Callidus Software 10Q 2010 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2010


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

For the transition period from to .

Commission file number: 000-50463

Callidus Software Inc.

(Exact name of registrant as specified in its charter)


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

Callidus Software Inc.
160 West Santa Clara Street, Suite 1300
San Jose, CA 95113
(Address of principal executive offices, including zip code)
(408) 808-6400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

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). Yeso Noo

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


Large accelerated filero		Accelerated filerþ		Non-accelerated filero (Do not check if a smaller reporting company)		Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

There were 31,175,576 shares of the registrant’s common stock, par value $0.001, outstanding on April 30, 2010, the latest practicable date prior to the filing of this report.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			34

PART II. OTHER INFORMATION
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 6. Exhibits			36
Signatures			37
Exhibit Index			38
EX-10.25
EX-31.1
EX-32.1

© 1998-2010 Callidus Software Inc. All rights reserved. Callidus Software, the Callidus Software logo, and TrueComp Manager are trademarks, servicemarks, or registered trademarks of Callidus Software Inc. in the United States and other countries. All other brand, service or product names are trademarks or registered trademarks of their respective companies or owners.

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)


	March 31,			December 31,
	2010			2009
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	11,340		$	11,565
Short-term investments		17,773			21,985
Accounts receivable, net of allowances of $414 in 2010 and $963 in 2009		15,647			12,715
Deferred income taxes		170			170
Prepaid and other current assets		3,799			3,872

Total current assets		48,729			50,307
Long-term investments		1,116			1,142
Property and equipment, net		4,222			4,355
Goodwill		8,054			5,528
Intangible assets, net		3,659			2,993
Deferred income taxes, noncurrent		1,255			1,255
Deposits and other assets		1,280			679

Total assets	$	68,315		$	66,259


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,265		$	3,407
Accrued payroll and related expenses		3,569			3,929
Accrued expenses		5,366			3,219
Deferred income taxes		1,229			1,229
Deferred revenue		23,768			21,440

Total current liabilities		36,197			33,224
Long-term deferred revenue		3,577			668
Other liabilities		848			1,136

Total liabilities		40,622			35,028


Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 31,159 and 30,561 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively		30			30
Additional paid-in capital		214,861			212,435
Acquisition contingent consideration		77			—
Accumulated other comprehensive income		154			244
Accumulated deficit		(187,429	)		(181,478	)

Total stockholders’ equity		27,693			31,231

Total liabilities and stockholders’ equity	$	68,315		$	66,259

See accompanying notes to unaudited condensed consolidated financial statements.

CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)


	Three Months Ended
	March 31,
	2010			2009
	(Unaudited)
Revenues:
Recurring	$	12,287		$	11,697
Services		3,645			11,202
License		229			3,001

Total revenues		16,161			25,900
Cost of revenues:
Recurring		6,414			5,785
Services		4,412			9,309
License		110			191

Total cost of revenues		10,936			15,285

Gross profit		5,225			10,615


Operating expenses:
Sales and marketing		4,645			5,862
Research and development		3,138			3,801
General and administrative		3,232			3,567
Restructuring		719			166

Total operating expenses		11,734			13,396


Operating loss		(6,509	)		(2,781	)
Interest and other income, net		7			29


Loss before provision (benefit) for income taxes		(6,502	)		(2,752	)
Provision (benefit) for income taxes		(551	)		58


Net loss	$	(5,951	)	$	(2,810	)


Net loss per share — basic and diluted
Net loss per share	$	(0.19	)	$	(0.10	)


Shares used in basic and diluted per share computation		30,963			29,549

See accompanying notes to unaudited condensed consolidated financial statements.

CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


	Three Months Ended
	2010			2009
	(unaudited)
Cash flows from operating activities:
Net loss	$	(5,951	)	$	(2,810	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		549			703
Amortization of intangible assets		869			435
Provision for doubtful accounts and service remediation reserves		(148	)		40
Stock-based compensation		1,277			977
Stock-based compensation related to acquisition contingent consideration		77			—
Revaluation of acquisition contingent consideration		22			—
Release of valuation allowance		(614	)		—
Net amortization on investments		47			2
Put option loss		33			93
Gain on investments classified as trading securities		(41	)		(123	)
Changes in operating assets and liabilities:
Accounts receivable		(1,768	)		(1,426	)
Prepaid and other current assets		37			642
Other assets		(607	)		70
Accounts payable		(1,133	)		955
Accrued expenses		743			(1,730	)
Accrued payroll and related expenses		(329	)		(1,461	)
Accrued restructuring		(133	)		—
Deferred revenue		5,104			1,410
Deferred income taxes		51			33

Net cash used in operating activities		(1,915	)		(2,190	)


Cash flows from investing activities:
Purchases of investments		(2,474	)		(10,760	)
Proceeds from maturities and sale of investments		6,700			—
Purchases of property and equipment		(356	)		(624	)
Purchases of intangible assets		(240	)		(100	)
Acquisition, net of cash acquired		(1,649	)		(14	)

Net cash provided by (used in) investing activities		1,981			(11,498	)


Cash flows from financing activities:
Net proceeds from issuance of common stock		762			990
Repurchases of stock		—			(742	)
Repurchase of common stock from employees for payment of taxes on vesting of restricted stock units		(75	)		(259	)
Repayment of debt assumed through acquisition		(899	)		—

Net cash used in financing activities		(212	)		(11	)

Effect of exchange rates on cash and cash equivalents		(79	)		5

Net decrease in cash and cash equivalents		(225	)		(13,694	)
Cash and cash equivalents at beginning of quarter		11,565			35,390

Cash and cash equivalents at end of quarter	$	11,340		$	21,696

See accompanying notes to unaudited condensed consolidated financial statements.

CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


	Three Months Ended
	2010			2009
	(unaudited)
Non-cash activities:
Fair value of common shares issued in connection with acquisition	$	453		$	—


Fair value of liability-classified contingent consideration and additional purchase price for net working capital adjustment	$	787		$	—

Purchases of property and equipment not paid as of quarter end	$	1,036		$	407

Purchases of intangible assets not paid as of quarter end	$	443		$	406

Deferred direct stock-based compensation costs	$	(2	)	$	(1	)

CALLIDUS SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements included in the Callidus Software Inc. Annual Report on Form 10-K for the year ended December 31, 2009. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations regarding interim financial statements. All amounts included herein related to the condensed consolidated financial statements as of March 31, 2010 and the three months ended March 31, 2010 are unaudited and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

In the opinion of management, the accompanying condensed consolidated financial statements include all necessary adjustments for the fair presentation of the Company’s financial position, results of operations and cash flows. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the full fiscal year ending December 31, 2010.

Principles of Consolidation

The condensed 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, Singapore and the United Kingdom. All intercompany transactions and balances have been eliminated upon consolidation.

Certain Risks and Uncertainties

The Company’s products and services are concentrated in the software industry, which is characterized by rapid technological advances and changes in customer requirements. A critical success factor is management’s ability to anticipate or to respond quickly and adequately to technological developments in its industry and changes in customer requirements. Any significant delays in the development or introduction of products or services could have a material adverse effect on the Company’s business and operating results.

Historically, a substantial portion of the Company’s revenues have been derived from sales of its products and services to customers in the financial and insurance industries. The substantial disruptions in these industries under the current economy may result in these customers deferring or cancelling future planned expenditures on the Company’s products and services. The Company is also subject to fluctuations in sales for the TrueComp product, and its revenues are typically dependent on a small volume of transactions. Continued macroeconomic weakness may keep potential customers from purchasing the Company’s products.

Use of Estimates

Preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, the reported amounts of revenues 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, uncertain tax liabilities, valuation of certain investments, allowances for doubtful accounts and service remediation reserves, the useful lives of fixed assets and intangible assets, goodwill and intangible asset impairment charges, accrued liabilities and other contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates such estimates and assumptions on an ongoing basis using historical experience and considers other factors, including the current economic environment, for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such evaluation. 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 financial statements in future periods.

Foreign Currency Translation

The functional currencies of the Company’s foreign subsidiaries are their respective local currencies. 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. Foreign currency transaction gains and losses are included in interest and other income, net in the accompanying consolidated statements of operations.

Fair Value of Financial Instruments and Concentrations of Credit Risk

The fair value of some of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate their respective carrying value due to their short maturity. See Note 5 — Financial Instruments for discussion regarding the valuation of the Company’s financial instruments for which the fair value does not approximate the carrying value. Financial instruments that potentially subject the Company to concentrations of credit risk are short-term investments, long-term investments and trade receivables. The Company mitigates concentration of risk by monitoring ratings, credit spreads and potential downgrades for all bank counterparties on at least a quarterly basis. Based on the Company’s ongoing assessment of counterparty risk, the Company will adjust its exposure to various counterparties.

Generally, credit risk with respect to accounts receivable is diversified due to the number of entities comprising the Company’s customer base and their dispersion across different geographic locations throughout the world. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. As of March 31, 2010, the Company had one customer comprising greater than 10% of net accounts receivable. As of December 31, 2009, the Company had no customers comprising greater than 10% of net accounts receivable.

Restricted Cash

Included in prepaid and other current assets and deposits and other assets in the consolidated balance sheets at March 31, 2010 and December 31, 2009 is restricted cash totaling $232,000, related to security deposits on leased facilities for our New York, New York and San Jose, California offices. The restricted cash represents investments in certificates of deposit required by landlords to meet security deposit requirements for the leased facilities. Restricted cash is included in prepaid and other current assets and deposits and other assets based on the contractual term for the release of the restriction.

Revenue Recognition

The Company generates revenues by providing its software applications as a service through its on-demand subscription and time-based term license offering and providing related professional services to its customers, as well as by licensing software on a perpetual basis and providing related software support. The Company presents revenue net of sales taxes and any similar assessments.

The Company recognizes revenues in accordance with accounting standards for software and service companies. The Company will not recognize revenue until persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is deemed probable. The Company evaluates each of these criteria as follows:

Evidence of an Arrangement.The Company considers a non-cancelable agreement signed by it and the customer to be evidence of an arrangement.

Delivery.In on-demand arrangements, the Company considers delivery to have occurred as the service is provided to the customer, and they have access to the hosting environment. In both perpetual and time-based term licensing arrangements, the Company considers delivery to have occurred when the customer either (a) takes possession of the software via a download (that is, when the customer takes possession of the electronic data on its hardware), or (b) has been provided with access codes that allow the customer to take immediate possession of the software on its hardware pursuant to an agreement or purchase order for the software, or in the case of physical delivery, media containing the licensed programs is provided to a common carrier. The Company’s typical end-user license agreement does not include customer acceptance provisions.

Fixed or Determinable Fee.The Company considers the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within its standard payment terms. The Company considers payment terms greater than 90 days to be beyond its customary payment terms. If the fee is not fixed or determinable, the Company recognizes the revenue as amounts become due and payable.

In perpetual licensing arrangements where the customer is obligated to pay at least 90% of the license amount within normal payment terms and the remaining 10% is to be paid within a year from the contract effective date, the Company will recognize the license revenue for the entire arrangement upon delivery assuming all other revenue recognition criteria have been met. This policy is effective as long as the Company continues to maintain a history of providing similar terms to customers and collecting from those customers without providing any contractual concessions.

Collection is Deemed Probable.The Company conducts a credit review for all significant transactions at the time of the arrangement to determine the creditworthiness of the customer. Collection is deemed probable if the Company expects that the customer will be able to pay amounts under the arrangement as payments become due. If the Company determines that collection is not probable, the Company defers the recognition of revenue until cash collection.

Recurring Revenue

Recurring revenues include on-demand revenues, time-based term license revenues and maintenance revenues. On-demand revenues are principally derived from technical operation fees earned through the Company’s services offering of the on-demand TrueComp suite, as well as revenues generated from business operations services. Time-based term license revenues are derived from fees earned through the licensing of our software bundled with maintenance for a specified period of time. Maintenance revenues are derived from maintaining, supporting and providing periodic updates for the Company’s licensed software. Customers that own perpetual licenses can receive the benefits of upgrades, updates, and support from either subscribing to the Company’s on-demand services or maintenance services.

On-Demand Revenue.In arrangements where the Company provides its software applications as a service, the Company has considered accounting guidance for arrangements that include the right to use software stored on another entity’s hardware and non-software deliverables in an arrangement containing more-than-incidental software, and has concluded that these transactions are considered service arrangements and fall outside of the scope of software revenue recognition guidance. Accordingly, the Company follows the provisions of SEC Staff Accounting Bulletin No. 104,Revenue Recognition,and accounting guidance for revenue arrangements with multiple deliverables. Customers will typically prepay for the Company’s on-demand services, which amounts the Company defers and recognizes ratably over the non-cancelable term of the customer contract. In addition to the on-demand services, these arrangements may also include implementation and configuration services, which are billed on a time-and-materials basis. In determining whether the consulting services can be accounted for separately from on-demand revenues, the Company considers the following factors for each consulting agreement: availability of the consulting services from other vendors; whether objective and reliable evidence of fair value exists for the undelivered elements; the nature of the consulting services; the timing of when the consulting contract is signed in comparison to the on-demand service contract and the contractual dependence of the consulting work on the on-demand service.

For all of the arrangements where the elements qualify for separate units of accounting, the on-demand revenues are recognized ratably over the non-cancelable contract term, which is typically 12 to 24 months, beginning on the date the on-demand services begin to be performed. Implementation and configuration services, when sold with the on-demand offering, are recognized as the services are rendered for time-and-

materials contracts. The majority of our implementation and configuration services for on-demand arrangements are accounted for in this manner. If implementation and configuration services associated with an on-demand arrangement do not qualify as a separate unit of accounting, the Company will recognize the revenue from implementation and configuration services ratably over the remaining non-cancelable term of the subscription contract once the implementation is complete. For arrangements with multiple deliverables, the Company allocates the total contractual arrangement to the separate units of accounting based on their relative fair values, as determined by the fair value of the undelivered and delivered items.

In addition, the Company will defer the direct costs of the implementation and configuration services and amortize those costs over the same time period as the related revenue is recognized. The deferred costs on the Company’s consolidated balance sheets for these consulting arrangements totaled $2.1 million and $1.8 million at March 31, 2010 and December 31, 2009, respectively. As of March 31, 2010 and December 31, 2009, $1.3 million and $1.4 million, respectively, of the deferred costs are included in prepaid and other current assets, with the remaining amount included in deposits and other assets in the condensed consolidated balance sheets.

Included in the deferred costs for on-demand arrangements is the deferral of commission payments to the Company’s direct sales force, which the Company amortizes over the non-cancelable term of the contract as the related revenue is recognized. The commission payments are a direct and incremental cost of the revenue arrangements. The deferral of commission expenditures related to the Company’s on-demand offering was $1.1 million and $1.0 million at March 31, 2010 and December 31, 2009, respectively.

Time-Based Term License. The Company introduced on-premise licenses of our software as a time-based term license arrangement in the third quarter of 2009. Such arrangements typically include an initial fee, which covers the time-based term license for a specified period and the maintenance and support for the first year of the arrangement. If a customer wishes to receive maintenance after the first year, then the customer must pay the maintenance fee for each year they wish to receive maintenance.

For a Single-Year Time-based Term License that is sold with multiple elements the entire arrangement fee is recognized ratably. In these arrangements, both the time-based term licenses and the maintenance agreements have durations of one year; therefore the fair value of the bundled maintenance services is not reliably measured by reference to a maintenance renewal rate. In these situations the Company will defer all revenue until either the services or the maintenance is the only undelivered element. If the maintenance term expires before the services are completed, the entire arrangement fee would be recognized over the remaining period during which the services are completed (beginning upon expiration of the maintenance term). If services are completed before the maintenance term expires, the entire fee will be recognized ratably over the remaining maintenance period. In these arrangements the Company will defer all direct costs of the implementation and configuration services and amortize those costs over the same time period as the related revenue is recognized. Sales commissions and partner fees attributable to the sale of Time-based Term Licenses are deferred and amortized over the same period as the related revenue is recognized.

Multi-Year Time-based Term License arrangements often include multiple elements (e.g., software technology, maintenance, training, consulting and other services). The Company allocates revenue to each element of the arrangement based on vendor-specific objective evidence of each element’s fair value when the Company can demonstrate that sufficient evidence exists of the fair value for the undelivered elements. The fair value of each element in multiple element arrangements is determined based on either (i) in the case of maintenance, providing the customer with the ability during the term of the arrangement to renew maintenance at a substantive renewal rate or (ii) selling the element on a stand-alone basis.

In Multi-Year Time-based Term License arrangements that include multiple elements and for which fair value of VSOE cannot be established for the undelivered elements the entire arrangement fee is recognized ratably upon completion of professional services, if any.

Similar to certain on-demand arrangements as described above, the Company will defer the direct costs, and amortize those costs over the same time period as the related revenue is recognized. The deferred costs on the Company’s consolidated balance sheets for these arrangements totaled $0.4 million and $0.1 million at March 31, 2010 and December 31, 2009, respectively. As of March 31, 2010 and December 31, 2009, $0.1 million and nil, respectively, of the deferred costs are included in prepaid and other current assets, with the remaining amount included in deposits and other assets in the condensed consolidated balance sheets. All of the deferred costs represented commission payments to the Company’s direct sales force for time-based term license arrangements, which the Company amortizes over the non-cancelable term of the contract as the related revenue is recognized. The commission payments are a direct and incremental cost of the revenue arrangements.

Maintenance Revenue.Under perpetual software license arrangements, a customer typically pre-pays maintenance for the first twelve months, and the related revenues are deferred and recognized ratably over the term of the initial maintenance contract. Maintenance is renewable by the customer on an annual basis thereafter. Rates for maintenance, including subsequent renewal rates, are typically established based upon a specified percentage of net license fees as set forth in the arrangement.

Services Revenue

Professional Service Revenue.Professional service revenues primarily consist of integration services related to the installation and configuration of the Company’s products as well as training. The Company’s installation and configuration services do not involve customization to, or development of, the underlying software code. Generally, the Company’s professional services arrangements are on a time-and-materials basis. Reimbursements, including those related to travel and out-of-pocket expenses, are included in services revenues, and an equivalent amount of reimbursable expenses is included in cost of services revenues. For professional service arrangements with a fixed fee, the Company recognizes revenue utilizing the proportional performance method of accounting. The Company estimates the proportional performance on fixed-fee contracts on a monthly basis, if possible, 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 of performance. To the extent the Company enters into a fixed-fee services contract, a loss will be recognized any time the total estimated project cost exceeds project revenues.

In certain arrangements, the Company has provided for unique acceptance criteria associated with the delivery of professional services. In these instances, the Company has recognized revenue in accordance with the provisions of SAB 104. To the extent there is contingent revenue in these arrangements, the Company will defer the revenue until the contingency has lapsed.

Perpetual License Revenue

The Company’s perpetual software license arrangements typically include: (i) an end-user license fee paid in exchange for the use of its products, generally based on a specified number of payees, and (ii) a maintenance arrangement that provides for technical support and product updates, generally over renewable twelve month periods. If the Company is selected to provide integration and configuration services, then the software arrangement will also include professional services, generally priced on a time-and-materials basis. Depending upon the elements in the arrangement and the terms of the related agreement, the Company recognizes license revenues under either the residual or the contract accounting method.

Certain arrangements result in the payment of customer referral fees to third parties that resell the Company’s software products. In these arrangements, license revenues are recorded, net of such referral fees, at the time the software license has been delivered to a third-party reseller and an end-user customer has been identified.

Residual Method.Perpetual license fees are recognized upon delivery whether licenses are sold separately from or together with integration and configuration services, provided that (i) the criteria described above have been met, (ii) payment of the license fees is not dependent upon performance of the integration and configuration services, and (iii) the services are not otherwise essential to the functionality of the software. The Company recognizes these license revenues using the residual method pursuant to the requirements of accounting guidance for software revenue recognition. Under the residual method, revenues are recognized when vendor-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement (i.e., professional services and maintenance), but does not exist for one or more of the delivered elements in the arrangement (i.e., the software product). Each license arrangement requires careful analysis to ensure that all of the individual elements in the license transaction have been identified, along with the fair value of each undelivered element.

The Company allocates revenue to each undelivered element based on its fair value, with the fair value determined by the price charged when that element is sold separately. For a certain class of transactions, the fair value of the maintenance portion of the Company’s arrangements is based on substantive stated renewal rates rather than stand-alone sales. The fair value of the professional services portion of the arrangement is based on the hourly rates that the Company charges for these services when sold independently from a software license. If evidence of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue from the arrangement 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. If the only undelivered element is maintenance, then the entire amount of revenue is recognized over the maintenance delivery period.

Contract Accounting Method.For arrangements where services are considered essential to the functionality of the software, such as where the payment of the license fees is dependent upon performance of the services, both the license and services revenues are recognized in accordance with the provisions of accounting for performance of construction-type and certain production-type contracts. The Company generally uses the percentage-of-completion method because the Company is able to make reasonably dependable estimates relative to contract costs and the extent of progress toward completion. However, if the Company cannot make reasonably dependable estimates, the Company uses the completed-contract method. If total cost estimates exceed revenues, the Company accrues for the estimated loss on the arrangement at the time such determination is made.

In certain arrangements, the Company has provided for unique acceptance criteria associated with the delivery of professional services. In these instances, the Company has recognized revenue in accordance with the provisions of accounting for performance of construction-type and certain production-type contracts. To the extent there is contingent revenue in these arrangements, the Company measures the level of profit that is expected based on the non-contingent revenue and the total expected project costs. If the Company is assured of a certain level of profit excluding the contingent revenue, the Company recognizes the non-contingent revenue on a percentage-of-completion basis and recognizes the contingent revenue upon final acceptance.

Cost of Revenues

Cost of recurring revenues 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 license revenues consists primarily of amortization of purchased technology. Cost of services revenues 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.

Net Loss Per Share

Basic net loss per share is calculated by dividing net loss for the period by the weighted average common shares outstanding during the period, less shares subject to repurchase. Diluted net loss per share is calculated by dividing the net loss for the period by the weighted average common shares outstanding, adjusted for all dilutive potential common shares, which includes shares issuable upon the exercise of outstanding common stock options, the release of restricted stock, and purchases of employee stock purchase plan (ESPP) shares to the extent these shares are dilutive. For the three months ended March 31, 2010 and 2009, the diluted net loss per share calculation was the same as the basic net loss per share calculation, as all potential common shares were anti-dilutive.

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


	Three Months Ended March 31,
	2010		2009
Restricted stock		1,374		1,126
Stock options		6,579		6,674
ESPP		52		113

Totals		8,005		7,913

The weighted-average exercise price of stock options excluded from weighted average common shares during the three months ended March 31, 2010 was $4.58 per share, as compared to the weighted average exercise price of stock options excluded from weighted average common shares during the three months ended March 31, 2009 of $4.87 per share.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update on improving disclosures about fair value measurements to add additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3. Levels 1, 2 and 3 of fair value measurements are defined in Note 5 below. We adopted the new disclosure requirements and clarifications of existing disclosures in the first quarter of 2010, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for interim and annual periods beginning after December 15, 2010. The adoption has no impact on our condensed consolidated financial statements in the three months ended March 31, 2010.

2. Acquisition

On January 1, 2010, the Company entered into a Stock Purchase Agreement for the purchase of 100% of the common stock of Actek, Inc. Actek delivers commission and incentive compensation software solutions to automate the process of calculating and managing complex commission, incentive and bonus pay arrangements. The acquisition expanded the Company’s product offering to commissions and compliance software for complex selling environments for the insurance and financial services industries.

The acquisition has been accounted for under the FASB’s accounting standard for business combinations, which the Company adopted as of the beginning of fiscal 2009. Assets acquired and liabilities assumed were recorded at their estimated fair values as of January 1, 2010. The Company has included the financial results of Actek in its condensed consolidated financial statements from the date of acquisition. For the three months ended March 31, 2010, Actek contributed $864,000 to our total revenues. During the quarter, the net loss produced by Actek was insignificant to the Company’s net operating results. The acquisition was not material to the Company’s condensed consolidated financial statements.

The following table summarizes the purchase price consideration paid for Actek (in thousands):


Closing Cash Payment	$	1,651
Closing Stock Issuance — Common Stock and Additional Paid-in Capital		453
Fair value of liability-classified contingent consideration		517
Additional purchase price for net working capital adjustment		270

Fair value of total consideration transferred	$	2,891

On January 1, 2010, upon the closing of the acquisition, the Company paid Actek’s sole stockholder $2.1 million in a combination of cash and common stock. The fair value of the common stock issued as part of the consideration paid for Actek was determined on the basis of the closing market price of the Company’s common shares on the acquisition date.

As part of the acquisition, the Company also agreed to pay additional consideration contingent on Actek achieving the following benchmark (the “Milestone”): Actek retains 90% of its recurring revenue during the one-year period following the acquisition. If the Milestone is achieved, the Milestone Payment consists of three components: (i) $600,000 in cash; (ii) 100,000 shares of the Company’s common stock in the form of a restricted stock unit (“RSU”); and (iii) 200,000 shares of the Company’s common stock in the form of a non-qualified stock option (“Option”). The RSU and the Option were awarded and granted, respectively, after the acquisition on the last trading day of January 2010. The RSU and Option shall each vest in full, if the Company’s board of directors determines after the one-year anniversary of the acquisition that: i) Actek has retained 90% of its recurring revenue, and ii) the former sole stockholder of Actek is still employed with the Company on the first anniversary of the acquisition or was earlier terminated by the Company other than for cause and has signed an acceptable full release of claims.

The fair value of the contingent consideration arrangement was probability-weighted to reflect the likelihood that the Milestone will be achieved at the valuation date. Because the vesting of the Company’s RSU and Option are subject to continued employment, these contingent payments are considered compensatory and thus not part of the purchase price. The preliminary fair value of the contingent consideration associated with the Company’s RSU and Option of $0.5 million is recorded as stock-based compensation in general and administrative expenses over the service period of one year, while the cash contingent consideration is included in the total purchase price, and will be paid upon the achievement of the related contingencies. The RSU and Option contingent consideration is classified as equity and will not be remeasured after the acquisition date. The cash contingent consideration is classified as a liability. Subsequent changes in fair value for liability-classified contingent consideration are recognized in earnings and not as an adjustment to the purchase price.

As of March 31, 2010, the amount recognized for the contingent consideration arrangement, the range of outcomes, and the assumptions used to develop the estimates have not materially changed. The possibility of achieving the Milestone slightly increased, resulting in an increase in the fair value of cash contingent consideration of $22,000 which we recorded as operating expense in the condensed consolidated statements of operations for the three months ended March 31, 2010.

Preliminary Purchase Price Allocation

The total purchase price for Actek was allocated to the assets acquired and liabilities assumed based upon their preliminary fair value at the acquisition date as set forth below. The preliminary allocation of the purchase price was based upon a preliminary valuation and our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the valuation of intangible assets acquired, the deferred taxes related to those intangibles and residual goodwill. We expect to continue to obtain information to assist us in determining the fair value of the net assets acquired at the acquisition date during the measurement period.

(in thousands)


Cash and cash equivalents	$	3
Accounts receivable		1,045
Other current assets		13
Fixed assets		341
Intangible assets		1,510
Accounts payable		(11	)
Accrued payroll and related expenses		(117	)
Deferred revenue		(147	)
Other accrued liabilities		(759	)
Notes payable		(899	)
Deferred Tax Liability		(614	)

Total identifiable net assets		365
Goodwill		2,526

Total Purchase Price	$	2,891

The Company considered uncertainty about collections and future cash flow when determining the fair value of the accounts receivable. The fair value of accounts receivable of $1.0 million represents its gross contractual accounts receivable as all amounts were determined to be collectible.

Preliminary Valuation of Intangible Assets Acquired

The following table sets forth each component of intangible assets acquired in connection with the acquisition:

(in thousands)


			Estimated
	Preliminary		Useful
	Fair Value		Life
Customer relationships	$	644	12 years
Developed Technology		524	7 years
Tradename		302	Indefinite
Favorable Lease		40	4 years

Total Intangible Assets	$	1,510

Customer relationships represent the fair value of the underlying customer support contracts and related relationships with Actek’s existing customers. The estimated useful life of 12 years was primarily based on projected customer retention rates. Developed technology represents the fair values of Actek’s products that have reached technological feasibility. The estimated useful life of 7 years was primarily based on projected product cycle and technology evolution. The tradename represents the fair value of brand and name recognition associated with the marketing of Actek’s products and services. The Company intends to use Actek’s tradename indefinitely. The favorable lease represents the fair value of a below market operating lease Callidus assumed related to an office facility located in Alabama. The estimated useful life was based on the remaining lease term. The Company utilized the income approach applying assumptions for future cash flow and discount rates using current market trends to determine the fair value.

Of the liabilities assumed by the Company through the acquisition, $759,000 was related to sales tax payable and $899,000 was related to debt that was repaid in the first quarter of 2010.

The excess of the purchase price over the preliminary assets acquired and liabilities assumed was recorded as goodwill. The goodwill arising from the acquisition mainly consists of the entity-specific synergies and economies of scale expected from combining the operations of the two companies.

Acquisition Related Expenses

Acquisition related expenses mainly consist of direct transaction costs such as professional service fees. For the three months ended March 31, 2010, the Company incurred $121,000 acquisition related expenses associated with the Actek acquisition. These direct transactions costs were recorded as expenses in the Company’s statements of operations.

3. Restructuring

In February 2010, management approved a cost savings program to reduce the Company’s workforce. The Company incurred restructuring charges of $0.7 million in the first quarter of 2010 in connection with severance and termination-related costs, most of which are severance-related cash expenditures. The February 2010 cost savings program was substantially completed in the first quarter of 2010.

Total costs of the Company’s restructuring programs incurred to date of $6.8 million include restructuring charges of $1.5 million in 2007, $1.6 million in 2008, $3.0 million in 2009 and $0.7 million in the first quarter of 2010.

The following table sets forth a summary of accrued restructuring charges for the first quarter of 2010 (in thousands):


	December 31,		Cash								March 31,
	2009		Payments			Additions		Adjustments			2010
Severance and termination-related costs	$	146	$	(857	)	$	741	$	(17	)	$	13


Total accrued restructuring charges	$	146	$	(857	)	$	741	$	(17	)	$	13

4. Goodwill and Intangible Assets

Goodwill as of March 31, 2010 and December 31, 2009 was $8.0 million and $5.5 million, respectively. The change is related to goodwill acquired associated with the Actek acquisition. (See Note 2 — Acquisition above for details).

Intangible assets consisted of the following as of March 31, 2010 and December 31, 2009 (in thousands):


												Weighted Average
												Amortization
			December 31,							March 31,		Period
			2009				Amortization			2010		Remaining
	Cost		Net		Additions		Expense			Net		(Years)
Purchased technology	$	5,422	$	1,972	$	549	$	(728	)	$	1,793		3.25
Customer relationships		2,000		1,021		644		(138	)		1,527		5.89
Tradename		—		—		302		—			302		N/A
Favorable Lease		—		—		40		(3	)		37		3.75


Total intangible assets, net	$	7,422	$	2,993	$	1,535	$	(869	)	$	3,659

Intangible assets include third-party software licenses used in our products, acquired assets related to the Compensation Technologies (“CT”) acquisition completed in 2008 and acquired assets related to the Actek acquisition completed in the first quarter of 2010 (see Note 2 - - Acquisition above for details). Costs incurred to renew or extend the term of a recognized intangible asset are expensed in the period incurred. Amortization expense related to intangible assets included in cost of revenues and operating expenses was $0.9 million for the three months ended March 31, 2010, as compared to amortization expense of $0.4 million for the three months ended March 31, 2009. The Company’s intangible assets are amortized over their estimated useful lives of one to twelve years, except for tradename, which has an indefinite life. Total future expected amortization is as follows (in thousands):


	Purchased		Customer		Favorable
	Technology		Relationships		Lease
Quarter Ending March 31:
Remainder of 2010	$	600	$	415	$	11
2011		613		554		13
2012		281		75		13
2013		75		54		—
2014		75		54		—
2015 and beyond		150		376		—


Total expected future amortization	$	1,794	$	1,528	$	37

5. Financial Instruments

The Company classifies debt and marketable equity securities based on the liquidity of the investment and management’s intention on the date of purchase and re-evaluates such designation as of each balance sheet date. Except for certain auction rate securities that are classified as trading, debt and marketable equity securities are classified as available-for-sale and carried at estimated fair value, which is determined based on the inputs discussed below. Those securities that are classified as trading are designated as short-term investments due to a contractual agreement that allows the Company to sell the securities at par value beginning on June 30, 2010. The total estimated fair value of such trading securities at March 31, 2010 was $3.6 million, which includes losses on investments of $0.1 million as compared to par value.

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. The Company considers all investments that are available for sale that have a maturity date of 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. The auction rate security classified as available for sale is designated as a long-term investment due to the maturity date being longer than one year and the security not being highly liquid in the current market.

Interest is included in interest and other income, net, in the accompanying condensed consolidated financial statements. Realized gains and losses are calculated using the specific identification method. The components of the Company’s debt and marketable equity securities classified as available-for-sale securities were as follows at March 31, 2010 (in thousands):


								Total Other
								Than Temporary
								Impairment		Gain (Loss) on
					Total Unrealized			Recorded In		Investments
					Losses in Other			Other		Recorded in the
	Amortized		Unrealized		Comprehensive			Comprehensive		Statement of		Estimated
March 31, 2010	Cost		Gains		Income (Loss)			Income (Loss)		Operations		Fair Value
Short-term investments:
Certificate of deposits	$	720	$	—	$	—		$	—	$	—	$	720
Corporate notes and obligations		7,397		18		(4	)		—		—		7,411
U.S. government and agency obligations		6,032		3		—			—		—		6,035
Long-term investments:
Auction rate securities classified as available for sale		900		—		(2	)		—		—		898


Investments in debt and equity securities	$	15,049	$	21	$	(6	)	$	—	$	—	$	15,064

The Company had no realized gains or losses on sales of investments for the three months ended March 31, 2010. The Company had no sales of investments for the three months ended March 31, 2009. The Company had proceeds of $6.7 million from maturities and sales of investments for the three months ended March 31, 2010. All proceeds from sales and maturities of investments were equal to the par value of the securities.

The Company measures financial assets at fair value on an ongoing basis. The estimated fair value of the Company’s financial assets was determined using the following inputs at March 31, 2010 and December 31, 2009 (in thousands):


	Fair Value Measurements at Reporting Date Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
March 31, 2010	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds (1)	$	7,019	$	7,019	$	—	$	—
U.S. treasury bills (2)		5,032		5,032		—		—
Certificate of deposits (2)		720		—		720		—
Corporate notes and obligations (2)		7,411		—		7,411		—
U.S. government agency obligations (2)		1,003		—		1,003		—
Auction-rate securities(2),(3)		4,505		—		—		4,505
Asset associated with put option (4)		70		—		—		70
Warrants (5)		25		—		—		25
Publicly traded securities (5)		193		193		—		—


Total	$	25,978	$	12,244	$	9,134	$	4,600


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

(2)		Except as indicated in (3), included in short-term investments on the consolidated balance sheet.

(3)		$898K included in long-term investments on the consolidated balance sheet.

(4)		Included in prepaid and other current assets on the consolidated balance sheet.

(5)		Included in long-term investments on the consolidated balance sheet.


	Fair Value Measurements at Reporting Date Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2009	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds (1)	$	6,644	$	6,644	$	—	$	—
U.S. treasury bills (2)		5,043		5,043		—		—
Certificate of deposits (2)		720		—		720		—
Corporate notes and obligations (2)		5,962		—		5,962		—
U.S. government agency obligations (2)		6,695		—		6,695		—
Auction-rate securities (2), (3)		4,458		—		—		4,458
Asset associated with put option (4)		102		—		—		102
Warrants (5)		25		—		—		25
Publicly traded securities (5)		225		225		—		—

Total	$	29,874	$	11,912	$	13,377	$	4,585


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

(2)		Except as indicated in (3), included in short-term investments on the consolidated balance sheet.

(3)		$892K included in long-term investments on the consolidated balance sheet.

(4)		Included in prepaid and other current assets on the consolidated balance sheet.

(5)		Included in long-term investments on the consolidated balance sheet.

The table below presents the changes during the period related to balances measured using significant unobservable inputs (Level 3) (in thousands):


					Gain (Loss)
	Balance at				Recorded in					Balance at
	December 31,				Statement of			Unrealized		March 31,
	2009		Addition		Operations			Gain (Loss)		2010
Auction rate securities classified as trading	$	3,566	$	—	$	41		$	—	$	3,607
Auction rate securities classified as available for sale		892		—		—			6		898
Asset associated with put option		102		—		(32	)		—		70
Warrants		25		—		—			—		25

Total	$	4,585	$	—	$	9		$	6	$	4,600

Valuation of Investments and Put Option

Level 1 and Level 2

The Company’s available-for-sale securities include certificate of deposits, corporate notes and obligations, and U.S. government and agency obligations at March 31, 2010 and December 31, 2009. The Company values these securities using a pricing matrix from a reputable pricing service, 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). However, the Company classifies all its available-for-sale securities, except for U.S. treasury and certain auction rated securities, as having Level 2 inputs. The Company validates the estimated fair value received from the reputable pricing service on a quarterly basis. The valuation techniques used to measure the fair value of the financial instruments having Level 2 inputs, all of which have counterparties with high credit ratings, were derived from the following: non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data.

In December 2009, the Company executed a “Subscription Agreement for Units” (“the Agreement”) with ForceLogix Technologies, Inc. (“ForceLogix”). ForceLogix is a Canada-based public company that delivers on-demand sales management process optimization solutions for sales organizations. Pursuant to the Agreement, the Company purchased 2,639,000 units of ForceLogix for an aggregate of $250,000. Each unit consists of one common share and three quarters (3/4) of one common share purchase warrant of ForceLogix. The Company owns approximately 5% of the outstanding common shares of ForceLogix as of March 31, 2010 and does not have the ability to exercise significant influence. The Company valued the investment in the common stock using observable inputs (Level 1 inputs) and the related warrants using unobservable inputs (Level 3 inputs).

There were no transfers between Level 1 and 2 fair value hierarchy during the three months ended March 31, 2010.

Level 3

The Company valued its auction rate securities using unobservable inputs (Level 3). The Company utilized the income approach applying assumptions for interest rates using current market trends and an estimated term based on expectations from brokers for liquidity in the market and redemption periods agreed to by other broker-dealers. The Company also applied an adjustment for the lack of liquidity to the value determined by the income approach utilizing a put option model. As a result of the valuation assessment, the Company recorded a gain on auction rate securities classified as trading securities of $41,000 and $123,000 for the three months ended March 31, 2010 and March 31, 2009, respectively, and an unrealized gain on auction rate securities classified as available-for-sale of $6,000 and $93,000 for the three months ended March 31, 2010 and March 31, 2009, respectively.

In connection with certain of the auction rate securities, in October 2008, one financial institution where the Company holds auction rate securities issued certain put option rights to the Company, which entitles the Company to sell its auction rate securities to the financial institution for a price equal to the par value plus any accrued and unpaid interest. These rights to sell the securities are exercisable at any time during the period from June 30, 2010 to July 2, 2012, after which the rights will expire. The Company valued its put option rights using the income approach similar to the valuation of the auction rate securities as noted above. As a result of the valuation assessment, the Company recorded a loss on the put option of $32,000 and $93,000 for the three months ended March 31, 2010 and March 31, 2009, respectively. The auction rate securities to which the put option applies were recorded as short-term investments and the asset associated with the put option was recorded as prepaid and other current assets as of March 31, 2010, as the put may be exercised beginning June 30, 2010.

The Company valued the ForceLogix warrants using the Black-Scholes-Merton option pricing model. At March 31, 2010, the fair value of the warrants is insignificant.

6. Commitments and Contingencies

The Company is from time to time a party to various litigation matters and customer disputes incidental to the conduct of its business. At the present time, the Company believes that none of these matters is 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 March 31, 2010, the Company has not recorded any such liabilities. The Company believes that it has valid defenses with respect to the legal matters pending against the Company, if any, and that the probability of a loss under such matters is not probable.

Other Contingencies

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

The Company’s product license and on-demand agreements typically include a limited indemnification provision for claims by third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others.To date, the Company has not incurred and therefore has not accrued for any costs related to such indemnification provisions.

7. Segment, Geographic and Customer Information

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

The following table summarizes revenues for the three months ended March 31, 2010 and 2009 by geographic areas (in thousands):


	Three Months Ended March 31,
	2010		2009
Americas	$	14,538	$	21,121
EMEA		1,463		4,315
Asia Pacific		160		464


	$	16,161	$	25,900

Substantially all of the Company’s long-lived assets are located in the United States. Long-lived assets located outside the United States are not significant.

In the three months ended March 31, 2010 and 2009, no customer accounted for more than 10% of our total revenues.

8. Comprehensive Loss

Comprehensive loss is the total of net 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 other comprehensive loss in the accompanying condensed consolidated financial statements.

The following table sets forth the components of comprehensive loss for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended March 31,
	2010			2009
Net loss	$	(5,951	)	$	(2,810	)
Other comprehensive loss:
Change in unrealized loss on investments, net		(5	)		(71	)
Change in cumulative translation adjustments		(85	)		(2	)


Comprehensive loss	$	(6,041	)	$	(2,883	)

9. Stock-based Compensation

Expense Summary

Under the provisions of the accounting for share-based payment, $1.4 million of stock-based compensation expense was recorded for the three months ended March 31, 2010, in the condensed consolidated statements of operations. Of the total stock-based compensation expense for the three months ended March 31, 2010, approximately $0.4 million was related to stock options, $0.1 million was related to purchases of common stock under the ESPP, $0.8 million was related to restricted stock units, and $0.1 million was related to the Actek acquisition contingent consideration considered compensatory (see Note 2 — Acquisition above for details). For the three months ended March 31, 2009, $1.0 million of stock-based compensation expense was recorded. Of the total stock-based compensation expense for the three months ended March 31, 2009, approximately $0.5 million was related to stock options, $0.1 million was related to purchases of common stock under the ESPP and $0.4 million was related to restricted stock units.

As of March 31, 2010, there was $3.8 million, $8.1 million and $0.5 million of total unrecognized compensation expense related to stock options, restricted stock units and the ESPP, respectively. This expense related to stock options, restricted stock units and the ESPP is expected to be recognized over a weighted average period of 2.54 years, 2.31 years and 0.83 years, respectively.

The table below sets forth the functional classification of stock-based compensation expense for the three months ended March 31, 2010 and 2009 (in thousands, except percentage data):


	Three		Three
	Months		Months
	Ended		Ended
	March 31,		March 31,
	2010		2009
Stock-based compensation:
Cost of recurring revenues	$	124	$	163
Cost of services revenues		241		13
Sales and marketing		271		232
Research and development		215		142
General and administrative		503		427


Total stock-based compensation	$	1,354	$	977

Determination of Fair Value

The fair value of each restricted stock unit is estimated based on the market value of the Company’s stock on the date of grant. The fair value of each option award is estimated on the date of grant and the fair value of the ESPP is estimated on the beginning date of the offering period using the Black-Scholes valuation model and the assumptions noted in the following table.


	Three Months Ended March 31,
	2010			2009
Stock Option Plans
Expected life (in years)		3.50			3.50
Risk-free interest rate	1.49% to 1.52		%		1.20	%
Volatility		67	%		63	%
Dividend Yield		—			—

Employee Stock Purchase Plan
Expected life (in years)		0.50 to 1.00			0.50 to 1.00
Risk-free interest rate	0.18% to 0.34		%	0.46% to 0.62		%
Volatility	49% to 60		%	97% to 126		%
Dividend Yield		—			—

10. Related-Party Transactions

In January 2010, Callidus entered into an operating lease agreement with K.L. Properties LLC for its office space. Farley Lavett, who was appointed as Vice President of Insurance, in January 2010 in connection with the Actek acquisition, is also President of K.L. Properties LLC. The Company incurred rent expense for the office space owned by K.L. Properties of approximately $39,000 for the three months ended March 31, 2010. This lease was assumed as part of the Actek acquisition and was determined to be a below market or favorable lease as of the acquisition date (see Note 2 — Acquisition above for details).

Subsequent to the acquisition of CT in 2008, the Company continued to purchase hosting services from Level 3 Communications, Inc. Michele Vion, who was appointed to the Company’s Board of Directors in September 2005, was the Senior Vice President, Human Resources, at Level 3 Communications through January 2010. The Company incurred no expenses for hosting services rendered by Level 3 Communications for the three months ended March 31, 2010, and expenses of approximately $27,000 for hosting services rendered by Level 3 Communications for the three months ended March 31, 2009. The Company believes this agreement represents an arm’s length transaction.

11. Subsequent Events

In April 2010, the Company entered into a new lease agreement to relocate its headquarters to Pleasanton, California. The new location consists of 32,000 square feet of office space. This new lease replaces the existing office lease in San Jose, which will expire in the third quarter of 2010. The annual rental expense is approximately $0.7 million. The new lease expires in July 2017.

In April 2010, the Company invested an additional $150,000 in ForceLogix in return for an additional 2,003,800 common shares. Following this purchase, the Company’s total investment in ForceLogix represents less than 10% of ForceLogix’s voting stock and Callidus cannot exercise significant influence.

In April 2010, management approved a cost savings program to reduce the Company’s workforce. The Company expects to incur restructuring charges of $0.7 million in the second quarter of 2010 in connection with severance and termination-related costs, most of which are severance-related cash expenditures. The April 2010 cost savings program will be fully completed in the second quarter of 2010.


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

The following discussion of financial condition and results of operations should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the notes thereto included in our Annual Report onForm 10-K for 2009 and with the unaudited condensed consolidated financial statements and the related notes thereto contained elsewhere in this Quarterly Report onForm 10-Q . This section of the Quarterly Report onForm 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to our future plans, objectives, expectations, prospects, intentions and financial performance and the assumptions that underlie these statements. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “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: our ability to achieve profitability, changes in and expectations with respect to our business strategy and products revenues and gross margins, future operating expense levels, the impact of quarterly fluctuations of revenue and operating results, levels of annual contract value bookings and recurring revenues, staffing and expense levels, the impact of foreign exchange rate fluctuations and the adequacy of our capital resources to fund operations and growth. As and when made, management believes that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made and may be based on assumptions that do not prove to be accurate. Our Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company’s historical experience and our present expectations or projections. Many of these trends and uncertainties are described in “Risk Factors” set forth in our Annual Report on Form 10-K for 2009 and elsewhere in this Quarterly Report onForm 10-Q. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report onForm 10-Q.

Overview of the Results for the Three Months Ended March 31, 2010

We are the market and technology leader in Sales Performance Management (“SPM”) software solutions designed to align internal sales resources and distribution channels with corporate strategy. Our software enhances core processes in sales management, such as the structuring of sales territories, the management of sales force talent, the establishment of sales targets and the creation and execution of sales incentive plans. Using our SPM software solutions, companies can tailor these core processes to further their strategic objectives, including coordinating sales efforts with long-range strategies regarding sales and margin targets, growth initiatives, sales force talent development, territory expansion and market penetration. Our customers can also use our SPM solutions to address more tactical objectives, such as successful new product launches and effective cross-selling strategies. Leading companies worldwide in the financial services, insurance, communications, high-technology, life sciences and retail industries rely on our solutions for their sales performance management and incentive compensation needs. Our SPM solutions can be purchased and delivered as either an on-demand service or an on-premise software solution. Our on-demand service allows customers to use our software products through a web interface rather than purchase computer equipment and install our software at their locations, and we believe the benefits of this deployment method will make our on-demand offering our most popular product choice.

We sell our products both directly through our sales force and in conjunction with our strategic partners. We also offer professional services, including configuration, integration and training, generally on a time-and-materials basis. We generate recurring subscription and support revenues from our on-demand service, support and maintenance agreements associated with our product licenses and, beginning in the third quarter of 2009, our recently introduced on-premise licenses of our software as a time based term license arrangement, all of which is recognized ratably over the term of the related agreement.

Recurring Revenue Growth and Cost Control

During the first quarter of 2010, the impact of prior quarter Software-as-a-Service (“SaaS”) bookings continue to drive increasing recurring revenues as our recurring revenues showed growth on a year on year basis. Our recurring revenues increased in the first quarter of 2010 by 5% to $12.3 million compared to $11.7 million in the first quarter of 2009. At the same time, existing customer attrition remains low. Our retention rates for our core SaaS offering as well as our legacy on-premise customers continue to be above 90%. Recurring revenue accounted for 76% of total revenues in the first quarter of 2010 as compared to 45% in the first quarter of 2009, continuing to reflect the diminished significance of perpetual license and services in our SaaS business model. We expect recurring revenues to continue to run at approximately 70% of revenues through 2010.

During the quarter we continued to make progress on reducing our operating expenses to better align our cost base with our new business model. Excluding stock-based compensation, amortization of acquired intangible assets and restructuring expenses, we have reduced our operating expenses by $2.4 million, or 20%, to $9.9 million for the first quarter of 2010 from $12.3 million for the first quarter of 2009. Stock-based compensation expenses increased by $0.2 million, amortization of acquired intangible assets increased by $32,000 and restructuring expenses increased by $0.6 million in the first quarter of 2010 compared to the same period in prior year.

During the transition of our business to a recurring revenue business model, we reported changes to our Net Annual Contract Value generated from the sales of our on-demand and time-based term license offerings. As our business model was transforming, we felt this was a useful metric for understanding the progress we were making in the transition of our business. While this metric was helpful in understanding the growth of our contracted recurring revenue business, it was not a good predictor of short term results given the variability in revenue recognition dictated by the terms of our customer agreements. Now that we have completed the transition and recurring revenues account for 70% or more of total revenues, we will no longer disclose this metric, as we believe the GAAP measured recurring revenue is a more reliable indicator of the operating results of the business.

Perpetual License and Service Business

As a result of our transition toward a recurring revenue business, our services and perpetual license revenues declined as expected. This shift in revenue mix from license revenue to recurring revenue has reduced our services revenues, as the average implementation time for an on-demand arrangement is significantly less than for an on-premise arrangement. The decrease in service revenues was also driven by the fact that a number of customers who signed agreements in prior quarters delayed the start of their implementation projects to future quarters, which negatively impacted both service revenues and gross margin. Services revenue decreased by $7.6 million, or 67%, in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. License revenue decreased by $2.8 million, or 92%, in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. We do not expect services and license to materially increase as percentage of our total revenues in future periods.

Acquisition of Actek

On January 1, 2010, we completed the 100% acquisition of Actek, Inc. Actek delivers commission and incentive compensation software solutions to automate the process of calculating and managing complex commission, incentive and bonus payment arrangements. The acquisition expanded our product offering to commissions and compliance software for complex selling environments for the insurance and financial services industries. Under the terms of the agreement, the Company paid Actek’s sole stockholder $2.1 million in a combination of cash and stock and assumed debt of $0.9 million. In addition, the Company may pay up to approximately $1.2 million in the future in the form of cash, restricted stock units and stock options, depending on the achievement of specified operational milestones on January 1, 2011. In connection with the acquisition, we recorded intangible assets of $1.5 million, which will be amortized to cost and operating expenses over their useful lives of four to twelve years, except for the tradename which has an indefinite life, and $2.5 million of goodwill, which will not be amortized. Goodwill and the tradename will be tested for impairment at least annually.

Challenges and Risks

In response to market demand, we shifted our primary business focus from the sale of perpetual licenses for our products to the provision of our software as a service through our on-demand offering. Our on-demand model also provides more predictable quarterly revenues for us. During 2008 we were able to sustain positive margins on this service offering for the first time since its launch in 2006. As a further step in our transition to a recurring revenue business model, in the third quarter of 2009 we began offering our on-premise products as a time based term license arrangement. We believe this offering will better address the needs of our customers that prefer our on-premise solution, and at the same time will provide us with more predictable revenue streams. If we are unable to significantly grow our on-demand business or continue to provide our on-demand services on a consistently profitable basis in the future, or if our new on-premise time based term license offering fails to achieve market acceptance, our business and operating results may be materially and adversely affected.

From a business perspective, we have a number of sales opportunities in process and additional opportunities coming from our sales pipeline; however, we continue to experience wide variances in the timing and size of our transactions and the timing of revenue recognition resulting from greater flexibility in contract terms. We believe one of our major remaining challenges is increasing prospective customers’ prioritization of purchasing our products and services over competing IT projects. To address this challenge, we have set goals that include expanding our sales efforts, promoting our on-demand services, and continuing to develop new products and enhancements to our suite of products.

Historically, a substantial portion of our revenues has been derived from sales of our products and services to customers in the financial and insurance industries. Consolidations and business failures in these industries could result in substantially reduced demand for our products and services. In addition, future disruptions in these industries and international financial crisis may cause potential customers to defer or cancel future purchases of our products and services as they seek to conserve resources in the face of economic turmoil and the drastically reduced availability of capital in the equity and debt markets. Any of these developments, or the combination of these developments, may materially and adversely affect our revenues, operating results and financial condition in future periods.

We remain committed to achieving our Non-GAAP profitability goal in the second half of this year. Non-GAAP operating results exclude stock-based compensation, amortization of acquired intangible assets and restructuring expenses. We have already begun executing on a number of our key operating objectives that are critical to this effort. Firstly, we must continue to drive recurring revenue growth by adding new customers and retaining existing customers. Secondly, in February 2010 in an effort to streamline our cost base to better align with our recurring revenue model, we reorganized our engineering department to expand our use of offshore third-party technical services and support and at the same time took other significant actions to reduce costs. Thirdly, in April 2010 we executed the lease for our new Pleasanton headquarters which will yield substantial savings starting Q3 2010. Finally, we have a plan in place to address the health of our services business which includes new executive leadership, a reduction in capacity that is commensurate with our current revenue expectations and additional sales incentives to drive additional service engagements. While we have continued to make progress towards these objectives, many of these factors are wholly or partially beyond our control. If these steps prove insufficient or ineffective or result in unanticipated disruption to our business, our ability to achieve or sustain profitability may be materially impaired.

In addition to these risks, our future operating performance is subject to the risks and uncertainties described in Item 1A — “Risk Factors” of Part II of this quarterly report on Form 10-Q and Item 1A — “Risk Factors” of Part I, in our Annual Report on Form 10-K for our fiscal year ended December 31, 2009.

Application of Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations which follows is based upon our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The application of GAAP requires our management to make assumptions, judgments and estimates that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosure 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 statement presentation of our financial condition or results of operations will be affected. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with our Audit Committee of the Board of Directors.

We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, allowance for doubtful accounts and service remediation reserve, stock-based compensation, goodwill impairment, long-lived asset impairment 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, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. It is also noted that we noted no indications of impairment of goodwill in our reporting unit as of March 31, 2010.

There were no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2010 as compared to the critical accounting policies and estimates disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Recent Accounting Pronouncements

In October 2009, the FASB issued new revenue recognition standards for arrangements with multiple deliverables, where certain of those deliverables are non-software related. The new standards permit entities to initially use management’s best estimate of selling price to value individual deliverables when those deliverables do not have VSOE of fair value or when third-party evidence is not available. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for annual periods beginning after June 15, 2010, however early adoption is permitted. The Company is currently evaluating the impact of adopting these new standards on our consolidated financial position, results of operations and cash flows, including possible early adoption.

In March 2010, the FASB’s Emerging Issues Task Force (“EITF”) reached the final consensus to apply the milestone method to milestone payments for achieving specified performance measures when those payments are related to uncertain future events. The scope of this final consensus is limited to transactions involving research or development if the milestone payment is to be recognized in its entirety in the period the milestone is achieved. Entities can make an accounting policy election to recognize arrangement consideration received for achieving specified performance measures during the period in which the milestones are achieved, provided certain criteria are met. Pending ratification by the FASB, the final consensus would be effective for interim and annual periods beginning on or after June 15, 2010 with early adoption permitted. The Company is currently evaluating the impact of adopting this new standard on our consolidated financial position, results of operations and cash flows, including possible early adoption.

See Note 1 of our Notes to Condensed Consolidated Financial Statements for information regarding the effect of newly adopted accounting pronouncements on our financial statements.

Results of Operations

Comparison of the Three Months Ended March 31, 2010 and 2009

Revenues, cost of revenues and gross profit

The table below sets forth the changes in revenues, cost of revenues and gross profit for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 (in thousands, except for percentage data):


	Three					Three
	Months					Months								Percentage
	Ended		Percentage			Ended		Percentage			Year to Year			Change
	March 31,		of Total			March 31,		of Total			Increase			Year over
	2010		Revenues			2009		Revenues			(Decrease)			Year
Revenues:
Recurring	$	12,287		76	%	$	11,697		45	%	$	590			5	%
Services		3,645		23	%		11,202		43	%		(7,557	)		(67	)%
License		229		1	%		3,001		12	%		(2,772	)		(92	)%


Total revenues	$	16,161		100	%	$	25,900		100	%	$	(9,739	)		(38	)%


	Three						Three
	Months						Months								Percentage
	Ended			Percentage			Ended		Percentage			Year to Year			Change
	March 31,			of Related			March 31,		of Related			Increase			Year over
	2010			Revenues			2009		Revenues			(Decrease)			Year
Cost of revenues:
Recurring	$	6,414			52	%	$	5,785		49	%	$	629			11	%
Services		4,412			121	%		9,309		83	%		(4,897	)		(53	)%
License		110			48	%		191		6	%		(81	)		(42	)%


Total cost of revenues	$	10,936					$	15,285				$	(4,349	)


Gross profit:
Recurring	$	5,873			48	%	$	5,912		51	%	$	(39	)		(1	)%
Services		(767	)		(21	)%		1,893		17	%		(2,660	)		(141	)%
License		119			52	%		2,810		94	%		(2,691	)		(96	)%


Total gross profit	$	5,225			32	%	$	10,615		41	%	$	(5,390	)		(51	)%

Revenues

Recurring Revenues.Recurring revenues, consisting of on-demand arrangements and maintenance revenues for both perpetual license and time-based on-premise arrangements, increased by $0.6 million, or 5%, in the three months ended March 31, 2010 compared to the same period last year. The increases were primarily due to the growth in our on-demand subscription revenues and our maintenance revenues for the time-based on-premise arrangements, which together were up 13% compared to the three months ended March 31, 2009. Support revenues for maintenance services associated with our perpetual license decreased by $0.5 million in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The decrease was partially offset by $0.2 million maintenance revenues generated by Actek acquired in January 2010. The overall decrease in support revenues associated with perpetual license of $0.3 million was primarily a result of a number of on-premise customers converting to our on-demand service and decreased perpetual license sales to new customers.

Services Revenues.Services revenues decreased by $7.6 million, or 67%, in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The decrease in services revenues was primarily driven by the fact that a number of customers who signed agreements in prior quarters delayed the start of their implementation projects to future quarters, which negatively impacted both service revenues and gross margin. The decrease from prior year was also expected as we transition to shorter and less expensive on-demand implementations. In the near term, we expect service revenues to remain stable.

License Revenues.Perpetual license revenues decreased as expected by $2.8 million, or 92%, in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The decrease was primarily attributable to our transition from a perpetual license business to a recurring revenue SaaS-oriented company. As a result, our perpetual license business continues to diminish in importance and we do not expect perpetual license revenue to return to historical levels.

Cost of Revenues and Gross Margin

Cost of Recurring Revenues.Cost of recurring revenues increased by $0.6 million, or 11%, in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The increase was primarily due to a combination of increased amortization of intangible assets resulting from higher cost of third-party technology used in our products and the allocation of a relatively greater portion of such amortization expense to the cost of recurring revenues as such revenues comprise a greater portion of total revenues of $0.7 million. The increase also reflected increased infrastructure cost of fulfilling a higher level of customer orders resulting from the increase in on-demand subscription revenue of $0.3 million. The increase was partially offset by a decrease in personnel cost of $0.3 million as a result of headcount reduction. The costs associated with supporting our on-demand offering are generally higher than the cost of maintenance related to our on-premise customers, as we are responsible for the full operation of the software that the customer has contracted for in our hosting facility.

Cost of Services Revenues.Cost of services revenues decreased by $4.9 million, or 53%, in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The decrease was attributable to the decrease in related services revenues as discussed above.

Cost of License Revenues.Cost of license revenues decreased by $0.1 million, or 42% in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The decrease was primarily the result of our transition to a recurring revenue business. As a result of the transition, we have allocated to the cost of license revenues a lower portion of the amortization expense for intangible assets comprised of third-party technology used in our products.

Gross Margin.Our overall gross margin decreased to 32% in the three months ended March 31, 2010 from 41% in the three months ended March 31, 2009. This was primarily due to the decrease in service gross margin as a result of lower than planned utilization and a decrease in our average billing rate. The decrease was also a result of our business model shifting to on-demand from perpetual license sales, which historically has had a higher margin.

Our recurring revenue gross margin declined from 51% in the first quarter of 2009 to 48% in the first quarter of 2010. The decreases were primarily due to the additional costs, including the amortization expense for intangible assets comprised of third party technology used in our products and infrastructure costs, as discussed above. Due to the revenue recognition rules that require us to defer revenue on certain on-demand contracts until the customer “goes live”, we often experience an increase in on-demand infrastructure costs associated with new customers that is not immediately offset by corresponding revenues, resulting in negative impact on recurring revenue margin. We expect our overall recurring revenue margin to fluctuate, but trend upwards in future periods as we realize the benefit of our recent cost cutting actions as well as anticipated efficiencies over the longer term.

Services gross margin decreased from 17% in the first quarter of 2009 to negative 21% in the first quarter of 2010. The decrease reflects lower than planned utilization resulting from the delayed projects and a decrease in our average billing rate. We have seen more competition in recent quarters from other system implementers utilizing more offshore consulting resources driving down the average billing rate. Over the longer term, we expect to see margin improvement as we drive higher revenues and leverage cheaper third party consulting resources. While we expect improvement in our services margin we do not expect it to return to the level it was under our old perpetual license business model.

License gross margin decreased from 94% in the first quarter of 2009 to 52% in the first quarter of 2010. The decrease in license gross margin reflects the lower license revenue offset against the fixed cost of license including the amortization expense for intangible assets allocated to license sales.

Operating Expenses

The table below sets forth the changes in operating expenses for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 (in thousands, except percentage data):


	Three					Three
	Months					Months								Percentage
	Ended		Percentage			Ended		Percentage			Year to Year			Change
	March 31,		of Total			March 31,		of Total			Increase			Year over
	2010		Revenues			2009		Revenues			(Decrease)			Year
Operating expenses:
Sales and marketing	$	4,645		29	%	$	5,862		23	%	$	(1,217	)		(21	)%
Research and development		3,138		19	%		3,801		15	%		(663	)		(17	)%
General and administrative		3,232		20	%		3,567		14	%		(335	)		(9	)%
Restructuring		719		4	%		166		1	%		553			333	%


Total operating expenses	$	11,734		73	%	$	13,396		52	%	$	(1,662	)		(12	)%

Sales and Marketing.Sales and marketing expenses decreased $1.2 million, or 21%, in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The decrease was primarily due to a $0.6 million decrease in payroll expenses as a result of reductions in headcount and a $0.5 million decrease in sales commissions as a result of reductions in revenues, partially offset by a $0.1 million increase in sales and marketing expenses related to the newly acquired Actek entity.

Research and Development.Research and development expenses decreased $0.7 million, or 17%, in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The decrease was primarily due to a $0.9 million decrease in personnel costs as a result of reductions in headcount, partially offset by a $0.3 million increase in research and development expenses related to the newly acquired Actek entity.

General and Administrative.General and administrative expenses decreased $0.3 million, or 9%, in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The decrease was primarily due to a $0.3 million decrease in personnel costs and a $0.1 million decrease in professional fees, partially offset by a $0.2 million increase in general and administrative expenses related to the newly acquired Actek entity. The decrease of personnel costs of $0.3 million was primarily due to no bonus payout during the three months ended March 31, 2010.

Restructuring.Restructuring charges were $0.7 million in the first quarter of 2010, compared to $0.2 million in the first quarter of 2009. These charges are mainly related to severance and termination-related costs, most of which were severance-related cash expenditures. The headcount reduction of approximately 35 employees during the first quarter of 2010 mainly affected the engineering department, the cost of which is recorded in the research and development expenses. The cost savings program in the first quarter of 2010 was substantially completed as of March 31, 2010.

Stock-Based Compensation

The following table sets forth a summary of our stock-based compensation expenses for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 (in thousands, except percentage data):


	Three		Three
	Months		Months					Percentage
	Ended		Ended		Year to Year			Change
	March 31,		March 31,		Increase			Year over
	2010		2009		(Decrease)			Year
Stock-based compensation:
Cost of recurring revenues	$	124	$	163	$	(39	)		(24	)%
Cost of services revenues		241		13		228			1,754	%
Sales and marketing		271		232		39			17	%
Research and development		215		142		73			51	%
General and administrative		503		427		76			18	%


Total stock-based compensation	$	1,354	$	977	$	377			39	%

Total stock-based compensation expenses increased $0.4 million, or 39%, in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The overall increases were primarily attributable to the allocated expense associated with a greater number of restricted stock units granted and vested in the first quarter of fiscal 2010, as compared to the first quarter of fiscal 2009. The increase is also attributable to the amortized expense of Actek acquisition contingent consideration that is considered compensatory (see Note 2 — Acquisition above for details).

Other Items

The table below sets forth the changes in other items for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 (in thousands, except percentage data):


	Three			Three
	Months			Months					Percentage
	Ended			Ended		Year to Year			Change
	March 31,			March 31,		Increase			Year over
	2010			2009		(Decrease)			Year
Interest and other income	$	7		$	29	$	(22	)		(76	)%


Provision (benefit) for income taxes	$	(551	)	$	58	$	(609	)		(1,050	)%

Interest and Other Income

Interest and other income decreased $22,000, or 76%, in the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The decrease was primarily attributable to the loss on foreign currency transactions as a result of a weaker US dollar.

Provision (benefit) for Income Taxes

Benefit from income taxes was $551,000 in the three months ended March 31, 2010 compared to provision for income taxes of $58,000 in the three months ended March 31, 2009. The tax benefit was mainly due to the recognition of deferred tax liabilities related to the intangible assets acquired from Actek and the associated release of a valuation allowance on the Company’s deferred tax assets of $614,000 in the first quarter of 2010, partially offset by $63,000 provision for income taxes in the three months ended March 31, 2010. The provisions for the three months ended March 31, 2010 and 2009 were primarily due to foreign withholding taxes and income taxes related to our foreign operations.

Liquidity and Capital Resources

As of March 31, 2010, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $29.1 million and accounts receivable of $15.6 million.

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


	Three Months Ended March 31,
	2010			2009
Net cash provided by (used in):
Operating activities	$	(1,915	)	$	(2,190	)
Investing activities		1,981			(11,498	)
Financing activities		(212	)		(11	)

Net Cash Used In Operating Activities.Net cash used in operating activities decreased $0.3 million for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The decrease in use of cash was primarily attributable to a $6.4 million decrease in payroll-related costs as a result of decrease in headcount, a 1.2 million decrease in professional service costs and a $0.6 million decrease in employee reimbursable expenses. These decreases were partially offset by a decrease of $7.9 million in cash collections resulting from the decrease in revenues.

Net Cash Provided by (Used in) Investing Activities.Net cash provided by investing activities was $2.0 million for the three months ended March 31, 2010 compared to net cash used in investing activities of $11.5 million for the three months ended March 31, 2009. Net cash provided by investing activities during the three months ended March 31, 2010 was attributable to proceeds from maturities and sales of investments of $6.7 million, partially offset by purchases of marketable investments of $2.5 million, payment made for the Actek acquisition of $1.6 million, purchases of property and equipment of $0.4 million, and payments made to acquire certain intangible assets of $0.2 million. Net cash used in investing activities during the three months ended March 31, 2009 was due to purchases of investments of $10.8 million, purchases of property and equipment of $0.6 million and purchases of intangible assets of $0.1 million.

Net Cash Used in Financing Activities.Net cash used in financing activities was $0.2 million for the three months ended March 31, 2010 compared to net cash used in financing activities of $11,000 for the three months ended March 31, 2009. Net cash used in financing activities during the three months ended March 31, 2010 was due to repayment of $0.9 million debt assumed through the Actek acquisition, and cash used to repurchase common stock from employees for payment of taxes on vesting of restricted stock units of $0.1 million, partially offset by cash received from the exercise of stock options and shares purchased under our employee stock purchase plan of $0.8 million. Net cash used in financing activities during the three months ended March 31, 2009 was due to cash paid for repurchases of stock of $0.7 million and cash used to repurchase common stock from employees for payment of taxes on vesting of restricted stock units of $0.3 million, partially offset by cash received from the exercise of stock options and shares purchased under our employee stock purchase plan of $1.0 million.

Auction Rate Securities

See Note 5 — Financial Instruments of our notes to condensed consolidated financial statements for information regarding our auction rate securities.

Contractual Obligations and Commitments

The following table summarizes our contractual cash obligations (in thousands) at March 31, 2010. Contractual cash obligations that are cancelable upon notice and without significant penalties are not included in the table. In addition, to the extent that payments for unconditional purchase commitments for goods and services are based, in part, on volume or type of services required by us, we included only the minimum volume or purchase commitment in the table below.


	Payments due by Period
			Remaining										2015
Contractual Obligations	Total		2010		2011		2012		2013		2014		and beyond
Operating lease commitments	$	3,822	$	1,549	$	1,141	$	472	$	279	$	166	$	215


Unconditional purchase commitments	$	942	$	510	$	330	$	102	$	—	$	—	$	—

For our New York, New York and San Jose, California offices, we had two certificates of deposit totaling approximately $232,000 as of March 31, 2010 and December 31, 2009, pledged as collateral to secure letters of credit required by our landlords for security deposits.

In April 2010, we entered into a new lease agreement to relocate its headquarters to Pleasanton, California. The new location consists of 32,000 square feet of office space. This new lease replaces the existing office lease in San Jose, which will expire in the third quarter of 2010. The annual rental expense is approximately $0.7 million, which is not included in the table above. Compared with the existing annual rental expense of $1.8 million related to the San Jose lease, the new Pleasanton lease will decrease our annual rental expense by $1.1 million. The new lease expires in July 2017.

Our future capital requirements will depend on many factors, including revenues we generate, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, market acceptance of our on-demand service offering, our ability to offer on-demand service on a consistently profitable basis and the continuing market acceptance of our other products. However, based on our current business plan and revenue projections, we believe our existing cash and investment balances will be sufficient to meet our anticipated cash requirements as well as the contractual obligations listed above for the next twelve months.

Off-Balance Sheet Arrangements

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


Item 3.		*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. Our market risk exposure is also a result of fluctuations in interest rates and foreign exchange rates. See Note 5 — Financial Instruments of our notes to condensed consolidated financial statements for information regarding our auction rate securities.

We do not hold or issue financial instruments for trading purposes except for certain auction rate securities, and we invest in 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 also establish credit quality standards, limits on exposure to any one security issue, limits on exposure to any one issuer and limits on exposure to the type of instrument.

Financial instruments that potentially subject us to market risk are short-term investments, long-term investments and trade receivables. We mitigate market risk by monitoring ratings, credit spreads and potential downgrades for all bank counterparties on at least a quarterly basis. Based on our on-going assessment of counterparty risk, we will adjust our exposure to various counterparties.

Interest Rate Risk.We invest our cash in a variety of financial instruments, consisting primarily of investments in money market accounts, certificates of deposit, high quality corporate debt obligations, United States government obligations, auction rate securities and the related put option asset.

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 March 31, 2010, the average maturity of our investments was approximately 8 months, and all investment securities other than auction rate securities had maturities of less than 24 months. The following table presents certain information about our financial instruments except for auction rate securities at March 31, 2010 that are sensitive to changes in interest rates (in thousands, except for interest rates):


	Expected Maturity						Total		Total
	1 Year			More Than			Principal		Fair
	or Less			1 Year			Amount		Value
Available-for-sale securities	$	10,680		$	3,469		$	14,149	$	14,166
Weighted average interest rate		0.52	%		1.36	%

Our exposure to interest rate risk also relates to the increase or decrease in the amount of interest expense we must pay on our outstanding debt instruments. As of March 31, 2010, we had no outstanding indebtedness for borrowed money. Therefore, we currently have no exposure to interest rate risk related to debt instruments. To the extent we enter into or issue debt instruments in the future, we will have interest rate risk.

Foreign Currency Exchange Risk.Our revenues and our expenses, except those related to our non-United States operations, are generally denominated in United States dollars. For the three months ended March 31, 2010 approximately 7.7% of our total revenues were denominated in foreign currency. At March 31, 2010, approximately 12.6% of our total accounts receivable was denominated in foreign currency. Our exchange risks and foreign exchange losses have been minimal to date. The overall decrease in revenue for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 was partially offset by a $0.1 million favorable effect due to currency exchange rate fluctuations. We expect to continue to transact a majority of our business in U.S. dollars.

Occasionally, we may enter into forward exchange contracts to reduce our exposure to currency fluctuations on our foreign currency transactions. The objective of these contracts is to minimize the impact of foreign currency exchange rate movements on our operating results. We do not use these contracts for speculative or trading purposes.

As of March 31, 2010, we had an aggregate of $0.6 million (notional amount) of outstanding short-term foreign currency forward exchange contracts related to customer payments denominated in Mexican Pesos (MXN).

We had $25,000 of loss related to the forward exchange contract in the three months ended March 31, 2010. This contract will be settled on June 30, 2010. We do not anticipate any material adverse effect on our financial condition, results of operations or cash flows resulting from the use of this instrument in the immediate future. However, we cannot provide any assurance that our foreign exchange rate contract investment strategies will be effective or that transaction losses can be minimized or forecasted accurately. In particular, generally, we hedge only a portion of our foreign currency exchange exposure. We cannot assure you that our hedging activities will eliminate foreign exchange rate exposure. Failure to do so could have an adverse effect on our business, financial condition, results of operations or cash flows.


Item 4.		*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 quarterly 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.

In connection with their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer did not identify any changes in our internal control over financial reporting during the three months ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.		*Legal Proceedings*

We are from time to time a party to various litigation matters incidental to the conduct of our business, none of which, at the present time, is likely to have a material adverse effect on our future financial results.


Item 1A.		*Risk Factors*

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2009. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

Factors That Could Affect Future Results

We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report onForm 10-Q. Because of the factors discussed below and in our Annual Report onForm 10-K for 2009, as well as other variables affecting our operating results, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

RISKS RELATED TO OUR BUSINESS

We cannot accurately predict customer subscription and maintenance renewal rates and the impact these renewal rates will have on our future revenues or operating results.

Our customers have no obligation to renew their subscriptions for our on-demand service, term licenses or maintenance support for term or perpetual license transactions after the expiration of their initial subscription or maintenance period, which is typically 12 to 24 months, and some customers have elected not to renew. In addition, our customers may renew for fewer payees or renew for shorter contract lengths. In addition, we recently began to offer a pay-as-you-go model, whereby customers can pay for our on-demand service on a monthly basis without a long-term commitment. To the extent this new model gains acceptance, the rate of customer non-renewals may increase and thereby increase the potential risk to our recurring revenue from greater than anticipated customer cancellations during any reporting period. Accordingly, we cannot accurately predict customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their reduced spending levels, their decision to do more of the work themselves internally, or dissatisfaction with our service. If our customers do not renew their subscriptions for our on-demand services or maintenance support, our revenue will decline and our business will suffer.


Item 6.		*Exhibits*

(a) Exhibits


Exhibit
Number		Description

10.25		Office Lease Agreement between 6200 Stoneridge Mall Road Investors LLC and Callidus Software Inc. dated March 30, 2010

31.1		Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act

32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

Availability of this Report

We intend to make this quarterly report on Form 10-Q publicly available on our website (www.callidussoftware.com) without charge immediately following our filing with the Securities and Exchange Commission. We assume no obligation to update or revise any forward-looking statements in this quarterly report on Form 10-Q, whether as a result of new information, future events or otherwise, unless we are required to do so by law.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 7, 2010.


	CALLIDUS SOFTWARE INC.
	By:	/s/ RONALD J. FIOR
		Ronald J. Fior
		Chief Financial Officer, Senior Vice President, Finance and Operations

EXHIBIT INDEX
TO
CALLIDUS SOFTWARE INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2010


Exhibit
Number		Description

10.25		Office Lease Agreement between 6200 Stoneridge Mall Road Investors LLC and Callidus Software Inc. dated March 30, 2010

31.1		Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act

32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Callidus Software (CALD) Inactive 10-Q2010 Q1 Quarterly report

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