there was no impairment expense related to intangible assets. The Company's intangible assets are amortized over their estimated useful lives of one to nine years. Total future expected amortization is as follows (in thousands):
 
Developed
Technology
 
Customer
Relationships
 
Tradenames
 
Patents and
Licenses
Year Ending December 31:
 
 
 
 
 
 
 
2016
$
3,210

 
$
1,209

 
$
331

 
$
498

2017
2,777

 
1,040

 
248

 
376

2018
1,891

 
557

 
100

 
314

2019
694

 
136

 
33

 
180

2020
275

 
81

 
33

 
168

2021 and beyond
325

 
52

 
10

 
347

Total expected amortization expense
$
9,172

 
$
3,075

 
$
755

 
$
1,883

Note 4—Financial Instruments
As of December 31, 2015, all marketable debt securities are classified as available-for-sale and carried at estimated fair value, which is determined based on the inputs described in Note 5 to the consolidated financial statements.
The Company classifies all highly liquid instruments with an original maturity on the date of purchase of three months or less as cash and cash equivalents. The Company classifies available-for-sale securities that have an original maturity date longer than three months to be short-term investments, including those investments with a maturity date of longer than one year that are highly liquid and for which the Company does not have a positive intent to hold to maturity.
Interest income is included within interest income and other income (expense), net in the accompanying consolidated statements of comprehensive loss. Realized gains and losses are calculated using the specific identification method. As of December 31, 2015 and 2014, the Company had no short-term investments in an unrealized loss position for a duration greater than 12 months.

58

The components of the Company's marketable debt securities classified as available-for-sale were as follows at December 31, 2015 (in thousands):
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
77,191

 
$
—

 
$
—

 
$
77,191

Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
41

 
—

 
—

 
41

Total cash equivalents
 
41

 
—

 
—

 
41

Total cash and cash equivalents
 
$
77,232

 
$
—

 
$
—

 
$
77,232

Short-term investments:
 
 
 
 
 
 
 
 
Certificates of deposit
 
1,500

 
—

 
—

 
1,500

U.S. government and agency obligations
 
7,423

 
—

 
(16
)
 
7,407

Corporate notes and obligations
 
11,087

 
—

 
(17
)
 
11,070

Total short-term investments
 
$
20,010

 
$
—

 
$
(33
)
 
$
19,977

For investments in securities classified as available-for-sale, market value and the amortized cost of debt securities have been classified in accordance with the following maturity groupings based on the contractual maturities of those securities as of December 31, 2015 (in thousands):
Contractual Maturity
 
Amortized
Cost
 
Estimated
Fair Value
Less than 1 year
 
$
15,151

 
$
15,133

Between 1 and 2 years
 
4,859

 
4,844

Total
 
$
20,010

 
$
19,977

The components of the Company's marketable debt securities classified as available-for-sale were as follows for December 31, 2014 (in thousands):
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
27,890

 
$
—

 
$
—

 
$
27,890

Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
6,310

 
—

 
—

 
6,310

Total cash equivalents
 
6,310

 
—

 
—

 
6,310

Total cash and cash equivalents
 
$
34,200

 
$
—

 
$
—

 
$
34,200

Short-term investments:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
2,773

 
$
—

 
$
(7
)
 
$
2,766

Corporate notes and obligations
 
—

 
—

 
—

 
—

Total short-term investments
 
$
2,773

 
$
—

 
$
(7
)
 
$
2,766

For investments in securities classified as available-for-sale, estimated fair value and the amortized cost of debt securities have been classified in accordance with the following maturity groupings based on the contractual maturities of those securities as of December 31, 2014 (in thousands):
Contractual Maturity
 
Amortized
Cost
 
Estimated
Fair Value
Less than 1 year
 
$
1,956

 
$
1,954

Between 1 and 2 years
 
817

 
812

Total
 
$
2,773

 
$
2,766

The Company had no realized losses on sales of its investments during the years ended December 31, 2015, 2014, and 2013, respectively. The Company had purchases, net of proceeds of investments, in 2015 of $17.4 million and proceeds net of purchases in 2014 of $5.1 million from maturities and sales of investments.

59

The short-term investments in government obligations or 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 so as to assess if any of the impairments will be considered other-than-temporary. The Company did not identify any government obligations or highly rated credit securities held as of December 31, 2015 and 2014 for which the fair value declined significantly below amortized cost and were considered other-than-temporary impairments.
Note 5—Fair Value Measurements
The Company measures financial assets at fair value on an ongoing basis. The estimated fair value of the Company's financial assets was determined using the following inputs at December 31, 2015 and 2014 (in thousands):
 
 
Fair Value Measurements at Reporting Date Using
December 31, 2015
 
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Money market funds (1)
 
$
41

 
$
41

 
$
—

 
$
—

Certificates of deposit (2)
 
1,500

 
—

 
1,500

 
—

U.S. government and agency obligations (2)
 
7,407

 
—

 
7,407

 
—

Corporate notes and obligations (2)
 
11,070

 
—

 
11,070

 
—

Total
 
$
20,018

 
$
41

 
$
19,977

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration and related liabilities (3)
 
$
324

 
$
—

 
$
—

 
$
324

Total
 
$
324

 
$
—

 
$
—

 
$
324

(1)
Included in cash and cash equivalents on the consolidated balance sheets.
(2)
Included in short-term investments on the consolidated balance sheets.
(3)
Included in accrued expenses on the consolidated balance sheets.

 
 
Fair Value Measurements at Reporting Date Using
December 31, 2014
 
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)(3)
Assets:
 
 
 
 
 
 
 
 
Money market funds(1)
 
$
6,310

 
$
6,310

 
$
—

 
$
—

Corporate notes and obligations(2)
 
—

 
—

 
—

 
—

U.S. government and agency obligations(2)
 
2,766

 
—

 
2,766

 
—

Total
 
$
9,076

 
$
6,310

 
$
2,766

 
$
—


(1)
Included in cash and cash equivalents on the consolidated balance sheets.
(2)
Included in short-term investments on the consolidated balance sheets.
(3)
During 2014 the Company had no Level 3 instruments.
Valuation of Investments
Level 1 and Level 2
The Company's available-for-sale securities include money market funds, U.S. Treasury bills, corporate notes and obligations, and U.S. government and agency obligations. The Company values these securities using a pricing matrix from a pricing service provider, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs). The Company classifies all of its available-for-sale securities, except for money market funds and U.S. Treasury, as having Level 2 inputs. The Company validates the

60

estimated fair value of certain securities from a pricing service provider on a quarterly basis. The valuation techniques used to measure the fair value of the financial instruments having Level 2 inputs, all of which have counterparties with high credit ratings, were derived from the following: non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments or pricing models, with all significant inputs derived from or corroborated by observable market data.
Level 3
Contingent consideration and related liabilities are defined as earn-out payments that the Company may pay in connection with the acquisition of BridgeFront. Contingent consideration and related liabilities are classified as Level 3 liabilities because the Company uses unobservable inputs to value them, which is a probability-based income approach. Subsequent changes in the fair value of contingent consideration and related liabilities will be recorded in the Company's consolidated statements of comprehensive loss.
The Company did not have any transfers between Level 1, Level 2 and Level 3 fair value measurements during the years presented as there were no changes in the composition in Level 1, 2 or 3. 

Note 6—Balance Sheet Components
Property and equipment consisted of the following (in thousands):
 
Estimated Useful Life
 
As of December 31,
 
 
2015
 
2014
Equipment
3-5 years
 
$
27,481

 
$
24,189

Purchased software
3 years
 
6,860

 
6,784

Furniture and fixtures
5 years
 
2,220

 
1,772

Leasehold improvements
Lease term up to 5 years
 
4,305

 
1,947

Construction in progress
 
 
2,190

 
3,724

Property and equipment, gross
 
 
43,056

 
38,416

Less: Accumulated depreciation
 
 
22,516

 
19,661

Property and equipment, net
 
 
$
20,540

 
$
18,755

Depreciation expense for 2015, 2014 and 2013 was $6.0 million, $4.8 million and $4.5 million, respectively.
In 2014, the Company improved its data center and incurred equipment costs. In addition, the Company moved its headquarters from Pleasanton, California to Dublin, California in February 2015 and incurred construction in progress costs related to furniture, fixtures and leasehold improvements.
Property and equipment includes assets that were acquired under capital leases for both years ended December 31, 2015 and 2014 was $5.8 million and $6.9 million, respectively. Accumulated amortization relating to these assets acquired under capital leases were $4.1 million and $4.3 million for the years ended December 31, 2015 and 2014, respectively. Amortization expense for these assets have been included in depreciation expense.
Total prepaid and other current assets consisted of the following (in thousands):
 
As of December 31,
 
2015
 
2014
Deferred commissions
$
5,971

 
$
4,215

Prepaid expenses
4,894

 
5,856

Other current assets
520

 
313

Total prepaid and other current assets
$
11,385

 
$
10,384


61

Accrued payroll and related expenses consisted of the following (in thousands):
 
As of December 31,
 
2015
 
2014
Vacation accrual
$
3,189

 
$
2,793

Commissions
3,362

 
2,387

Bonus
3,173

 
1,628

ESPP
1,109

 
966

Accrued payroll related expenses
1,677

 
1,277

Total accrued payroll related expenses
$
12,510

 
$
9,051

Accrued expenses consisted of the following (in thousands):
 
As of December 31,
 
2015
 
2014
Sales tax payable
$
454

 
$
733

Deferred income tax
—

 
1,475

Versata litigation settlement
1,963

 
1,963

Holdback payable
403

 
1,922

Customer payments
1,046

 
998

Equipment financing arrangement
—

 
3,775

Accrued expenses
7,151

 
7,477

Total accrued expenses
$
11,017

 
$
18,343


Note 7—Restructuring and Other
On June 30, 2014, management approved and initiated restructuring plans to realign the Company's resources to improve cost efficiencies. Restructuring and other expenses primarily consist of costs associated with the exit of excess facilities, employee terminations and incremental depreciation expense as a result of the change in the estimated useful life of assets to be abandoned.
The Company incurred restructuring and other expenses of $0.6 million, $1.0 million, and $1.7 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The following table sets forth a summary of accrued restructuring expenses (included in accrued expenses in the consolidated balance sheets) for 2015 and 2014 (in thousands):
 
December 31,
2014
 
Additions
 
Adjustments
 
Cash Payments
 
December 31,
2015
Severance and termination-related costs
$
—

 
$
278

 
$
—

 
$
(278
)
 
$
—

Facilities related costs
194

 
350

 
—

 
(527
)
 
17

Total accrued restructuring expenses
$
194

 
$
628

 
$
—

 
$
(805
)
 
$
17

 
December 31,
2013
 
Additions
 
Adjustments
 
Cash Payments
 
December 31,
2014
Severance and termination-related costs
$
141

 
$
70

 
$
—

 
$
(211
)
 
$
—

Facilities related costs
234

 
162

 
20

 
(222
)
 
194

Total accrued restructuring expenses
$
375

 
$
232

 
$
20

 
$
(433
)
 
$
194

In 2015, the Company recorded an impairment charge of $0.3 million on its intangible assets, included in the table above.

62

In 2014, the Company incurred $0.8 million of non-cash expense, primarily related to incremental depreciation as a result of the change in the estimated useful life of assets at the Company's then-current office space in Pleasanton, California.
Note 8—Contractual Obligations, Commitments and Contingencies
Contractual Obligations and Commitments
For each of the next five years and beyond, the Company has the following contractual obligations, long-term operating obligations and unconditional purchase commitments (in thousands):
 
 
Settlement Payable (1)
 
Unconditional
Purchase
Commitments (2)
 
Operating
Lease
Commitments (3)
 
 
 
Principal
 
Interest
 
Year Ending December 31:
 
 
 
 
 
 
 
 
 
2016
 
$
1,968

 
$
34

 
$
1,224

 
$
3,187

 
2017
 
466

 
34

 
800

 
2,861

 
2018
 
—

 
—

 
—

 
2,846

 
2019
 
—

 
—

 
—

 
2,725

 
2020
 
—

 
—

 
—

 
2,796

 
2021 and beyond
 
—

 
—

 
—

 
4,989

 
Future minimum payments
 
$
2,434

 
$
68

 
$
2,024

 
$
19,404

 
(1)
In November 2014, the Company entered into a settlement agreement with Versata and agreed to make payments of $0.5 million starting on January 31, 2015 and every three months thereafter until January 2017.
(2) Unconditional purchase commitments includes the contingency and earnout payment to Bridgefront of $0.6 million in 2016 and $0.5 million in 2017. In addition, the unconditional purchase commitments include amounts payable to certain vendors.
(3)
The Company has facilities under several non-cancellable operating lease agreements that expire at various dates through 2018. The Company's rent expense for the years ended December 31, 2015, 2014 and 2013 was $3.0 million, $2.1 million and $1.9 million, respectively.

Included in non-current deposits and other assets in the consolidated balance sheets at December 31, 2015 and 2014 is restricted cash and rental deposits totaling $0.3 million and $0.2 million, respectively, related to security deposits on leased facilities and a customer letter of credit. The restricted cash represents investments in certificates of deposit and secured letters of credit required by landlords to meet security deposit requirements for the leased facilities.
As of December 31, 2015, the liability for uncertain tax positions was $3.4 million including interest. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, the Company is unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.
In May 2014, we entered into a credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under which Wells Fargo agreed to make a revolving loan ("Revolver") to us in an amount not to exceed $10.0 million, with an accordion feature that allows us to increase the maximum borrowing amount by not less than $5.0 million and not more than $10.0 million. The Revolver matures in May 2019. Outstanding borrowings under the Revolver bear interest, at our option, at a base rate plus an applicable margin. The applicable margin ranges between 0.75% and 2.25% depending on our leverage ratio. Interest is payable every three months. In September 2014, we exercised the accordion feature and increased the maximum borrowing amount to $15.0 million. As of December 31, 2015 we have no outstanding borrowings under the Revolver.
In October 2014, the Company entered into a sublease agreement ("Sublease") with Oracle America, Inc. (“Sublandlord”) for office space located at 4140 Dublin Boulevard, Dublin, California 94568 ("Subleased Premises"). The term of the Sublease commenced in February 2015, when the Sublandlord delivered possession of the Subleased Premises to the Company and expires on May 15, 2022. Base rent will be abated from the commencement of the Sublease until November 30, 2015. Thereafter, monthly base rent was $149,928 for 2015 and increase annually as set forth in the Sublease, up to $184,411 in 2022. The total cash obligation for base rent over the term of the Sublease is approximately $15.1 million, without rent abatement, and is included in the operating lease commitment in the table above. In addition to base rent, the Company will be required to pay its pro rata share of building operating costs including utilities, insurance, repair and personnel costs, along with real estate taxes in excess of the amounts for certain base years.

63

Letter of Credit
The Company obtained a $1.1 million letter of credit in October 2014 for its leased space in Dublin, California. The letter of credit will expire on October 1, 2016. There is no balance outstanding under this line of credit.
Warranties and Indemnification
The Company generally warrants that its software will perform to standard documentation. Under the Company's standard warranty, should a software product not perform as specified in the documentation within the warranty period, it will repair or replace the software or refund the license fee paid. To date, the Company has not incurred any costs related to warranty obligations for its software.
The Company's product license and on-demand agreements typically include a limited indemnification provision for claims by third parties relating to its intellectual property. To date, the Company has not incurred and has not accrued for any costs related to such indemnification provisions.
Intellectual Property Litigation
Versata Software, Inc., Versata Development Group, Inc. and Versata Inc. v. Callidus Software Inc. - Settled
On July 19, 2012, Versata Software, Inc. and Versata Development Group, Inc. (collectively, “Versata”) filed suit against the Company in the United States District Court for the District of Delaware (“Delaware District Court”). The suit asserted that the Company infringed U.S. Patent Nos. 7,904,326, 7,908,304 and 7,958,024. On May 30, 2013, the Company answered the complaint and filed a counterclaim in the Delaware District Court. The Company's counterclaim asserted that Versata infringed U.S. Patent Nos. 6,269,355, 6,850,924 and 6,473,748. On August 30, 2013, the Company filed petitions with the United States Patent and Trademark Office Patent Trial and Appeal Board (“PTAB”) for covered business method (“CBM”) patent review of U.S. Patent Nos. 7,904,326, 7,908,304 and 7,958,024, which Versata filed responses to on December 12, 2013. The Company also filed a motion with the Delaware District Court on August 30, 2013 to stay the litigation pending completion of the patent review proceedings with the PTAB (“Motion to Stay”). On January 8, 2014, the Company was granted leave by the Delaware District Court to add Versata Inc. (included in the above definition of “Versata”) as a counterclaim defendant. On March 4, 2014, the PTAB instituted covered business method patent review of each of Versata’s patents, namely, U.S. Patent Nos. 7,904,326, 7,908,304 and 7,958,024, finding it more likely than not that the Company would prevail in establishing that the challenged claims were not patentable. After requesting the PTAB to reconsider its decision to institute, which was denied, Versata filed a petition for writ of mandamus with the Court of Appeals for the Federal Circuit (“CAFC”) on April 11, 2014 asking that Court to deny institution of CBM patent review by the PTAB. The CAFC denied Versata’s petition for writ of mandamus on May 5, 2014. On April 17, 2014, the Company filed additional petitions with the PTAB for CBM patent review to address all of the remaining claims not previously covered in the prior petitions with respect to U.S Patent Nos. 7,908,304 and 7,958,024. On May 8, 2014, the Delaware District Court: (i) granted our Motion to Stay in part with respect to U.S. Patent No. 7,904,326, and (ii) denied the Company's Motion to Stay in part with respect to U.S. Patent Nos. 7,908,304 and 7,958,024. On May 8, 2014, the Company appealed to the CAFC the Delaware District Court’s denial of the Motion to Stay with respect to U.S. Patent Nos. 7,908,304 and 7,958,024. On October 2, 2014, the PTAB instituted covered business method patent review of the remaining claims covered in the second set of petitions for U.S Patent Nos. 7,908,304 and 7,958,024. On October 21, 2014, the Company engaged in a mediation with Versata and on November 13, 2014, entered into an agreement with Versata to settle and dismiss the pending district court litigation and patent office proceedings, to extend patent cross-licenses and covenants not to sue to one another, and the Company was appointed as an authorized reseller of certain Versata products. Under the agreement, each party covenanted not to sue the other (and its related entities) for infringement of any patents now owned (including pending patents) or later acquired by either party. In addition, each party granted to the other a fully paid-up, irrevocable, nonexclusive, worldwide license to certain patents (including the patents asserted in the pending district court litigation) for specified products of each party. The agreement also contained a release for any past infringement or claim between the parties and dismissal of the civil pending in the Delaware District Court, as well as the five covered business method patent review proceedings then-pending before the PTAB. Pursuant to the agreement, the Company agreed to pay to Versata $4.5 million in nine equal quarterly installments, commencing on January 31, 2015. The fair value of these payments was $4.3 million, of which the Company recognized a charge to earnings for $2.9 million in 2014 and capitalized $1.4 million for the value of the patent license. The $1.4 million will be amortized to expense over the average life span of the associated patents of approximately 9.5 years. The difference between the installment payment and the fair value will be charged to interest as incurred.
Callidus Software, Inc. v. Xactly Corporation - Settled
On August 31, 2012, the Company filed suit against Xactly Corporation (“Xactly”) in the United States District Court for the Central District of California. The suit alleged that Xactly infringed U.S. Patents 8,046,387 and 7,774,378. On October 24, 2012, the Company amended its complaint to add Xactly's President and Chief Executive Officer as a defendant and to add

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claims for trademark infringement, false advertising, false and misleading advertising, trade libel, defamation, intentional interference with prospective economic advantage, intentional interference with contractual relations, breach of contract and unfair competition, in addition to patent infringement. On January 28, 2013, the Company further amended its complaint to allege that Xactly also infringed U.S. Patent 6,473,748 and dismissed its intentional interference with contractual relations claim. On March 14, 2013, the case was transferred to the United States District Court in the Northern District of California. On May 31, 2013, the Company and Xactly entered into a stipulated dismissal of the Company's trademark infringement claim whereby Xactly agreed that it would not use the Company's trademarks-in-suit in certain of Xactly's marketing and advertising activities going forward. On November 25, 2013, Callidus, Xactly and Xactly's President and Chief Executive Officer entered into a Settlement, Release, and License Agreement that, among other things, included an agreement by Xactly to pay the Company $2.0 million in license fee, which will be paid in four equal annual installments of $0.5 million beginning November 2013. Upon receipt of installment payments, the Company will record the amount under operating expenses as an offset to legal fees.
Other matters
In addition to the above litigation matters, the Company from time to time is a party to other various litigation and customer disputes incidental to the conduct of its business. At the present time, the Company believes that none of these matters are likely to have a material adverse effect on the Company's future financial results.
The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews the need for any such liability on a quarterly basis and records any necessary adjustments to reflect the effect of ongoing negotiations, contract disputes, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case in the period they become known. At December 31, 2015, the Company has not recorded any such liabilities in accordance with accounting for contingencies. However, litigation is subject to inherent uncertainties and the Company's view on these matters may change in the future.
Note 9—Net Loss Per Share
Basic net loss per share is calculated by dividing net loss for the period by the weighted average common shares outstanding during the period. Diluted net loss per share is calculated by dividing the net loss for the period by the weighted average common shares outstanding, adjusted for all dilutive potential common shares, which includes shares issuable upon the conversion of the Convertible Notes, the exercise of outstanding common stock options, the release of restricted stock, and purchases of shares under the Employee Stock Purchase Plan (ESPP) to the extent these shares are dilutive. For 2015, 2014 and 2013, the diluted net loss per share calculation was the same as the basic net loss per share calculation as all potential common shares were anti-dilutive.
Diluted net loss per share does not include the effect of the following potential weighted average common shares because to do so would be anti-dilutive for the periods presented (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
Restricted stock
2,728

 
2,379

 
1,918

Stock options
883

 
1,630

 
2,490

ESPP
10

 
39

 
42

Convertible notes
—

 
829

 
7,129

Total
3,621

 
4,877

 
11,579

The weighted average exercise price of stock options excluded for 2015, 2014 and 2013 was $6.21, $4.09 and $4.42, respectively.
Note 10—Stock-Based Compensation
Stockholder-Approved Stock Option and Incentive Plans
In June 2013, the 2013 Stock Incentive Plan ("2013 Plan") became effective upon the approval of the Company's Board of Directors and stockholders, and as a result, the 2003 Stock Incentive Plan ("2003 Plan") expired and was replaced. All outstanding shares available for grant under the 2003 Plan expired upon the adoption of the 2013 Plan.

65

The Company initially reserved 3,469,500 shares of common stock for issuance under the 2013 Plan and, in 2015, the Company reserved an additional 5,000,000 shares of common stock for issuance under the 2013 Plan. Under the 2013 plan, the Company's Board of Directors (or an authorized subcommittee) may grant stock options or other types of stock awards, such as restricted stock, performance-based restricted stock units, restricted stock units, stock bonus awards or stock appreciation rights. Incentive stock options may be granted only to the Company's employees. Nonstatutory stock options and other stock-based awards may be granted to employees, consultants or non-employee directors. These options vest as determined by the board of directors (or an authorized subcommittee), generally over four years. No stock options were granted in 2015 and 2014. The restricted stock units and performance-based stock units also vest as determined by the board, generally over three years.
Shares Available for Grant
A summary of the Company's shares available for grant and the status of options and awards are as follows:
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
(Number of Shares)
Beginning Available
770,511

 
2,478,798

 
2,578,940

Authorized
5,000,000

 
—

 
3,469,500

Granted
(1,865,864
)
 
(1,913,499
)
 
(2,024,798
)
Cancelled
454,342

 
383,549

 
1,335,591

Expired
—

 
(178,337
)
 
(2,880,435
)
Ending Available
4,358,989

 
770,511

 
2,478,798

Expense Summary
Stock-based compensation expenses of $18.6 million, $11.8 million and $10.4 million was recorded during the years ended December 31, 2015, 2014 and 2013, in the consolidated statement of comprehensive loss. The table below sets forth a summary of stock-based compensation expense as follows (in thousands).
 
Year Ended December 31,
 
2015
 
2014
 
2013
Stock-based compensation:
 
 
 
 
 
Stock Options
$
613

 
$
790

 
$
866

Restricted Stock Units
13,524

 
7,705

 
7,835

Performance-based Restricted Stock Units
3,505

 
2,370

 
1,097

ESPP
950

 
948

 
597

Total stock-based compensation
$
18,592

 
$
11,813

 
$
10,395

The table below sets forth the functional classification of stock-based compensation expense as follows (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
Stock-based compensation:
 
 
 
 
 
Cost of recurring revenue
$
1,237

 
$
911

 
$
783

Cost of services and other revenue
1,149

 
1,026

 
1,060

Sales and marketing
5,488

 
3,518

 
2,420

Research and development
3,031

 
2,012

 
1,797

General and administrative
7,687

 
4,346

 
4,335

Total stock-based compensation
$
18,592

 
$
11,813

 
$
10,395





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Determination of Fair Value    
The fair value of service-based awards is estimated based on the market value of the Company’s stock on the date of grant. A portion of the performance-based restricted stock units granted during 2015 are based on relative stockholder return and therefore are subject to a market condition. As a result, the fair value of performance awards is calculated using a Monte Carlo simulation model that estimates the distribution of the potential outcomes of the grants of performance awards based on simulated future index of the peer companies.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton valuation model. No stock options were granted during 2015 and 2014. The fair value of each ESPP share is estimated on the beginning date of the offering period using the Black-Scholes-Merton valuation model and the assumptions noted in the following table.
 
Year Ended December 31,
 
2015
 
2014
 
2013
Stock Option Plans
 
 
 
 
 
Expected life (in years)
—
 
—
 
5.0 to 6.1
Risk-free interest rate
—
 
—
 
1.41% to 1.93%
Volatility
—
 
—
 
61% to 63%
Dividend Yield
—
 
—
 
—
Employee Stock Purchase Plan
 
 
 
 
 
Expected life (in years)
0.5 to 1.0
 
0.5 to 1.0
 
0.5 to 1.0
Risk-free interest rate
0.25% to 0.38%
 
0.05% to 0.12%
 
0.08% to 0.17%
Volatility
39% to 40%
 
47% to 50%
 
41% to 62%
Dividend Yield
—
 
—
 
—
Expected Dividend Yield—The Company has never paid dividends and does not expect to pay dividends.
Risk-Free Interest Rate—The risk-free interest rate was based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term.
Expected Term—Expected term represents the period that the Company's stock-based awards are expected to be outstanding. The Company's assumptions about the expected term have been based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards. The expected term for stock options was estimated using the simplified method allowed under SEC guidance.
Expected Volatility—Expected volatility is based on the historical volatility over the expected term.
Stock Options
As of December 31, 2015, the Company had $0.8 million of unrecognized compensation expense, net of forfeitures, which it expects to recognize over a weighted average period of 1.5 years. No stock options were granted during the years ended December 31, 2015 and 2014. The total intrinsic value of stock options exercised was $4.9 million, $5.9 million and $6.2 million for 2015, 2014 and 2013, respectively. The total cash received from employees as a result of stock option exercises was $2.0 million, $2.9 million and $5.1 million for 2015, 2014 and 2013, respectively.    

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Stock option activity is summarized below:
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding as of December 31, 2012
3,035,482

 
$
4.09

 
 
 
 

Granted
815,500

 
6.79

 
 
 
 

Exercised
(1,427,456
)
 
3.54

 
 
 
$
6,151

Forfeited
(108,306
)
 
5.10

 
 
 
 

Expired
(367,006
)
 
5.30

 
 
 
 

Outstanding as of December 31, 2013
1,948,214

 
5.34

 
 
 
 

Exercised
(701,220
)
 
4.09

 
 
 
5,940

Forfeited
(44,407
)
 
7.40

 
 
 
 

Expired
(26,626
)
 
10.17

 
 
 
 

Outstanding as of December 31, 2014
1,175,961

 
5.89

 
 
 
 

Exercised
(452,554
)
 
4.63

 
 
 
4,913

Forfeited
(50,760
)
 
6.21

 
 
 
 

Outstanding as of December 31, 2015
672,647

 
$
6.63

 
6.94
 
$
8,032

Vested and Expected to Vest as of December 31, 2015
651,653

 
$
6.62

 
6.91
 
$
7,787

Exercisable as of December 31, 2015
443,849

 
$
6.50

 
6.60
 
$
5,356

As of December 31, 2015, the range of exercise prices and weighted average remaining contractual life of outstanding options are as follows:
 
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
Number of
Shares
 
Weighted Average Remaining
Contractual Life
(Years)
 
Weighted Average
Exercise Price
 
Number of
Shares
 
Weighted
Average
Exercise Price
$4.00 - $5.70
109,000

 
3.84
 
$
5.27

 
100,666

 
$
5.35

$6.01 - $6.01
122,000

 
7.41
 
6.01

 
78,791

 
6.01

$6.25 - $6.25
47,500

 
7.43
 
6.25

 
47,500

 
6.25

$6.42 - $6.42
3,200

 
6.00
 
6.42

 
3,200

 
6.42

$6.59 - $6.59
132,963

 
7.49
 
6.59

 
62,379

 
6.59

$6.67 - $6.67
40,000

 
7.58
 
6.67

 
24,166

 
6.67

$6.74 - $6.74
2,334

 
6.08
 
6.74

 
2,188

 
6.74

$7.69 - $7.69
206,650

 
7.66
 
7.69

 
119,959

 
7.69

$9.17 - $9.17
6,000

 
7.75
 
9.17

 
3,375

 
9.17

$10.35 - $10.35
3,000

 
7.83
 
10.35

 
1,625

 
10.35

$4.00 - $10.35
672,647

 
6.93
 
$
6.63

 
443,849

 
$
6.50

Restricted Stock Units and Performance-based Restricted Stock Units
As of December 31, 2015, the Company had $17.8 million of unrecognized compensation expense, net of forfeitures, for time-based restricted stock units, which it expects to recognize over a weighted-average period of 1.9 years, and $6.4 million of unrecognized compensation expense, net of forfeitures, for performance-based restricted stock units, which it expects to recognize over a weighted-average period of 1.8 years.

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Restricted unit and performance-based restricted stock unit activity is summarized below:
 
Restricted Stock Units
 
Performance-based Restricted Stock Units
 
Number of
Shares
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic Value
(in thousands)
 
Number of Shares
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic Value
(in thousands)
Unreleased as of December 31, 2012
2,947,749

 
 

 
161,934

 
 
Granted
857,562

 
 

 
351,736

 
 
Released
(1,631,071
)
 
 

 
(123,801
)
 
 
Forfeited
(648,859
)
 
 

 
(207,836
)
 
 
Unreleased as of December 31, 2013
1,525,381

 
 

 
182,033

 
 
Granted
1,441,699

 
 

 
471,800

 
 
Released
(653,412
)
 
 

 
(82,857
)
 
 
Forfeited
(138,745
)
 
 

 
(44,862
)
 
 
Unreleased as of December 31, 2014
2,174,923

 
 

 
526,114

 
 
Granted
1,446,908

 
 

 
418,956

 
 
Released
(1,453,595
)
 
 

 
(89,314
)
 
 
Forfeited
(169,472
)
 
 

 
(58,997
)
 
 
Unreleased as of December 31, 2015
1,998,764

0.79
$
37,117

 
796,759

1.82
$
14,796

Vested and Expected to Vest as of December 31, 2015
1,801,614

0.82
$
29,634

 
646,745

1.76
$
12,010

Restricted stock units and performance-based restricted stock units granted to employees are not considered outstanding at the time of grant, as the holders of these units are not entitled to dividends and voting rights. Unvested restricted stock units are not considered outstanding in the computation of basic net loss per share.
Performance-based Restricted Stock Units
In 2015, the Company granted performance-based restricted stock units with vesting contingent on successful attainment of pre-set SaaS revenue growth and recurring revenue gross profit target over the three-year period from July 1, 2015 through June 30, 2018. The Company records stock-based compensation expense on a straight-line basis over the requisite service period. In 2015, $0.7 million of expense, net of forfeiture, was recognized.
In 2014, the Company granted performance-based restricted stock units with vesting contingent on absolute SaaS revenue growth over the three-year period from January 1, 2014 through December 31, 2016, and on the Company's relative total shareholder return over the same three-year period compared to an index of 17 SaaS companies. The Company records stock-based compensation expense on a straight-line basis over the requisite service period. In 2015, $2.8 million expense, net of forfeiture, was recognized.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (ESPP), which was adopted in 2003 and amended and restated in 2013, qualifies as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. The ESPP is designed to enable eligible employees to purchase shares of the Company's common stock at a discount on a periodic basis through payroll deductions. Each offering period under the ESPP covers 12 months and consists of two consecutive six-month purchase periods. The purchase price for shares of common stock purchased under the ESPP is 85% of the lesser of the fair market value of the Company's common stock on the first day of the applicable offering period and the fair market value of the Company's common stock on the last day of each purchase period. The Company issued approximately 256,000, 319,000 and 435,000 shares under the ESPP during the years ended December 31, 2015, 2014 and 2013, respectively. The weighted-average fair value of stock purchase rights granted under the ESPP during 2015, 2014 and 2013 was $4.61 per share, $3.59 per share and $1.96 per share, respectively.
As of December 31, 2015, the Company had $0.5 million of unrecognized compensation expense related to ESPP subscriptions that will be recognized over 0.4 years.

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Note 11—Stockholders' Equity
Preferred Stock
The Company's certificate of incorporation authorizes 5,000,000 shares of undesignated preferred stock with a par value of $0.001, of which no shares were outstanding as of December 31, 2015 and 2014.
Note 12—Income Taxes
The following is a geographical breakdown of consolidated loss before income taxes by income tax jurisdiction (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
United States
$
(13,000
)
 
$
(11,557
)
 
$
(20,675
)
Foreign
643

 
1,008

 
1,319

Total
$
(12,357
)
 
$
(10,549
)
 
$
(19,356
)
The provision for income taxes consists of the following (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
Current:
 
 
 
 
 
Federal
$
4

 
$
(25
)
 
$
—

State
3

 
3

 
—

Foreign
992

 
1,138

 
1,815

Deferred:
 
 
 
 
 
Federal
148

 
78

 
159

State
1

 
(89
)
 
—

Foreign
(357
)
 
(93
)
 
81

Total provision for income taxes
$
791

 
$
1,012

 
$
2,055

Provision for income tax decreased in 2015 as compared to 2014. The decrease was primarily due to a decrease in foreign withholding taxes, in part offset by increase in income taxes in foreign jurisdictions.
The provision (benefit) for income taxes differs from the expected tax benefit computed by applying the statutory federal income tax rates to consolidated loss before income taxes as follows (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
Federal tax at statutory rate
$
(4,200
)
 
$
(3,587
)
 
$
(6,581
)
State taxes, net of benefit
4

 
3

 
—

Non-deductible expenses
600

 
453

 
1,248

Foreign taxes
415

 
703

 
1,447

Current year net operating losses and other deferred tax assets for which no benefit has been recognized
4,423

 
4,828

 
7,320

Research and experimentation credit
(451
)
 
(1,239
)
 
(1,379
)
Tax benefit due to the recognition of acquired deferred tax liabilities
—

 
(149
)
 
—

Total provision for income taxes
$
791

 
$
1,012

 
$
2,055

    

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Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. In November 2015, the FASB ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company early adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of its net non-current deferred tax liabilities.
Deferred tax accounts consist of the following (in thousands):
 
As of December 31,
 
2015
 
2014
Deferred tax assets
 
 
 
Net operating loss carryforwards
$
57,058

 
$
54,712

Accrued expenses
4,743

 
5,420

Unrealized gain/loss on investments
263

 
916

Research and experimentation credit carryforwards
13,682

 
12,609

Capitalized research and experimentation costs
16,660

 
14,072

Deferred stock compensation
4,775

 
3,956

Gross deferred tax assets
97,181

 
91,685

Less valuation allowance
(96,608
)
 
(90,598
)
Total deferred tax assets, net of valuation allowance
573

 
1,087

Deferred tax liabilities
 
 
 
Property and equipment and intangibles
(816
)
 
(1,699
)
Goodwill
(1,174
)
 
(1,024
)
Gross deferred tax liabilities
(1,990
)
 
(2,723
)
Net deferred tax liabilities
$
(1,417
)
 
$
(1,636
)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the level of historical taxable income and projections for future taxable income over the period in which the temporary differences are deductible, the Company recorded a valuation allowance against the deferred tax assets for which it believes it is not more likely than not to be realized. As of December 31, 2015 and 2014, a valuation allowance has been recorded on all deferred tax assets, except the deferred tax assets related to three of its foreign subsidiaries, based on the analysis of profitability for those subsidiaries.
The net changes for valuation allowance for years ended December 31, 2015 and 2014 were an increase of $6.0 million and $4.0 million, respectively.
The Company recorded approximately $0 million and $0.9 million additional net deferred tax liabilities related to the various acquisitions completed during 2015 and 2014, respectively. The additional deferred tax liabilities create a new source of taxable income, thereby requiring the Company to release a portion of its deferred tax asset valuation allowance with a related reduction in income tax expense.
As of December 31, 2015, the Company had net operating loss carryforwards for federal and California income tax purposes of $185.7 million and $39.7 million, respectively, available to reduce future income subject to income taxes. The federal net operating loss carryforwards, if not utilized, will expire over 20 years beginning in 2017. The California net operating loss carryforward, began to expire in 2016.
Not included in the deferred income tax asset balance at December 31, 2015 is approximately $12.6 million, which pertains to certain net operating loss carryforwards resulting from the exercise of employee stock options. When recognized, the tax benefit of these losses will be accounted for as a credit to additional paid-in capital rather than a reduction of the income tax provision.

71

The Company also has research credit carryforwards for federal and California income tax purposes of approximately $9.0 million and $9.5 million, respectively, available to reduce future income taxes. The federal research credit carryforward, if not utilized, will expire over 20 years beginning in 2019. The California research credit carries forward indefinitely.
Federal and California tax laws impose restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an ownership change, as defined in Section 382 of the Internal Revenue Code. The Company's ability to utilize its net operating loss and tax credit carryforwards are subject to limitations under these provisions.
The Company has not provided for federal income taxes on all of the non-U.S. subsidiaries' undistributed earnings as of December 31, 2015 of $4.2 million, because such earnings are intended to be indefinitely reinvested. The residual U.S. tax liability, if such amounts were remitted, would be nominal.
The Company's unrecognized tax benefits are set forth below (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
Beginning balance
$
3,037

 
$
2,843

 
$
2,478

Increases (decreases) related to prior year tax positions
(59
)
 
(44
)
 
175

Increases related to current year tax positions
239

 
270

 
222

Reductions to unrecognized tax benefits as a result of a lapse of applicable statute of limitations
(4
)
 
(32
)
 
(32
)
Ending balance (1) (2)
$
3,213

 
$
3,037

 
$
2,843

(1) 2014 ending balance consists of $2.7 million of the unrecognized tax benefits which reduced deferred tax assets, and $0.3 million was included in other liabilities on the consolidated balance sheet.
(2) 2015 ending balance consists of $2.9 million of the unrecognized tax benefits which reduced deferred tax assets, and $0.4 million was included in other liabilities on the consolidated balance sheet.
If recognized, $0.4 million of the unrecognized tax benefits at December 31, 2015 would reduce the Company's annual effective tax rate. The Company also accrued potential penalties and interest of $0.04 million related to these unrecognized tax benefits during 2015, and in total, as of December 31, 2015, the Company recorded a liability for potential penalties and interest of $0.1 million. The Company recognized interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statement of comprehensive loss. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. The Company classified the unrecognized tax benefits as a noncurrent liability, as the Company does not expect any payment of incremental taxes over the next 12 months. The Company also does not expect its unrecognized tax benefits to change significantly over the next 12 months.
The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. All tax years generally remain subject to examination by federal and most state tax authorities. In foreign jurisdictions, the 2004 through 2015 tax years generally remain subject to examination by their respective tax authorities.
Note 13—Employee Benefit Plan
In 1999, the Company established a 401(k) tax-deferred savings plan ("401(k) plan"), whereby eligible employees may contribute a percentage of their eligible compensation up to the maximum allowed under IRS rules. The Company's contributions are discretionary, and no such contributions have been made since the inception of this plan up until December 31, 2011. Beginning January 1, 2012, the Company contributed 50% of each dollar that an employee contributed to their 401(k) plan up to a maximum of $1,000 annually, and the vesting of the Company's contributions is based on years of service. During the years ended December 31, 2015 and 2014, the Company recognized approximately $390,000 and $272,000, respectively in expense related to the 401(k) plan match.

72

Note 14—Segment, Geographic and Customer Information
The accounting principles guiding disclosures about segments of an enterprise and related information establishes standards for the reporting by business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method of determining which information is reported is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company's chief operating decision maker is considered to be the Company's chief executive officer (CEO). The CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. By this definition, the Company operates in one reportable segment, which is the development, marketing and sale of enterprise software and related services.
The following table summarizes revenue by geographic areas (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
United States and Canada
$
142,276

 
$
110,707

 
$
91,408

EMEA
17,695

 
15,162

 
12,241

Asia Pacific
9,627

 
8,400

 
5,379

Other
3,489

 
2,349

 
3,309

 
$
173,087

 
$
136,618

 
$
112,337

No individual country, outside of the U.S. accounted for more than 10% of the Company's property, plant and equipment as of December 31, 2015 and 2014.
As of December 31, 2015, the Company's goodwill balance was $50.1 million, of which $11.0 million was located in U.K. (EMEA) and intangible asset balance of $14.9 million, and $2.0 million was located in U.K. (EMEA). No individual country, outside the U.S. accounted for more than 10% of goodwill and intangible asset balance as of December 31, 2015.
In 2015, 2014 and 2013, no customer accounted for more than 10% of total revenue.
Note 15—Related Party Transactions
In June 2013, in the normal course of business, the Company entered into agreements with Lithium Technologies, Inc. (“Lithium”), whose Chief Financial Officer is a member of the Company's Board of Directors. In 2014 and 2015, the Company renewed its annual subscription for Lithium's social media management solutions in the amounts of $120,000 and $155,000, respectively, which were paid in full during 2014 and 2015, respectively.
In 2013, Lithium entered into a two-year web hosting agreement with the Company, which was extended for another three years in 2015 in the amount of $138,000 per year, from which the Company recognized approximately $127,000 in hosting revenue. In addition, during 2015, the Company entered into various agreements with Lithium for professional services, and recognized approximately $107,165 in services revenue.
In 2014, the Company purchased an annual subscription from Lithium for Community Administration for $45,000, which was paid in full in January 2015. Additionally, in 2014, the Company purchased a one year consulting and training service contract for Social Success Services from Lithium for $40,000, which was paid in full in 2014.
In 2015, the Company incurred expenses of $30,000 for redesigning the user interface for Community Administration, which was paid to Lithium in full in May 2015. Additionally, in 2015, the Company purchased a one year consulting and training service contract for Social Success Services from Lithium for $60,000, which was paid in full in October 2015. As of December 31, 2015, $35,000 was included in prepaid and other current assets.
    


    

73

Supplementary Data (unaudited)
The following tables set forth unaudited supplementary quarterly financial data for the two-year period ended December 31, 2015. In management's opinion, the unaudited data has been prepared on the same basis as the audited information and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the data for the periods presented.
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
Year ended December 31, 2015
 
 
 
 
 
 
 
 
 
Total revenue
$
39,745

 
$
41,614

 
$
44,944

 
$
46,784

 
$
173,087

Gross profit
$
23,726

 
$
25,711

 
$
27,592

 
$
29,607

 
$
106,636

Net loss
$
(4,043
)
 
$
(4,724
)
 
$
(2,243
)
 
$
(2,138
)
 
$
(13,148
)
Basic and diluted net loss per share
$
(0.08
)
 
$
(0.08
)
 
$
(0.04
)
 
$
(0.04
)
 
$
(0.24
)
Weighted average common shares (basic and diluted)
50,709

 
55,595

 
56,104

 
56,390

 
54,719

 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
Year ended December 31, 2014
 
 
 
 
 
 
 
 
 
Total revenue
$
30,977

 
$
32,515

 
$
35,000

 
$
38,126

 
$
136,618

Gross profit
$
18,579

 
$
19,385

 
$
19,354

 
$
23,262

 
$
80,580

Net income (loss)
$
(2,467
)
 
$
250

 
$
(5,235
)
 
$
(4,109
)
 
$
(11,561
)
Basic and diluted net income (loss) per share
$
(0.05
)
 
$
—

 
$
(0.11
)
 
$
(0.08
)
 
$
(0.24
)
Weighted average common shares (basic)
45,944

 
46,648

 
48,564

 
48,987

 
47,547

Weighted average common shares (diluted)
45,944

 
48,061

 
48,564

 
48,987

 
47,547

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.    Controls and Procedures
(a)   Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
(b)   Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control—Integrated Framework (2013). Our management has concluded that, as of December 31, 2015, our internal control over financial reporting is effective based on these criteria. In addition, our independent registered public accounting firm has issued an attestation report on the Company's internal control over financial reporting as of the reporting date.

74

(c)   Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.    Other Information
None.
PART III
The information required by Part III of Form 10-K is incorporated by reference to our Proxy Statement for the 2016 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2015.
PART IV
Item 15.    Exhibits and Financial Statement Schedules
(a)   Consolidated financial statements, consolidated financial statements schedule and exhibits
1.    Consolidated financial statements.    The consolidated financial statements as listed in the accompanying "Index to Consolidated Financial Information" are filed as part of this Annual Report on Form 10-K.
2.     All schedules not listed in the accompanying index have been omitted as they are either not required or not applicable, or the required information is included in the consolidated financial statements or the notes thereto.
3.    Exhibits.    The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report on Form 10-K.

75


EXHIBIT INDEX
Exhibit
Number
 
Description
2.1
 
Agreement, dated September 15, 2014, between the vendors set forth therein, Callidus Software Inc. and Dorset Acquisition Corp (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K (File No. 000-50463) filed with the Commission on September 17, 2014).
3.1
 
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-109059) filed with the Commission on September 23, 2003, and declared effective on November 19, 2003).
#3.2
 
Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant's Form 10-Q (File No. 000-50463) filed with the Commission on November 5, 2010)
4.1
 
Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 4, filed with the Commission on November 7, 2003, to the Registrant's Registration Statement on Form S-1 (File No. 333-109059) filed with the Commission on September 23, 2003, and declared effective on November 19, 2003)
#10.1
 
Sublease between Oracle America, Inc. and Callidus Software Inc. dated October 3, 2014 (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 2, 2015)
10.2+
 
1997 Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1 (File No. 333-109059) filed with the Commission on September 23, 2003, and declared effective on November 19, 2003)
#10.3+
 
Amended and Restated 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.3.1 to the Company's Form 10-Q (File No. 000-50463) filed with the Commission on August 9, 2010)
10.4+
 
Forms of Stock Option Agreement and Restricted Stock Unit Agreement under the 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 10, 2014)
10.5+
 
2013 Stock Incentive Plan and Forms of Restricted Stock Unit Agreement and Stock Option Agreement (incorporated by reference to Appendix B of the Registrant's Schedule 14A Proxy Statement (File No. 000-50463) filed with the Commission on April 28, 2015, Exhibit 99.1 to the Registrant's Form S-8 (File No. 333-189416) filed with the Commission on June 18, 2013, and Exhibit 4.5 to the Registrant's Form S-8 (File No. 333-205389) filed with the Commission on July 1, 2015)
10.6+
 
Amended and Restated Employee Stock Purchase Plan, and enrollment forms (incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 10, 2014)
10.7+
 
Executive Incentive Bonus Plan, effective January 27, 2014 (incorporated by reference to Exhibit 99.1 to the Registrant's Form 8-K (File No. 000-50463) filed with the Commission on January 31, 2014)
10.8
 
Form of Non-Employee Director Offer Letter (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q (File No. 000-50463) filed with the Commission on August 4, 2014)
#10.9+
 
Form of Executive Change of Control Agreement (incorporated by reference to Exhibit 10.12 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 2, 2015)
#10.10+
 
Form of Director Change of Control Agreement (incorporated by reference to Exhibit 10.13 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 2, 2015)
#10.11
 
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 2, 2015)
10.12+
 
Amendment dated November 20, 2007 to Offer Letter Between Callidus Software Inc. and Leslie J. Stretch (incorporated by reference to Exhibit 10.16 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 10, 2014)
#10.13+
 
Offer Letter with Jimmy Duan dated September 24, 2008 (incorporated by reference to Exhibit 10.16 to the Registrant's Form 10-K (File No. 000-50463) filed with the Commission on March 2, 2015)
10.14+
 
Employment Agreement with Bob L. Corey dated April 30, 2013 (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q (File No. 000-50463) filed with the Commission on November 7, 2013)
10.15
 
Credit Agreement by and among Wells Fargo Bank, National Association, as administrative agent, the lender that is a party thereto, and Callidus Software Inc., dated as of May 13, 2014 (incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K (File No. 000-50463) filed with the Commission on May 13, 2014)
10.16
 
Amendment Number One, dated August 29, 2014, to Credit Agreement by and among Wells Fargo Bank, National Association, as administrative agent, the lender that is a party thereto, and Callidus Software Inc., dated as of May 13, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q (File No. 000-50463) filed with the Commission on August 6, 2015)
10.17
 
Amendment Number Two, dated September 11, 2014, to Credit Agreement by and among Wells Fargo Bank, National Association, as administrative agent, the lender that is a party thereto, and Callidus Software Inc., dated as of May 13, 2014 (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q (File No. 000-50463) filed with the Commission on August 6, 2015)
10.18
 
Amendment Number Three, dated September 16, 2014, to Credit Agreement by and among Wells Fargo Bank, National Association, as administrative agent, the lender that is a party thereto, and Callidus Software Inc., dated as of May 13, 2014 (incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-Q (File No. 000-50463) filed with the Commission on August 6, 2015)

76

#10.19
 
Agreement between Callidus Software Inc. and Versata Software, Inc., Versata Development Group, Inc., and Versata, Inc. dated November 13, 2014 (incorporated by reference to Exhibit 10.19 to the Registrant's Form 10-K/A (File No. 000-50463) filed with the Commission on May 1, 2015)
#23.1
 
Consent of Independent Registered Public Accounting Firm
#31.1
 
Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted by Section 302 of the of the Sarbanes-Oxley Act of 2002
#31.2
 
Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted by Section 302 of the of the Sarbanes-Oxley Act of 2002
#32.1
 
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
#101
 
Interactive Data Files Pursuant to Rule 405 of Regulations S-T (XBRL)
_________________________________________________________________________________________________________________
#    Filed herewith
+    Management contract or compensatory plan or arrangement




77

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 25, 2016.
 
CALLIDUS SOFTWARE INC.
 
 
 
 
By:
/s/ BOB L. COREY
 
 
Bob L. Corey,
 Executive Vice President, Chief Financial Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below.
Signature
 
Title
 
Date
 
 
 
 
 
/s/ LESLIE J. STRETCH
 
 
 
February 25, 2016
Leslie J. Stretch
 
President, Chief Executive Officer and Director (Principal Executive Officer)
 
 
 
 
 
 
 
/s/ BOB L. COREY
 
 
 
February 25, 2016
Bob L. Corey
 
Executive Vice President, Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer)
 
 
 
 
 
 
 
/s/ CHARLES M. BOESENBERG
 
 
 
February 25, 2016
Charles M. Boesenberg
 
Chairman of the Board
 
 
 
 
 
 
 
/s/ WILLIAM B. BINCH
 
 
 
February 25, 2016
William B. Binch
 
Lead Independent Director
 
 
 
 
 
 
 
/s/ MARK A. CULHANE
 
 
 
February 25, 2016
Mark A. Culhane
 
Director
 
 
 
 
 
 
 
/s/ KEVIN M. KLAUSMEYER
 
 
 
February 25, 2016
Kevin M. Klausmeyer
 
Director
 
 
 
 
 
 
 
/s/ MURRAY D. RODE
 
 
 
February 25, 2016
Murray D. Rode
 
Director
 
 
 
 
 
 
 
/s/ MICHELE VION CHOKA
 
 
 
February 25, 2016
Michele Vion Choka
 
Director
 
 




78