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(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
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to used the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes o No 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, 2017, as reported on The Nasdaq Stock Market, was approximately $i1,545 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 15, 2018, the Registrant had i66,460,419
of its common stock, $0.001 par value, outstanding.
The information called for by Part III of this Form 10-K is 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, 2017, or an amendment to this Form 10-K.
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
Recent Development
On
January 29, 2018, we entered into an agreement and plan of merger (the “Merger Agreement”) with SAP America, Inc., a Delaware corporation (“SAP”) and Emerson One Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of SAP (“Merger Sub”).
Pursuant to the terms of the Merger Agreement, and subject to the conditions thereof, Merger Sub will merge with and into Callidus Software Inc. and we will become a wholly-owned subsidiary of SAP (the “Merger”). If the Merger is completed, our stockholders will be entitled to receive $36.00 in cash for each share of our common stock owned by them as of the date of the Merger.
The
consummation of the Merger is subject to certain conditions, including (i) adoption of the Merger Agreement by holders of a majority of our outstanding common stock entitled to vote thereon, (ii) the accuracy of our, SAP’s and Merger Sub’s respective representations and warranties, subject to specified materiality qualifications, (iii) the expiration or termination of any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, as well as any similar filings and clearances under certain foreign antitrust laws (the “Regulatory Approvals”), (iv) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement), and (v) other customary conditions.
The special meeting of our stockholders to vote on adoption of the Merger Agreement will be held on March 29, 2018. If our
stockholders adopt the Merger Agreement at the special meeting and all Regulatory Approvals are received prior to such time, Callidus and SAP currently anticipate that all other conditions set forth in the Merger Agreement will either be satisfied or waived, and closing of the transactions contemplated by the Merger Agreement will occur, within three International Business Days (as defined in the Merger Agreement) after the special meeting. For additional information related to the Merger and the Merger Agreement, please refer to our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on January 30, 2018, and the Definitive Proxy Statement on Schedule 14A filed with the SEC on February 22, 2018. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement, which
is incorporated by reference as Exhibit 2.1 to this Annual Report on Form 10-K. Upon completion of the Merger, shares of our common stock will cease trading on The Nasdaq Stock Market.
Overview
CallidusCloud® is a global leader in cloud-based sales, marketing, learning and customer experience solutions. CallidusCloud enables our customers to sell more, faster with its Lead to Money suite of solutions that, among other things, identifies leads, trains personnel, implements territory and quota plans, enables sales forces, automates configuration pricing
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and quoting, manages contracts,
streamlines sales compensation, captures customer feedback and provides rich predictive analytics for competitive advantage. Over 6,400 leading organizations, across all industries, rely on CallidusCloud to optimize the Lead to Money process to close more deals for more money in record time.
Lead to Money is designed to help companies respond to the changing role of sales and marketing in the redefined buying cycle. In the last decade, the ubiquity of social networks, mobile devices and e-commerce has transformed the traditional sales cycle into a buyer-led digital economy. Buyers are researching and evaluating companies online and are completing a significant portion of their purchases digitally. In order to successfully compete in the evolving digital market and turn leads into money, sales, marketing, learning and customer experience teams must leverage software solutions
that enhance productivity, improve collaboration and drive sales conversion.
We provide a suite of Software-as-a-Service ("SaaS") solutions which generate revenue from cloud subscriptions, services and term licenses. Our SaaS customers typically purchase annual subscriptions, but occasionally will purchase multi-year subscriptions.
We were incorporated in Delaware in 1996. Our principal executive office is located in Dublin, California and our principal website address is www.calliduscloud.com. The information on our website
is not incorporated herein by reference and is not part of this Annual Report on Form 10-K.
Our Lead to Money Solutions
Our Lead to Money suite and technology solutions are detailed below.
Sales Performance Management Cloud
•
Commissions streamlines the design and management of incentive compensation programs and commission payments. It drives sales performance while reducing errors in sales force payouts and preventing shadow accounting by sales professionals.
This leads to more selling time and higher cross-sell and up-sell revenue. It also includes modules for Management by Objectives ("MBO") programs, channel and producer onboarding, reporting, and basic workflows.
•
Territory and Quota is designed to optimize, assign, and manage sales territories based on opportunity, workload, account information, and geography. Sales managers gain alignment between potential and sales capacity by enabling them to set sales quotas using a self-service collaboration platform for quota allocation. It also includes team-based distribution and real-time visibility into quota attainment.
•
SalesMotivate
is a gamification platform for sales that uses points, badges, and leaderboards to drive behavior and improve sales performance. SalesMotivate breaks down complex tasks into smaller easier-to-manage objectives, with clear communication of goals and instant recognition of achievements to drive enhanced completion.
Sales Execution Cloud
•
Configure Price Quote ("CPQ") guides sales representatives through the quoting process, highlights opportunities for cross-selling and up-selling, while ensuring the optimum configuration for the maximum deal size. CPQ eliminates errors, manages margins, and generates
appealing and insightful proposals in minutes, all from any device.
•
Contract Lifecycle Management ("CLM") streamlines the creation, negotiation, and storage of contracts to accelerate the final stage 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.
•
Datahug is a sales forecasting and pipeline management tool. It provides powerful insights into sales forecasts that predict the likelihood of success in a sales cycle, as well as offering rich visualizations to show what has changed in the forecast in real time. The platform also enables managers to coach their teams on the best next steps in a deal to improve close rates and speed up sales cycles.
•
Revsymis a revenue and commissions recognition and expense solution built for Topic 606 and IFRS 15. It enables accurate, timely, and automated rule-based revenue recognition and commission expense management, while
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increasing a finance organization’s productivity and reducing cost. We are integrating RevSym into CPQ and CLM to enable customers to optimize their revenue and commissions processes to streamline compliance under Topic 606 and IFRS 15.
Customer Engagement Cloud
•
Marketing
Automation ("LeadRocket") empowers customers to generate high-quality sales leads by capturing intelligence about buyers' behaviors and engaging them across multiple channels. LeadRocket tracks buyers through their journey identifying which are ready to buy, and which should continue to be nurtured before being engaged by the sales force.
•
Voice of the Customer ("Clicktools") is a business to business “Voice of the Customer” solution that helps companies better understand and serve their customers and deliver an enhanced customer experience. Clicktools provides self-service tools to collect, centralize, and act on customer feedback
across all channels including surveys, forms, and call scripts. Customer Relationship Management (“CRM”) integration enables the synchronization of results with critical customer data.
•
ServiceMotivate is a gamification tool for customer service representatives that leverages the power of real-time transparent feedback, recognition, and friendly competition, to motivate customer service agent performance.
Sales Enablement and Learning Cloud
•
Enablement provides
employees, 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("Learning") is a powerful, mobile-friendly platform for training. Administrators can package content into rich, interactive courses and
deploy them to learners. Automatically generated reports provide management with important insight into the success of the training programs and how learners are engaging with the content to optimize how companies train their staff, partners, and customers.
•
Litmos Heroes is an expanding library of 2,500 packaged courses and videos that cover compliance, sales, finance, marketing, leadership and customer success. The collection can be consumed on any device and is designed to be highly engaging and deploys in a micro-learning style.
•
Coachingenables
customers to set targeted coaching plans tailored to the individual sales professional. Coaching 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.
Technology Cloud
•
OrientDB is a multi-model, open source NoSQL Database Management System (“DBMS”) that includes support for graph databases, as well as support for key value, reactive, object-oriented and geospatial models, all combined
into one scalable, high-performance operational database.
•
Thunderbridge Advanced Analytics is designed to allow users to explore sales performance data with visualizations and simple drag and drop configurations to discover deep insights, identify costly errors, and recognize new opportunities.
•
Thunderbridge Augmented Intelligence ("AI3")
is a platform that employs artificial intelligence along with machine learning and human insight to help sales make decisions that result in larger deals, faster close rates, and increased profitability. This platform uses Lead to Money data to build a recommendation engine for sales.
•
Workflow is a 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.
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•
Connect
Enterprise is a SaaS to SaaS rapid data integration tool. Connect Enterprise provides out-of-the-box connectors between several known external CRM, Enterprise Resource Planning (“ERP”), and Human Resource (“HR”) systems and CallidusCloud products such as Commissions and Litmos. It uses simple and intuitive user interface (“UI”) based data mapping that allows the user to set up data transfers using drop down menus.
Vertical Solutions
•
Producer Pro is designed to provide a flexible central repository for producer data that can be tailored to customers. It is designed to help customers
with large channels to manage their producer hierarchies, licenses, appointments, education, correspondence, and book of business in order to optimize the effectiveness of channel programs.
•
Telco Dealer Pro is designed specifically for customers in the telecommunications industry. It is a solution for managing the direct sales channel that provides a unified and connected process for training, incentives, and on-boarding of agents and dealers. It provides customers with a single source of truth to manage their agents and dealers from demographic data to customer account information.
•
Incentive
Compensation Management ("ICM") is a Commissions-based product 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.
•
DS Pro is an enterprise-grade cloud solution for managing real-time volumes, genealogy and awards for Direct Sellers. It includes tools to design and manage incentive plans, calculate volumes, and pay Direct Sellers. It also provides management
of global genealogies, and reporting and analytics to track spend, amortization, and accruals.
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 business rules, set up of pre-defined reports and custom reports, and the ability to interface our hosted application with other applications used by our customers. Configuration and other
professional services related to our software can be performed by us, our customers or third-party implementation providers. We also provide services to our implementation partners to aid them in certain projects and training programs. In addition, we provide strategic and expert services to help our customers optimize incentive compensation business processes and management capability.
Business Process Outsourcing Services. We provide a suite of value-added business outsourcing solutions designed to drive specific customer outcomes. Each solution includes clearly defined engagement plans, rapid deployment methods, and a proven track record of delivering value to customers. Business Process Outsourcing Services include Sales Operations Management to manage day-to-day operations and maintain the sales effectiveness system; Sales
Performance Manager to design and deploy the right territory, quota, incentive plan, and coaching strategy to drive specific financial targets; Sales Performance Intelligence to analyze capacity, coverage, and incentive effectiveness; and Sales Performance Optimization to benchmark and tune the Sales Performance Manager system.
Maintenance and Technical Support Services. We have maintenance and technical support services from our centers in the United States and India and Serbia. 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 certification is available for professionals who demonstrate the ability to implement our suite of products and promotes our standards of service.
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Customers
We
ended 2017 with over 6,400 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 2017, 2016 and 2015, 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; Meridian, Idaho; and Vancouver, Washington. Outside the United States, we
have sales and service offices in Australia, Canada, Germany, Hong Kong, India, Ireland, Japan, Malaysia, Mexico, Netherlands, Serbia, Singapore, and the United Kingdom.
Sales. Our Enterprise direct sales force, which consists 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 force 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, digital marketing, web marketing and telemarketing. In addition, our corporate website
is optimized to drive prospects to our Lead to Money solutions.
Alliances and Partnerships
We actively promote and maintain strategic relationships with systems integrators, consulting organizations, independent software vendors, value-added resellers, and technology providers. These relationships provide both customer referrals and co-marketing opportunities, which have contributed to the expansion of our customer base. We have established alliances with partners such as Accenture, Canidium, Cognizant Technology Solutions, Deloitte Consulting, OpenSymmetry, PricewaterhouseCoopers, and Tata Consulting Services to service our customers nationally and internationally. We have also expanded our relationship with technology partners such as Docusign, Microsoft, NetSuite, Salesforce and
SAP 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 and Xactly Corporation
•Marketing:
Marketo, Oracle and Hubspot
•Learning: Adobe Systems, Cornerstone On-demand, SABA Software and SumTotal Systems
•Customer Experience: Allegiance, Qualtrics 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;
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•industry-specific
domain expertise;
•scalability and flexibility of solutions;
•quality of customer service;
•total cost of ownership; and
•ease of use.
We believe that we compete effectively with other established enterprise software companies due to our broad suite of solutions beyond core commission management, established market leadership, domain expertise, and our highly scalable architecture. Furthermore, we believe we have
developed the domain expertise necessary to meet the dynamic requirements of our customers' complex and growing sales performance and sales effectiveness programs.
We believe that our products offer customers a more cost-effective and more extensive alternative to their internally-developed solutions, which are generally expensive, inflexible and difficult to maintain, particularly for companies with increasingly complex sales performance programs and sales channels. We also believe that our suite of SaaS-based solutions for the spectrum of Lead to Money 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, 2017, we had approximately 1,300 employees. None of our employees are represented by a labor union.
Segment and Geographic Information
We operate in one reportable
segment, which is the development, marketing and sale of enterprise software and related services. See Note 13, Segment, Geographic and Customer Information, to our consolidated financial statements.
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Executive Officers
The following table sets forth information about our executive officers as of December 31, 2017:
Leslie J. Stretch has served as our President
and CEO since 2007 and has served as a director on our Board of Directors since 2008. Mr. Stretch was our Senior Vice President, Global Sales, Marketing and On-Demand Business in 2007, and before that he served as our Senior Vice President, Worldwide Sales from 2006 to 2007 and Vice President, Worldwide Sales from 2005 to 2006. Mr. Stretch currently serves on the board of directors of QAD Inc., a provider of enterprise software and services for global manufacturers, and the advisory council of Warburg Pincus LLC, a private equity firm. Prior to joining Callidus, Mr. Stretch served as Interim Chief Executive Officer for The Hamsard Group, plc., a software solutions and services provider, in the United Kingdom. Previously, Mr. Stretch served in a variety of roles at Sun Microsystems, Inc. a computer networking company, most recently as Senior Vice President of Global Channel Sales. Prior to joining Sun Microsystems, Inc. (since acquired by Oracle Corporation), Mr. Stretch
served in a variety of roles at Oracle Corporation, UK, an enterprise software provider. Mr. Stretch holds a B.A. in Economics and Economic History from the University of Strathclyde and a Postgraduate Diploma in Computer Systems Engineering from the University of Edinburgh.
Roxanne Oulmanhas served as our Chief Financial Officer since November 2016. Since joining Callidus in 2013, Ms. Oulman has served in a variety of executive management roles, including Senior Vice President of Finance and Accounting. From 2011 to 2013, Ms. Oulman served as an Interim Chief Financial Officer at Thoratec Corporation, a biomedical device company, and from 2004 to 2011 she held several other financial leadership positions at Thoratec Corporation. From 1999 to 2004, Ms. Oulman was a General
Manager and Western Regional Controller at Zomax, Inc., a logistics and supply chain company. Ms. Oulman has a Bachelor’s of Science in Accounting from Minnesota State University, Mankato and a Masters of Business Administration from University of the Pacific—Eberhardt School of Business.
Jimmy Duan, Ph.D. has served as our Chief Technology Officer since 2013. Since joining Callidus in 2008, Dr. Duan has served in a variety of executive management roles, including Senior Vice President of Commissions Business and International Sales. From 2006 to 2008, Dr. Duan served as Vice President of Client Services at Xactly Corporation, a software company, where he was responsible for defining and setting up SaaS operations and managing customer success. Earlier in his career, Dr. Duan held professional services management positions at Quovera and Talus Solutions
(acquired by Manugistics) and consulted with multi-national organizations in financial services, telecommunications, transportation and high-tech manufacturing. Dr. Duan holds a Ph.D. in industrial and systems engineering from Virginia Polytechnic Institute and State University (Virginia Tech). Dr. Duan holds a B.S. in Mining Engineering, from Central South University, China.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other periodic reports are available free of charge on our website (www.calliduscloud.com)
as soon as reasonably practicable after we have electronically filed such materials with, or furnished such materials to the Securities and Exchange Commission. They are also available at www.sec.gov.
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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 the Merger
Our proposed merger with SAP may not be completed within the expected
timeframe, or at all, and the failure to complete the merger could adversely affect our business and the market price of our common stock.
On January 29, 2018, we entered into the Merger Agreement with SAP and Merger Sub, pursuant to which we would become a wholly-owned subsidiary of SAP if the merger is completed. The Merger Agreement is subject to closing conditions beyond our control, including receipt of the required regulatory approvals and the requirement that holders of more than 50% of our outstanding common stock entitled to vote thereon adopt the Merger Agreement, and there is no guarantee that these conditions will be satisfied in a timely manner or at all. If any of the conditions to the proposed merger are not satisfied or waived, the merger might not be completed. In addition, the Merger Agreement may be terminated under specified circumstances. Failure to complete
the merger could adversely affect our business and the market price of our common stock in a number of ways, including:
•
if the merger is not completed, and no other party is willing and able to acquire us at a price of $36.00 per share or higher, on terms acceptable to us, the share price of our common stock is likely to decline;
•
we have incurred, and continue to incur, significant expenses for professional third-party services in connection with the proposed merger, for which we will have received little or no benefit if the merger
is not completed. Many of these fees and costs will be payable even if the merger is not completed and may relate to activities that we would not have undertaken other than to complete the merger;
•
a failed merger may result in negative publicity and/or give a negative impression of us in the investment community or business community generally; and
•
if the Merger Agreement is terminated under specified circumstances, we may be required to pay SAP a $75 million termination
fee.
The announcement and pendency of the merger could adversely affect our business, financial condition, and results of operations.
The announcement and pendency of our proposed merger with SAP could disrupt our business and create uncertainty about it, which could have an adverse effect on our business, financial condition, and results of operations, regardless of whether the merger is completed. These risks to our business, all of which could be exacerbated by a delay in the completion of the merger, include:
•
potential uncertainty in the marketplace, which could lead current and prospective customers to purchase from other vendors or delay purchasing
from us;
•
the possibility of disruption to our business and operations, including diversion of significant management time and resources towards the completion of the merger;
•
impairment of our ability to attract and retain key personnel;
•
difficulties maintaining relationships with employees,
customers, and other business partners, including maintaining or completing contractual arrangements with customers and partners;
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•
restrictions on the conduct of our business prior to the completion of the merger, which prevent us from taking specified actions without the prior consent of SAP, which we might otherwise take in the absence of the Merger Agreement;
•
the
fact that under the terms of the Merger Agreement, we are unable to solicit other acquisition proposals during the pendency of the merger;
•
the amount of cash per share under the Merger Agreement is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations, including any potential long-term value of the successful execution of our current strategy as an independent company or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock; and
•
potential
future stockholder litigation relating to the merger that could prevent or delay the merger, and the related costs.
We may have difficulty attracting, motivating and retaining executives and other key employees in light of the proposed merger.
Uncertainty among our employees about their future roles after the completion of the proposed merger with SAP may impair our ability to attract, retain and motivate key personnel. In addition, some of our executives and key employees are entitled to severance payments if they terminate their employment after the proposed merger as a result of, or in conjunction with specified circumstances, including changes in their duties, positions, compensation and benefits, or their primary office location. These factors may encourage some executives or key employees to consider career changes, distracting them from performing their duties
to our company. In addition, distractions for the workforce and management associated with integrating our employees into the SAP workforce could arise in the time before completion of the merger. Any of these issues could have an adverse effect on our business operations and financial performance.
Our important business relationships may be disrupted due to uncertainties associated with the merger, which could adversely affect our business.
Some of the parties with which we do or desire to do business may be uncertain about continuing or completing a business relationship with us as a result of the proposed merger. For example, customers, partners, resellers, suppliers, vendors and others may attempt to negotiate changes in their existing business relationships with us, or may not enter into business
relationships with us, or they may consider canceling or not renewing a business relationship or contract with us, or they may enter into alternative business relationships with other parties. Some of our customers, partners, resellers, suppliers, vendors and others may have rights to terminate contracts that are triggered upon completion of the proposed merger. These disruptions could have an adverse effect on our business, financial condition or results of operations, or the prospects of the combined business. Any delay in completion of the merger, or termination of the Merger Agreement, could exacerbate these risks and adverse effects.
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 $20.3 million in 2017, $19.0 million in 2016, and $13.1 million in 2015. We had an accumulated deficit of $323.1 million as of December 31, 2017. We intend to continue to invest in our business, including with respect to our employee base, sales and marketing, new product development, and improvement of existing products, services and features. Therefore, to achieve profitability, we must increase our revenue, particularly our recurring revenue, by entering into more and larger sales transactions while limiting customer churn, and by managing our cost structure in line with our revenue. If we fail to do
so, our future results and financial condition will be adversely affected, and we may be unable to continue operating.
We continue to monitor and manage our costs to optimize our performance for the long term. However, there is no assurance that we will succeed, and unforeseen expenses, difficulties or delays may prevent us from realizing our goals. From time to time, we incur restructuring expenses or expenses related to cost reduction efforts, but we can offer no assurance that these or other actions will enable us to achieve or sustain profitability in the future. In addition, we cannot be certain that steps we have taken to control our costs will not adversely affect our prospects for long-term revenue growth. If we cannot increase our revenue, improve gross margins and control costs, our future results and financial condition will be negatively affected.
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Our
revenue and operating results have fluctuated in the past and are likely to fluctuate in the future, and because we recognize revenue from subscriptions over a period of time, downturns in revenue may not be immediately reflected in our operating results.
Period-to-period comparisons of our results of operations should not be relied upon as definitive indicators of future performance. Because we recognize recurring revenue and maintenance revenue ratably over the terms of the related subscription agreements and maintenance support agreements, most of our revenue each quarter results from recognition of deferred revenue related to agreements entered into during previous quarters. Consequently, declines in new or renewed subscription agreements and maintenance agreements, or termination of existing subscription agreements and maintenance agreements that occur in one quarter will
be felt in both that quarter and future quarters. We may be unable to generate sufficient new revenue to offset revenue declines and we may be unable to adjust our operating expenses and capital expenditures to align with revenue reductions. Our subscription model makes it more difficult for us to increase our revenue rapidly, because revenue from new customers is recognized over multiple periods. Other factors that may cause our revenue and operating results to fluctuate include:
•
timing of customer budget cycles;
•
the
priority our customers place on our products compared to other business investments;
•
size, timing and contract terms of new customer contracts, and unpredictable or lengthy sales cycles;
•
reduced renewals of subscription and maintenance
agreements;
•
competitive factors, including new product introductions, upgrades and discounted pricing or special payment terms offered by our competitors, as well as strategic actions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;
•
technical difficulties, errors or service interruptions in our solutions that may cause customer
dissatisfaction with our solutions;
•
consolidation among our customers, which may alter their buying patterns, or business failures that may reduce demand for our solutions;
•
operating expenses associated with expansion of our sales force or business and our product development efforts;
•
cost,
timing and management efforts related to the introduction of new features to our solutions;
•
our ability to obtain, maintain and protect our intellectual property rights and adequately safeguard the information imported into our solutions or otherwise provided to us by our customers;
•
reduced engagement or acceptance of our solutions as part of changes that may be implemented in connection with the European Union’s General
Data Protection Regulation ("GDPR").
•
changes in the regulatory environment, including with respect to tax, 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.
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If we are unable to maintain the profitability of our recurring revenue solutions, our operating results could be adversely affected.
We
have invested, and expect to continue to invest, substantial resources to expand, market and refine our solutions for which we recognize recurring revenue. If we are unable to grow our recurring revenue, or to improve our recurring revenue gross margins, we may not be able to achieve profitability and our operating results and financial condition could be adversely affected. Factors that could harm our ability to improve recurring revenue include:
•
customer attrition as customers decide not to renew for any reason;
•
our
inability to maintain or increase the prices customers pay for our solutions, due to competitive pricing pressures or limited demand;
•
our inability to reduce operating costs through technology-based efficiencies and streamlined processes;
•
increased direct and indirect cost of third-party services, including hosting facilities and professional services contractors performing implementation and support services;
•
higher
personnel and personnel-related costs;
•
increased costs to integrate products or personnel that we acquire, including time and expense associated with new sales personnel reaching full productivity; and
•
increased costs to license and maintain and replace third-party software embedded in our solutions or to create alternatives to such third-party software.
Our
business and operations have experienced rapid growth in recent periods, and if we do not effectively manage any future growth or are unable to improve our systems and processes, our operating results will be adversely affected.
We have experienced rapid growth and increased demand for our products over the last few years. Our employee headcount and number of customers have increased significantly, and we expect to continue to grow our headcount significantly in future periods. For example, from December 31, 2016 through December 31, 2017, our employee headcount increased from approximately 1,100 to approximately 1,300 employees and our number of customers increased from over 5,200 to over 6,400. We anticipate that we will continue to significantly expand our operations and headcount
in the near term, and that our customer base will continue to expand. The growth and expansion of our business and our product and service offerings place a significant strain on our management, operations, sales and marketing, and financial resources. To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems, our sales and marketing teams and our ability to manage headcount, capital and business processes in an efficient manner.
We may not be able to implement improvements to our systems and processes in an efficient or timely manner, and we may discover deficiencies in our existing systems and processes. We may experience difficulties in managing improvements to our systems and processes, which could disrupt existing customer relationships, cause us to lose
customers, limit sales of our products, or increase our technical support costs. Our failure to improve our systems and processes, or the failure of those systems and processes to operate in the intended manner, may result in our inability to manage the growth of our business and accurately forecast our revenue and expenses. Our productivity and the quality of our solutions may be adversely affected if we do not integrate and train new employees quickly and effectively. Any future growth would add complexity to our organization and require effective coordination throughout our organization. Failure to manage any future growth effectively could result in increased costs, negatively impact our customers' satisfaction with our solutions and harm our operating results.
Decreases in customer retention rates for SaaS subscriptions could materially impact our future revenue or operating
results.
Our customers have no obligation to renew their SaaS subscriptions or maintenance support arrangements after the expiration of the subscription or maintenance period, which is typically 12 to 36 months. Customers may elect not to renew, or may renew for fewer seat licenses or shorter contract terms for a number of reasons, including a change in corporate priorities or personnel. In addition, we offer a pay-as-you-go model, whereby customers can pay for our SaaS services on a monthly basis without a long-term commitment, which may unexpectedly increase the rate of customer non-
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renewals and thus negatively and unpredictably
affect our recurring revenue. If our customer renewal rates decline, which may occur as a result of many factors, including reduced budgets, insourcing decisions or dissatisfaction with our service, our revenue will be adversely affected, and our business will suffer.
Most of our revenue is derived from our Lead to Money solutions, and a decline in sales of those solutions could adversely affect our operating results and financial condition.
We derive a majority of our revenue from our Lead to Money solutions. If demand for those solutions declines significantly and we are unable to replace the revenue with revenue from our other offerings, our business and operating results will be adversely affected. We cannot be certain that our current levels of market penetration and revenue from
these solutions will continue. If conditions in the market for these solutions change as a result of increased competition or new product offerings by our competitors or consolidation among our competitors, or if we are unable to timely introduce successful new solutions to keep pace with technological advancements, our revenue may decline and our financial results and financial condition would be harmed.
If we do not compete effectively, our revenue may not grow and could decline.
We experience intense competition from other software and cloud companies, as well as from customers' internal development teams. We compete principally with vendors of sales effectiveness software, incentive compensation management software, enterprise resource planning software, customer relationship management
software, and learning management system solutions. 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 of our competitors also have a larger installed base of users, larger marketing budgets, broader relationships, established distribution agreements, and greater name recognition. Some of our competitors' products may also be more effective at performing particular functions than our solutions or may be more customizable for particular customer needs in any given market. Even if our competitors provide products with less functionality than our solutions, their products may incorporate other functions, such as recording and accounting for transactions, customer orders or inventory management. A product that performs these functions, along with the functions of our solutions, may appeal to some customers by reducing the number of software applications they use in their business. Our competitors, especially larger competitors, may also bundle certain functionalities with their other offerings, rendering our software unnecessary or 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 in ways that inhibit integration with ours, or they could deny or delay our access to advance software releases, which would restrict or delay our ability to adapt our products for integration with their new releases and could result in the loss of both sales opportunities and renewals of our products.
Some potential customers have already made substantial investments in third-party solutions or internally-developed solutions designed to provide functionality similar to our solutions. 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 cloud 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
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prices and product implementations. These practices could, over time, limit the prices that we can charge for our solutions or cause us to modify our existing market strategies accordingly. If we cannot offset price reductions and other terms that are more favorable to our customers with a corresponding increase in sales or decrease in spending, then the reduced revenue resulting from lower prices would adversely affect our gross margins and operating results.
If
we experience service interruptions in our offerings to customers, our business and financial results could be harmed.
Our business is primarily conducted over the Internet, so we depend on our ability to protect our computer equipment and stored data against damage from natural disasters, human error, power loss, telecommunications and network equipment failures, cyber-attacks or other unauthorized intrusion and other events. Moreover, our headquarters are located in the San Francisco Bay Area, a region known for seismic activity. Although we have redundant facilities to support our operations, our systems, procedures and controls might not be adequate for all eventualities, which could prolong the adverse impact.
There can be no assurance that our disaster preparedness will prevent
significant interruption of our operations, which could be lengthy, or reduce the speed or functionality of our services. Service interruptions, no matter how prolonged or frequent, may result in material liability claims from customers for breach of service-level commitments, customer terminations and damage to our reputation and business prospects.
In addition, third-party service providers for hosting facilities or other critical infrastructure could be interrupted in the event of a natural disaster, facility closings or other unanticipated problems. Third-party telecommunications providers of Internet and other telecommunication services may fail to perform adequately, or their systems may fail to operate properly or be disabled, causing business interruption, system damage or significant expense for us to replace, and could harm our revenue, increase costs, cause regulatory
intervention or damage to our reputation.
Potential changes in generally accepted accounting principles could affect our reported financial results and require significant changes to our internal accounting systems and processes.
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. ("GAAP"). These principles are subject to interpretation by the Financial Accounting Standards Board ("FASB"), the SEC, and various other bodies formed to interpret and create appropriate accounting principles and guidance. The FASB is currently working with the International Accounting Standards Board ("IASB") to converge accounting principles, and facilitate more comparable financial reporting, between companies that
are required to follow GAAP and those that are required to follow international financial reporting standards. In connection with that initiative, the FASB has issued new accounting standards for revenue recognition and accounting for leases, which we discuss in Note 1, The Company and Significant Accounting Policies, to our consolidated financial statements under the heading “Recently Issued Accounting Pronouncements.” These and other such standards could cause us to adopt new accounting principles, which could significantly impact our reported financial results or cause volatility of those financial results. In addition, we may need to change our customer and vendor contracts, financial accounting systems and other internal processes. The cost and effects of these changes could adversely
affect our results of operations.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers, (Topic 606),” which supersedes the revenue recognition requirements in “Revenue Recognition, (Topic 605).” We adopted this new standard effective January 1, 2018. The potential impact of this guidance is included in Note 1, The Company and Significant Accounting Policies, to our consolidated financial statements. Market practices with respect to these disclosures are still evolving, and securities analysts and investors may not fully understand the implications of our disclosures or how or why
they may differ from similar disclosures by other companies. If our reported results fall below analyst or investor expectations, our stock price could decline.
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
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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 customers to access and transmit confidential data, including personally identifiable information of their employees, agents and customers over the Internet, and we store our customers' data on servers. We may also have access to confidential data in connection with the activities of our professional services organization, including implementation, maintenance and support activities for our customers.
Moreover, many of our customers are subject to heightened security obligations and standards regarding the personally identifiable information of their downstream customers. In the United States, these heightened obligations and standards particularly affect the financial services, healthcare and insurance sectors, which are subject to controls over personal information under various state and federal laws and regulations. Other directives, such as the GDPR and
the European Union Directive on Data Protection and accompanying laws and regulations of the Member States of the European Union implementing the directives, 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. In addition, the GDPR includes significant penalties for non-compliance.
Our security measures to protect customer information may be inadequate or breached by third-party action, including intentional misconduct or malfeasance, system error, employee error or otherwise, resulting in unauthorized access to or disclosure of our customers' data, including intellectual property and other confidential business information. Because the techniques used to obtain unauthorized
access, or to sabotage systems, change frequently and are often not recognized until launched against a target, we may be unable to anticipate them or to implement or take adequate preventative measures. Because we do not control our customers or third-party technology providers that our customers may authorize to access their data, we cannot ensure the integrity or security of their activities. In addition, malicious third parties may conduct attacks designed to temporarily deny customers access to our services.
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 or data centers and misappropriate customers' confidential information, our reputation may be damaged, resulting in a loss of confidence in our solutions, negatively impacting our brand and future sales, and
we may be sued and incur substantial damages. Even if it is determined that our security measures were adequate, the damage to our reputation may cause customers and potential customers to reconsider the use of our solutions, which may have a material adverse effect on our results of operations.
Our business depends in part on a strong and trusted brand, and any failure to maintain, protect, and enhance our brand could harm our business.
We have developed a strong and trusted brand that is associated with our solutions and services and that brand has contributed to the success of our business. Our brand is based on customer trust in our solutions and the implementations of our solutions in their businesses, across a broad range of industries. To continue to expand our customer base,
it is important that we maintain, protect and enhance our brand. Our ability to achieve that goal depends largely on our ability to maintain our customers’ trust and continue to provide high-quality and secure solutions. Negative publicity could harm our reputation and customer confidence in and use of our solutions, whether that negative publicity relates to our industry or our company, the quality and reliability of our solutions, our risk management processes, our privacy and security practices, or other issues experienced by our customers. Accordingly, harm to our brand can stem from many sources, such as if we fail to satisfy expectations of service and quality, inadequately protect sensitive information or experience compliance failures. If we do not successfully maintain a strong and trusted brand, our business and financial results may be harmed.
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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 continue to expand data protection and privacy regulation and we expect more public scrutiny, enforcement and sanctions in this area. In addition, foreign court judgments and regulatory actions may affect our ability to transfer, process and receive data transnationally, including
data that is critical to our operations or core to the functionality of our solutions. New laws, regulations, judgments or actions may relate to the solicitation, collection, processing, use and disclosure of personal information, including cross-border transfers of personal information, in a way that could affect demand for our solutions or cause us to change our platform or business model and increase our costs of doing business.
Our customers can use our solutions to store compensation and other personal identifying information about their sales personnel that is or may be considered personal data in some jurisdictions and, therefore, may be subject to this evolving legislation, regulation or heightened public scrutiny. In addition to the potential adoption of new laws and regulations in the United States and internationally, evolving definitions and norms regarding personal
data may require us to adapt our business practices, or limit or inhibit our ability to operate or expand our business.
In order to comply with new United States or international laws, regulations or judgments, including adopting new and potentially onerous customer contractual clauses, we may incur substantial costs or change our business practices in a manner that could reduce our revenue or compromise our ability to effectively pursue our growth strategy. Furthermore, to comply with any new non-U.S. laws, regulations or judgments, we may have to create expensive duplicative information technology infrastructure and business operations, which could hinder our expansion plans or render them commercially infeasible, increase our costs of doing business and harm our financial results.
In
addition, customers may experience higher compliance costs as a result of laws, regulations and judgments, which may limit the use and adoption of our solutions and reduce overall demand, or lead to significant fines, penalties or liabilities for any noncompliance. As a result, some industries may not adopt our solutions based on perceived privacy concerns, regardless of the validity of such concerns.
While we take measures to protect the security of information that we collect, use and disclose in the operation of our business, and we offer privacy protections for this information, these measures may not always be effective. Furthermore, although we strive to comply with applicable laws and regulations relating to privacy and data collection, use and disclosure, these laws and regulations are continually evolving, not always clear and not always consistent across the jurisdictions
in which we do business. Any proceedings brought against us relating to compliance with these laws and regulations could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, adversely affect the demand for our solutions and ultimately result in the imposition of monetary liability or restrictions on our ability to conduct our business. There is no assurance that contractual indemnity or insurance would be available to offset any portion of these costs.
In addition, if we are perceived as not operating in accordance with industry best privacy practices, we may be subject to negative publicity, government investigation, litigation or investigation by accountability groups. Any action against us could be costly and time consuming, require us to change our business practices, expose
us to substantial monetary liability and result in damage to our reputation and business.
Acquisitions of, and investments in, other businesses present many risks. We may not realize the anticipated financial and strategic benefits of these transactions, and we may not be able to manage our operations with the acquired businesses efficiently or profitably.
As part of our business strategy, we evaluate opportunities to expand and enhance our product and service offerings to meet customer needs, increase our market opportunities and grow revenue through internal development efforts and external acquisitions and partnerships. We have completed a number of acquisitions in recent years and 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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•
anticipated benefits, such as increased revenue, may not materialize if, for example, a larger than expected number of customers choose not to renew their contracts or if we are unable to cross-sell the acquired company's solutions to our existing customer base;
•
we
may have difficulty integrating and managing the acquired technologies or products with our existing product lines, and maintaining uniform standards, controls, procedures and policies across locations;
•
we may experience challenges in, and have difficulty penetrating, new markets where we have little or no prior experience and where competitors have stronger market positions;
•
integrating the financial systems and personnel
of the acquired business and retaining key employees may be difficult, and, to the extent we issue shares of stock or other rights to purchase stock to such individuals, existing stockholders may be diluted;
•
our ongoing business and management's attention may be disrupted or diverted by transition or integration, or by the complexity of overseeing geographically and culturally diverse locations;
•
we may find that the
acquired businesses or assets do not further our business strategy, or that we overpaid for the businesses or assets, or that we do not realize the expected operating efficiencies or product integration benefits;
•
our use of cash consideration for one or more significant acquisitions may require us to use a substantial portion of our available cash or incur substantial debt, and if we incur substantial debt, it could result in material limitations on the conduct of our business;
•
we
may fail to uncover or realize the significance of, or otherwise become exposed to, liabilities and other issues assumed from an acquired business, such as claims from terminated employees or third-parties and unfavorable revenue recognition or other accounting practices; and
•
we may experience customer confusion as a result of product overlap, particularly when we offer, price and support various product lines differently.
These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows. Furthermore, during periods of operational
expansion, we often need to increase the size of our staff, our related operations and third-party partnerships, and potentially amplify our financial and accounting controls to ensure they remain effective. Such changes may increase our expenses, and there is no assurance that our infrastructure will be sufficiently scalable to efficiently manage any growth that we may experience. If we are unable to leverage our operating cost investments as a percentage of revenue, our ability to generate or increase profits will be adversely impacted. In addition, from time to time, we may enter into negotiations for acquisitions and other investments that are not ultimately consummated, which could result in significant expense and diversion of management attention.
Some of our products rely on third-party software licenses to operate, and the loss of or inability to maintain these licenses,
or errors, discontinuations or updates to that third-party software, could result in higher costs, delayed sales, customer claims or termination of existing agreements.
We license technology and content from several software providers for our products, and we anticipate continuing to license technologies and content from these or other providers in connection with our current and future products. We also rely on generally available third-party software to run our applications. Any of these software applications may cease to be available on commercially reasonable terms, if at all, or new versions may be released that are incompatible with our offerings. Some of the products could be difficult to replace, and developing or integrating new software with our products could require months or years of design and engineering work. Modification or loss of access to any of these technologies
could result in delays in providing our products until equivalent technology or content is developed or, if available, is identified, licensed and integrated. Acquisitions of third-party technologies or content by other companies, including our competitors, may have a material adverse impact on us if the acquirer seeks to cancel or change the terms, including pricing 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
18
service
and harm our reputation. Our use of additional or alternative third-party products could result in new or higher royalty payments by us if we are required to enter into license agreements for such products.
Our growth depends in part on the success of our strategic relationships with third parties.
We depend on strategic relationships with third parties, such as resellers, OEM partners, and technology or content providers, to extend the utility or reach of our products and increase our sales. Identifying potential strategic partners, then negotiating, documenting and implementing any resulting strategic relationships, requires us to commit significant time and resources with no guarantee that any resulting revenue will justify the investments. If we fail to establish or maintain effective
relationships with third parties, our ability to compete in the marketplace successfully or to grow our revenues could be impaired, and our operating results could suffer. For example, if our solutions are not integrated with related solutions that are valued by potential customers, it may be more difficult for us to compete and we may lose customers and revenue. Even if we succeed in establishing and maintaining strategic relationships, we cannot assure you that they will result in increased sales of our solutions. In addition, the rate at which any strategic relationship will achieve its intended results, if at all, is outside of our control and difficult to predict.
Our success depends upon our ability to develop new solutions and enhance our existing solutions rapidly and cost-effectively. Failure to introduce new or enhanced solutions that meet customer needs may adversely
affect our operating results.
The markets for sales effectiveness solutions and cloud computing are generally characterized by:
•
rapid technological advances,
•
changing customer needs, and
•
frequent
new product introductions and enhancements.
To keep pace with technological developments, satisfy increasingly sophisticated customer requirements, achieve market acceptance and effectively respond to competition, we must quickly identify emerging trends and requirements, accurately define and design enhancements and improvements for existing solutions, and introduce new solutions that satisfy our customers' changing demands. Accelerated introductions for new solutions require substantial expenditures for research and development that could adversely affect our operating results. Further, any new solutions we develop may not be introduced in a timely manner or be available in a distribution model favored by our target markets and, therefore, may not achieve the broad market acceptance necessary to generate significant revenue. If we are unable to quickly and
successfully develop or acquire and distribute new products and services cost-effectively, or enhance existing solutions, or if we fail to position and price our solutions to meet market demand, our business and operating results will be adversely affected.
Our offshore product development, support and professional services may prove difficult to manage and may not allow us to realize our growth and cost reduction goals, or produce effective new solutions.
We use offshore resources to perform new product development and provide support and professional services, which requires detailed technical and logistical coordination. We must ensure that our offshore resources are aware of and understand development specifications and customer support, as well as implementation and configuration
requirements, and that they can meet applicable timelines. If we are unable to maintain acceptable standards of quality in product development, support and professional services through our offshore resources, including our personnel and our third-party service providers, our attempts to reduce costs and drive growth through new products and through margin improvements in technical support and professional services may be negatively impacted, which may adversely affect our results of operations. The use of offshore resources, including third-party service providers, may expose us to misappropriation of our intellectual property or that of our customers, or make it more difficult to defend intellectual property rights in our technology.
The 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
19
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 quality levels and meet customers' needs, we need to recruit, retain and motivate highly-skilled employees and contractors in all areas of our business, including sales, professional services and engineering. In particular, if we are unable to hire and retain talented personnel with the skills, and in the locations, we require, we might need to redeploy existing personnel or increase our reliance on contractors. Furthermore, we have increased and intend to continue to increase our sales force and, if we are not successful in attracting and retaining qualified personnel, or if new sales personnel are unable to achieve desired productivity levels within a reasonable time period, we may not be able to increase our revenue
and realize the anticipated benefits of these investments.
As our customer base increases and as we continue to evaluate and modify our organizational structure to increase efficiency, we are likely to experience staffing constraints in connection with the deployment of trained and experienced professional services and support resources to implement, configure, maintain and support 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 increase in the quantity of shares authorized
for issuance under our equity compensation plan. If we are not able to secure that stockholder, approval, our ability to recruit, retain and motivate employees may be adversely impacted, which could harm our operating results.
If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial statements and the trading price of our common stock may be negatively affected.
We are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Effective planning and management processes are necessary to meet these requirements. We expect that we will need to continue to improve existing, and implement new, operational and financial
systems, procedures and controls to manage our business effectively in the future. We are also required to furnish a management report on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the trading price of our common stock could be negatively affected, and we could become subject to investigations by The Nasdaq Stock Market, the Securities and Exchange Commission or other regulatory authorities, which could be costly
for us.
If we fail to protect our proprietary rights and intellectual property adequately, we may lose valuable assets, experience reduced revenue and incur costly litigation.
Our success and ability to compete depends on our internally-developed technology and expertise, including 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
20
disclosure of our licensed programs and services may be unenforceable under the laws of some jurisdictions. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States, and the outcome of any actions taken in any foreign jurisdiction to enforce our rights may be different than if such actions were determined under the laws of the United States. To the extent that we engage in international activities, our exposure to unauthorized copying and use of our products, services and proprietary information increases.
We
enter into various restrictive agreements with our employees and consultants, as well as with customers and third parties with whom we have strategic relationships. We cannot ensure that these agreements will be effective in controlling access to and distribution of our products, services and proprietary information. These agreements also do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our solutions. Litigation may be necessary to enforce our intellectual property rights and protect our trade secrets. Litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management resources, either of which could seriously harm our business.
Our results of operations may be adversely affected if we are subject to a protracted infringement claim or one that results in a significant
damage award.
From time to time, we receive claims that our products, services offerings or business infringe or misappropriate the intellectual property rights of third parties, and we have in the past, and may continue in the future, to assert claims of infringement against third parties on such bases. Our competitors or other third parties may also challenge the validity or scope of our intellectual property rights. We believe that claims of infringement are likely to increase as the functionalities of our solutions expand and we introduce new solutions, including technology acquired or licensed from third parties. Any infringement claim, whether offensive or defensive, could:
•
require
costly litigation to resolve;
•
absorb significant management time;
•
cause us to enter into unfavorable royalty or license agreements;
•
require
us to discontinue the sale of, or materially modify, all or a portion of our products or services;
•
require us to indemnify our customers or third-party service providers; and
•
require us to expend additional development resources to redesign our products or services.
Inclusion of open source software in our
products may expose us to liability or require release of our source code.
We currently use open source software in our products and may use more in the future. We could be subject to suits by parties claiming ownership of what we believe to be open source software that has been incorporated into our products. In addition, some open source software is provided under licenses that 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 certain of our products became subject to open source licenses, our ability to continue
commercializing such solutions, along with our operating results, would be materially and adversely affected.
The vote by the United Kingdom to leave the European Union could adversely affect us.
The United Kingdom vote authorizing its exit from the European Union (referred to as “Brexit”) could over time create uncertainty and disrupt our business. For example, our relationships with European customers or prospective customers in the United Kingdom, data centers and other vendors, and employees could change in unpredictable ways and have an adverse effect on our business, financial results and operations, and could also have an adverse impact on our bookings. The outcome of negotiations about the specific terms of the United Kingdom’s future relationship with the European Union
are unpredictable. For example, important issues such as trade and tariff, immigration, intellectual property and commercial regulation may be modified during a transition period or permanently. These measures could potentially disrupt the markets we serve and the tax jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions, and may cause us to lose customers or prospective customers, vendors, and employees. In addition, Brexit could lead to legal uncertainty and divergent national laws and regulations where previously
21
European Union laws and regulations prevailed, raising our cost of doing business. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, business opportunities, results of operations,
financial condition and cash flows.
Sales to customers in international markets pose risks and challenges for which we may not achieve the expected results.
We continue to invest substantial time and resources to grow our international operations. If we fail to do so successfully, our business and operating results could be seriously harmed. Such expansion may require substantial financial resources and management attention. International operations involve a variety of risks, particularly:
•
greater difficulty in supporting
and localizing our solutions;
•
complying with numerous regulatory requirements, taxes, trade and export laws and tariffs that may conflict or change unexpectedly, including labor, tax, privacy and data protection;
•
using international resellers and complying with anti-bribery and anti-corruption laws;
•
greater
difficulty in establishing, staffing and managing foreign operations;
•
greater difficulty in maintaining acceptable quality standards in support, product development and professional services by our international third-party service providers;
•
differing abilities to protect our intellectual property rights; and
•
possible
political and economic instability, as well as natural and environmental disasters, and terrorist activities.
We may be affected by fluctuations in currency exchange rates.
We are potentially exposed to adverse movements in currency exchange rates. Although most of our revenue and expenses occur in U.S. Dollars, some occur in local currencies and the amounts occurring in local currencies may increase as we expand our international operations. An increase in the value of the U.S. Dollar could increase the real cost to our customers of our products in those markets outside the United States, and a weakened U.S. Dollar could increase the cost of our expenses, as well as overseas capital expenditures. Therefore, fluctuations in the exchange rate of foreign currencies
may have a negative impact on our revenue and operating activities.
Our services revenue produces substantially lower gross margins than our recurring revenue, and periodic variations in the proportional relationship between services revenue and higher margin recurring revenue may harm our overall gross margins.
Our services revenue, which includes fees for consulting, implementation and training, represented 20% of our revenue in 2017 and 21% in 2016. Our services revenue has a substantially lower gross margin than our recurring revenue.
The percentage of total revenue represented by services revenue has varied significantly from period to period
principally because the number of new recurring revenue customer transactions varies from quarter to quarter. If the proportional relationship between our services revenue and recurring revenue varies in the future, it may harm our overall gross margin.
Deployment of solutions may require substantial technical implementation and support, by us or third-party service providers. We may lose sales opportunities and our business may be harmed if we do not meet these implementation and support requirements, which may cause a decline in revenue and an increase in our expenses.
We deploy solutions, such as large enterprise-wide deployments, that require a substantial degree of technical and logistical expertise, personnel commitments, and mutual cooperation to achieve milestone and other
commitments by both us and our customers. It may be difficult for us to manage these deployments, including the timely allocation of personnel and resources by us and our customers. Failure to successfully manage the process could harm our reputation, both generally and with specific customers, harming our sales and causing customer disputes, which could adversely affect our
22
revenue and increase our technical support and litigation costs. If actual remediation services exceed our accrued estimates, we could be required to take additional charges, which could be material.
We engage third-party partners, systems integrators and software vendors to provide customer referrals, cooperate with us in the design, sales
and marketing of our solutions, provide insights into market demands, and provide our customers with systems implementation services or overall program management. In some cases, we may not have formal agreements governing such relationships, and the agreements we do have generally do not include specific obligations with respect to exclusivity, generating sales opportunities or cooperating on future business.
From time to time, we also consider new or unusual strategic relationships, which can pose additional risks. For example, while reseller arrangements offer the advantage of leveraging larger sales organizations than our own to sell our products, they also require considerable time and effort on our part to train and support the reseller's personnel, and require the reseller to properly motivate and incentivize its sales force. Also, if we enter into an exclusive reseller
arrangement, the exclusivity may prevent us from pursuing the applicable market ourselves, and if the reseller is not successful in the particular location, our results of operations may be adversely affected.
Should any of these third-parties go out of business, perform unsatisfactory services or choose not to work with us, we may be forced to develop new capabilities internally, which may cause significant delays and expense, thereby adversely affecting our operating results. These third-party providers may offer products of other companies, including products competitive with ours. If we do not successfully or efficiently establish, maintain and expand our relationships with influential market participants, we could lose sales and service opportunities, which would adversely affect our results of operations.
Our
solutions have unpredictable sales cycles, making it difficult to plan our expenses and forecast our results.
It is difficult to determine how long the sales cycles for our solutions will be, thereby making it difficult to predict the quarter in which a particular sale will close and to plan expenditures accordingly. Moreover, to the extent that sales are completed in the final two weeks of a quarter, the impact of recurring revenue transactions is typically not reflected in our financial statements until subsequent quarters. The period between our initial contact with a potential customer and ultimate sale of our solutions is relatively long due to several factors, which may include:
•
the
complex nature of some of our products;
•
the need to educate potential customers about the uses and benefits of our solutions;
•
budget cycles of our potential customers that affect the timing of purchases;
•
the
expiration date of existing point solutions that we seek to replace;
•
customer requirements for competitive evaluation and often lengthy internal approval processes and protracted contract negotiations (particularly of large organizations) before purchasing our solutions; and
•
potential delays of purchases due to announcements
or planned introductions of new solutions by us or our competitors.
The length and unpredictability of our sales cycle make it difficult for us to project revenues and plan for levels of expenditures to support our solutions appropriately. If we do not manage our sales cycle successfully, we may misallocate resources and our financial results may be harmed.
Future indebtedness or assessments of our creditworthiness may adversely affect our financial condition and results of operations.
Future assessments by any rating agency of our creditworthiness could negatively affect the value of both our debt and equity securities and increase the interest amounts we pay on outstanding or future debt and the associated interest expense.
These risks could adversely affect our financial condition and results.
23
If existing on-premise license customers fail to migrate or delay migration to our on-demand solution, our revenue may be harmed.
We continue to promote our on-demand product offerings to existing customers who currently have on-premise perpetual and term licenses. Customers with on-premise licenses may need to migrate to our on-demand solutions to take full advantage of the features and functionality in those solutions. For example, in April 2016, we stopped offering perpetual licenses for our
commissions product and we stopped providing maintenance and support for any remaining on-premise customer at the end of 2017. A migration is likely to involve additional cost, which our customers may delay or decline to incur. If a sufficient number of customers do not migrate to our on-demand product offerings, our continued maintenance support opportunities and our ability to sell additional products to these customers, and as a result, our revenue and operating income, may be harmed.
Risks Related to Our Stock
Our stock price is likely to remain volatile.
The trading price of our common stock has in the past, and may in the future, be subject to wide fluctuations in response to many factors,
including those described in this section. The volume of trading in our common stock is limited, which may increase volatility. Investors should consider an investment in our common stock as risky and should purchase our common stock only if they can withstand significant losses. Other factors that affect the volatility of our stock include:
•
our actual and anticipated operating performance and the performance of other similar companies;
•
actual
and anticipated fluctuations in our financial results;
•
failure of securities analysts to maintain coverage of us;
•
ratings changes by any securities analysts who follow us;
•
failure
to meet our projected results or the published operating estimates or expectations of securities analysts and investors;
•
failure to achieve revenue or earnings expectations;
•
price and volume fluctuations in the overall stock market, including as a result of trends in the global economy;
•
significant
sales by existing investors, coupled with limited trading volume for our stock;
•
announcements by us or our competitors of significant contracts, results of operations, projections, or new technologies;
•
lawsuits threatened or filed against us;
•
adverse
publicity;
•
acquisitions, commercial relationships, joint-ventures or capital commitments;
•
changes in our management team or board of directors;
•
publication
of research reports, particularly those that are inaccurate or unfavorable, about us or our industry by securities analysts; and
•
other events or factors, including those resulting from war, incidents or terrorism or responses to these events.
Additionally, some companies with volatile market prices for their public 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.
24
Future
sales of substantial amounts of our common stock, including securities convertible into or exchangeable for shares of our common stock, could cause our stock price to fall.
We may issue additional shares of our common stock, including securities convertible into or exchangeable for, or that represent the right to receive, shares of our common stock. Such issuances will dilute the ownership interest of our stockholders and could adversely affect the market price of our common stock. We cannot predict the effect that future sales of shares of our common stock or other equity-related securities would have on the market price of our common stock. In addition, sales by existing stockholders of a large number of shares of our common stock in the public trading market (or in private transactions), including sales by our executive officers, directors or institutional investors, or the
perception that such additional sales could occur, could cause the market price of our common stock to drop. We have stock options and restricted stock units outstanding for shares of our common stock. Our stockholders may incur dilution upon exercise of an outstanding stock option or vesting of outstanding restricted stock units.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize
any future gains on their investment.
Provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.
Our certificate of incorporation and bylaws contain provisions that could make it harder for a third-party to acquire us without the consent of our board of directors. For example, if a potential acquirer were to make a hostile bid for us, the acquirer would not be able to call a special meeting of stockholders to remove our board of directors or act by written consent without a
meeting. In addition, our board of directors has staggered terms, which means that replacing a majority of our directors would require at least two annual meetings. A potential acquirer would also be required to provide advance notice of its proposal to replace directors at any annual meeting, and would not be able to accumulate votes at a meeting, which would require such potential acquirer to hold more shares to gain representation on the board of directors than if cumulative voting were permitted. Furthermore, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% stockholders that have not been approved by the board of directors. All of these factors make it more difficult for a third-party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by some stockholders. Our board of directors could choose not to negotiate with a potential acquirer that it does not believe
is in our strategic interests. If a potential acquirer is discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by these or other measures, under some circumstances, the market price of our common stock could be reduced.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease our headquarters in Dublin, California which consists of approximately 109,000 square feet of office
space. We also lease facilities in Alabama, Georgia, Idaho, New York, Wisconsin, Washington, Australia, Canada, Germany, Hong Kong, India, Ireland, Japan, Malaysia, Mexico, Netherlands, Serbia, Singapore, and United Kingdom. We believe that our properties are in good operating condition and adequately serve our current business operations. We also anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion. Refer to Note 7, Contractual Obligations, Commitments and Contingencies, to our consolidated financial statements for information regarding our lease obligations.
Item 3. Legal Proceedings
We are from time
to time, a party to various litigation and customer disputes incidental to the conduct of our business. At the present time, we believe that none of these matters are material.
Item 4. Mine Safety Disclosures
None.
25
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 Stock 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.
As
of February 15, 2018, there were 66,460,419 shares of our common stock outstanding held by 19 stockholders of record including The Depository Trust Company, which holds shares of our common stock on behalf of an indeterminate number of beneficial owners.
Dividends
We have never declared or paid cash dividends on our capital stock. We expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
Performance Graph
The following performance graph shall not be deemed to be incorporated by reference by
means of any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those acts.
The graph compares the cumulative total return of our common stock from December 31, 2012 through December 31, 2017 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,
2012, (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.
26
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
Callidus
Software Inc.
$
100
$
302
$
360
$
409
$
370
$
631
Nasdaq
Composite
$
100
$
140
$
161
$
172
$
187
$
243
Nasdaq
Computer
$
100
$
134
$
163
$
176
$
200
$
281
*We
have not changed indices since 2012.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item is hereby incorporated by reference herein from our proxy statement for the 2018 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2017, or an amendment to this Form 10-K.
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, 2017, and the consolidated balance sheet data as of December 31, 2017 and 2016, 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,
2014 and 2013 and the selected consolidated balance sheet data as of December 31, 2015, 2014 and 2013 are derived from our audited consolidated financial statements that have not been included in this Form 10-K.
Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
Recent Development
On January 29, 2018, we entered into an Agreement and Plan of Merger (“MergerAgreement”) with SAP America, Inc., a Delaware corporation (“SAP”) and Emerson One Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of SAP (“MergerSub”). Pursuant to the terms of the Merger Agreement, and subject to the conditions thereof, Merger Sub will merge with and into Callidus and we will become a wholly-owned subsidiary of SAP (the “Merger”). If the Merger is completed, our stockholders
will be entitled to receive $36.00 in cash for each share of our common stock owned by them as of the date of the Merger.
The consummation of the Merger is subject to certain conditions, including (i) adoption of the Merger Agreement by holders of a majority of our outstanding common stock entitled to vote thereon, (ii) the accuracy of our, SAP’s and Merger Sub’s respective representations and warranties, subject to specified materiality qualifications, (iii) the expiration or termination of any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, as well as any similar filings and clearances under certain foreign antitrust laws (the "Regulatory Approvals"), (iv) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement), and (v) other customary conditions.
The
special meeting of our stockholders to vote on adoption of the Merger Agreement will be held on March 29, 2018. If our stockholders adopt the Merger Agreement at the special meeting and all Regulatory Approvals are received prior to such time, Callidus and SAP currently anticipate that all other conditions set forth in the Merger Agreement will either be satisfied or waived, and closing of the transactions contemplated by the Merger Agreement will occur within three International Business Days (as defined in the Merger Agreement) after the special meeting.
For additional information related to the Merger and the Merger Agreement, please refer to our Current Report on Form 8-K filed with the U.S. Securities Exchange Commission ("SEC") on January 30, 2018; and the Definitive
Proxy Statement on Schedule 14A filed with the SEC on February 22, 2018. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement incorporated by reference as Exhibit 2.1 to this Annual Report on Form 10-K. Upon completion of the Merger, shares of our common stock will cease trading on The Nasdaq Stock Market.
Overview
CallidusCloud® is a global leader in cloud-based sales, marketing, learning and customer experience solutions. CallidusCloud enables our customers to sell more, faster with its Lead to Money suite of solutions that, among other things, identifies leads, trains personnel, implements territory and quota plans, enables sales forces, automates configuration pricing and quoting,
manages contracts, streamlines sales compensation, captures customer feedback and provides rich predictive analytics for competitive advantage. Over 6,400 leading organizations, across a broad set of industries rely on CallidusCloud to help optimize their Lead to Money process, train their personnel and close more deals, faster.
The Lead to Money process is designed to help companies respond to the changing role of sales and marketing in the redefined sales cycle of the modern economy. In the last decade, the ubiquity of social networks, mobile devices and e-commerce has transformed the traditional sales cycle into an increasingly buyer-led digital process. Buyers research and evaluate companies online, and complete a significant portion of their purchases digitally. To compete successfully
in this evolving digital market, and turn their leads into money, a company’s sales, marketing, learning and customer experience teams must effectively leverage software solutions that enhance productivity, improve collaboration and drive sales conversion.
We provide a suite of Lead to Money solutions on a Software-as-a-Service ("SaaS") basis and generate revenue from subscriptions, services and to a much lesser degree, term licenses. Our SaaS customers typically purchase annual subscriptions, and some enter into multi-year subscription commitments. We are experiencing a decline in maintenance fee revenue primarily due to conversion of existing on-premise customers to our cloud-based commissions solution. In addition, maintenance fee revenue continued to decline during 2017 as we have stopped providing maintenance and support on any remaining on-premise customers who
were planning to move to the SaaS solution. We discontinued upgrading our on-premise software commissions products.
To grow our business, the key elements of our strategy include: (1) investing in sales and marketing to expand our customer base in what we believe is an under penetrated market; (2) retaining along with cross-selling and up-selling to our customer base; (3) providing new solutions to customers; (4) working closely with our key customers to understand their needs and developing responsive solutions; (5) evaluating and integrating new acquisitions or investment opportunities in
29
complementary businesses, joint ventures, services and technologies and intellectual property rights in an effort to expand
our offerings; (6) expanding our sales efforts internationally; and (7) establishing new data centers to serve a growing business.
As a result of our execution of these strategic elements, we expect our revenue to increase over time and our revenue per customer to increase over time. We also expect our sales and marketing expenses and our research and development expenses to increase, with periodic fluctuations for many reasons, but to decline as a percentage of revenues over time. Other operating expenses are expected to increase more slowly. Acquisition and investment activities may influence particular periods but we do not believe they are a fundamental indicator of our results.
We believe that factors influencing our ability to succeed in our business strategy include: our prospective
customers’ willingness to migrate to enterprise cloud computing solutions; the performance and security of our solutions; our ability to develop new and improved features that are in demand by our customers; our ability to successfully integrate acquired businesses and technologies; successful customer implementation and utilization of our solutions; our ability to penetrate markets where we have few customers; location and timing of new data centers; our ability to attract new personnel and retain and motivate current personnel and our ability to retain along with cross-selling and up-selling to our customer base.
Revenue Increase and Customer Expansion
In2017, we added approximately 1,200 net new customers and as of December 31, 2017 we had over 6,400 customers,
including approximately 460 multi-product customers.
In 2017, total revenue was $253.1 million, an increase of $46.4 million, or 22%, from 2016. Total recurring revenue, which includes SaaS revenue and maintenance revenue, increased $38.4 million as a result of higher SaaS revenue, reflecting market acceptance of our solutions and our continued marketing and sales efforts. SaaS revenue was $198.2 million in 2017, an increase of $46.7 million or 31% from 2016. Maintenance revenue was $2.8 million, a decrease of 75%, as a result of customers converting from the on-premise solution to the cloud solution. In 2017, recurring revenue accounted for 79% of our total revenue, and we expect that percentage to increase going forward. The decrease in maintenance revenue, and investments in our data centers globally, contributed to the decline in recurring revenue gross margin to 72% in 2017 from 74% in 2016, and the decline in overall
gross margin to 61% in 2017 from 62% in 2016.
SaaS revenue continued to drive the increases in both recurring revenue and total revenue, reflecting continued market acceptance of our Lead to Money solutions. We discontinued selling on-premise software of our commissions product, which sales formerly included license fees and on-going maintenance fees paid for support and upgrades during the life of the product. As a result, we no longer realize license fee revenue. We experienced a decline in maintenance fee revenue due to conversion of existing on-premise customers to our cloud-based commissions product.
Acquisitions
On December 4, 2017, we acquired Learning Seat PTY. Ltd. ("Learning Seat"), a privately-held
provider of adaptive training and compliance learning content. The purchase of Learning Seat enhances our Litmos Learning Platform by adding nearly 500 courses. The purchase consideration was $26.3 million in cash.
On September 15, 2017, we acquired OrientDB Ltd. ("OrientDB"), a privately-held provider of data management platforms of Graph Data Base technology. The purchase of OrientDB enhances our Direct Selling Pro solution for the multi-level marketing industry, and other applications in our Lead to Money Suite. The purchase consideration was $9.1 million, which included $8.0 million paid in cash, a $1.0 million indemnity holdback to be paid one year from the date of the agreement and $0.1 million to be paid two years from the date of the agreement.
On June 2, 2017, we
acquired Learning Heroes Ltd. ("Learning Heroes"), a privately-held company that is a provider of innovative education content. The purchase of Learning Heroes enhances our mobile learning platform, and accelerates our creation of high quality, engaging and impactful learning experiences. Learning Heroes' creates courses that can run on any Learning Management System. The purchase consideration was $10.3 million, which included $8.8 million in cash and 1.2 million British Pound Sterling indemnity holdback to be paid one year from the date of the agreement.
On May 18, 2017, we acquired RevSym Inc. ("RevSym"), a privately-held company focused on innovative cloud-based solutions for the management of revenue. RevSym is a cloud solution that takes into account the new accounting guidance related to Topic 606 and IFRS 15, Revenue from Contracts
with Customers. We purchased RevSym, a cloud solution, in order to integrate with our leading commissions, Configure Price Quote and Contract Lifecycle Management solutions, to enable customers to optimize their critical revenue and commissions processes to streamline compliance under Topic 606 and IFRS 15. The purchase consideration was $5.5 million, which included $3.0 million in cash and an indemnity holdback with
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the first payment of $1.0 million to be paid six months from the date of the agreement and the remaining balance of $1.5 million to be paid one year from the date of the agreement.
Please refer to Note 2, Acquisitions, to our consolidated
financial statements for further details regarding the above acquisitions, which did not have a material impact on our financial position or results of operations.
Application of Critical Accounting Policies and Use of Estimates
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The application of GAAP requires our management to make assumptions, judgments and estimates that affect our reported amounts of assets, liabilities, revenue and expenses, and the related disclosures regarding these items. We base our assumptions, judgments and estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates
under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our future financial condition or results of operations will be affected. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with our Audit Committee.
We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, valuation of acquired intangible assets, goodwill impairment, long-lived asset impairment, contingent consideration and income taxes have the greatest potential impact on our consolidated financial statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates. Historically, our assumptions, judgments and estimates in accordance with our critical accounting policies
have not materially differed from actual results. For a more detailed discussion of these accounting policies and our use of estimates, refer to Note 1, The Company and Significant Accounting Policies, to our consolidated financial statements included in this report.
Revenue Recognition
We generate revenue by providing software as a service ("SaaS") solutions through on-demand subscription, on-premise perpetual and term licenses and related software maintenance, and services. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Recurring Revenue. Recurring revenue, which includes
SaaS revenue and maintenance revenue, is recognized ratably over the stated contractual period. SaaS revenue consists of subscription fees from customers accessing our cloud-based service offerings. Maintenance revenue consists of fees from customers purchasing licenses and receiving support for such on-premise solutions. We also recognize SaaS and maintenance revenue associated with customers using our solutions in excess of contracted usage ("Overages"). Overages are primarily attributed to SaaS products and are recorded in SaaS revenue in the period incurred. Revenue related to Overages was immaterial for all years presented.
Service and License Revenue. Service and license revenue primarily consists of services revenue related to training, integration and configuration services. Our professional services arrangements are generally billed on
a time-and-materials basis. Time and material services are recognized as the services are rendered based on inputs to the project, such as billable hours incurred. For fixed-fee professional services arrangements, we recognize revenue under the proportional performance method of accounting and estimates the proportional performance on a monthly basis, utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If we do not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion. Service and license revenue also includes revenue from perpetual licenses, which is recognized upon delivery of the product, using the residual method, assuming all the other conditions for revenue recognition have been met. Revenue related to perpetual licenses was immaterial for all the years presented.
In a limited
number of arrangements with non-standard acceptance criteria, we defer the revenue until the acceptance criteria are satisfied. Reimbursements, including those related to travel and out-of-pocket expenses, are included in services and license revenue, and an equivalent amount of reimbursable expenses is included in cost of services and license revenue.
In general, recurring revenue agreements are entered into for 12 to 36 months, and the professional services are performed within nine months of entering into a contract with the customer, depending on the size of integration.
Our SaaS agreements provide specified service level commitments, excluding scheduled maintenance. The failure to meet
this level of service availability may require us to credit qualifying customers a portion of their subscription and support fees. Based on our historical experience meeting its service level commitments, we do not currently have any liabilities on our consolidated balance sheets for these commitments.
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We recognize revenue when all of the following conditions are met:
• Persuasive evidence of an arrangement exists;
• Delivery has occurred or services have been rendered;
• The fees are fixed or determinable;
and
• Collection of the fees is reasonably assured.
If we determine that any one of the four criteria is not met, we will defer recognition of revenue until all the criteria are met.
Multiple-deliverable arrangements with on-demand subscription. For on-demand subscription agreements with multiple deliverables, we evaluate each element to determine whether it represents a separate unit of accounting. We determine the best estimated selling price of each deliverable in an arrangement based on a selling price hierarchy of methods contained in Finance Accounting Standards Board ("FASB") Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Accounting Standards Codification
(“ASC”) Topic 605)-Multiple-Deliverable Revenue Arrangements. The best estimated selling price for a deliverable is based on its vendor-specific objective evidence (“VSOE”), if available, third-party evidence (“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available. Total arrangement fees are allocated to each element using the relative selling price method. We have currently established VSOE for most deliverables, except for fixed fee service arrangements and on-premise software licenses.
We considered all of the following factors to establish the ESP for fixed fee service arrangements when sold with its on-demand services: the weighted average actual sales prices of professional services sold on a stand-alone basis for on-demand services; average billing
rates for fixed fee service agreements when sold with on-demand services, cost plus a reasonable mark-up and other factors such as gross margin objectives, pricing practices and growth strategy.
Multiple-deliverable arrangements with on-premise license. For arrangements with multiple deliverables, including license, professional services and maintenance, we recognize license revenue using the residual method of accounting pursuant to the requirements of the guidance contained in ASC 985-605, Software Revenue Recognition. Under the residual method, revenue is recognized when VSOE for fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. If evidence of fair value cannot be established for the undelivered
elements, all of the revenue is deferred until evidence of fair value can be established, or until the items for which evidence of fair value cannot be established are delivered. For maintenance and certain professional services, we are able to establish VSOE because we have a sufficient history of selling these deliverables at an established price. Our revenue arrangements do not include a general right of return relative to the delivered products.
Generally, for our term-based licenses, if the only undelivered element is maintenance, the entire amount of revenue is recognized ratably over the maintenance period.
Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenue.
Refer to Note
1, The Company and Significant Accounting Policies, of the notes to our consolidated financial statements included in this report for further discussion on our revenue recognition policies.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, assumed equity award based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, deferred revenue obligations and equity assumed.
Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical
experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
•
Future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents;
•
The acquired company's
trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company's produce portfolio; and
32
•
Discount rates.
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the deferred revenue obligations assumed. The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a
normal profit margin. The estimated costs to fulfill the obligations are based on the historical costs related to fulfilling the obligations.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Recent Accounting Pronouncements
Refer to Note 1, The Company and Significant Accounting Policies, of the notes to our consolidated financial statements included in this report for information regarding the effect of newly adopted accounting pronouncements on our consolidated financial statements.
Total
Revenue. Total revenue increased in 2017 compared to 2016 due to continued SaaS revenue growth and associated services growth. In general, increased revenues reflect volume-driven increases in revenue from new business, which includes new customers, upgrades and additional subscriptions from existing customers.
Recurring Revenue. Recurring revenue consists of SaaS revenue and maintenance revenue. SaaS revenue increased to $198.2 million in 2017, representing an increase of $46.7 million or 31%. The increase reflects volume-driven increases in revenue from new business, which includes new customers, upgrades
and additional subscriptions from existing customers, partially as a result of our investment in expanding the sales force in recent years. The increase in SaaS revenue was partially offset by the decrease in maintenance revenue to $2.8 million in 2017 from $11.1 million in 2016, as a result of customers converting from on-premise to cloud-based offerings.
Services and License Revenue. Services and license revenue consists of integration and configuration services ("consulting services"), training and perpetual licenses. Services revenue increased by $7.8 million in 2017 to $51.7 million due to services associated with increased sales of our SaaS offerings. License revenue
was immaterial during 2017 and 2016 because we stopped selling on-premise products in early 2016.
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Cost of Revenue and Gross Profit
Cost of Recurring Revenue. The increase in cost of recurring revenue in 2017 over 2016 was driven by investing in our data centers globally, which resulted in $9.7 million increase in depreciation, maintenance and equipment, a $2.4 million increase in personnel costs and a $0.6 million increase in travel-related expenses. We expect to continue to invest in hosting facilities to support our revenue growth and a larger and expanded customer base.
Cost of Services and License
Revenue. The increase in cost of services and license revenue was primarily due to a $6.0 million increase in personnel costs and related travel expenses along with $1.7 million in consulting costs.
Recurring Revenue Gross Profit. The improvement in our recurring revenue gross profit was primarily due to a $46.7 million increase in SaaS revenue, partially offset by a $8.3 million decrease in maintenance revenue, a $9.7 million increase in depreciation, maintenance and equipment expenses, a $2.4 million increase in personnel costs and a $0.6 million increase in travel-related expenses.
Services and License Revenue Gross Profit. The increase in services and license gross profit was primarily due to $7.8 million increase in service revenue , partially offset by a $5.8
million increase in personnel and related travel expenses and a $1.7 million increase in consulting costs. During 2017, our focus was to continue to support our partners on implementing our products.
Operating Expenses
The table below sets forth the changes in operating expenses in 2017 from 2016 (in thousands, except percentage data):
Sales
and Marketing. The increase in sales and marketing expense was primarily due to a $9.8 million increase in personnel-related costs, which included a $3.2 million increase in commissions associated with increased bookings and an increase of $0.1 million in stock-based compensation expense. In addition, sales and marketing costs increased by $2.8 million related to third party commissions, a $1.6 million increase in entertainment and travel-related expenses associated with more sales personnel and a $0.6 million increase in marketing events and programs.
Research and Development. The increase in research and development expenses was due to $4.9 million in higher personnel-related costs, which included $2.0 million in stock-based compensation expense as we continue to invest in headcount to support product development, and an increase of $1.1 million in maintenance expense.
General
and Administrative. The increase in general and administrative expenses was primarily due to a $3.8 million increase in personnel-related costs, which included $1.9 million in stock-based compensation expense, a $1.6 million increase in acquisition costs, a $1.5 million increase in corporate expenses and a $1.0 million increase in consulting costs.
Income from Settlement and Patent Licensing. On November 25, 2013, we entered into a settlement agreement with Xactly Corporation and Xactly's President and Chief Executive Officer that, includes an agreement by Xactly to pay a $2.0 million license fee in four annual installments of $0.5 million commencing in November 2013 with the final payment in November 2016 of $0.5 million to offset legal fees incurred under operating expenses regarding this settlement.
Restructuring
and Other. Restructuring and other expenses increased, mainly due to severance costs from the elimination of positions at our headquarters, India and Serbia offices and the relocation of our United Kingdom office. In 2016, we incurred relocation costs at our Birmingham, Alabama office.
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Stock-Based Compensation
The following table summarizes our stock-based compensation expenses in 2017 and 2016 (in thousands, except percentage data).
Year
Ended December 31,
Increase
(Decrease)
Percentage
Change
2017
2016
Stock-based compensation:
Cost
of recurring revenue
$
1,748
$
1,639
$
109
7%
Cost of services
revenue
2,338
2,097
241
11%
Sales and marketing
9,318
9,244
74
1%
Research
and development
7,126
5,147
1,979
38%
General and administrative
12,890
10,996
1,894
17%
Total
stock-based compensation
$
33,420
$
29,123
$
4,297
15%
Total
stock-based compensation expense increased in 2017 over 2016, primarily due to the timing of restricted stock and performance share unit grants, a higher stock price and increased employee stock purchase plan participation. In addition, the increase in stock-based compensation expense charged to general and administrative includes stock-based compensation expenses associated with the retirement of our former CFO on June 30, 2017.
Other Items
The table below sets forth the changes in other items in 2017 and 2016 (in thousands, except percentage data):
Year
Ended December 31,
Increase (Decrease)
Percentage Change
2017
2016
Other income (expense), net:
Interest
income and other income (expense), net
$
1,021
$
(122
)
$
1,143
937%
Interest
expense
(66
)
(267
)
(201
)
(75)%
Other income (expense), net
$
955
$
(389
)
$
1,344
346%
Provision
for income taxes (benefit)
$
(220
)
$
1,128
$
1,348
120%
Interest
Income and Other Income (Expense), net
The $1.1 million increase in the interest income and other was primarily due to higher interest income on higher investment balances and lower foreign exchange loss.
Interest Expense
Interest expense decreased by $0.2 million in 2017 because of lower interest expense on our capital financing arrangements.
Provision for Income Taxes
Provision for income tax was a benefit in 2017 compared to an expense in 2016, primarily due to the benefits obtained from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). Our initial analysis of the impact of this Tax Act resulted in a provisional federal discrete tax benefit of $1.6 million in 2017. The tax benefit is primarily driven by the corporate rate reduction and reassessment
of the realizability of our deferred tax assets and liabilities. Since the Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the deferred tax re-measurements, realizability of net deferred tax assets/liabilities, and transition tax to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”). This benefit was partially offset by an increase in sales to foreign customers subject to withholding taxes.
On December 22, 2017, this Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a
corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We are
35
required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities.
SAB 118 provides guidance on accounting for the tax effects of the Tax
Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. However, in accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
At the beginning of 2017,
we adopted Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which resulted in the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital. Given our current valuation allowance position in the United States jurisdiction, the adoption of this guidance did not have a material impact on our consolidated financial statements.
Total
Revenue. The increase in total revenue for 2016 compared to 2015 was due to continued SaaS revenue growth. In general, increased revenues primarily reflect volume-driven increases in revenue from new business, which includes new customers, upgrades and additional subscriptions from existing customers.
Recurring Revenue. Recurring revenue consists of SaaS revenue and maintenance revenue. SaaS revenue increased to $151.5 million in 2016, representing an increase of $36.0 million or 31% from 2015. The increase reflects volume-driven increases in revenue from new business, which includes new customers, upgrades and additional subscriptions from existing customers and our investment in expanding the sales force in recent years. The increase in our SaaS revenue was partially offset by the decrease in maintenance revenue to $11.1 million in 2016 from $14.4 million in 2015, as a result
of customers converting from on-premise maintenance license arrangements to cloud-based offerings.
Services and License Revenue. Services and license revenue consists of integration and configuration services ("consulting services"), training and perpetual licenses. Services revenue increased by $2.3 million in 2016 to $43.8 million due
36
to services associated with increased sales of our SaaS offerings. This increase was partially offset by a decrease of $1.3 million in license revenue as we stopped selling to new on-premise customers in early 2016.
Cost of Revenue and Gross Profit
Cost of Recurring Revenue. The increase
in cost of recurring revenue in 2016 over 2015 was driven by investing globally in our data centers which resulted in $4.5 million increase in depreciation, maintenance and equipment, by a $3.5 million increase in personnel costs and $0.4 million in travel and related expenses. We expect to continue to invest in hosting facilities to support our revenue growth and a larger and expanded customer base.
Cost of Services and License Revenue. The increase in cost of services and license revenue in 2016 over 2015 was primarily due to a $3.2 million increase in personnel costs and travel-related expenses.
Recurring Revenue Gross Profit. The improvement in our recurring revenue gross profit in 2016 over 2015 was primarily due to a $36.0 million increase in SaaS revenue, partially offset by a $3.3 million decrease in maintenance revenue, a
$4.5 million increase in depreciation, maintenance and equipment, a $3.5 million increase in personnel costs and $0.4 million increase in travel and related expenses.
Services and License Revenue Gross Profit. The decrease in our services and license gross profit in 2016 over 2015 was primarily due to a $3.2 million increase in personnel and travel related expenses and a $1.3 million decrease in license revenue partially offset by a $2.3 million increase in service revenue. In 2016, we have become more focused on our partners implementing our products and in 2017 we expect this will continue.
Operating Expenses
The table below sets forth the changes in operating expenses in 2016 from 2015 (in thousands, except percentage data):
Sales
and Marketing. The increase in sales and marketing expense in 2016 over 2015 was primarily due to $12.7 million in higher personnel-related costs, which included an increase of $3.8 million in stock-based compensation expense and an increase of $1.7 million in commissions associated with increased bookings. In addition, sales and marketing costs increased by $2.9 million due to more marketing events and programs, $1.7 million related to third party commissions and $2.5 million increase in entertainment and travel related expenses associated with increased sales personnel.
Research and Development. The increase in research and development expenses in 2016 over 2015 was due to a $4.5 million increase in personnel-related costs, which included $2.1 million in stock-based compensation expense as we continue to invest in headcount to support product development, and a $1.1 million increase
in maintenance agreement expense.
General and Administrative. The increase in general and administrative expenses in 2016 over 2015 was primarily due to a $3.9 million increase in personnel-related costs, which included $3.3 million in stock-based compensation expense, partially offset by the decrease of $0.8 million in professional services and $0.6 million in corporate expenses.
Income from Settlement and Patent Licensing. On November 25, 2013, we entered into a settlement agreement with Xactly Corporation and Xactly's President and Chief Executive Officer that, includes an agreement by Xactly to pay a $2.0 million license fee in four annual installments of $0.5 million commencing in November 2013 with the final payment in November 2016. In 2015 and 2016, we recorded $0.5 million
of offset to legal fees under operating expenses regarding this settlement.
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Restructuring and Other. Restructuring and other expenses decreased in 2016 over 2015, mainly as a result of a reduction in expenses associated with our consolidation of certain office locations.
Stock-Based Compensation
The following table summarizes our stock-based compensation expenses in 2016 and 2015 (in thousands, except percentage data).
Year
Ended December 31,
Increase
(Decrease)
Percentage
Change
2016
2015
Stock-based compensation:
Cost
of recurring revenue
$
1,639
$
1,237
$
402
32%
Cost of services
revenue
2,097
1,149
948
83%
Sales and marketing
9,244
5,488
3,756
68%
Research
and development
5,147
3,031
2,116
70%
General and administrative
10,996
7,687
3,309
43%
Total
stock-based compensation
$
29,123
$
18,592
$
10,531
57%
Total
stock-based compensation expense increased in 2016 compared to 2015, primarily due to the timing of restricted stock unit grants, an increase in our stock price and an increase in employee stock purchase plan participation in 2016.
Other Items
The table below sets forth the changes in other items in 2016 and 2015 (in thousands, except percentage data):
Year Ended
December 31,
Increase (Decrease)
Percentage Change
2016
2015
Other income (expense), net:
Interest
income and other income (expense), net
$
(122
)
$
(522
)
$
(400
)
(77)%
Interest
expense
(267
)
(180
)
87
48%
Other income (expense), net
$
(389
)
$
(702
)
$
313
45%
Provision
for income taxes
$
1,128
$
791
$
337
43%
Interest Income
and Other Income (Expense), net
The decrease in the net expense associated with "interest income and other income (expense), net" in 2016 of $0.4 million was primarily due to a reduction in foreign exchange loss and an increase in interest income from holding larger balances in short-term investments.
Interest Expense
Interest expense increased in 2016 compared to 2015 by $0.1 million because of increased interest expense on our capital financing arrangements.
Provision for Income Taxes
Provision for income tax increased in 2016 compared to 2015 was primarily attributable to higher deferred tax liabilities from acquisitions in 2016, as well as an increase in sales to foreign customers subject to withholding taxes.
Liquidity
and Capital Resources
As of December 31, 2017, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $150.5 million, and accounts receivable of $76.8 million.
In September 2016, we completed a follow-on offering in which we issued 5.1 million shares of our common stock at a public offering price of $18.25 per share and received net proceeds of $87.1 million after deducting underwriting discounts and commissions of $5.6 million and other offering expenses of $0.4 million. In October 2016, the underwriters exercised their over-allotment option and purchased an additional 0.8 million shares at the public offering price of $18.25 per share and we received
net proceeds of $13.1 million after deducting underwriting discounts and commissions of $0.8 million.
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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. During the third quarter of 2017, we terminated this credit agreement with Wells Fargo Bank. We did not have a balance outstanding when we terminated this arrangement.
During 2017, accounts receivable and deferred revenue increased significantly due to growth in SaaS revenue. We expect these trends to continue into 2018 and we expect to continue to achieve positive operating cash flows during 2018.
We believe our existing cash, cash equivalents and short-term investments and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs over the next 12 months.
The following table summarizes, for the years indicated, selected items in our consolidated statements of cash flows (in thousands):
Net
cash (used in) provided by financing activities
(11,633
)
100,799
52,593
In 2017, cash and cash equivalents decreased by approximately $72.8 million primarily due to $104.2 million of cash used
by our investing activities and $11.6 million of cash used by our financing activities, partially offset by $43.0 million of cash provided by our operating activities.
Net cash provided by operating activities was $43.0 million in 2017, which was $13.2 million higher compared to $29.8 million in 2016. In 2017, the net loss of $20.3 million included non-cash charges of $20.4 million of depreciation and amortization expense,
$33.4 million of stock-based compensation expense and $1.6 million in bad debt expense. Changes in working capital provided cash of $9.1 million, which included a $28.5 million increase in deferred revenue, a $2.8 million increase in accrued payroll and related expenses, and a $1.3 million increase in accounts payable and accrued expenses, partially offset by $19.5 million increase in accounts receivable, $2.1 million increase in prepaid expenses, and $1.9 million increase in other non-current assets.
Net cash used in
investing activities was $104.2 million in 2017, which was $45.1 million higher compared to $59.1 million in 2016. Net cash used in investing activities in 2017 included $44.8 million for the acquisitions of Learning Seat Pty LLC, OrientDB Ltd., Learning Heroes Ltd. and RevSym Inc. as well as a tax payment related to the DataHug Ltd. acquisition, net purchases of investments of $38.1 million, purchases of property and equipment of $19.5 million for our data center improvements, $1.4 million used for restricted cash and $0.5 million used for purchases of intangibles.
In 2016, we received $100.3 million in proceeds
from the public offering of our common stock. Net cash used for financing activities was $11.6 million in 2017, which is $112.4 million lower compared to $100.8 million provided by cash in 2016. Net cash used by financing activities in 2017 was due to $15.2 million payment of restricted stock units acquired to settle employee withholding tax liability and $2.4 million payment of consideration related to acquisitions, partially offset by $6.0 million of proceeds net of purchases from the issuance of common stock pursuant to exercise and release of stock awards.
Net cash provided by operating activities was $29.8 million in 2016, which was $3.3 million higher compared to $26.5 million in 2015. In 2016, the net loss of $19.0 million included non-cash charges of $14.5 million of depreciation and amortization expense, $29.1 million of stock-based compensation expense and $1.5 million in bad debt expense. Changes in working capital provided cash of $3.2 million, which included a $19.0 million increase in deferred revenue, a $5.3 million increase in accrued payroll and related expenses, partially offset by $12.4 million increase in accounts receivable, $6.1 million
39
increase in prepaid expenses, $2.3 million decrease in accounts payable and accrued expenses and $0.4 million increase in other non-current assets.
Net
cash used in investing activities was $59.1 million in 2016, which was $23.4 million higher compared to $35.7 million in 2015. Net cash used in investing activities in 2016 included net purchases of investments of $20.0 million, purchases of property and equipment of $15.6 million for our data center improvements and new facilities, $1.0 million for purchases of intangibles and $22.6 million for the acquisitions of ViewCentral LLC., Badgeville LLC., and DataHug Ltd.
Net cash provided by financing activities was $100.8 million in 2016, which was $48.2 million higher compared to $52.6 million in 2015. Net cash provided by financing activities in 2016 was due to $100.3 million in proceeds from the public offering of our common stock, $4.4 million of proceeds net of purchases from the issuance of common stock pursuant to exercise and release of stock awards, partially offset by $3.5 million restricted stock units acquired to settle
employee withholding tax liability and $0.5 million payment of consideration related to acquisitions.
Contractual Obligations and Commitments
We have the following contractual cash obligations at December 31, 2017. Contractual cash obligations that are cancellable upon notice and without significant penalties are not included in the table. During 2017, we entered into various contractual obligations, including non-cancellable operating lease obligations and unconditional purchase commitments. Future minimum lease payments under non-cancellable operating leases (with initial or remaining lease terms in excess of one year) and non-cancellable purchase commitments as of December 31, 2017 are as follows (in thousands):
Primarily
represents amounts associated with agreements that are enforceable, legally binding and specify terms, including: software purchases, data center equipment purchases and maintenance agreements. In addition, amounts include unconditional purchase agreements during the normal course of business with various vendors for future services.
(2)
We have facilities under non-cancellable operating lease agreements that expire at various dates through 2025. Our rent expense for 2017, 2016 and 2015 was $4.7 million, $3.6 million and $3.0 million, respectively.
Included
in non-current deposits and other assets in the consolidated balance sheets at December 31, 2017 is restricted cash of $1.4 million and security deposits of $0.3 million, and at December 31, 2016 security deposits $0.2 million, related to leased facilities. The restricted cash represents investments in certificates of deposit required by landlords to meet security deposits for the leased facilities.
Unrecognized Tax Benefit
As of December 31, 2017, the total gross unrecognized tax benefit before the impact of the valuation allowance was $3.7 million, including immaterial interest
and penalties. We have made an election to recognize the interest and penalties as a component of income tax expense. If recognized, the amount of the unrecognized tax benefit that would impact the tax expense is $0.4 million. It is possible that the amount of existing unrecognized tax benefits may decrease within 12 months as a result of statute of limitations lapses in some of the jurisdictions, however, an estimate of the range cannot be made.
Letter of Credit
We obtained a $1.4 million letter of credit on October 1, 2016 for our leased space in Dublin, California. The letter of credit will expire on October 1, 2018. There is no balance outstanding under this line of credit.
The letter of credit is secured by cash
collateral, which is treated as restricted cash and recorded in deposits and other non-current assets on the consolidated balance sheets. Prior to obtaining the cash collateral, we secured the letter of credit with
40
the revolver line of credit with Wells Fargo Bank that was entered into in May 2014, and was terminated during the third quarter of 2017.
Revolver Line of Credit
In May 2014, we entered into a credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under which Wells Fargo agreed to make a revolving loan ("Revolver") to us in an amount not to exceed $10.0 million, with an accordion feature that allows us to increase the maximum borrowing amount by not
less than $5.0 million and not more than $10.0 million. The Revolver matures in May 2019. Outstanding borrowings under the Revolver bear interest, at our option, at a base rate plus an applicable margin. The applicable margin ranges between 0.75% and 2.25% depending on our leverage ratio. Interest is payable every three months. In September 2014, we exercised the accordion feature and increased the maximum borrowing amount to $15.0 million.
During the third quarter of 2017, we terminated its May 2014 credit agreement with Wells Fargo Bank that provided for a revolving loan in an amount not to exceed $15.0 million. We did not have a balance outstanding when we terminated this arrangement.
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
We do not have any related party transactions to report for the period covered by this Annual Report on Form 10K.
Non-GAAP Financial Information
We believe SaaS billings and normalized SaaS billings are useful information to investors and others as a leading indicator in understanding and evaluating operating results. We believe that normalized SaaS billings provide valuable insight into the sales of our solutions and the performance of our business. We do not consider normalized SaaS billings as a substitute for revenue recognition or revenue measurement. We define SaaS
billings and normalized SaaS billings as follows:
•
SaaS billings is calculated as SaaS revenue plus the change in SaaS deferred revenue in a period.
•
Normalized SaaS billings is calculated as SaaS revenue plus the change in SaaS deferred revenue, reduced for the remaining deferred revenue acquired during the period, plus or minus effect of multiple year SaaS billings in that period.
41
The
billings calculations are as follows (in thousands, except for percentage data):
The
following table provides a reconciliation of total deferred revenue as included in the consolidated balance sheets to SaaS deferred revenue (in thousands):
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.
Interest
Rate Risk. We invest our cash in a variety of financial instruments, principally 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, 2017, the weighted average maturity of our investments was approximately eleven 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, 2017 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
$
41,124
$
34,305
$
75,429
$
75,248
Weighted
average interest rate
1.43
%
1.56
%
Foreign Currency Exchange Risk. A portion of our business originates outside the U.S. and
subjects us to fluctuations in the U.S Dollar value of revenues, expenses, and cash flows as a result of changes in foreign exchange rates. For 2017 and 2016, approximately 23% and 22%, respectively, of our total revenue was generated outside the United States. At December 31, 2017 and 2016, approximately 10% and 14%, respectively, of our total accounts receivable was denominated in foreign currency. In addition, we maintain foreign subsidiaries which have the local currency as their functional currency and we are subject to translation risk. While our exposure to foreign currency risk is concentrated primarily in British Pound Sterling, Euro, Australian Dollars and Canadian Dollars, our overall foreign exchange exposure has been minimal to date. For the years ended December
31, 2017 and 2016, we recognized losses on foreign exchange transactions of $0.1 million and $0.3 million, respectively. We expect to continue to transact a majority of our business in U.S. Dollars.
The Company has initiated a hedging program to limit the exposure of foreign currency risk resulting from the revaluation of foreign denominated assets and liabilities through the use of forward exchange contracts. For further information regarding our hedging program, refer to Note 5, Fair Value Measurements, to our consolidated financial statements.
43
Item 8. Consolidated
Financial Statements and Supplementary Data
Report
of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Callidus Software, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Callidus Software, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017 based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,
2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinion
The
Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
45
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.
Accounts
receivable, net of allowances of $1,980 and $1,536 at December 31, 2017 and 2016, respectively
i76,750
i55,464
Prepaid
and other current assets
i24,007
i18,275
Total
current assets
i251,256
i261,013
Property
and equipment, net
i57,058
i35,456
Goodwill
i96,092
i63,957
Intangible
assets, net
i36,641
i21,659
Deposits
and other assets
i6,400
i4,416
Total
assets
$
i447,447
$
i386,501
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
i3,973
$
i3,573
Accrued
payroll and related expenses
i21,079
i17,831
Accrued
expenses
i26,190
i15,126
Deferred
revenue
i133,313
i99,758
Total
current liabilities
i184,555
i136,288
Deferred
revenue, noncurrent
i506
i3,209
Deferred
income taxes, noncurrent
i2,252
i1,541
Other
liabilities
i15,175
i8,602
Total
liabilities
i202,488
i149,640
Commitments
and contingencies (Note 7)
i
i
Stockholders'
equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding
i—
i—
Common
stock, $0.001 par value; 100,000 shares authorized; 68,360 and 66,031 shares issued and 66,021 and 63,692 shares outstanding at December 31, 2017 and 2016, respectively
Adjustments
to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation expense
i11,738
i8,041
i6,011
Amortization
of intangible assets
i8,677
i6,431
i5,687
Provision
for doubtful accounts
i1,602
i1,548
i1,897
Stock-based
compensation
i33,420
i29,123
i18,592
Deferred
income taxes
(i1,660
)
i210
i26
Loss
on foreign currency from mark-to-market derivatives
i180
i23
i—
Excess
tax benefits from stock-based compensation
i—
(i59
)
(i91
)
Loss
on disposal of property and equipment
i5
i23
i10
Net
amortization on investments
i125
i170
i133
Changes
in operating assets and liabilities:
Accounts receivable
(i19,517
)
(i12,439
)
(i2,944
)
Prepaid
and other current assets
(i2,091
)
(i6,118
)
(i972
)
Other
non-current assets
(i1,877
)
(i426
)
(i549
)
Accounts
payable
i622
(i1,088
)
i1,413
Accrued
expenses and other liabilities
i707
(i1,237
)
i67
Accrued
payroll and related expenses
i2,766
i5,321
i3,459
Accrued
restructuring and other expenses
i56
i252
(i131
)
Deferred
revenue
i28,480
i18,970
i7,009
Net
cash provided by operating activities
i42,960
i29,779
i26,469
Cash
flows from investing activities:
Purchases of investments
(i80,738
)
(i37,409
)
(i24,479
)
Proceeds
from maturities of investments
i37,009
i16,715
i3,565
Proceeds
from sale of investments
i5,644
i726
i3,554
Purchases
of property and equipment
(i19,519
)
(i15,599
)
(i13,128
)
Purchases
of intangible assets
(i458
)
(i962
)
(i827
)
Acquisitions,
net of cash acquired
(i44,790
)
(i22,574
)
(i4,365
)
Change
in restricted cash
(i1,355
)
i—
i—
Net
cash used in investing activities
(i104,207
)
(i59,103
)
(i35,680
)
Cash
flows from financing activities:
Proceed from follow-on offering, net of issuance costs
i—
i100,345
i64,372
Proceeds
from issuance of common stock
i5,951
i4,384
i4,484
Restricted
stock units acquired to settle employee withholding tax liability
(i15,184
)
(i3,479
)
(i3,070
)
Excess
tax benefits from stock-based compensation
i—
i59
i91
Payment
of consideration related to acquisitions
(i2,400
)
(i510
)
(i1,802
)
Repayment
of Revolver line of credit
i—
i—
(i10,481
)
Payment
of principal under capital leases
i—
i—
(i1,001
)
Net
cash (used in) provided by financing activities
(i11,633
)
i100,799
i52,593
Effect
of exchange rates on cash and cash equivalents
i123
(i699
)
(i350
)
Net
(decrease) increase in cash and cash equivalents
(i72,757
)
i70,776
i43,032
Cash
and cash equivalents at beginning of period
i148,008
i77,232
i34,200
Cash
and cash equivalents at end of period
$
i75,251
$
i148,008
$
i77,232
Supplemental
disclosures of cash flow information:
Cash paid for interest on line of credit
$
i61
$
i68
$
i104
Cash
paid for income taxes
$
i630
$
i757
$
i542
Noncash
investing and financing activities:
Purchases of property and equipment through accounts payable and other accrued liabilities
$
i13,076
$
i7,291
$
i5,314
The
accompanying notes are an integral part of these consolidated financial statements.
50
CALLIDUS SOFTWARE INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—iThe
Company and Significant Accounting Policies
iDescription of Business
Callidus Software Inc. ("Callidus" or "CallidusCloud") is a global leader in cloud-based sales, marketing, learning and customer experience solutions. CallidusCloud enables its customers to sell more, faster with its Lead to Money suite of solutions that, among other things, identifies leads, trains personnel, implements territory and quota plans, enables sales forces, automates configuration
pricing and quoting, manages contracts, streamlines sales compensation, captures customer feedback and provides rich predictive analytics for competitive advantage.
iPrinciples of Consolidation
The consolidated financial statements include the accounts of Callidus Software Inc. and its wholly-owned subsidiaries (collectively, the "Company"),
which include wholly-owned subsidiaries in Australia, Canada, Germany, Hong Kong, India, Ireland, Japan, Malaysia, Mexico, Netherlands, New Zealand, Serbia, Singapore, and the United Kingdom. All intercompany transactions and balances have been eliminated in the consolidation.
iUse of Estimates
Preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principals ("GAAP") and the rules and regulations of
the U.S. Securities and Exchange Commission ("SEC") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, the reported amounts of revenue and expenses during the reporting period and the accompanying notes. Estimates are used for, but not limited to, the allocation of the value of purchase consideration for business acquisitions and other contingencies, allowances for doubtful accounts, the useful lives of fixed assets and intangible assets, the attainment of performance-based restricted stock units, stock-based compensation forfeiture rates, accrued liabilities and uncertain tax positions. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates such estimates and assumptions on an ongoing basis for continued reasonableness, using historical experience
and other factors, including the current economic environment. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such evaluation. Illiquid credit markets, volatile equity and foreign currency markets and fluctuations in information technology spending by prospective customers can increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ materially from those estimates. Changes in those estimates, if any, resulting from continuing changes in the economic environment, will be reflected in the consolidated financial statements in future periods.
iForeign
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) on the consolidated balance sheets. Foreign currency transaction gains and losses are included in interest income and other income (expense), net in the accompanying consolidated
statements of comprehensive loss.
iDerivative Financial Instruments
During 2017 and 2016, the Company entered into foreign currency derivative contracts with financial institutions to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The
Company uses forward currency derivative contracts to minimize the Company’s exposure to balances primarily denominated in Euros, Australian dollars, British Pound Sterling and Canadian dollars. The Company’s foreign currency derivative contracts, which are not designated as hedging instruments, are used to reduce the exchange rate risk associated primarily with cash, accounts receivable and intercompany receivables and payables. The Company’s derivative financial instruments program is not designated for trading or speculative
purposes. As of December 31, 2017 and 2016, the foreign currency derivative contracts that were not settled were recorded at fair value on the consolidated balance sheets. See Note 5, Fair Value Measurements, for a discussion regarding the valuation of the Company's derivative financial instruments.
Foreign currency derivative contracts are marked-to-market at the end of each reporting period with gains and losses recognized as other expense to offset the gains or losses resulting from the settlement or remeasurement of the underlying
51
foreign
currency denominated cash, receivables and payables. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties.
iBusiness
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 consolidated statements of comprehensive loss. See Note 2, Acquisitions, for a discussion of the Company's acquisitions during 2017 and 2016.
In addition, uncertainties in income tax and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. The Company continues to gather information and evaluate these items and records any adjustments to the preliminary estimates to goodwill when the estimates are within the measurement period. Subsequent to the measurement period, changes to these income tax uncertainties and tax related valuation allowances will affect the Company's
provision for income taxes in its consolidated statements of comprehensive loss.
The Company estimates the fair value of an indemnity holdback payable, which relates to business combinations, based on the contract value. The terms of the holdback payable include standard representations and warranties.
The Company estimates the fair value of the contingent consideration issued in business combinations using a probability-based income approach. The fair value of the Company's liability-classified contingent consideration is remeasured
at each reporting period, with any changes in the fair value recorded as income or expense. Contingent acquisition consideration payable is included in accrued liabilities on the Company's consolidated balance sheets.
iCash 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, 2017 and 2016 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, 2017 and 2016, all investment securities were designated as "available-for-sale."The Company considers available-for-sale securities that have
an original maturity date longer than three months on the date of purchase to be short-term investments, including those investments that have a maturity date of longer than one year that are highly liquid and for which the Company does not have a positive intent to hold to maturity. These securities are carried at estimated fair value based on quoted market prices or other readily available market information, with the unrealized gains and losses included in accumulated other comprehensive income (loss) on the consolidated balance sheets. 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.
iAllowance 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.
52
iBelow
is a summary of the changes in the Company's allowance for doubtful accounts for 2017, 2016 and 2015 (in thousands):
The asset balance for deferred commissions on the Company's consolidated balance sheets totaled $i14.6 million and $i11.5
million at December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016, $i12.4 million and $i9.5
million, respectively, of deferred commissions are included in prepaid and other current assets in total current assets, with the remaining amounts included in deposits and other assets in long-term assets in the consolidated balance sheets. The deferred costs mainly represent commission payments to the Company's direct sales force and third parties for on-demand subscription and maintenance agreements, which the Company amortizes as sales and marketing expense over the non-cancellable term of the contract as the related revenue is recognized. The commission payments are a direct and incremental cost of the revenue arrangements.
iProperty
and Equipment, net
Property and equipment, net is stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally two to eight years. Leasehold improvements are amortized over the lesser of the assets' estimated useful lives or the related lease terms. Expenditures for maintenance and repairs are expensed as incurred. Cost and accumulated depreciation of assets sold or retired are removed from the respective property accounts and any resulting gain or loss is reflected in the consolidated statements of comprehensive loss.
The Company capitalizes certain internal software costs. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has
reached the development stage, internal and external costs, if direct, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. Capitalized costs are recorded as part of property and equipment. Maintenance and training costs are expensed as incurred. Internal use software is amortized on a straight line basis over its estimated useful life, generally two to five years.
iGoodwill,
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 ione
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, 2017, and did not perform the second step of the goodwill impairment test.
Intangible assets with finite lives are amortized over their estimated useful lives of one to twelve years. Generally, amortization is based on the higher of a straight-line method or the pattern in which the economic benefits of the intangible asset will be consumed. There were no material impairment charges related to intangible assets in the years presented.
53
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 material impairment charges recorded during the years ended December 31, 2017, 2016 and 2015.
iDeferred
Revenue
Deferred revenue consists of invoicing and payments received in advance of revenue recognition and is recognized once 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.
iRevenue
Recognition
The Company generates revenue by providing software as a service ("SaaS") solutions through on-demand subscription and term licenses, related software maintenance associated with the Company's existing on-premise solution, and professional services. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Recurring Revenue. Recurring revenue, which includes SaaS revenue and maintenance revenue, is recognized ratably over the stated contractual period. SaaS revenue consists of subscription fees
from customers accessing the Company's cloud-based service offerings. Maintenance revenue consists of fees from customers purchasing licenses and receiving support for such on-premise solutions. The Company also recognizes SaaS and maintenance revenue associated with customers using its products in excess of contracted usage ("Overages"). Overages are primarily attributed to SaaS products and such Overages are recorded in SaaS revenue in the period incurred. Revenue related to Overages was immaterial for all years presented.
Service and License Revenue. Service and license revenue primarily consists of training, integration and configuration services. Generally, the
Company's professional services arrangements are billed on a time-and-materials basis. Time and material services are recognized as the services are rendered based on inputs to the project, such as billable hours incurred. For fixed-fee professional services arrangements, the Company recognizes revenue under the proportional performance method of accounting and estimates the proportional performance on a monthly basis, utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If the Company does not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion. Service and license revenue also includes revenue from perpetual licenses, which is recognized upon delivery of the product, using the residual method, assuming
all the other conditions for revenue recognition have been met. Revenue related to perpetual licenses was immaterial for all the years presented.
In a limited number of arrangements with non-standard acceptance criteria, the Company defers the revenue until the acceptance criteria are satisfied. Reimbursements, including those related to travel and out-of-pocket expenses, are included in services and license revenue, and an equivalent amount of reimbursable expenses is included in cost of services and license revenue.
In general, recurring revenue agreements are entered into for i12
to i36 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.
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Multiple-deliverable arrangements with on-demand subscription. For on-demand subscription agreements with multiple deliverables, the
Company evaluates each element to determine whether it represents a separate unit of accounting. The Company determines the best estimated selling price of each deliverable in an arrangement based on a selling price hierarchy of methods contained in Finance Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2009-13, "Revenue Recognition (Accounting Standards Codification (“ASC”) Topic 605)-Multiple-Deliverable Revenue Arrangements." The best estimated selling price for a deliverable is based on its vendor-specific objective evidence (“VSOE”), if available, third-party evidence (“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available. Total arrangement fees are allocated to each element using the relative selling
price method. The Company has currently established VSOE for most deliverables, except for fixed fee service arrangements and on-premise software licenses.
The Company considered all of the following factors to establish the ESP for fixed fee service arrangements when sold with its on-demand services: the weighted average actual sales prices of professional services sold on a stand-alone basis for on-demand services; average billing rates for fixed fee service agreements when sold with on-demand services, cost plus a reasonable mark-up and other factors such as gross margin objectives, pricing practices and growth strategy.
Multiple-deliverable
arrangements with on-premise license. For arrangements with multiple deliverables, including license, professional services and maintenance, the Company recognizes license revenue using the residual method of accounting pursuant to the requirements of the guidance contained in ASC 985-605, "Software Revenue Recognition." Under the residual method, revenue is recognized when VSOE for fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. If evidence of fair value cannot be established for the undelivered elements, all of the revenue is deferred until evidence of fair value can be established, or until the items for which evidence of fair value cannot be established are delivered. For maintenance and certain professional
services, the Company has established VSOE because it has a sufficient history of selling these deliverables at an established price. The Company's revenue arrangements do not include a general right of return relative to the delivered products.
Generally, for the Company's term-based licenses, if the only undelivered element is maintenance, the entire amount of revenue is recognized ratably over the maintenance period.
Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenue.
iCost
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.
iRestructuring
and Other Expenses
Restructuring and other expenses are comprised primarily of employee termination costs related to headcount reductions, costs related to properties abandoned in connection with facilities consolidation including estimated losses related to excess facilities based upon the Company's contractual obligations, net of estimated sublease income and related write-downs of leasehold improvements and impairment of intangible assets. The Company reassesses the liability for excess facilities periodically based on market conditions. Restructuring and other expense was $i1.2
million, $i0.5 million and $i0.6 million during the years 2017, 2016 and 2015, respectively.
iResearch
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.
iStock-Based Compensation
Stock-based compensation expense is measured at the
grant date based on the fair value of the award and is recognized on a straight-line basis over the requisite service period, which is generally the vesting period. Stock-based compensation expense for restricted stock units is estimated based on the closing price of the Company's common stock on the date of grant and the estimated forfeiture rate, which is based on historical forfeitures. The Company measures stock-based compensation expense for employee stock purchase plan shares using the Black-Scholes-Merton option pricing model. These
55
variables include: the expected term of the plan, taking into account projected exercises; the
Company's expected stock price volatility over the expected term of the awards; the risk-free interest rate; and expected dividends. The Company estimates forfeiture rate based on an analysis of actual forfeitures and they will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience and other factors. Changes in these variables could affect stock-based compensation expense in the future.
The Company granted performance-based restricted stock units ("PSUs") to select executives and other key employees. Vesting of the Company's PSUs is based on achievement of specified company or other goals. In 2017, the
Company granted performance-based restricted stock units with vesting contingent on successful attainment of annualized SaaS revenue growth and Non-GAAP annual operating margin targets over the three-year period from January 1, 2017 through December 31, 2019. In 2016, the Company granted PSU's with vesting contingent on attainment of pre-set quota for the EMEA region over the three-year period from January 1, 2016 through December 31, 2018. The Company also granted PSUs to its CEO with vesting contingent upon the Company's
relative total shareholder return over a three year period (2016-2018) compared to the Company's 2016 executive compensation peer group companies. In 2015, the Company granted PSUs with vesting contingent on its annualized SaaS revenue growth over the three-year period from July 1, 2015 to June 30, 2018. In 2014, the Company granted PSUs with vesting contingent on its annualized SaaS revenue growth over the three-year period from January 1, 2014 to 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. 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 are 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.
iAdvertising
Costs
The Company expenses advertising costs in the period incurred. Advertising expense was $i4.5 million, $i3.8
million, and $i2.1 million for 2017, 2016 and 2015, respectively.
iIncome
Taxes
The Company is subject to income and foreign withholding taxes in both the United States and foreign jurisdictions and the Company uses estimates in determining its provision for income taxes. This process involves estimating actual current tax assets and liabilities together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the consolidated balance sheets. Net deferred tax assets are recorded to the extent the Company believes that it is more-likely-than-not to be realized. In making such determination, all
available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. Except for the net deferred tax assets of some of the Company's foreign subsidiaries, the Company maintained a full valuation allowance against its net deferred tax assets at December 31, 2017 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 valuation allowance would increase net income in the period such determination was made.
The Company regularly reviews its tax positions and benefits to be realized. The Company recognizes tax liabilities based upon its estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax
position will not be recognized if it has less than a 50% likelihood of being sustained. The Company recognizes interest and penalties related to income tax matters as income tax expense. Interest or penalties associated with unrecognized tax benefits was immaterial for all the years presented.
iComprehensive 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) on the consolidated balance sheets.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which simplifies various aspects related to the accounting and presentation of stock-based payments. The amendments require entities to record all tax effects related to stock-
56
based
payments at settlement or expiration through the income statement and the windfall tax benefit to be recorded when it arises, subject to normal valuation allowance considerations. All tax-related cash flows resulting from the stock-based payments are required to be reported as operating activities in the statement of cash flows. Further, the amendments allow entities to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. The Company adopted this guidance on January 1, 2017 on a prospective basis. Adoption of the new standard did not have a material impact to the Company's consolidated financial statements and resulted in the recognition of excess tax benefits to the
Company's income taxes rather than paid-in capital. The Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.
iRecently Issued, But Not Yet Adopted Accounting Pronouncements
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting,
which amends the scope of modification accounting for stock-based payment arrangements, provides guidance on the types of changes to the terms or conditions of stock-based payment awards to which an entity would be required to apply modification accounting under ASC 718, Compensation- Stock Compensation. This ASU is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash, which requires that a statement of cash flows explain
the change during the period for the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for the Company's fiscal year beginning January 1, 2018. Restricted cash will be included as a component of cash, cash equivalents, and restricted cash on the Company's consolidated statement of cash flows. The inclusion of restricted cash will increase the beginning and ending balances of the consolidated statement of cash flows by $i1.4
million.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for certain cash receipts and cash payments. The amendments in this guidance are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Entities are permitted to adopt the standard early in any interim or annual period, and a retrospective application is required. While the Company continues to assess the impact of this standard, it does not expect the adoption of this ASU to have
a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. For leases with a term of 12 months
or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and provide additional information about the nature of an organization’s leasing activities. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The transition guidance also provides specific guidance for sale and leaseback transactions, build-to-suit leases and
amounts previously recognized in accordance with the business combinations guidance for leases. The updated standard is effective for the Company beginning in the first quarter of 2019. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("Topic 606"). Topic 606 also includes ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers,
which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as “Topic 606.” Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, and supersedes current revenue recognition guidance, including industry-specific guidance. Topic 606 also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts
with customers.
Topic 606 will accelerate the recognition of revenue for on-premise term software licenses and, in some cases, where so-called contingent revenue (i.e., amounts allocated to delivered items are limited to amounts that are not contingent on the provision of future services) exists.
57
iThe table below details both the current
and expected revenue recognition timing in the following areas:
Current Revenue Standard
Topic 606
Customer arrangements:
Term
software licenses
Ratable
Upfront
Software support services
Ratable
Ratable
Software-as-a-service
Ratable
Ratable
Contingent
revenue
Defer
As delivered
Revenue for the majority of the Company’s subscription services customer contracts will continue to be recognized over time because of the continuous transfer of control to the customer; however, the Company expects a decrease in accumulated deficit, primarily driven by (i) accounting
for non-cancellable multi-year contracts, and (ii) the removal of the current limitation on contingent revenue.
Also, included in the Company’s assessment of Topic 606 is the potential impact relating to the deferral of incremental commission costs and other associated fringe benefits of obtaining subscription contracts. Such costs are capitalized and amortized over the corresponding terms of the contract, under the current standard, whereas under Topic 606, they will be amortized over the associated term of economic
benefit or the related contractual renewal period, which will affect the Company’s operating margin and magnitude of the deferred costs for each reporting period. The Company has determined that the term of economic benefit of its costs to obtain customer contracts is approximately four years.
The two permitted transition methods under the new standard are the full retrospective method, under which Topic 606 would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, under which
the cumulative effect of applying Topic 606 would be recognized at the date of initial application. Topic 606 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted Topic 606 starting on January 1, 2018 and elected the modified retrospective transition approach.
The adoption of Topic 606 will impact the opening consolidated balance sheet on January 1, 2018, for contingent revenue and on-premise term software licenses, by decreasing accumulated deficit with a corresponding increase to contract
assets and a decrease in deferred revenue. In addition, the impact to commissions will result in a decrease to accumulated deficit, offset by an increase in prepaid and other current assets and deposits and other assets. The Company is currently quantifying the impact of this new standard on its consolidated financial statements.
Except for the updated accounting standards discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to the Company's consolidated financial statements.
Note 2—iAcquisitions
Learning
Seat PTY. Ltd.
On December 4, 2017, the Company acquired Learning Seat PTY. Ltd. ("Learning Seat"), a privately-held provider of adaptive training and compliance learning content. The purchase of Learning Seat enhances the Company's Litmos Learning Platform by adding nearly i500
courses. The purchase consideration was $i26.3 million in cash.
OrientDB Ltd.
On September 15, 2017, the Company acquired OrientDB Ltd. ("OrientDB"), a privately-held provider of data management platforms of Graph Data Base technology. The
purchase of OrientDB enhances the Company's Direct Selling Pro solution for the multi-level marketing industry, and other applications in the Company's Lead to Money Suite. The purchase consideration was $i9.1 million, which included $i8.0
million paid in cash, a $i1.0 million indemnity holdback to be paid one year from the date of the agreement and $i0.1
million to be paid two years from the date of the agreement.
As part of the acquisition, the Company agreed to make incentive payments to specified consultants and employees for up to an aggregate of $i1.9 million which will be treated as compensation expense and will be recognized over the term of the payments
in 2018 and 2019.
58
Learning Heroes Ltd.
On June 2, 2017, the Company acquired Learning Heroes Ltd. ("Learning Heroes"), a privately-held company that is a provider of innovative education content. The purchase of Learning Heroes enhances the Company's learning business, and accelerates its creation of high quality, engaging and impactful learning experiences. Learning Heroes creates courses that run on any Learning Management System. The purchase consideration was $i10.3
million, which included $i8.8 million in cash and i1.2
million British Pound Sterling indemnity holdback to be paid one year from the date of the agreement.
RevSym Inc.
On May 18, 2017, the Company acquired RevSym Inc. ("RevSym"), a privately-held company focused on innovative cloud-based solutions for the management of revenue. RevSym is a cloud solution that enables companies to follow the new accounting guidance for Topic 606 and IFRS 15, Revenue from Contracts with Customers. The Company purchased RevSym, a cloud solution, in order to integrate
with the Company's leading commissions, Configure Price Quote and Contract Lifecycle Management solutions, to enable customers to optimize their critical revenue and commissions processes to streamline compliance under Topic 606 and IFRS 15. The purchase consideration was $i5.5 million, which
included $i3.0 million in cash and an indemnity holdback with the first payment of $i1.0
million to be paid isix months from the date of the agreement and the remaining balance of $i1.5
million to be paid one year from the date of the agreement.
The purchase price allocation and intangible assets for the 2017 acquisitions are summarized below (dollar amounts stated in thousands):
Learning Seat (1)
OrientDB
Learning
Heroes (1)
RevSym (1)
Consolidated statement of comprehensive loss Classification: Amortization expense
(1) For these acquisitions, the values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of December 31, 2017, and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of December 31, 2017, the primary areas that are not yet finalized due to information that may become available subsequently and may result in changes in the values assigned to various assets and liabilities, include the fair values of
intangible assets, deferred revenue and deferred tax liabilities as well as assumed tax assets and liabilities.
Under the acquisition method of accounting, the Company allocated the purchase price to the identifiable assets and liabilities based on their estimated fair value at the date of acquisition. The fair value of the intangible assets at the date of acquisition require significant judgment, and were measured primarily based on inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, Fair Value Measurements.
The excess of the purchase price over the total net identifiable assets is recorded as goodwill which includes synergies expected from the expanded service capabilities and the value of the assembled workforce in accordance with generally accepted accounting principles. Except for the Revsym acquisition, where the goodwill balance is deductible for tax purposes, the goodwill balance is not deductible for tax purposes. The Company
did not record any in-process research and development intangible assets in connection with the acquisitions.
The financial results for the above acquisitions are included in the Company's consolidated financial statements from the date of acquisition through December 31, 2017.
The above acquisitions did not have a material impact on the Company's consolidated financial statements and therefore, pro forma disclosures have not been presented.
2016 Acquisitions
DataHug Ltd.
On
November 7, 2016, the Company acquired DataHug Ltd. ("DataHug"), a privately-held company and provider of SaaS predictive forecasting and sales analytics. The Company's purchase of DataHug is intended to utilize its unique, patented technology to deliver predictive analysis of sales pipelines that is easy to understand and visualize. The purchase consideration was $i13.0
million which included $i11.7 million paid in cash and a $i1.3
million indemnity holdback to be paid one year from the date of the agreement.
Badgeville Inc.
On June 24, 2016, the Company acquired certain assets of Badgeville, Inc. ("Badgeville"), a privately-held company and a leading technology provider in enterprise gamification and digital motivation. The Company's purchase of Badgeville is intended to extend digital motivation as part of the Company's Lead to Money suite. The purchase consideration was $i7.5
million in cash.
ViewCentral LLC
On April 8, 2016, the Company acquired certain assets of ViewCentral LLC ("ViewCentral"). The acquisition is intended to augment the Company's Litmos mobile learning solution with a full revenue management and e-commerce platform designed for selling and optimizing profitable training for customers. The purchase consideration was $i4.0
million in cash.
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iThe purchase price allocation and intangible assets for the 2016 acquisitions are summarized below (dollar amounts stated in thousands):
Under the acquisition method of accounting, the Company allocated the purchase price to the identifiable assets and liabilities based on their estimated fair value at the date of acquisition.i
The fair value of the intangible assets at the date of acquisition require significant judgment, and were measured primarily based on inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, Fair Value Measurements.
The excess of the purchase price over the total net identifiable assets has been recorded as goodwill which includes synergies expected from the expanded service capabilities and the value of the assembled workforce in accordance with generally accepted accounting principles. Except for DataHug, where the goodwill balance is not deductible for tax purposes, the goodwill balance is deductible for tax purposes. The Company did not record any in-process research and development intangible assets in connection with the acquisition.
The
financial results for the above acquisitions are included in the Company's consolidated financial statements from the date of acquisition through December 31, 2017.
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The above acquisitions did not have a material impact on the Company's consolidated financial statements and therefore, pro forma disclosures have not been presented.
Note 3—iGoodwill
and Intangible Assets
Goodwill
iThe changes in the carrying amount of goodwill for the fiscal years ended December 31, 2017 and 2016 are as follows (in thousands):
The net additions above include acquisition related intangibles discussed in detail in Note 2, Acquisitions.
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Amortization expense related to intangible assets was $i8.7 million, $i6.4
million, and $i5.7 million in 2017, 2016, and 2015, respectively, and was charged to cost of revenue for purchased technology, education and course content, backlog and patents and licenses; sales and marketing expense for customer contracts and related relationships; and general and administrative expense for tradenames and other. The
Company's intangible assets are amortized over their estimated useful lives of one to twelve years. iTotal future expected amortization is as follows (in thousands):
As of December 31, 2017, all marketable debt securities are classified as available-for-sale and carried at estimated fair value, which is determined based on the inputs described in Note 5, Fair Value Measurements.
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, 2017 and 2016, the Company had no short-term investments in an unrealized loss position for a duration greater than 12 months.
The components of the Company's marketable debt securities classified as available-for-sale were as follows at December 31,
2017 (in thousands):
iFor
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, 2017 (in thousands):
Contractual Maturity
Amortized
Cost
Estimated
Fair
Value
Less than 1 year
$
i41,124
$
i41,100
Between
1 and 2 years
i34,305
i34,148
Total
$
i75,429
$
i75,248
iThe
components of the Company's marketable debt securities classified as available-for-sale were as follows at December 31, 2016 (in thousands):
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, 2016 (in thousands):
Contractual Maturity
Amortized Cost
Estimated Fair
Value
Less than 1 year
$
i32,252
$
i32,262
Between
1 and 2 years
i7,015
i7,004
Total
$
i39,267
$
i39,266
The
Company had ino realized losses on sales of its investments during the years ended December 31, 2017, 2016 and 2015. In 2017 and 2016, the Company had net purchases of investments, of $i38.1
million and $i20.0 million, respectively.
The short-term investments in highly rated credit securities generally have minor to moderate fluctuations in the fair values from period to period. The Company monitors credit ratings, downgrades and significant events surrounding these securities in order to
assess whether any of the impairments will be considered other-than-temporary. The Company did not identify any securities held as of December 31, 2017 and 2016 for which the fair value declined significantly below amortized cost and were considered other-than-temporary impairments.
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.
Note 5—iFair
Value Measurements
Valuation of Investments
Level 1 and Level 2
The Company's available-for-sale securities include money market funds, U.S. Treasury bills, corporate notes and obligations, and U.S. government and agency obligations. The Company values these securities using a pricing matrix from a
64
pricing service provider, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly
or indirectly (Level 2 inputs). The Company classifies all of its available-for-sale securities, except for money market funds, as having Level 2 inputs. The Company validates the estimated fair value of certain securities from a pricing service provider on a quarterly basis. The valuation techniques used to measure the fair value of the financial instruments having Level 2 inputs, all of which have counterparties with high credit ratings, were derived from the following: non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments or pricing models, with all significant inputs derived from or corroborated by observable market data. The Company
also classifies the foreign currency derivative contracts as Level 2.
Level 3
Except for Level 3 inputs related to intangible asset valuations described in Note 2, Acquisitions, the Company had no level 3 inputs as of December 31, 2017 and 2016.
The Company did not have any transfers between Level 1, Level 2 and Level 3 fair value measurements during the years presented as there were no changes in the composition in Level 1, 2 or 3.
iThe
Company measures financial assets and liabilities at fair value on an ongoing basis. The estimated fair value of the Company's financial assets was determined using the following inputs at December 31, 2017 and 2016 (in thousands):
The
Company accounts for the derivative instruments at fair value, with changes in the fair value recorded as a component of interest income and other income (expense), net in the consolidated statements of comprehensive loss. During the year ended December 31, 2017 and 2016, such changes were immaterial.
Note 6—iBalance
Sheet Components
iProperty and equipment consisted of the following (in thousands):
Depreciation
expense for the years ended December 31, 2017, 2016 and 2015 was $i11.7 million, $i8.0
million and $i6.0 million, respectively.
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During 2017, the Company significantly improved and expanded its data processing centers and incurred equipment and software costs. The
Company entered into various financing agreements related to these purchases, with the current portion included in accrued expenses and the non-current portion included in other liabilities in the Company’s consolidated balance sheet.
Software includes the capitalization of certain internal software costs. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. Included in these capitalized costs are $i0.1
million of stock-based compensation expenses.
iTotal prepaid and other current assets consisted of the following (in thousands):
Note 7—iContractual
Obligations, Commitments and Contingencies
Contractual Obligations and Commitments
During the year ended December 31, 2017, the Company entered into various contractual obligations, long-term operating lease obligations and unconditional purchase commitments. iFuture minimum lease payments under non-cancellable
operating leases (with initial or remaining lease terms in excess of one year) and purchase commitments as of December 31, 2017 are as follows (in thousands):
67
Unconditional
Purchase
Commitments
(1)
Operating
Lease
Commitments (2)
Year Ending December 31:
2018
$
i21,591
$
i5,051
2019
i16,903
i4,691
2020
i6,012
i4,731
2021
i—
i4,450
2022
i—
i2,162
2023
and beyond
i—
i1,074
Future
minimum payments
$
i44,506
$
i22,159
(1)
Primarily
represents amounts associated with agreements that are enforceable, legally binding and specify terms, including: software purchases, data center equipment purchases and maintenance agreements. In addition, amounts include unconditional purchase agreements during the normal course of business with various vendors for future services.
(2)
The Company has facilities under several non-cancellable operating lease agreements that expire at various dates through 2025. The Company's rent expense for the years ended December 31,
2017, 2016 and 2015 was $i4.7 million, $i3.6 million and $i3.0
million, respectively.
Contractual cash obligations that are cancellable upon notice and without significant penalties are not included in the table above.
Included in non-current deposits and other assets in the consolidated balance sheets at December 31, 2017 is restricted cash of $i1.4
million and security deposits of $i0.3 million, and at December 31, 2016 security deposits of $i0.2
million, related to leased facilities. The restricted cash represents investments in certificates of deposit required by landlords to meet security deposit requirements for the leased facilities.
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, California94568 ("Subleased Premises"). The term of the Sublease commenced in February 2015, when the Sublandlord
delivered possession of the Subleased Premises to the Company, and expires on May 15, 2022. In July 2016, the Company entered into an amended coterminous agreement to include additional office space, in the building.
Unrecognized Tax Benefit
As of December 31, 2017, the total gross unrecognized tax benefit before the impact of the valuation allowance was $i3.7
million, including immaterial interest and penalties. The Company has made an election to recognize the interest and penalties as a component of income tax expense. If recognized, the amount of the unrecognized tax benefit that would impact the tax expense is $i0.4 million. It is possible that the amount of existing unrecognized tax benefits may decrease within 12 months
as a result of statute of limitations lapses in some of the jurisdictions, however, an estimate of the range cannot be made.
Revolver Line of Credit
During the third quarter of 2017, the Company terminated its May 2014 credit agreement with Wells Fargo Bank that provided for a revolving loan in an amount not to exceed $i15.0
million. The Company did not have a balance outstanding when it terminated this arrangement.
Letter of Credit
The Company obtained a $i1.4
million letter of credit in October 2016 for its leased space in Dublin, California. The letter of credit will expire on October 1, 2018. As of December 31, 2017, there was ino balance outstanding under this line of credit.
The letter of credit is secured by cash collateral,
which is treated as restricted cash and recorded in deposits and other non-current assets on the balance sheet. Prior to obtaining the cash collateral, the Company secured the letter of credit with the revolver line of credit with Wells Fargo Bank that was entered into in May 2014, and was terminated during the third quarter of 2017.
68
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 $i4.5 million in nine equal quarterly installments, commencing on January 31, 2015. The fair value of these payments was $i4.3
million, of which the Company recognized a charge to earnings for $i2.9 million in 2014 and capitalized $i1.4
million for the value of the patent license. The $i1.4 million will be amortized to expense over the average life span of the associated patents of approximately i9.5
years. The difference between the installment payment and the fair value will be charged to interest as incurred.
Callidus Software Inc. v. Xactly Corporation - Settled
On August 31, 2012, the Company filed suit against Xactly Corporation (“Xactly”) in the United States District Court for the Central District of California. The suit alleged that Xactly infringed U.S. Patents 8,046,387 and 7,774,378. On October 24, 2012, the Company amended its complaint to add Xactly's President and Chief Executive Officer as a defendant and to add claims
for trademark infringement, false advertising, false and misleading advertising, trade libel, defamation, intentional interference with prospective economic advantage, intentional interference with contractual relations, breach of contract and unfair competition, in addition to patent infringement. On January 28, 2013, the Company further amended its complaint to allege that Xactly also infringed U.S. Patent 6,473,748 and dismissed its intentional interference with contractual relations
69
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 $i2.0 million in license fee, which will be paid in four equal annual installments of $i0.5
million beginning November 2013 and with the final payment in November 2016.
Other matters
In addition to the above litigation matters, the Company from time to time is a party to other various litigation and customer disputes incidental to the conduct of its business. At the present time, the Company believes that none of these matters are likely to have a material adverse effect on the Company's future financial results.
The Company records a liability when it is
both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews the need for any such liability on a quarterly basis and records any necessary adjustments to reflect the effect of ongoing negotiations, contract disputes, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case in the period they become known. At December 31, 2017, the Company has not recorded any such liabilities in accordance with accounting for contingencies. However, litigation is subject to inherent uncertainties and the
Company's view on these matters may change in the future.
Note 8—iNet 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 the exercise of outstanding common stock options, the release of restricted stock, and purchases of shares under the ESPP to the extent these shares are dilutive. For the years 2017, 2016 and 2015, 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.
iDiluted 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):
The
weighted average exercise price of stock options excluded for 2017, 2016 and 2015 was $i6.74, $i6.66
and $i6.21, respectively.
Note 9—iStock-Based
Compensation
Stockholder-Approved Stock Option and Incentive Plans
In June 2013, the 2013 Stock Incentive Plan ("2013 Plan") became effective upon the approval of the Company's Board of Directors and stockholders. The Company initially reserved i3,469,500
shares of common stock for issuance under the 2013 Plan, in 2015, the Company reserved an additional i5,000,000 and, in 2017, the Company reserved an additional i4,700,000
shares of common stock for issuance under the 2013 Plan. Under the 2013 Plan, the Company's Board of Directors (or an authorized subcommittee) may grant stock options or other types of stock awards, such as restricted stock, performance-based restricted stock units ("PSU"), restricted stock units ("RSU"), stock bonus awards or stock appreciation rights. Incentive stock options may be granted only to the Company's employees. Nonstatutory stock options and other stock-based awards may be granted to employees, consultants or non-employee directors. These options vest as determined by the Board of Directors (or an authorized subcommittee), generally over ifour
years. No stock options were granted in 2017, 2016 and 2015. The restricted stock units and performance-based restricted stock units also vest as determined by the board, generally over ithree years.
70
Shares
Available for Grant
iA summary of the Company's shares available for grant are as follows:
Stock-based compensation expenses of $i33.4 million, $i29.1
million and $i18.6 million was recorded during 2017, 2016 and 2015, in the consolidated statements of comprehensive loss. iThe
table below sets forth a summary of stock-based compensation expense as follows (in thousands).
In
2017, the Company capitalized $i0.1 million of share-based compensation expense to capitalized software as discussed in the property and equipment section of Note 6, Balance Sheet Components.
Determination of Fair Value
The fair value of service-based awards is estimated based on the market
value of the Company’s stock on the date of grant. A portion of the PSU's granted during 2016 are based on relative total shareholder 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.
71
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 2017, 2016 and 2015. iThe
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.
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.
Expected Volatility—Expected volatility is based on the historical volatility over the expected term.
Restricted Stock Units and Performance-based Restricted Stock Units
As of December 31, 2017, the Company had $i30.9
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 i1.77 years, and $i5.4
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 i1.30 years.
iRestricted
stock units 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)
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 2017, the Company granted performance-based restricted stock units with vesting contingent on successful attainment of annualized SaaS revenue growth and Non-GAAP annual operating margin targets over the three-year period from January 1, 2017 through December 31, 2019. During 2017, expense of $i1.8
million, net of forfeiture, was recognized.
In 2016, the Company granted performance-based restricted stock units with vesting contingent on attainment of pre-set quota for the EMEA region over the three-year period from January 1, 2016 through December 31, 2018 and performance-based restricted stock units with vesting contingent upon the Company's relative total shareholder return over the same three-year period compared to the Company's 2016 executive compensation peer group companies. During 2017
and 2016, $i0.1 million and $i0.4
million, respectively of expense, net of forfeiture, was recognized.
In 2015, the Company granted performance-based restricted stock units with vesting contingent on successful attainment of annualized SaaS revenue growth 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 2017, 2016, and 2015, $i3.8
million, $i3.1 million, and $i0.7
million respectively of expense, net of forfeiture, was recognized.
In 2014, the Company granted performance-based restricted stock units with vesting contingent on annualized 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 2017, expense of $i0.3
million, net of forfeiture was recognized. There was no expenses recorded in the second, third and fourth quarter of 2017. And in 2016 and 2015, $i3.0 million and $i2.8
million, respectively of expense, net of forfeiture, was recognized.
Stock Options
As of December 31, 2017, the Company had no unrecognized compensation expense. No stock options were granted during the years ended December 31, 2017, 2016 and 2015. The total intrinsic value of stock options exercised was $i4.3 million,
$i2.2 million and $i4.9
million for 2017, 2016 and 2015, respectively. The total cash received from employees as a result of stock option exercises was $i1.6 million, $i1.3
million, and $i2.0 million for 2017, 2016 and 2015, respectively.
iAs
of December 31, 2017, the range of exercise prices and weighted average remaining contractual life of outstanding options are as follows:
Options Outstanding
Options
Exercisable
Range of Exercise Prices
Number of
Shares
Weighted Average Remaining
Contractual Life
(Years)
Weighted Average
Exercise Price
Number of
Shares
Weighted
Average
Exercise
Price
$4.31 - $4.31
i4,688
i5.33
$
i4.31
i4,688
$
i4.31
$5.27
- $5.27
i15,000
i4.43
i5.27
i15,000
i5.27
$6.01
- $6.01
i4,000
i0.24
i6.01
i4,000
i6.01
$6.25
- $6.25
i15,000
i5.43
i6.25
i15,000
i6.25
$6.59
- $6.59
i13,130
i5.49
i6.59
i13,130
i6.59
$6.67
- $6.67
i40,000
i5.58
i6.67
i40,000
i6.67
$7.69
- $7.69
i88,056
i5.66
i7.69
i88,056
i7.69
$10.35
- $10.35
i3,000
i5.83
i10.35
i3,000
i10.35
$4.31
- $10.35
i182,874
i5.39
$
i6.99
i182,874
$
i6.99
Employee
Stock Purchase Plan
The Company's ESPP, which was adopted in 2003 and amended and restated in 2013, qualifies as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. The ESPP is designed to enable eligible employees to purchase shares of the Company's common stock at a discount on a periodic basis through payroll deductions. Each offering period under the ESPP covers i12
months and consists of itwo consecutive six-month purchase periods. The purchase price for shares of common stock purchased under the ESPP is i85%
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 i308,000,
i277,000 and i256,000
shares under the ESPP during the years ended December 31, 2017, 2016 and 2015, respectively. The weighted-average fair value of stock purchase rights granted under the ESPP during 2017, 2016 and 2015 was $i6.52,
$i4.54 and $i4.61
per share respectively.
As of December 31, 2017, the Company had $i0.4 million
of unrecognized compensation expense related to ESPP subscriptions that will be recognized over i0.3 years.
In September 2016, the Company completed a follow-on offering in which the Company issued i5.1
million shares of its common stock at a public offering price of $i18.25 per share. The Company received net proceeds of $i87.1
million after deducting underwriting discounts and commissions of $i5.6 million and other offering expenses of $i0.4 million.
In October 2016, the Company received an additional $i13.1 million, after deducting underwriting discounts and commissions of $i0.8
million, related to the underwriters' purchase of an additional i0.8 million shares at the public offering price of $i18.25
per share.
74
Note 11—iIncome Taxes
iThe
following is a geographical breakdown of consolidated income (loss) before income taxes by income tax jurisdiction (in thousands):
Provision
for income tax was a benefit in 2017 compared to an expense in 2016 which was primarily due to the benefits obtained from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) in which the Company's initial analysis of the impact of this Tax Act resulted in a provisional federal discrete tax benefit of $i1.6 million
in the period ending December 31, 2017. The tax benefit is primarily driven by the corporate rate reduction and the reassessment of the realizability of our deferred tax assets and liabilities. Since the Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the deferred tax re-measurements, realizability of net deferred tax assets/liabilities, and transition tax to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”). This benefit was offset by an increase in sales to foreign customers subject to withholding
taxes.
On December 22, 2017, this Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax
assets and liabilities.
SAB 118 provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. However, in accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment
of the Tax Act.
75
iThe provision for income taxes differs from the expected tax benefit computed by applying the statutory federal income tax rates to consolidated loss before income taxes as follows (in thousands):
Tax
benefit due to the reduction of valuation allowance
i12,698
i5,476
i4,423
Research
and experimentation credit
(i726
)
(i637
)
(i451
)
Impact
of tax reform on goodwill deferred tax liabilities
(i1,559
)
i—
i—
Provision
for income taxes
$
(i220
)
$
i1,128
$
i791
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.
iDeferred tax accounts consist of the following (in thousands):
Total
deferred tax assets, net of valuation allowance
i1,973
i550
Deferred
tax liabilities:
Property and equipment and intangibles
(i2,697
)
(i1,479
)
Goodwill
(i1,303
)
(i574
)
Gross
deferred tax liabilities
(i4,000
)
(i2,053
)
Net
deferred tax liabilities
$
(i2,027
)
$
(i1,503
)
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, 2017 and 2016, a valuation allowance has been recorded on all deferred tax assets, except the deferred tax assets related
to some of its foreign subsidiaries, based on the analysis of profitability for those subsidiaries.
The net decrease in the valuation allowance for 2017 was $i9.1 million, mainly due to the release of the valuation allowance because of the Tax Act driven by the rate reduction
and the reassessment of the realizability of the Company's deferred assets and liabilities. In 2016, the valuation allowance increased by $i5.1 million.
As of December 31, 2017, the Company had net operating loss carryforwards for
federal and California income tax purposes of $i221.3 million and $i43.0
million, respectively, available to reduce future income subject to income taxes. The
76
federal net operating loss carryforwards, if not utilized, will expire over i20 years beginning in 2018. The California net operating loss carryforward, began to expire in 2018.
The
Company also has research credit carryforwards for federal and California income tax purposes of approximately $i10.6 million and $i11.8
million, respectively, available to reduce future income taxes. The federal research credit carryforward, if not utilized, will expire over i20 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 because such earnings are intended to be indefinitely reinvested. The residual U.S. tax liability, if such amounts were remitted, would be nominal.
iThe
activity related to the Company's unrecognized tax benefits is set forth below (in thousands):
Reductions
to unrecognized tax benefits as a result of a lapse of applicable statute of limitations
(i51
)
(i28
)
(i4
)
Ending
balance (1) (2)
$
i3,736
$
i3,467
$
i3,213
(1)
2017 ending balance consists of $i3.4 million of the unrecognized tax benefits which reduced deferred tax assets, and $i0.3
million was included in other liabilities on the consolidated balance sheets.
(2) 2016 ending balance consists of $i3.1 million of the unrecognized tax benefits which reduced deferred tax assets, and $i0.4
million was included in other liabilities on the consolidated balance sheets.
If recognized, $i0.4 million of the unrecognized tax benefits at December 31, 2017 would reduce the Company's annual effective tax rate. The
Company also accrued an immaterial amount of potential penalties and interest related to these unrecognized tax benefits during 2017, and in total, as of December 31, 2017, the Company recorded a liability for potential penalties and interest of $i0.1 million. The Company recognized interest and penalties
related to unrecognized tax benefits within the provision for income tax (benefit) expense line in the consolidated statement of comprehensive loss. Accrued interest and penalties are included in the other non-current liability line on the consolidated balance sheets. The Company classified the unrecognized tax benefits as a non-current liability on the consolidated balance sheets, as it does not expect any payment of incremental taxes over the next 12 months. The Company also does not expect its unrecognized tax benefits to change significantly over the next 12 months.
The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying
statutes of limitations. All tax years generally remain subject to examination by federal and most state tax authorities. In foreign jurisdictions, the 2009 through 2017 tax years generally remain subject to examination by their respective tax authorities.
Note 12—iEmployee 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. In 2017, the Company matched i50% of each dollar that a participating employee contributed to their 401(k) Plan, up to a maximum of $i2,000
annually. In 2016, the Company matched i50% of each dollar that a participating employee contributed to their 401(k) Plan, up to a maximum of $i1,000
annually. The vesting of the Company's 2016 contributions to a participating employee’s 401(k) Plan is based on the participating employee's years of service and in 2017 the contributions vest immediately. During the years ended December 31, 2017 and 2016, the Company recognized approximately $i1.4
million and $i0.6 million, respectively, in expense related to the 401(k) Plan match.
77
Note 13—iSegment,
Geographic and Customer Information
The Company operates as ione operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who in the Company's case is the chief executive officer, in deciding how
to allocate resources and assess performance. The Company's chief executive officer ("CEO") is considered to be the chief operating decision maker. The CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. By this definition, the Company operates in one business segment, which is the development, marketing and sale of the Company's cloud-based sales, marketing, learning and customer experience solutions.
iThe
following table summarizes revenue by geographic areas (in thousands):
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, 2017 and 2016.
As of December 31, 2017, the Company's goodwill balance was $i96.1
million, of which $i44.0 million was located in the U.K., Ireland (EMEA) and Australia (Asia Pacific) and the Company's intangible asset balance of $i36.6
million, of which $i25.5 million was located in the U.K., Ireland (EMEA) and Australia (Asia Pacific). No other individual country outside the U.S. accounted for more than 10% of goodwill and intangible asset balance as of December 31, 2017.
The
Company's customer base consists of businesses throughout the United States and Canada, EMEA, Asia Pacific, Latin America, Middle East and Africa. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. As of December 31, 2017 and 2016, the Company had no customers comprising greater than 10% of net accounts receivable. Further, in 2017, 2016 and 2015, ino
single customer accounted for more than 10% of the Company's total revenue.
Note 14 - iSubsequent Event
On January 29, 2018, the Company announced
that it had entered into an agreement and plan of merger (the "Merger Agreement") with SAP America Inc. ("SAP") and Emerson One Acquisition Corp., pursuant to which SAP will acquire the Company. The Company's board of directors has unanimously approved the transaction. The transaction is expected to close in the second quarter of 2018, subject to adoption of the Merger Agreement by holders of a majority of the Company's outstanding common stock entitled to vote thereon, clearances by the relevant regulatory authorities, and other customary closing conditions.
78
Supplementary
Data (unaudited)
The following tables set forth unaudited supplementary quarterly financial data for 2016 and 2017. 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.
Weighted
average common shares (basic and diluted)
56,690
57,098
58,009
63,663
58,852
79
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, 2017. 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, 2017, 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.
(c) Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of 2017 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 herein from the Proxy Statement for our 2018 annual meeting of stockholders or an amendment to this Form 10-K.
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.
+ Management contract or compensatory plan or arrangement
82
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 28, 2018.
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.
