10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2013

OR

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

For the transition period from          to          .

Commission file number: 000-50463

Callidus Software Inc.

(Exact name of registrant as specified in its charter)

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

Callidus Software Inc.

6200 Stoneridge Mall Road, Suite 500

Pleasanton, California  94588

(Address of principal executive offices, including zip code) 

(925) 251-2200

(Registrant’s telephone number, including area code) 

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

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

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

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

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

There were 40,378,221 shares of the registrant’s common stock, par value $0.001, outstanding on October 31, 2013, 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	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	28
Item 4. Controls and Procedures	28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	29
Item 6. Exhibits	30
Signatures	31
Exhibit Index	32
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 101

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CALLIDUS SOFTWARE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

	September 30, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	25,192		$	16,400
Short-term investments	8,886			12,771
Accounts receivable, net of allowances of $721 and $485 at September 30, 2013 and December 31, 2012, respectively	23,304			22,567
Deferred income taxes	40			40
Prepaid and other current assets	7,761			6,718
Total current assets	65,183			58,496
Noncurrent assets:
Property and equipment, net	12,381			10,580
Goodwill	31,207			31,207
Intangible assets, net	18,083			21,196
Deferred income taxes, noncurrent	392			392
Deposits and other assets	3,243			2,872
Total assets	$	130,489		$	124,743
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,415		$	4,705
Accrued payroll and related expenses	5,868			5,854
Accrued expenses	6,635			8,164
Deferred income taxes	944			944
Deferred revenue	42,054			35,483
Capital lease obligations	1,232			921
Total current liabilities	58,148			56,071
Noncurrent liabilities:
Deferred revenue, noncurrent	7,592			3,702
Deferred income taxes, noncurrent	345			160
Other liabilities	1,908			2,159
Capital lease obligations, noncurrent	1,460			8
Convertible notes	59,215			59,215
Total liabilities	128,668			121,315
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $0.001 par value; 100,000 shares authorized; 41,362 and 38,538 shares issued and 39,023 and 36,199 shares outstanding at September 30, 2013 and December 31, 2012, respectively	39			34
Additional paid-in capital	268,228			255,331
Treasury stock; 2,339 shares at September 30, 2013 and December 31, 2012	(14,430		)	(14,430		)
Accumulated other comprehensive income	161			239
Accumulated deficit	(252,177		)	(237,746		)
Total stockholders’ equity	1,821			3,428
Total liabilities and stockholders’ equity	$	130,489		$	124,743

See accompanying notes to unaudited condensed consolidated financial statements.

3

CALLIDUS SOFTWARE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenues:
Recurring	$	21,119		$	17,533		$	60,359		$	52,446
Services and other	9,559			6,392			21,791			17,273
Total revenues	30,678			23,925			82,150			69,719
Cost of revenues:
Recurring	7,303			6,989			21,687			22,434
Services and other	4,475			5,078			14,436			14,266
Total cost of revenues	11,778			12,067			36,123			36,700
Gross profit	18,900			11,858			46,027			33,019
Operating expenses:
Sales and marketing	8,981			8,322			24,516			23,544
Research and development	4,146			3,947			12,984			12,037
General and administrative	5,757			4,785			16,889			14,639
Acquisition-related contingent consideration	—			50			—			(1,787		)
Restructuring	141			(53		)	1,699			561
Total operating expenses	19,025			17,051			56,088			48,994
Operating loss	(125		)	(5,193		)	(10,061		)	(15,975		)
Interest income and other income (expense), net	29			139			(92		)	134
Interest expense	(860		)	(860		)	(2,578		)	(2,594		)
Loss before provision for income taxes	(956		)	(5,914		)	(12,731		)	(18,435		)
Provision for income taxes	457			444			1,700			213
Net loss	$	(1,413	)	$	(6,358	)	$	(14,431	)	$	(18,648	)
Net loss per share - basic and diluted
Net loss per share	$	(0.04	)	$	(0.18	)	$	(0.38	)	$	(0.53	)
Shares used in basic and diluted per share computation	38,648			35,853			37,873			35,070
										34674
Comprehensive loss
Net Loss	$	(1,413	)	$	(6,358	)	$	(14,431	)	$	(18,648	)
Unrealized gains (loss) on available-for-sale securities	5			22			(6		)	35
Foreign currency translation adjustments	(64		)	53			84			58
Comprehensive loss	$	(1,472	)	$	(6,283	)	$	(14,353	)	$	(18,555	)

See accompanying notes to unaudited condensed consolidated financial statements.

4

CALLIDUS SOFTWARE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(14,431	)	$	(18,648	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation expense	3,278			2,184
Amortization of intangible assets	3,621			3,818
Provision for doubtful accounts and service remediation reserves	846			188
Stock-based compensation	8,345			10,917
Release of valuation allowance	—			(350		)
(Loss) gain on disposal of property and equipment	2			(6		)
Amortization of convertible notes issuance cost	402			402
Net amortization on investments	63			310
Acquisition-related contingent consideration	—			(1,787		)
Changes in operating assets and liabilities:
Accounts receivable	(1,583		)	(7,627		)
Prepaid and other current assets	(1,043		)	(1,809		)
Other noncurrent assets	(773		)	322
Accounts payable	(3,250		)	(129		)
Accrued expenses	1,517			741
Accrued payroll and related expenses	462			(267		)
Accrued restructuring	(476		)	37
Deferred revenue	10,461			1,635
Deferred income taxes	185			111
Net cash provided by (used in) operating activities	7,626			(9,958		)
Cash flows from investing activities:
Purchases of investments	(5,634		)	(16,536		)
Proceeds from maturities and sale of investments	9,450			31,811
Purchases of property and equipment	(1,714		)	(4,927		)
Proceeds from disposal of property and equipment	—			6
Purchases of intangible assets	(634		)	(4,485		)
Acquisitions, net of cash acquired	—			(7,721		)
Net cash provided by (used in) investing activities	1,468			(1,852		)
Cash flows from financing activities:
Proceeds from issuance of common stock	5,375			5,222
Repurchase of common stock from employees for payment of taxes on vesting of restricted stock units	(818		)	(2,079		)
Payment of consideration related to acquisitions	(3,078		)	(1,160		)
Repayment of debt assumed through acquisition	—			(30		)
Payment of principal under capital leases	(1,709		)	(887		)
Net cash (used in) provided by financing activities	(230		)	1,066
Effect of exchange rates on cash and cash equivalents	(72		)	58
Net increase (decrease) in cash and cash equivalents	8,792			(10,686		)
Cash and cash equivalents at beginning of period	16,400			17,383
Cash and cash equivalents at end of period	$	25,192		$	6,697
Supplemental disclosures of cash flow information:
Cash paid for interest on convertible debt	$	1,406		$	2,110
Cash paid for interest on capital leases	56			83
Non-cash financing of fixed assets acquired under capital lease	2,627			—

See accompanying notes to unaudited condensed consolidated financial statements.

5

CALLIDUS SOFTWARE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.Summary of Significant Accounting Policies

Basis of Presentation and Summary of Accounting Policies

All amounts included herein related to the condensed consolidated financial statements as of September 30, 2013 and the three and nine months ended September 30, 2013 and 2012 are unaudited and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Callidus Software Inc.'s ("the Company's") Annual Report on Form 10-K for the year ended December 31, 2012. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the Securities and Exchange Commission ("SEC") rules and regulations regarding interim financial statements.

In the opinion of management, the accompanying 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, 2013.

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

The Company recognized an adjustment of $1.0 million which increased revenue in the three months ended September 30, 2013 as a result of a review of all outstanding deferred revenue projects, of which $0.2 million is included in SaaS revenues, and $0.8 million is included in services and other revenues. Based upon Management's review of qualitative and quantitative factors, Management believes the impact of the adjustment is not material to current or prior periods.

Use of Estimates

Preparation of the condensed consolidated financial statements in conformity with GAAP and the rules and regulations of the SEC requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed 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, uncertain tax liabilities, allowances for doubtful accounts, the useful lives of fixed assets and intangible assets, goodwill and intangible asset impairments, stock-based compensation forfeiture rates, accrued liabilities, the allocation of the value of purchase consideration for business acquisitions, 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 for continued reasonableness, using historical experience and other factors, including the current economic environment. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such evaluation. Illiquid credit markets, volatile equity and foreign currency markets and declines in Information Technology spending by companies have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ materially from those estimates. Changes in those estimates, if any, resulting from continuing changes in the economic environment, will be reflected in the condensed consolidated financial statements in future periods.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2013-11 ("ASU 2013-11"), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an entity to present unrecognized tax benefits as a reduction of a deferred tax asset, except in certain circumstances. ASU 2013-11 is effective for fiscal years and interim periods beginning after December 31, 2013, and early adoption is permitted. Based upon a preliminary review of the guidance, the Company does not anticipate that adoption will have a significant impact on the Company’s condensed consolidated financial statements.

6

In February 2013, FASB issued Accounting Standards Update 2013-02 ("ASU 2013-02"), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires an entity to present either on the face of the statement where comprehensive income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. ASU 2013-02 was effective for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02, which involves presentation and disclosures only, did not impact the Company’s condensed consolidated financial statements.

2.Restructuring

Restructuring expenses primarily consist of costs associated with employee terminations and exit of excess facilities. These costs are recognized in accordance with the accounting guidance for exit activities and are presented as restructuring expenses in the Company's condensed consolidated statements of comprehensive loss. The Company incurred restructuring expense of $0.1 million and $(0.1) million during the three months ended September 30, 2013 and 2012, respectively, and $1.7 million and $0.6 million during the nine months ended September 30, 2013 and 2012, respectively.

The following table sets forth a summary of accrued restructuring expenses for the nine months ended September 30, 2013 and 2012, respectively (in thousands):

	December 31, 2012		Cash Payments			Additions		Adjustments			September 30, 2013
Severance and termination-related costs	$	589	$	(2,146	)	$	1,707	$	(8	)	$	142
Facilities-related costs	289		(30		)	—					259
Total accrued restructuring expenses	$	878	$	(2,176	)	$	1,707	$	(8	)	$	401

	December 31, 2011		Cash Payments			Additions		Adjustments			September 30, 2012
Severance and termination-related costs	$	—	$	(312	)	$	510	$	(53	)	$	145
Facilities-related costs	443		(212		)	209		(105		)	335
Total accrued restructuring expenses	$	443	$	(524	)	$	719	$	(158	)	$	480

3.Acquisitions

6FigureJobs.com

On May 4, 2012, the Company acquired 6FigureJobs.com (“6FigureJobs”), a premier job advertisement placement, recruitment media services and other career-related services provider to extend Hiring Cloud offerings. 6FigureJobs, a wholly-owned subsidiary of Workstream, Inc., a Canadian corporation, was purchased in exchange for $1.0 million in cash, which included an indemnity holdback of $0.3 million that was settled in May 2013.

LeadFormix, Inc.

On January 3, 2012, the Company acquired Leadformix, Inc., a leader in next-generation marketing automation and sales enablement, headquartered in the United States with operations in India, for $9.0 million in cash, which included an indemnity holdback of $1.5 million. In January 2013, $1.3 million of the indemnity holdback was paid and the remainder of the indemnity holdback was settled.

Webcom, Inc.

On October 3, 2011, the Company acquired Webcom, Inc. ("Webcom"), a U.S.-based company with operations in Serbia, a leader in Software-as-a-Service ("SaaS") based product configuration, pricing, quoting and proposal management. The total purchase price for Webcom was $10.8 million in cash, including a $1.6 million indemnity holdback and a $1.8 million earn-out condition. The full remaining balance of the earn-out condition of $1.8 million was paid in February 2013. During the third quarter of 2013, claims worth $0.1 million were applied to the indemnity holdback, and as of September 30, 2013, $0.8 million of the indemnity holdback remains accrued for potential indemnification items.

7

The Company’s business combinations described above did not have a material impact on the Company’s consolidated financial statements, and therefore pro forma disclosures have not been presented.

4.Goodwill and Intangible Assets

Management determined that no changes in the $31.2 million carrying amount of goodwill were necessary during the third quarter of 2013. Intangible assets consisted of the following as of September 30, 2013 and December 31, 2012 (in thousands):

	December 31, 2012 Cost		December 31, 2012 Net		Additions		Amortization Expense			September 30, 2013 Net		Weighted Average Amortization Period (Years)
Developed technology	$	15,179	$	12,384	$	495	$	(2,498	)	$	10,381	4.5
Customer relationships	6,884		4,952		—		(653		)	4,299		5.1
Trade names	1,202		1,040		—		(167		)	873		5.4
Patents and licenses	1,525		2,744		—		(263		)	2,481		7.8
Other	182		76		13		(40		)	49		0.8
Total	$	24,972	$	21,196	$	508	$	(3,621	)	$	18,083

Intangible assets include third-party software licenses used in the Company's products and acquired assets related to the Company’s acquisitions.

Amortization expense related to intangible assets was $1.2 million and $1.3 million for the three months ended September 30, 2013 and 2012, respectively, and $3.6 million and $3.8 million for the nine months endedSeptember 30, 2013 and 2012, respectively. Amortization expense related to intangible assets was included within cost of revenues for developed technology and patents and licenses, sales and marketing expense for customer relationships and trade names, and general and administrative expense for a favorable lease and other items. Intangible assets are amortized over their estimated useful lives of one to twelve years. Total future expected amortization is as follows (in thousands):

	Developed Technology		Customer Relationships		Trade names		Patents and Licenses		Other
Quarter Ending September 30:
Remainder of 2013	$	792	$	220	$	45	$	89	$	15
2014	2,451		874		179		348		34
2015	2,118		874		179		343		—
2016	2,124		876		151		344		—
2017	1,813		768		142		343		—
2018	1,083		501		101		313		—
2019 and beyond	—		186		76		701		—
Total expected amortization expense	$	10,381	$	4,299	$	873	$	2,481	$	49

5.Financial Instruments

As of September 30, 2013 and December 31, 2012, all investment debt securities are classified as available-for-sale and carried at estimated fair value, which is determined based on the inputs discussed below.

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

8

Realized gains and losses are calculated using the specific identification method. As of September 30, 2013 and December 31, 2012, the Company had no short-term investments in a material unrealized loss position.

The components of the Company’s cash, cash equivalents and investments classified as available-for-sale were as follows at September 30, 2013 and December 31, 2012 (in thousands):

September 30, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Other Than Temporary Impairment		Estimated Fair value
Cash	$	19,913	$	—	$	—	$	—	$	19,913
Cash equivalents:
Money market funds	5,279		—		—		—		5,279
Total cash equivalents	5,279		—		—		—		5,279
Total cash and cash equivalents	$	25,192	$	—	$	—	$	—	$	25,192
Short-term investments:
U.S. government and agency obligations	5,621		1		—		—		5,622
Corporate notes and obligations	3,260		4		—		—		3,264
Total short-term investments	$	8,881	$	5	$	—	$	—	$	8,886

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Other Than Temporary Impairment		Estimated Fair value
Cash	$	13,062	$	—	$	—	$	—	$	13,062
Cash equivalents:
Money market funds	3,338		—		—		—		3,338
Total cash equivalents	3,338		—		—		—		3,338
Total cash and cash equivalents	$	16,400	$	—	$	—	$	—	$	16,400
Short-term investments:
U.S. government and agency obligations	6,700		—		—		—		6,700
Corporate notes and obligations	6,061		10		—		—		6,071
Total short-term investments	$	12,761	$	10	$	—	$	—	$	12,771

The market value and the amortized cost of available-for-sale debt securities by contractual maturities as of September 30, 2013 were as follows (in thousands):

Contractual maturity	Amortized Cost		Estimated Fair value
Less than 1 year	$	6,581	$	6,586
Between 1 and 2 years	2,300		2,300
Total	$	8,881	$	8,886

At September 30, 2013, the Company had no unrealized losses related to U.S. government and agency securities.

The Company had no realized gains or losses on sales of its investments for the three and nine months ended September 30, 2013 and 2012. The Company had proceeds, net of purchases of investments, of $3.8 million and $15.3 million from maturities and sales of investments during the nine months ended September 30, 2013 and 2012, respectively.

9

The short-term investments in government obligations or highly rated credit securities generally have minor to moderate fluctuations in the fair values from period to period. The Company monitors credit ratings, downgrades and significant events surrounding these securities so as to assess if any of the impairments will be considered other-than-temporary. The Company did not identify any government obligations or highly rated credit securities held as of September 30, 2013 or as of December 31, 2012 for which the fair value declined significantly below amortized cost and were considered other-than-temporary impairments.

6.Fair Value Measurements

The Company measures financial assets at fair value on an ongoing basis. The estimated fair value of the Company’s financial assets was determined using the following inputs at September 30, 2013 (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
September 30, 2013	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds (1)	$	5,279	$	5,279	$	—	$	—
U.S. government and agency obligations (2)	5,622		—		5,622		—
Corporate notes and obligations (2)	3,264		—		3,264		—
Total	$	14,165	$	5,279	$	8,886	$	—

__________________________________________________

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

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

The table below presents the changes during the nine months ended September 30, 2013 related to balances measured using significant unobservable inputs (Level 3) (in thousands):

	December 31, 2012		Additions		Payments			September 30, 2013
Liabilities:
Contingent consideration to Webcom	$	1,750	$	—	$	(1,750	)	$	—
Total	$	1,750	$	—	$	(1,750	)	$	—

During the first quarter of 2013, the Company paid earn-out consideration related to the acquisition of Webcom of $1.8 million.

10

The estimated fair value of the Company’s financial assets was determined using the following inputs at December 31, 2012 (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2012	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds (1)	$	3,338	$	3,338	$	—	$	—
U.S. Treasury bills (2)	1,000		1,000		—		—
Corporate notes and obligations (2)	6,071		—		6,071		—
U.S. government and agency obligations (2)	5,700		—		5,700		—
Total	$	16,109	$	4,338	$	11,771	$	—
Liabilities:
Contingent consideration (3)	$	1,750	$	—	$	—	$	1,750
Total	$	1,750	$	—	$	—	$	1,750

__________________________________________________

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

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

(3) Included in accrued expenses on the consolidated balance sheet.

Valuation of Investments

Level 1 and Level 2

The Company’s available-for-sale securities include money market funds, U.S. Treasury bills, commercial paper, corporate notes and obligations, and U.S. government and agency obligations. The Company values these securities using a pricing matrix from a pricing service provider, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs). The Company classifies all of its available-for-sale securities, except for money market funds and U.S. Treasury bills, as having Level 2 inputs. The Company validates the estimated fair value of certain securities from a pricing service provider on a quarterly basis. The valuation techniques used to measure the fair value of the financial instruments having Level 2 inputs, all of which have counterparties with high credit ratings, were derived from the following: non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments or pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data.

Level 3

Contingent consideration is defined as earn-out payments, which the Company may pay in connection with acquisitions. Contingent consideration liabilities are classified as Level 3 liabilities, as the Company uses unobservable inputs to value them, which is a probability-based income approach. Subsequent changes in the fair value of contingent consideration liabilities will be recorded within the acquisition-related contingent consideration in the Company’s condensed consolidated statements of comprehensive loss. As of September 30, 2013, the Company had no Level 3 liabilities.

7.Convertible Notes

As of September 30, 2013, the Company had an aggregate principal amount of $59.2 million of the 4.75% Convertible Senior Notes (“Convertible Notes”) due in 2016 outstanding. Interest is payable on June 1 and December 1 of each year until the maturity date of June 1, 2016 unless the Convertible Notes are converted, redeemed or repurchased. The Convertible Notes

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are senior unsecured obligations of the Company. Based on market prices, the fair value of the Convertible Notes was $74.1 million and $58.0 million as of September 30, 2013 and December 31, 2012, respectively.

The Convertible Notes contain an optional redemption feature, which allows the Company, any time on or after June 6, 2014, to redeem all or part of the Convertible Notes for cash if the last reported sale price per share of common stock (as described below) has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption. The redemption price would be 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest.

Holders may convert the Convertible Notes into common stock of the Company at any time at a conversion rate of 129.6596 shares of common stock per $1,000 principal amount, or approximately $7.71 per share, subject to certain adjustments. If holders convert their notes in connection with a “make-whole fundamental change,” such holders are entitled, under certain circumstances, to an increase in the conversion rate for notes surrendered. Upon conversion, the Company will satisfy its conversion obligations by delivering shares of the Company’s common stock.

The Convertible Notes are recorded as long-term debt. The current balance of the debt issuance costs associated with the issuance of the Convertible Notes is recorded within prepaid and other current assets, and the non-current balance is recorded within deposits and other assets, and is being amortized to interest expense over the terms of the Convertible Notes. At September 30, 2013 and December 31, 2012, $0.5 million of the debt issuance costs are included in prepaid and other current assets, with the remaining amounts of $0.9 million and $1.3 million, respectively, recorded in deposits and other assets.

Please refer to Note 13 for recent activity regarding the Convertible Notes.

8.Commitments and Contingencies

Except as discussed below, there were no material changes in the Company's commitments under contractual obligations as disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2012.

On March 26, 2013, the Company entered into an agreement to procure application server software licenses and related maintenance services, payable quarterly over three years in the amount of $2.6 million and $4.3 million, respectively.

Warranties and Indemnification

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

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

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Intellectual Property Litigation

On July 19, 2012, Versata Software, Inc. and Versata Development Group, Inc. (collectively, “Versata”) filed suit against Callidus in the United States District Court for the District of Delaware (“Delaware District Court”). The suit asserted that the Company infringes U.S. Patent Nos. 7,904,326, 7,908,304 and 7,958,024. The Company believes that the claims are without merit and intends to vigorously defend against these claims. On May 30, 2013, the Company answered the complaint and filed a counterclaim against Versata in the United States District Court for the District of Delaware.  The Company's counterclaim asserted that Versata infringes U.S. Patent Nos. 6,269,355, 6,850,924 and 6,473,748. As of August 30, 2013, the Company filed petitions with the United States Patent and Trademark Office Patent Trial and Appeal Board (“PTAB”) for covered business method patent review of U.S. Patent Nos. 7,904,326, 7,908,304 and 7,958,024. The Company also filed a motion with the Delaware District Court on August 30, 2013 to stay the litigation pending the completion of the patent review proceedings with the PTAB. The Company is not in a position to assess whether any loss or adverse effect on the Company's financial condition is probable, or to estimate the range of potential loss, if any.

On August 31, 2012, the Company filed suit against Xactly Corporation (“Xactly”) in the United States District Court for the Central District of California. The suit alleges that Xactly infringes U.S. Patents 8,046,387 and 7,774,378. On October 24, 2012, the Company amended its complaint to add Xactly's President and Chief Executive Officer as a defendant and to add claims for trademark infringement, false advertising, false and misleading advertising, trade libel, defamation, intentional interference with prospective economic advantage, intentional interference with contractual relations, breach of contract and unfair competition, in addition to patent infringement. On January 28, 2013, the Company further amended its complaint to allege that Xactly also infringes U.S. Patent 6,473,748 and dismiss its intentional interference with contractual relations claim. On March 14, 2013, the case was transferred to the United States District Court in the Northern District of California. On May 31, 2013, the Company and Xactly entered into a stipulated dismissal of the Company's trademark infringement claim whereby Xactly agreed that it will not use the Company's trademarks-in-suit in certain of Xactly's marketing and advertising activities going forward. The case is currently scheduled for trial in October 2014. Please refer to Note 13 for recent activity regarding this litigation.

 On December 14, 2012, TQP Development, LLC filed suit against Callidus in the United States District Court for the Eastern District of Texas Marshall Division. The suit asserts that Callidus infringes U.S. Patent No. 5,412,730. The Company believes that the claim is without merit and intends to vigorously defend against the claim. The case is currently scheduled for trial in August 2014. As of October 11, 2013, the Company filed a petition with the PTAB for covered business method patent review of U.S. Patent No. 5,412,730. The Company is not in a position to assess whether any loss or adverse effect on the Company's financial condition is probable, or to estimate the range of potential loss, if any.

Other matters

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

The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews the need for any such liability on a quarterly basis and records any necessary adjustments to reflect the effect of ongoing negotiations, contract disputes, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case in the period they become known. At September 30, 2013, the Company had not recorded any such liabilities in accordance with accounting for contingencies. However, litigation is subject to inherent uncertainties and the Company's view on these matters may change in the future.

9.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 business segment, which is the development, marketing and sale of sales and marketing effectiveness cloud software and related services.

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The following table summarizes revenues for the three and nine months ended September 30, 2013 and 2012 by geographic areas (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
United States	$	22,052	$	18,301	$	62,616	$	54,808
EMEA	3,050		2,484		9,227		7,919
Asia Pacific	3,273		1,650		5,783		4,038
Other	2,303		1,490		4,524		2,954
	$	30,678	$	23,925	$	82,150	$	69,719

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.

During the three and nine months ended September 30, 2013 and 2012, no customer accounted for more than 10% of total revenues.

10.Net Loss Per Share

Basic net loss per share is calculated by dividing net loss for the period by the weighted average common shares outstanding during the period. Diluted net loss per share is calculated by dividing the net loss for the period by the weighted average common shares outstanding, adjusted for all dilutive potential common shares, which includes shares issuable upon the conversion of the Convertible Notes, the exercise of outstanding common stock options, the release of restricted stock, and purchases of employee stock purchase plan ("ESPP") shares to the extent these shares are dilutive. For the three and nine months ended September 30, 2013 and 2012, 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 September 30,		Nine Months Ended September 30,
	2013	2012	2013	2012
Restricted stock	1,967	3,441	2,071	3,701
Stock options	2,558	3,076	2,622	3,381
ESPP	19	32	6	11
Convertible Notes	7,680	7,680	7,680	7,680
Total	12,224	14,229	12,379	14,773

The weighted average exercise price of stock options excluded for the three and nine months ended September 30, 2013 was $4.62 and $4.22, respectively. The weighted average exercise price of stock options excluded for the three and nine months ended September 30, 2012 was $3.34 and $3.71, respectively.

Holders may convert the Convertible Notes into common stock of the Company at any time at a conversion rate of 129.6596 shares of common stock per $1,000 principal amount, or approximately $7.71 per share, subject to certain adjustments. Please refer to Note 7 for details.

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11.Stock-based Compensation

Expense Summary

The table below sets forth a summary of stock-based compensation expense for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Stock-based compensation:
Stock options	$	181	$	143	$	642	$	713
Performance-based restricted stock units	463		210		984		387
Restricted stock units	1,750		2,849		6,263		9,281
ESPP	150		220		456		536
Total stock-based compensation	$	2,544	$	3,422	$	8,345	$	10,917

As of September 30, 2013, there was $2.8 million, $1.6 million, $7.1 million and $0.5 million of total unrecognized compensation expense related to stock options, performance-based restricted stock units, restricted stock units and the ESPP shares, respectively. The expenses related to stock options, performance-based restricted stock units, restricted stock units and ESPP shares are expected to be recognized over a weighted average period of 3.5 years, 0.9 years, 1.6 years and 0.8 years, respectively.

The table below sets forth the functional classification of stock-based compensation expense for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Stock-based compensation:
Cost of recurring revenues	$	234	$	351	$	612	$	1,280
Cost of services and other revenues	218		573		860		1,623
Sales and marketing	769		997		1,924		2,937
Research and development	384		477		1,317		1,376
General and administrative	939		1,024		3,632		3,701
Total stock-based compensation	$	2,544	$	3,422	$	8,345	$	10,917

Performance-based Restricted Stock Units

During the nine months ended September 30, 2013, the Company granted performance-based restricted stock units with vesting contingent on successful attainment of predetermined SaaS revenue growth, recurring revenue gross margin targets, and days sales outstanding ("DSO") targets. The DSO targets apply only to performance-based restricted stock units granted to the Chief Financial Officer and Chief Executive Officer.

During 2012, the Company granted as compensation restricted stock units that were performance-based restricted stock units. The pre-established goals were measured against annual recurring revenue and operating income. The annual recurring revenue target for 2012 was met. As a result, 50% of those awards vested during the first quarter of 2013, with the remainder to vest quarterly through the first quarter of 2014. The operating income target for 2012 was not met, and therefore in 2012 the shares related to this target were canceled and the associated expense was reversed when the Company determined the target was not met.

Determination of Fair Value

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The fair value of each restricted stock unit, relating to both performance and non-performance awards, is estimated based on the market value of the Company’s stock on the date of grant. The fair value of the performance-based award assumes that performance goals will be achieved.  If such goals are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed.  The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table.

	Three Months Ended September 30,			Nine Months Ended September 30,
	2013	2012		2013	2012
Stock Option Plans
Expected life (in years)	6.0 to 6.1	—		5.0 to 6.1	5.0 to 6.0
Risk-free interest rate	1.69% to 1.93%	—	%	1.41% to 1.93%	0.72% to 1.33%
Volatility	61% to 62%	—	%	61% to 63%	60% to 65%
Dividend yield	None	None		None	None

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

	Nine Months Ended September 30,
	2013	2012
Employee Stock Purchase Plan
Expected life (in years)	0.50 to 1.00	0.50 to 1.00
Risk-free interest rate	0.08% to 0.17%	0.13% to 0.20%
Volatility	41% to 62%	56% to 62%
Dividend yield	None	None

12.Related-Party Transactions

In June 2013, in the normal course of business, the Company entered into agreements with Lithium Technologies, Inc. (“Lithium”). The Chief Financial Officer of Lithium is a member of the Company's Board of Directors. The Company purchased an annual subscription for Lithium's social media management solutions in the amount of $120,000.  In the same period, Lithium entered into a two year hosting agreement with the Company in the amount of $113,000. During the third quarter of 2013, the Company paid the entire annual fee of $120,000 for the social media management solution, of which $32,000 was expensed and $88,000 remains in prepaid and other current assets as of September 30, 2013. During the third quarter of 2013 the Company recognized $26,000 in revenue under the$113,000 annual hosting agreement. In addition, during the third quarter of 2013 the Company entered into an agreement with Lithium for services in the amount of $109,000, of which $62,000 was recognized during the quarter.

Webcom, a wholly-owned subsidiary of the Company, engages the services of a third-party vendor to perform product modeling and maintenance of certain equipment. The third-party vendor is owned by a relative of Webcom’s senior management. For the three and nine months ended September 30, 2013, the Company paid $40,000 and $114,000, respectively, to this vendor. For the three and nine months ended September 30, 2012, the Company paid $53,000 and $101,000, respectively, to this vendor.

13. Subsequent Events

On October 24, 2013, the Company entered into an agreement with a holder of the Company's Convertible Notes whereby the Company agreed to issue 1,251,215 shares of its common stock in exchange for $9.7 million aggregate principal amount of Convertible Notes consistent with the original conversion terms of the Convertible Notes plus a negotiated market-based cash premium and $0.2 million in accrued interest expense and the cash was paid upon the closing of the deal on October 25, 2013.

On November 7, 2013, the Company entered into an agreement with a holder of the Company's Convertible Notes whereby the Company agreed to issue 518,638 shares of its common stock in exchange for $4.0 million aggregate principal amount of Convertible Notes consistent with the original conversion terms of the Convertible Notes plus a negotiated market-

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based cash premium and $0.1 million in accrued interest expense and the cash was paid upon the closing of the deal on November 7, 2013.

On November 5, 2013, Callidus, Xactly and Xactly's President and Chief Executive Officer entered into a binding memorandum of understanding, pursuant to which the parties agreed to enter into a definitive settlement agreement, subject to court approval, that among other things, will include an agreement by Xactly to pay the Company $2.0 million, to be paid in four equal annual installments beginning in 2013.

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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 on Form 10-K for the year ended December 31, 2012 and with the unaudited condensed consolidated financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. This section of this Quarterly Report on Form 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, as amended. 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,” "may," “will,” and similar expressions and the negatives thereof identify forward-looking statements, which generally are not historical in nature.  These forward-looking statements include, but are not limited to, statements concerning the following: levels of recurring revenues, levels of SaaS revenues, changes in and expectations with respect to revenues, revenue growth and gross profits, operating expense levels, the impact of quarterly fluctuations of revenue and operating results, staffing and expense levels, expected cash and investment balances, the impact of foreign exchange rates and interest rate fluctuations, projected future financial performance, our anticipated growth and trends in our businesses, our business strategy, and other characterizations of future events or circumstances.  As and when made, management believes that these forward-looking statements are reasonable.  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.  In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections.  Many of these risks and uncertainties are described in “Risk Factors” set forth in our Annual Report on Form 10-K for the year ended December 31, 2012 and elsewhere in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or circumstances occurring after the date of this Quarterly Report on Form 10-Q, except as required by law.

Overview of the Results for the Three Months Ended September 30, 2013

Incorporated in Delaware in 1996, Callidus Software Inc. (NASDAQ:CALD), doing business as “CallidusCloud” (referred to herein as “CallidusCloud,” “Callidus,” “we” and “our”), is a leading provider of sales and marketing effectiveness cloud software. CallidusCloud enables organizations to drive performance and productivity across their business with our Hiring, Learning, Marketing and Selling Clouds. From back office to the field, from desktop to mobile, we ensure organizations have the right tools to simplify the entire sales process. We believe the combined power of our clouds, our people and our partners fuel growth, empower the work force and deliver real value. CallidusCloud drives performance and productivity for small, medium and large enterprises across multiple industries and geographies rely on CallidusCloud for quicker hiring, simpler learning, better marketing and smarter selling.

After the expansion of our offerings in recent years, we have a broad suite of solutions across the sales, marketing, hiring and learning product spectrum all focused primarily on improving the sales performance of our customers.

Recurring revenues consist of Software-as-a-Service (“SaaS”) revenues and recurring maintenance revenues. SaaS revenues are primarily made up of on-demand hosting revenues, sales operation services and term license revenues. SaaS billings grew 34% during the current quarter, and we added 135 net new customers. SaaS billings are defined as all monthly, quarterly, annual and multi-year billings pursuant to our on-demand subscription contracts. Services and other revenues are comprised of perpetual license sales and our software consulting services. Our software consulting services provide customers with a full range of sales effectiveness solution implementations, system upgrades, strategic consulting, migration assistance, reporting and integration consulting and solution architecture services.

Revenue Growth and Customer Expansion

While we offer our customers a range of purchasing and deployment options, from on-demand subscriptions to on-premise term or perpetual licenses, our business and revenue model is focused on recurring revenues. From time to time, we will invoice for overages to customers that have used payees, with respect to our incentive compensation solution, and/or storage capacity in excess of the agreed-upon contractual levels.  The actual overage revenue is recognized in SaaS revenue in the period of settlement.

We now have over 2,000 customers. Our recurring revenue customer retention rates over the past twelve months were over 90%. We believe our rapid customer growth and high retention rates are indicators of the quality of our products and the strength of our customer base.

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SaaS and license revenue drove the growth in total revenues for the three months ended September 30, 2013. SaaS revenues grew to $17.1 million for the three months ended September 30, 2013, representing a $3.5 million or 26% increase over the same period in 2012. Overages were approximately 8% of SaaS revenue during the three months ended September 30, 2013, which resulted from our customers' expanding use and reliance on our cloud solutions.

We recognized an adjustment of $1.0 million in revenue in the three months ended September 30, 2013 as a result of a review of all outstanding deferred revenue projects, of which $0.2 million is included in SaaS revenues, and $0.8 million is included in services and other revenues. Based upon Management's review of qualitative and quantitative factors, Management believes the impact of the adjustment is not material to current or prior periods.

Recurring Gross Margin Improvement

Recurring revenue gross profits increased $3.3 million, or 31% during the three months ended September 30, 2013 compared to the same period in 2012, and increased $8.7 million or 29%, during the nine months ended September 30, 2013 compared to the same period in 2012. The recurring revenue gross margin percentage for the three months ended September 30, 2013 was 65%, compared to 60% in the same period in 2012, and was 64% for the nine months ended September 30, 2013, compared to 57% in the same period in 2012. These increases reflect successful execution of key components of our 2013 strategic initiatives of SaaS revenue growth and margin improvement.

Cash Improvement

Cash and short-term investments increased $6.9 million, or 25% to $34.1 million, from $27.2 million in the second quarter of 2013, primarily due to continued improvement in days sales outstanding ("DSO"), strong collections during the quarter, and cash proceeds received from exercises of stock options. Net cash provided by operations was $7.6 million during the nine months ended September 30, 2013.

Operating Expense Results

Operating expenses increased $2.0 million, or 12% to $19.0 million from $17.0 million in the third quarter of 2012. The increase in operating expenses was primarily due to higher headcount in our sales team, commissions from record bookings, higher bad debt expense, legal fees from protecting our IP, general corporate bonuses, severance and recruiting expenses. Total headcount at September 30, 2013 was 590, an increase of 95 or 19% from 495 at September 30, 2012.

Challenges and Risks

In response to market demand, our primary business focus is providing software as a service. We believe that our offerings address the needs of our customers, and at the same time, provide more predictable revenue streams. For customers that prefer to purchase software on a perpetual basis, we continue to offer such licenses, and in the three and nine months ended September 30, 2013, we generated $3.4 million and $5.6 million, respectively, in perpetual license revenues.  We expect perpetual license revenue to fluctuate from period to period based upon customer demand.

While we have a number of sales opportunities in process and in our sales pipeline, we continue to experience wide variances in the timing and size of our transactions. We believe one of our major challenges continues to be increasing the prioritization with prospective customers of purchasing and implementing our solutions over competing products. As part of our effort to address this challenge, we continue to expand our sales force presence, to promote our on-demand products and to develop new products and enhancements During 2011 and 2012, we completed eight acquisitions to expand our product offerings and customer base. We also invested in our infrastructure and are in the process of consolidating and upgrading existing data centers to better serve our customer base.

In addition to these risks, our future operating performance is subject to the risks and uncertainties described in “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012.

Application of Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations which follows are based upon our condensed consolidated financial statements prepared in accordance with the generally accepted accounting principles in the United States of America ("GAAP"). The application of GAAP requires management to make assumptions, judgments and estimates that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosures regarding

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these items. We base our assumptions, judgments and estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our future financial condition or results of operations will be affected. We evaluate our assumptions, judgments and estimates on a regular basis. 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, stock-based compensation, valuation of acquired intangible assets, goodwill impairment, long-lived asset impairment, contingent consideration and income taxes have the greatest potential impact on our condensed 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 and we consider these to be our critical accounting policies. There were no significant changes in our critical accounting policies and estimates during the three and nine months ended September 30, 2013 as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2013-11 ("ASU 2013-11"), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an entity to present unrecognized tax benefits as a reduction of a deferred tax asset, except in certain circumstances. ASU 2013-11 is effective for fiscal years and interim periods beginning after December 31, 2013, and early adoption is permitted. Based upon a preliminary review of the guidance, the Company does not anticipate adoption will have a significant impact on the Company’s condensed consolidated financial statements.

In February 2013, FASB issued Accounting Standards Update 2013-02 ("ASU 2013-02"), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires an entity to present either on the face of the statement where comprehensive income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The adoption of ASU 2013-02, which involves presentation and disclosures only, did not impact the Company’s condensed consolidated financial statements.

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Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2013 and 2012

Revenues, Cost of Revenues and Gross Profit

The following tables set forth the changes in revenues, cost of revenues and gross profit for the three and nine months ended September 30, 2013, compared to same periods in 2012 (in thousands, except for percentage data):

	Three Months Ended September 30, 2013		Percentage of Revenues	Three Months Ended September 30, 2012		Percentage of Revenues	Increase (Decrease)			Percentage Change
Revenues:
Recurring	$	21,119	69%	$	17,533	73%	$	3,586		20%
Services and other	9,559		31%	6,392		27%	3,167			50%
Total revenues	$	30,678	100%	$	23,925	100%	$	6,753		28%
Cost of revenues:
Recurring	$	7,303	35%	$	6,989	40%	$	314		4%
Services and other	4,475		47%	5,078		79%	(603		)	(12)%
Total cost of revenues	$	11,778	38%	$	12,067	50%	$	(289	)	(2)%
Gross profit:
Recurring	$	13,816	65%	$	10,544	60%	$	3,272		31%
Services and other	5,084		53%	1,314		21%	3,770			287%
Total gross profit	$	18,900	62%	$	11,858	50%	$	7,042		59%

	Nine Months Ended September 30, 2013		Percentage of Revenues	Nine Months Ended September 30, 2012		Percentage of Revenues	Increase (Decrease)			Percentage Change
Revenues:
Recurring	$	60,359	73%	$	52,446	75%	$	7,913		15%
Services and other	21,791		27%	17,273		25%	4,518			26%
Total revenues	$	82,150	100%	$	69,719	100%	$	12,431		18%
Cost of revenues:
Recurring	$	21,687	36%	$	22,434	43%	$	(747	)	(3)%
Services and other	14,436		66%	14,266		83%	170			1%
Total cost of revenues	$	36,123	44%	$	36,700	53%	$	(577	)	(2)%
Gross profit:
Recurring	$	38,672	64%	$	30,012	57%	$	8,660		29%
Services and other	7,355		34%	3,007		17%	4,348			145%
Total gross profit	$	46,027	56%	$	33,019	47%	$	13,008		39%

Total Revenues.  Total revenues for the three months ended September 30, 2013 were $30.7 million, an increase of 28% or $6.8 million compared to the same period in 2012. Total revenues for the nine months ended September 30, 2013 were $82.2 million, an increase of 18% or $12.4 million compared to the same period in 2012. The increases during both the three months

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and nine months ended September 30, 2013 were primarily due to higher recurring revenue generated by our SaaS business, driven by the expansion of our sales force and our continued focus on SaaS revenue growth. Increased perpetual license revenue also contributed to the increases in both periods, along with a benefit to revenue as a result of the review of all outstanding projects included in deferred revenue.

Recurring Revenues.  Recurring revenues, which consist of on-demand subscription revenues, term license revenues, and maintenance revenues, increased $3.6 million or 20% to $21.1 million in the three months ended September 30, 2013 compared to $17.5 million in the same period of 2012. Recurring revenues increased $7.9 million or 15% to $60.4 million in the nine months ended September 30, 2013 from $52.5 million in the previous year period. The increases during the three and nine months ended September 30, 2013 were attributable to revenue recognized from the sequential growth in SaaS bookings quarter over quarter.

Services and Other Revenues.  Services and other revenues, which consist of integration and configuration services, training and perpetual licenses, increased $3.2 million or 50% to $9.6 million in the third quarter of 2013 from $6.4 million in the third quarter of 2012. Services and other revenues increased $4.5 million or 26% to $21.8 million in the nine months ended September 30, 2013 from $17.3 million in the previous year period. The increases in both the three and nine months ended September 30, 2013 were primarily due to increases in license revenues and increases in service revenues as a direct result of SaaS revenue growth. In addition, services revenues benefited $0.8 million during the quarter ended September 30, 2013, as a result of the review of outstanding projects included in the deferred revenue review, as discussed above.

Cost of Revenues and Gross Profit

Cost of Recurring Revenues.  Cost of recurring revenues increased $0.3 million or 4% to $7.3 million in the three months ended September 30, 2013 from $7.0 million in the same period in 2012 primarily due to $0.2 million in data center consolidation costs. Costs of recurring revenues decreased $0.7 million or 3% to $21.7 million during the nine months ended September 30, 2013 from $22.4 million in the previous year period, primarily due to a $0.5 million decrease in contract specific amortization costs and $0.5 million in in-sourcing costs incurred in the 2012 period which did not recur in the current period, partially offset by the $0.2 million in data center consolidation-related costs.

Cost of Services and Other Revenues.  Cost of services and other revenues decreased $0.6 million or 12% to $4.5 million during the three months ended September 30, 2013 from $5.1 million in the same period in 2012, primarily due to a decrease of $0.5 million in costs for fixed fee projects and a decrease of $0.4 million in lower stock-based compensation expense, partially offset by $0.2 million in general corporate bonuses. Cost of services and other revenues were relatively flat at $14.4 million during the nine months ended September 30, 2013 compared to $14.3 million in the previous year period.

Gross Margin.  Overall gross margin percentage was 62% for the three months ended September 30, 2013, compared to 50% during the same period in 2012. Overall gross margin percentage was 56% for the nine months ended September 30, 2013, compared to 47% during the same period in 2012.

Our recurring revenue gross margin percentage increased to 65% for the three months ended September 30, 2013, compared to 60% in the same period in 2012. Recurring revenue gross margin percentage was 64% for the nine months ended September 30, 2013, compared to 57% in the previous year period. The improvement in our recurring revenue gross margin percentage is primarily due to increased SaaS revenue and the scaling of our on-demand infrastructure costs, which are largely fixed, over and increasing customer base.

Services and other revenue gross margin percentage was 53% for the three months ended September 30, 2013, compared to 21% in the same period of 2012. Services and other revenue gross margin percentage was 34% for the nine months ended September 30, 2013, compared to 17% in the previous year period. The increase in gross margin percentage for both the three and nine month periods was primarily due to higher perpetual license revenues and improvement in service margins due to higher billable utilization. In addition, services and other revenue gross margin benefited as a result of the review of outstanding projects included in deferred revenue, which also contributed to the revenue increase.

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Operating Expense

The following tables outline the changes in operating expenses for the three and nine months ended September 30, 2013, compared to the same periods in 2012 (in thousands, except percentage data):

	Three Months Ended September 30, 2013		Percentage of Total Revenues	Three Months Ended September 30, 2012			Percentage of Total Revenues	Increase (Decrease)			Percentage Change
Operating expenses:
Sales and marketing	$	8,981	29%	$	8,322		35%	$	659		8%
Research and development	4,146		14%	3,947			16%	199			5%
General and administrative	5,757		19%	4,785			20%	972			20%
Acquisition-related contingent consideration	—		—%	50			—%	(50		)	(100)%
Restructuring expenses	141		—%	(53		)	—%	194			(366)%
Total operating expenses	$	19,025	62%	$	17,051		71%	$	1,974		12%

	Nine Months Ended September 30, 2013		Percentage of Total Revenues	Nine Months Ended September 30, 2012			Percentage of Total Revenues	Increase (Decrease)		Percentage Change
Operating expenses:
Sales and marketing	$	24,516	30%	$	23,544		34%	$	972	4%
Research and development	12,984		16%	12,037			17%	947		8%
General and administrative	16,889		21%	14,639			21%	2,250		15%
Acquisition-related contingent consideration	—		—%	(1,787		)	(3)%	1,787		(100)%
Restructuring expenses	1,699		2%	561			1%	1,138		203%
Total operating expenses	56,088		68%	48,994			70%	7,094		14%

Sales and Marketing.  Sales and marketing expenses increased $0.7 million or 8% in the three months ended September 30, 2013 compared to the same period in 2012. The increase was primarily driven by $1.1 million in increased commissions resulting from increased SaaS bookings and license revenues, partially offset by lower marketing event costs of $0.3 million and $0.2 million in lower stock-based compensation expense.

Sales and marketing expenses increased $1.0 million or 4% in the nine months ended September 30, 2013 compared to the prior year period. The increase was primarily due to $2.3 million in increased commissions resulting from increased SaaS bookings and license revenues, partially offset by decreases of $1.0 million in stock-based compensation expense and $0.3 million in personnel-related costs.

Research and Development.  Research and development expenses increased $0.2 million or 5% for the three months ended September 30, 2013 compared to the same period in 2012. The increase is driven primarily by an increase in personnel-related costs associated with enhanced product functionality.

Research and development expenses increased $0.9 million or 8% during the nine months ended September 30, 2013 compared to the prior year period, primarily due to a net increase of $0.4 million increase in product development costs, $0.3 million in personnel-related costs and $0.1 million in higher bonus expense.

General and Administrative.  General and administrative expenses increased $1.0 million or 20% during the three months ended September 30, 2013 compared to the same period in 2012. The increase was primarily due to $0.4 million in increased bad debt expense, $0.4 million in higher legal fees, $0.2 million in higher bonus expense, and $0.3 million in severance and recruiting fees, partially offset by a decrease of $0.3 million in professional consulting fees related to the NetSuite implementation in 2012.

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General and administrative expenses increased $2.3 million or 15% during the nine months ended September 30, 2013 compared to the prior year period primarily due to $0.8 million in higher headcount-related costs, largely consisting of severance charges related to the departure of our former Chief Financial Officer, additional recruiting fees of $0.4 million, higher legal fees of $1.1 million, $0.6 million of additional bad debt expense, and $0.2 million in higher bonus expense , partially offset by $0.8 million of acquisition-related costs incurred in 2012 that did not recur in 2013.

Restructuring.  Restructuring expenses increased by $0.2 million during the three months ended September 30, 2013 as compared to the same period in 2012 due to actions to align resources with product strategy and improve efficiency. Restructuring expenses increased $1.1 million during the nine months ended September 30, 2013 compared to the prior year period, due to a $0.5 million one-time severance charge related to the departure of our former General Counsel, as well as $0.6 million due to activities to align our organization, integrate acquisitions and consolidate locations.

Stock-based Compensation

The following tables set forth a summary of our stock-based compensation expenses for the three and nine months ended September 30, 2013, compared to the same period in 2012 (in thousands, except percentage data):

	Three Months Ended September 30, 2013		Three Months Ended September 30, 2012		Increase (Decrease)			Percentage Change
Stock-based compensation:
Cost of recurring revenues	$	234	$	351	$	(117	)	(33)%
Cost of services revenues	218		573		(355		)	(62)%
Sales and marketing	769		997		(228		)	(23)%
Research and development	384		477		(93		)	(19)%
General and administrative	939		1,024		(85		)	(8)%
Total stock-based compensation	$	2,544	$	3,422	$	(878	)	(26)%

	Nine Months Ended September 30, 2013		Nine Months Ended September 30, 2012		Increase (Decrease)			Percentage Change
Stock-based compensation:
Cost of recurring revenues	$	612	$	1,280	$	(668	)	(52)%
Cost of services revenues	860		1,623		(763		)	(47)%
Sales and marketing	1,924		2,937		(1,013		)	(34)%
Research and development	1,317		1,376		(59		)	(4)%
General and administrative	3,632		3,701		(69		)	(2)%
Total stock-based compensation	$	8,345	$	10,917	$	(2,572	)	(24)%

Total stock-based compensation expenses decreased $0.9 million or 26% during the three months ended September 30, 2013, and $2.6 million or 24% during the nine months ended September 30, 2013 compared to the same periods in 2012. The decreases in stock-based compensation during the three and nine months ended September 30, 2013 were primarily due to the timing of restricted stock unit grants, increased forfeitures due to restructuring activities, and less outstanding awards in accordance with management's plan to reduce the equity award burn rate.

During the three and nine months ended September 30, 2013, the Company granted performance-based restricted stock units with vesting contingent on successful attainment of pre-determined SaaS revenue growth, recurring revenue gross profit targets and days sales outstanding ("DSO") targets. The DSO targets apply only to performance-based restricted stock units granted to the Chief Financial Officer and Chief Executive Officer. In general, in 2013 and 2012 we granted performance-based awards rather than time-based awards and we do not anticipate an increase in stock-based compensation expense as a result of the 2012 and 2013 performance-based restricted stock grants.

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Other Items

The following tables set forth changes in other items for the three and nine months ended September 30, 2013, compared to the same periods in 2012 (in thousands, except percentage data):

	Three Months Ended September 30, 2013			Three Months Ended September 30, 2012			Increase (Decrease)			Percentage Change
Other income (expense), net
Interest income and other income (expense), net	$	29		$	139		$	(110	)	(79)%
Interest expense	(860		)	(860		)	—			—%
	$	(831	)	$	(721	)	$	(110	)	15%
Provision (benefit) for income taxes	$	457		444			13			n.m.

	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012			Increase (Decrease)			Percentage Change
Other income (expense), net
Interest income and other income (expense), net	$	(92	)	$	134		$	(226	)	n.m.
Interest expense	(2,578		)	(2,594		)	16			(1)%
	$	(2,670	)	$	(2,460	)	$	(210	)	9%
Provision (benefit) for income taxes	$	1,700		213			1,487			698%

Interest Income and Other Income (Expense), Net

Interest income and other income (expense), net decreased by $0.1 million and $0.2 million during the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. The decreases were primarily driven by lower gains on foreign exchange transactions in the current periods.

Interest Expense

Interest expense was consistent in the three months ended September 30, 2013 and decreased by $16,000 in the nine months ended September 30, 2013 compared to the same period in 2012. The decrease was primarily due to lower interest rates on capital lease obligations incurred in 2013, which resulted in lower interest expense.

Provision (Benefit) for Income Taxes

Provision for income tax for the three and nine months ended September 30, 2013 was $0.5 million and $1.7 million, respectively, compared to an income tax benefit of $0.4 million and $0.2 million for the same periods in 2012.  The tax provision for the three and nine months ended September 30, 2013 was primarily related to withholding taxes in foreign jurisdictions. The benefit from income taxes in the three and nine months ended September 30, 2012 was primarily due to the recognition of deferred tax liabilities related to acquired intangible assets.

Liquidity and Capital Resources

As of September 30, 2013, our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $34.1 million and accounts receivable of $23.3 million, compared to $29.2 million and $22.6 million at December 31, 2012, respectively.

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Cash provided by operating activities during the nine months ended September 30, 2013 improved significantly compared to cash used by operating activities during the previous year period, primarily due to lower net losses, a significant increase in deferred revenue and collections commensurate with increased billings, as well as continued improvement in DSO. In addition, overall cash benefited from cash received from exercises of stock options.

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

	Nine Months Ended September 30,
	2013			2012
Net cash provided by (used in) operating activities	$	7,626		$	(9,958	)
Net cash provided by (used in) investing activities	1,468			(1,852		)
Net cash (used in) provided by financing activities	(230		)	1,066

Cash Flows During the Nine Months Ended September 30, 2013

Net cash provided by operating activities was $7.6 million in the nine month period ended September 30, 2013

compared to $10.0 million used in the previous period. Net loss of $14.4 million in the nine months ended September 30, 2013

was partially offset by non-cash items of $8.3 million in stock-based compensation and $6.9 million in depreciation and amortization expense. Changes in working capital provided $5.5 million in cash during the nine month period, primarily driven by $10.5 million in cash from increases in deferred revenue, partially offset by a decrease in accounts payable of $3.3 million.

Net cash provided by investing activities was $1.5 million during the nine months ended September 30, 2013, compared to $1.9 million used by investing activities in the previous period. The net cash provided by investing activities is primarily due to $3.8 million in net proceeds from maturities and sale of investments, partially offset by $2.3 million in purchases of capital assets.

Net cash used in financing activities was $0.2 million during the nine months ended September 30, 2013, compared to $1.1 million cash provided by financing activities in the previous period. The net cash used in financing activities was primarily due to $3.1 million of acquisition-related holdback and earn-out payments and $1.7 million of principal payments for capital leases, partially offset by $5.4 million in proceeds from exercises of stock options and issuance of stock under employee stock purchase plans.

Forward Looking Cash Commitments

Our future capital requirements depend on many factors, including the amount of revenues we generate, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of new product introductions and enhancements to existing products, our ability to offer SaaS service on a consistently profitable basis, the continuing market acceptance of our products and future acquisitions or other capital expenditures we may make. However, based upon our current business plan and revenue projections, we believe that our current working capital and anticipated cash flows from operations will be adequate to meet our cash needs for daily operations and capital expenditures for at least the next twelve months, and we intend to continue to manage our cash in a manner designed to ensure that we have adequate cash and cash equivalents to fund our operations as well as future commitments, including debt service on the $59.2 million principal balance of our outstanding Convertible Notes, which is expected to be repaid no later than June 1, 2016. Cash commitments in the near term include $1.4 million in interest on our Convertible Notes, which is due semi-annually in June and December. In addition, in the first quarter of 2013, we entered into an agreement for application server software licenses and related maintenance payable over three years in the amount of $2.6 million and $4.3 million, respectively.

On October 24, 2013, the Company entered into an agreement with a holder of the Company's Convertible Notes whereby the Company agreed to issue 1,251,215 shares of its common stock in exchange for $9.7 million aggregate principal amount of Convertible Notes consistent with the original conversion terms of the Convertible Notes plus a negotiated market-based cash premium and $0.2 million in accrued interest expense and the cash was paid upon the closing of the deal on October 25, 2013.

On November 7, 2013, the Company entered into an agreement with a holder of the Company's Convertible Notes whereby the Company agreed to issue 518,638 shares of its common stock in exchange for $4.0 million aggregate principal amount of Convertible Notes consistent with the original conversion terms of the Convertible Notes plus a negotiated market-

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based cash premium and $0.1 million in accrued interest expense and the cash was paid upon the closing of the deal on November 7, 2013. The remaining balance of outstanding Convertible Notes subsequent to the conversions is $45.5 million.

Contractual Obligations and Commitments

Refer to Note 8 of our notes to condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q for further information. For additional information on existing unconditional purchase commitments, please refer to our Annual Report on Form 10-K for the year ended December 31, 2012.

Off-Balance Sheet Arrangements

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the three and nine months ended September 30, 2013, there were no significant changes to our quantitative and qualitative disclosures about market risk. Please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended December 31, 2012 for a more complete discussion on the market risks we encounter.

Item 4. Controls and Procedures

Evaluation of Disclosures 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, as amended, Rules 13a-15(e) or 15d-15(e)) as of September 30, 2013, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures.

Changes in Internal Control Over Financial Reporting

In connection with their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer did not identify any changes in our internal control over financial reporting during the three months ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On July 19, 2012, Versata Software, Inc. and Versata Development Group, Inc. (collectively, “Versata”) filed suit against Callidus in the United States District Court for the District of Delaware (“Delaware District Court”). The suit asserted that the Company infringes U.S. Patent Nos. 7,904,326, 7,908,304 and 7,958,024. The Company believes that the claims are without merit and intends to vigorously defend against these claims. On May 30, 2013, we answered the complaint and filed a counterclaim against Versata in the United States District Court for the District of Delaware.  The Company's counterclaim asserted that Versata infringes U.S. Patent Nos. 6,269,355, 6,850,924 and 6,473,748. As of August 30, 2013, the Company filed petitions with the United States Patent and Trademark Office Patent Trial and Appeal Board (“PTAB”) for covered business method patent review of U.S. Patent Nos. 7,904,326, 7,908,304 and 7,958,024. The Company also filed a motion with the Delaware District Court on August 30, 2013 to stay the litigation pending the completion of the patent review proceedings with the PTAB. The Company is not in a position to assess whether any loss or adverse effect on the Company's financial condition is probable, or to estimate the range of potential loss, if any.

On August 31, 2012, the Company filed suit against Xactly Corporation (“Xactly”) in the United States District Court for the Central District of California. The suit alleges that Xactly infringes U.S. Patents 8,046,387 and 7,774,378. On October 24, 2012, the Company amended its complaint to add Xactly's President and Chief Executive Officer as a defendant and to add claims for trademark infringement, false advertising, false and misleading advertising, trade libel, defamation, intentional interference with prospective economic advantage, intentional interference with contractual relations, breach of contract and unfair competition, in addition to patent infringement. On January 28, 2013, the Company further amended its complaint to allege that Xactly also infringes U.S. Patent 6,473,748 and dismiss its intentional interference with contractual relations claim. On March 14, 2013, the case was transferred to the United States District Court in the Northern District of California. On May 31, 2013, the Company and Xactly entered into a stipulated dismissal of the Company's trademark infringement claim whereby Xactly agreed that it will not use the Company's trademarks-in-suit in certain of Xactly's marketing and advertising activities going forward. The case is currently scheduled for trial in October 2014. On November 5, 2013, Callidus, Xactly and Xactly's President and Chief Executive Officer entered into a binding memorandum of understanding, pursuant to which the parties agreed to enter into a definitive settlement agreement, subject to court approval, that among other things, will include an agreement by Xactly to pay the Company $2.0 million, to be paid in four equal annual installments beginning in 2013.

 On December 14, 2012, TQP Development, LLC filed suit against Callidus in the United States District Court for the Eastern District of Texas Marshall Division. The suit asserts that Callidus infringes U.S. Patent No. 5,412,730. The Company believes that the claim is without merit and intends to vigorously defend against the claim. The case is currently scheduled for trial in August 2014. As of October 11, 2013, the Company filed a petition with the PTAB for covered business method patent review of U.S. Patent No. 5,412,730. The Company is not in a position to assess whether any loss or adverse effect on the Company's financial condition is probable, or to estimate the range of potential loss, if any.

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

Item 1A. Risk Factors

There have been no material changes from the risk factors previously described under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012.  You should carefully consider the factors discussed in the foregoing report, which are incorporated herein by reference. These risks are not the only risks facing us and could affect our business, financial condition and operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition and 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 on Form 10-Q.  Because of the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2012, 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.

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Item 6. Exhibits

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

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SIGNATURES

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

		CALLIDUS SOFTWARE INC.
Date:	November 7, 2013	By:	/s/ BOB L. COREY
			Bob L. Corey
			Chief Financial Officer,
			Senior Vice President, Finance and Operations
			(duly authorized officer)

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EXHIBIT INDEX

TO

CALLIDUS SOFTWARE INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2013

Exhibit Number	Description
10.1	2013 Sales Compensation Plan for Jimmy Duan
10.2	Employment Agreement with Bob L. Corey dated April 30, 2013
10.3	Separation Agreement and General Waiver and Release between Virginia Albert and Callidus Software Inc. dated April 30, 2013
10.4	Separation Agreement and General Waiver and Release between Ronald Fior and Callidus Software Inc. dated July 31, 2013
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
101	Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (ii) Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2013 and 2012, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 and (iv) Notes to Condensed Consolidated Financial Statements

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EX-10.1

EXHIBIT 10.1

2013 Sales Compensation Plan April 1, 2013 to December 31, 2013

Name:Jimmy Duan

Role:        SVP, Chief Technology Officer

ID#:        1096

Manager:    Leslie Stretch

Threshold/Quotas Q1’13Q2’13Q3’13Q4’132013 Totals

Services Revenue:     $ 4,800,000    $ 5,100,000    $ 5,200,000    $ 5,600,000    $20,700,000

Services Margin:     $ 151,000    $ 782,000    $ 780,000    $ 784,000    $ 2,497,000

RR Gross Margin:     $12,957,000    $13,039,000    $14,379,000    $15,890,000    $56,265,000

Base rates

Services Revenue:            0.23%

Services Margin:                 1.92%

RR Gross Margin:             0.17%

Accelerators

Services Revenue (>$22,770,000):        0.46%

Services Margin (>$2,747,000):         3.84%

RR Gross Margin (>$61,891,000):         0.34%

Note: Payout is Quarterly.

1. What is Commissionable?

The following are all commissionable and subject to exclusions and carve-outs as noted in Sections II, III, and IV.

A    Services Revenue: Reported Quarterly Services Revenue.

B.    Services Margin (Retained Recurring):Reported Quarterly Services Gross Margin.

C.    Recurring Revenue Gross Margin: Reported quarterly Recurring Revenue Gross Margin.

2. Threshold/Quota Attainment:

Threshold/Quota is attained by aggregating the plan year’s attainment for each plan component. Threshold/Quota is achieved when the YTD value of each plan component reaches the Threshold/Quota number assigned to the participant

3. Commission

Commission Definitions

A.    Services revenue rate is the base commission rate that will be paid on all applicable reported services revenue and is paid on a quarterly basis.

B.    Services margin Rate is the commission rate paid on reported services gross margin and is paid on a quarterly basis.

B.    Recurring Revenue Gross Margin rate is the commission rate paid on reported Recurring Revenue gross margin and is paid on a quarterly basis.

4. Terms of Payment:

Earned Commissions and Bonuses will be paid in the following month's ending payroll following quarter end (e.g. Q1’13 earnings paid in Apr-13). Participant must be an employee of Callidus at the time commissions are earned.

5. General Terms:

A. Modification and Interpretation: Callidus reserves the right to modify this Plan at will, with or without notice. In the event of conflict of interpretation, the judgment of the Vice President, Sales, and the CFO of Callidus, acting in concert shall be final and binding.

B. Performance: Any sales representative who maintains two consecutive quarters of no Threshold/Quota attainment is subject to discipline up to and including termination.

C. No Employment Agreement: This Plan is not to be construed in any way to be any form of employment agreement and I understand and acknowledge that my employment with the company is "at-will," which means that my employment is for no definite period and may be terminated by me or by the Company at any time for any reason, with or without good cause and with or without advance notice. I also understand that any representation to the contrary is unauthorized and invalid unless obtained in a writing signed by an officer of the Company.

D. Termination: All compensation including base salary, commissions, TCV commissions for customers not yet paid, and bonuses will cease to be earned on the last day of work. Only expenses incurred during employee's employment will be reimbursed by Callidus Software. If employment terminates or is terminated for any reason whatsoever, Callidus Software will forward a statement of commission account to the participant within thirty (30) days after the effective date of such termination. This statement will be accompanied by a check for commissions earned up to the date of termination. All clawbacks for which the participant is responsible (inclusive of recoverable draws), and all outstanding expenses owed to Callidus Software by the participant will be netted against commissions and all other monies then owing or accruing.

E. Mandatory Arbitration: I further agree that the Company and I are required to submit to binding arbitration any claim that relates to the termination of my employment or claims of harassment, discrimination or retaliation that occurs during my employment, and that we each waive our rights to trial by jury of such claims. This agreement applies to any claim relating to my employment that the Company may have against me, or any claims relating to the termination of my employment or claims of harassment, discrimination or retaliation that occurs during my employment that I may have against the Company or against its officers, directors, employees or agents. The agreement to arbitrate does not, however, relate to claims by me or the Company for preliminary injunctive relief. Any arbitration commenced pursuant to this agreement shall take place in Santa Clara County, California, and shall proceed according to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA") in effect at the time the claim is submitted. This agreement in no way limits the relief to which I would otherwise be entitled in a judicial action, and the Company shall pay the arbitrator's expenses and fees, all meeting room charges and any other expenses that would not have been incurred if the case had been brought in court, where required by law. The arbitrator's written opinion and final award, including findings of fact, shall be subject to judicial review as provided in California Code of Civil Procedure section 1285.

6. Acknowledgement:

Approving this compensation plan by signing below indicates that you have read, understand and agree to the terms and conditions of this compensation plan.

Name:Jimmy C. Duan________

Signed:/s/ JIMMY C. DUAN

Date:October 28, 2013

EX-10.2

EXHIBIT 10.2

April 30, 2013

Robert L. Corey

3726 Smallwood Ct.

Pleasanton, CA 94566

Dear Bob:

Congratulations, it is with great pleasure that I extend you an offer to join my team as Senior Vice President, Chief Financial Officer. You will report directly to me. This position will commence no later than May 31, 2013.

Your starting salary will be $350,000.00 per year, which equals $29,166.67 per month, subject to periodic review. In addition, you will be eligible to participate in the Company’s annual executive incentive compensation plan of 60% of your base salary which is based upon Company performance.

The Company will also provide you a one-time lump sum sign on bonus equal to $40,000 (subject to applicable taxes and withholdings). The sign on bonus will be paid with your first payroll following your start date.

As a further incentive, you will be granted a non-qualified option to purchase 122,000 shares of Callidus Software Inc. common stock subject to the terms and conditions of the Company’s stock plan, and the Company’s policies and procedures. Such Option shall be granted effective as of the last business day of the month in which you commence your employment with the Company (“Grant Date”) and shall vest over a period of four (4) years with 25% of the shares vesting one (1) year after the Grant Date and the remaining 75% of the shares vesting in equal monthly installments thereafter over the remaining three (3) years, subject to your continued employment with the Company.

In addition, you will be awarded 122,000 shares of restricted stock units, subject to the terms and conditions of the Company’s stock plan and the Company’s policies and procedures. Such RSUs shall be awarded effective on the last trading day of the month in which you commence your employment with the Company (the "Award Date") and such RSUs shall vest over a period of

two (2) years with vesting in quarterly installments starting on August 30, 2013 and will continue over the vesting period. Vesting will occur on the last business day of the month in August, November, February and May. Vesting on all stock awards are subject to your continued employment with the Company.

As a new member of executive management team, you be classified as a Section 16 officer of Callidus, and that you should therefore be granted benefits in connection with a corporate change of control and indemnification in the case of litigation.  Copies of our Board approved Change of Control Agreement and Indemnification Agreement are included for your review and execution. You will need to execute and return these agreements for them to become effective.

As a Section 16 officer, you will be subject to CallidusCloud’s stock ownership policy which requires you to hold a value of Callidus Software Inc. stock of at least one (1) times your annual base salary. For purposes of determining compliance with the Ownership Policy, the aggregate value of the shares required to be owned from each applicable year shall be determined as the Record Date for the Company’s annual meeting of stockholders, (the “Determination Date”) based on the higher of: (a) the price the shares were acquired or (b) market value, with market value determined as the average daily closing price of the Company’s common stock over the twelve (12) calendar months immediately preceding the Determination Date. In calculating share ownership, shares underlying unexercised stock options will not be included, while 65% of unvested restricted stock unites (estimating next after tax shares assuming a 35% tax rate) will be included. Under the guidelines you have up to three (3) years to attain the ownership holding guideline amount.

As a regular, full-time employee, you are eligible to participate in CallidusCloud’s benefits programs, including medical, vision, and dental insurance, life insurance, 401(k) and ESPP plans, as set forth in our CallidusCloud Benefits Guidebook.

This offer is conditional upon the completion of your background check and credit history. This said, you have been advised, understand, and agree that this offer is contingent on our satisfaction of the outcome of the background check and credit history. This offer is also contingent upon your completing and executing an Employment, Confidential Information and Invention Assignment Agreement (“Invention Agreement”).

The Company is an “at will” employer, which means that the employment relationship may be terminated at any time by either the Company or by you, with or without notice and with or without cause.

By signing below, you acknowledge that your employment at Callidus is for an unspecified duration, and neither this letter, nor your acceptance thereof, constitutes a contract of

employment. Should you be involuntarily terminated other than for cause at any time, you shall receive a twelve (12) month base pay severance payment (lump sum), in return for signing a full release of claims.

Upon separation from the Company for any reason, you also agree to return to the Company any equipment that has been provided to you.

For purposes of federal immigration law, you will be required to provide to Callidus documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three business days of your date of hire with Callidus, or our employment relationship with you may be terminated for cause. Additionally, the company requests that you participate in our direct deposit payroll program.

Bob, on behalf of CallidusCloud, we very much look forward to your acceptance of this offer. This letter contains all the terms and conditions of your offer of employment and any modification or variation shall be invalid unless in writing and signed by the Company. This letter replaces any and all prior verbal or written communications and representations between you and Company. As evidence of your acceptance, please sign the letter and return along with the signed Invention Agreement via e-mail to Cindy Eppard, Senior Vice President, Chief Talent Officer ceppard@calliduscloud.com. Should you wish to fax your acceptance, you may do so to Cindy Eppard at (925) 251-2371 or by U.S. mail to: CallidusCloud, Attn: Cindy Eppard, 6200 Stoneridge Mall Road, Suite 500, Pleasanton, CA 94588 no later than Wednesday, May 1, 2013 by 12:00 pm PDT

I look forward to working with you at CallidusCloud. If you have any questions regarding any points in this letter please feel free to contact me. Welcome aboard!

Sincerely,

/s/ Leslie Stretch

Leslie Stretch

President and Chief Executive Officer

CallidusCloud

I accept the terms of this letter and agree to keep the terms of this letter confidential. I agree to start work for Callidus Software on: 5/31/13 ("Start Date").

/s/ Bob L. CoreyMay 1, 2013

Signature of Robert Corey Date

EX-10.3

EXHIBIT 10.3

SEPARATION AGREEMENT

AND GENERAL WAIVER AND RELEASE

This Separation Agreement and General Waiver and Release (“Agreement”) is made by and between Virginia Albert (“Employee”) and Callidus Software Inc. (the “Company”).

The Company and Employee have agreed that Employee’s last day of work in the office was March 12, 2013. From March 13, 2013 until April 30, 2013, Employee agrees to be available and responsive to the Company as an offsite employee on an as needed basis.

The Company and Employee wish to completely resolve all issues between them based on Employee’s employment with the Company and the separation therefrom. The Company therefore agrees to provide Employee with Severance Pay and Benefits despite the fact the Company is not legally, contractually or otherwise obligated to do so, as provided below, and Employee agrees to release the Company from any lawsuits or causes of action arising from or related to the employment relationship or the separation therefrom, as provided below.

NOW THEREFORE, in consideration of the mutual promises made herein, the Company and Employee (collectively referred to as “the Parties”) hereby agree as follows:

1.Separation from Employment. Employee’s separation date shall be April 30, 2013 (“Separation Date”).

2.Severance Pay and Benefits.Provided Employee complies with the terms of this Agreement, and signs and returns this Agreement, without revocation, on or before May 10, 2013, the Company agrees to provide Employee with the following Severance Pay and Benefits.

(a) The Company agrees to pay Employee the gross amount of $286,650.00, less all required deductions, representing twelve (12) months of salary, within fourteen (14) days of the Effective Date of this Agreement.

(b) The Company agrees to pay Employee the gross amount of $214,987.50, less all required deductions, representing twelve (12) months of target bonus.

(c) The Company agrees to provide the Employee with twelve (12) months of COBRA coverage, in a lump sum payment, less required tax withholding.

(d) The Company agrees to permit Employee to retain her current laptop computer after Callidus has secured and deleted all information on it, her iPad and her mobile phone.

(e) Employee agrees that in return for this Agreement, she will receive compensation, i.e., something of value, beyond that which she was already entitled to receive before entering into this Agreement. Employee acknowledges that unless and until this Agreement is executed, and provided it is not revoked as provided herein, she is not otherwise entitled to receive the above compensation (“Severance Pay and Benefits”). Employee agrees that the Severance Pay and Benefits described in paragraphs 2 (a), (b), (c) and (d) constitute the entire amount of monetary consideration provided to her under this Agreement and that she is not entitled to any other claimed damage, costs, or attorneys' fees in connection with the matters encompassed in this Agreement.

(f) Employee acknowledges and agrees that the offer of Severance Pay and Benefits is dependent upon execution of this Agreement and that failure to sign this Agreement within forty-five (45) days will result in the revocation of this offer. Should that day fall on a weekend or holiday where the signing of the agreement would be impossible, the offer will be extended to the first day of business after the last day the offer were to expire.

(g) Should Employee return to work for Callidus within six months of Employee’s Separation Date, either as an employee or a contractor, Employee agrees to reimburse Callidus on a pro rata basis for Severance Pay and Benefits received.

1.Payment of Salary; Approved Business Expense Reimbursement. Employee acknowledges and represents that the Company has paid all salary due to Employee through April 30, 2013, which Employee is entitled to regardless of whether she signs this Agreement. Regardless of whether Employee signs this Agreement, the Company shall reimburse Employee for approved business expenses incurred through April 30, 2013, subject to Employee’s compliance with the Company’s policies, procedures, and rules on such expenses and documentation thereof. All expenses must be submitted within 30 days of April 30, 2013.

1.Release of All Disputes and Causes of Action. Employee hereby fully and forever releases, on behalf of herself and her respective heirs, the Company, which includes its executors, officers, directors, employees, investors, shareholders, administrators, predecessor and successor corporations, and assigns, of and from any cause of action, whether in law or in equity, relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that Employee may possess arising from any omissions, acts or facts that have occurred up until and including the date upon which the Employee executes this Agreement including, without limitation,

(a) any and all causes of action relating to or arising from Employee’s employment relationship with the Company and the separation therefrom;

(b) any and all causes of action for wrongful discharge of employment; termination in violation of public policy; discrimination; breach of contract, both express and implied; breach of the covenant of good faith and fair dealing; promissory estoppel; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; and conversion;

(c) any and all causes of action for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the Worker Adjustment and Retraining Notification Act, the Age Discrimination in Employment Act, Older Workers Benefit Protection Act, the California Fair Employment and Housing Act, and Labor Code section 201, et seq. and section 970, et seq., but excluding the Fair Labor Standards Act, the National Labor Relations Act and any other state, federal or local statute or law which prohibits the release of claims generally or absent court, agency or other approval;

(d) any and all causes of action for violation of the federal, or any state, constitution; and

(e) any and all attorneys’ fees and costs.

The Company and Employee agree that the release set forth in this section shall be and remain in effect in all respects as a complete and general release as to the matters released. It is the intention of the parties in executing this Agreement that it shall be effective as a bar to each and every matter released herein and that, should any proceeding be instituted with respect to matters released herein, this Agreement shall be deemed in full and complete accord, satisfaction and settlement of any such released matter and sufficient basis for its dismissal. This release does not extend to any obligations incurred under this Agreement.

2.Waiver of Known and Unknown Claims. The Employee represents that she is not aware of any disputes or causes of action she has other than the disputes and causes of action that are released by this Agreement. Employee acknowledges that she is familiar with the provisions of California Civil Code Section 1542, or any similar provision contained in the laws of the state in which Employee resides, which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

Employee, being aware of this code section, nonetheless agrees to expressly waive any rights she may have under it, as well as under any other statute or common law principles of similar effect.

3.Time To Consider Agreement; Knowing and Voluntary Agreement.Employee understands and agrees that: (a) Employee has had up to 45 days within which to consider this Agreement before executing it; (b) Employee has reviewed all aspects of this Agreement; (c) Employee has carefully read and fully understands all of the provisions of this Agreement; (d) Employee understands that in agreeing to this document she is releasing the Company from any and all causes of action or lawsuits she may have against it; (e) Employee knowingly and voluntarily agrees to all the terms set forth in this Agreement; (f) Employee was advised and hereby is advised in writing to consider the terms of this Agreement and consult with an attorney of her choice prior to executing this agreement; (g) Employee has a full seven (7) days following the execution of this Agreement and has been and hereby is advised in writing that this Agreement will not become effective or enforceable until the revocation period has expired. To revoke, the Employee must send a written statement of revocation by certified mail to Cindy Eppard, SVP Chief Talent Officer, Callidus Software Inc., 6200 Stoneridge Mall Road, Suite 500, Pleasanton, CA 94588; and (h) Employee understands that rights or claims under the Age Discrimination in Employment Act of 1967 that may arise after the date of this Agreement is executed are not waived; and (i) Employee acknowledges that she has been informed in writing of the following information:

(i)The business unit affected;

(ii) The job titles and ages of all affected individuals in the affected business units and the ages of all individuals in the same business units who were not affected as of her termination date;

(iii)The eligibility requirements of this severance program.

4.No Pending or Future Lawsuits. Except as described below, Employee agrees not to file any lawsuit or bring any cause of action against the Company or any other person or entity referred to herein, in any court or administrative agency, with regard to any dispute, demand, liability or obligation arising out of Employee’s employment with the Company or separation therefrom. Employee further represents that no claims, complaints, charges or other proceedings are pending in any court, administrative agency, commission or other forum relating directly to her employment with the Company; however, nothing in this Agreement precludes Employee from filing a charge or complaint with the Equal Employment Opportunity Commission (EEOC) or other federal, state or local governmental agency. In addition, in spite of this Agreement, the Employee still retains the right to challenge the knowing and voluntary nature of this Agreement under the OWBPA and ADEA before a court, the EEOC, or any state or local agency permitted to enforce those laws, and this release does not impose any penalty or condition for doing so. The Employee understands, however, that if she successfully pursues a claim against the Company under the OWBPA or the ADEA, the Company may seek to set off the amount paid to her for signing the release against any amount she obtains. If Employee unsuccessfully pursues a claim against the Company under the OWBPA or the ADEA, then the Company may be entitled to recover its costs and attorneys’ fees to the extent specifically authorized by federal law.

5.Violation of the Agreement. By signing this Agreement, Employee agrees that she will not pursue any causes of action or lawsuits covered by this Release. If the Employee breaks this promise and violates this Agreement, the Employee agrees to pay the Company’s costs and expenses (including reasonable attorneys’ fees) that flow from that violation, other than for claims under the Older Workers Benefit Protection Act (OWBPA) and the Age Discrimination in Employment Act (ADEA). Employee also agrees that if she violates any part of this Agreement, she will not be entitled to the Severance Pay and Benefits provided by this Agreement and will immediately repay to the Company any Severance Pay and Benefits previously paid to her consistent with federal law and paragraph 7 of this Agreement. Any such violation will immediately render the Company’s obligations and agreements hereunder null and void but the Employee’s obligations and agreements hereunder shall remain in full force and effect.

6.Confidential Information. Employee acknowledges and agrees that in the course of her employment with the Company, she has had access to and/or made use of certain confidential information relating to the business activities of the Company. Such confidential information includes, but is not limited to, technical information; personnel information; business strategies; financial results; pricing data; sourcing information, design information, market surveys and research data; and contractual agreements between the Company and vendors and other persons or entities, compilations of information and records that are owned by the Company and are regularly used in the operation of the Company’s business and other information that is kept confidential by the Company. Employee agrees that she will not disclose any such confidential information, directly or indirectly, or use any of it in any way whatsoever. Employee further represents and agrees that all files, computer programs, records, documents, lists, specifications, and similar items relating to the business activities of the Company, including any and all copies, whether prepared by Employee or otherwise coming into Employee’s possession, custody or control, are property of the Company and have been or will be returned immediately by her to the Company and that she will not remove from the premises of the Company any such property

or information or any electronic or other equipment of any kind. Employee understands and agrees that the Employment, Confidential Information, Invention Assignment and Arbitration Agreement signed by Employee remains in full force and effect and is incorporated herein by reference.

7.Solicitation of Employees. Employee shall not for a period of twenty-four (24) months immediately following the termination of her relationship with the Company either directly or indirectly solicit, induce, recruit or encourage any of the Company's employees to leave their employment, take away such employees from the Company, or attempt to so solicit, induce, recruit, encourage or take away employees of the Company, either for herself or on behalf of any other person or entity.

8.Return of Company Equipment. The Company agrees that Employee may keep her current laptop computer after Callidus has deleted all information from it, her iPad and her mobile phone, but otherwise Employee acknowledges that she has returned all Company credit cards, keys, access cards, and other equipment or material in her possession or control and understands and agrees that the Company’s payment of Severance Pay and Benefits is contingent upon the return of such equipment and material.

9.Cooperation. Employee agrees to reasonably cooperate in any and all complaints, administrative proceedings or other litigation matters to which Employee or the Company is or could reasonably become a party. Employee further agrees she will not act in any manner that might damage the business of the Company. Employee agrees that she will not counsel or assist any attorneys or their clients in the presentation or prosecution of any lawsuits or causes of action by any third party against the Company and/or any officer, director, employee, agent, representative, shareholder or attorney of the Company, unless under subpoena or other court order to do so. Nothing in this Agreement shall be construed to preclude Employee from testifying, assisting or participating in an investigation, proceeding or hearing conducted by the EEOC or other federal, state or local agency.

10.Non-Disparagement. Employee agrees not to disparage the Company, or any of its officers, directors or employees. The Executives of the Company agree not to disparage Employee.

11.No Representations. Each party represents that it has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement.

12.No Oral Modification. This Agreement may only be amended in writing signed by Employee and the President and Chief Executive Officer (“CEO”) of the Company.

13.Costs. The Parties shall each bear their own costs, attorneys’ fees and other fees incurred in connection with this Agreement consistent with federal law and paragraphs 7 and 8 of this Agreement.

14.Enforcement. The Parties agree that any and all disputes arising out of the terms of this Agreement, their interpretation, and any of the matters herein released, shall be heard before a neutral arbitrator selected from a list provided by and in accordance with the employment rules of the Judicial Arbitration and Mediation Service (JAMS) in the jurisdiction in which the Employee worked. The arbitrator’s decision and/or award shall be final and binding. The Parties agree that the prevailing Party shall be entitled to recover from the other Party its reasonable attorneys fees and costs incurred to enforce this Agreement.

15.Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Employee represents and warrants that she has the capacity to act on her own behalf and on behalf of all whom might claim through her to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the disputes or causes of action released herein.

16.Severability. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision.

17.Governing Law. This Agreement shall be governed by the laws of the State of California.

18.Effective Date. This Agreement is effective on the eighth (8^th) day after it has been signed by both Parties provided the Employee has not revoked the Agreement during the previous seven (7) day period.

19.Non-Admission of Liability. The parties agree that this Agreement is a compromise of all claims disputed between Employee and the Company and is not and shall never be treated as an admission of liability of any kind to Employee or any other person by the Company for any purposes whatsoever.

20.Entire Agreement. This Agreement, and the other agreements referenced herein, represent the entire agreement and understanding between the Company and Employee concerning Employee’s separation from the Company, and supersede and replace any and all prior agreements and understandings concerning Employee’s relationship with the Company. Notwithstanding the above, this Agreement does not supersede the indemnification obligations of the Company in the officer Indemnification Agreement entered into by the Company and the Employee officer the terms of which are attached hereto.

21.Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that:

(a) They have read this Agreement;

(b) They have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel;

(c) They understand the terms and consequences of this Agreement and of the release it contains;

(d) They are fully aware of the legal and binding effect of this Agreement.

IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below.

THE EMPLOYEE SHOULD READ THIS AGREEMENT CAREFULLY. THIS AGREEMENT CONTAINS A RELEASE OF ALL KNOWN AND UNKNOWN CAUSES OF ACTION AND WILL SERVE AS A DEFENSE TO ANY CAUSE OF ACTION OR LAWSUIT THE EMPLOYEE MAY BRING.

Callidus Software Inc.

Date: April 5, 2013                By/s/ Cindy Eppard_________________

Cindy Eppard

Virginia Albert, an individual

Date: April 30, 2013                By /s/ Virginia Albert_______________

Virginia Albert

EX-10.4

EXHIBIT 10.4

SEPARATION AGREEMENT

AND GENERAL WAIVER AND RELEASE

This Separation Agreement and General Waiver and Release (“Agreement”) is made by and between Ronald Fior (“Employee”) and Callidus Software Inc. (the “Company”).

The Company and Employee have agreed that Employee’s last day of work in the office was May 10, 2013. From May 11, 2013 until July 31, 2013, Employee agrees to be available and responsive to the Company as an offsite employee on an as needed basis.

The Company and Employee wish to completely resolve all issues between them based on Employee’s employment with the Company and the separation therefrom. The Company therefore agrees to provide Employee with Severance Pay and Benefits despite the fact the Company is not legally, contractually or otherwise obligated to do so, as provided below, and Employee agrees to release the Company from any lawsuits or causes of action arising from or related to the employment relationship or the separation therefrom, as provided below.

NOW THEREFORE, in consideration of the mutual promises made herein, the Company and Employee (collectively referred to as “the Parties”) hereby agree as follows:

1.Separation from Employment. Employee’s separation date shall be July 31, 2013 (“Separation Date”).

2.Severance Pay and Benefits. Provided Employee complies with the terms of this Agreement, and signs and returns this Agreement, without revocation, AFTER on or before May 10, 2013, the Company agrees to provide Employee with the following Severance Pay and Benefits.

(a) The Company agrees to pay Employee the gross amount of $324,900.00, less all required deductions, representing twelve (12) months of salary, within fourteen (14) days of the Effective Date of this Agreement.

(b) The Company agrees to pay Employee the gross amount of $243,675.00, less all required deductions, representing twelve (12) months of target bonus. Employee shall not be entitled to any additional payout under the 2013 Executive Incentive Plan.

(c) The Company agrees to provide the Employee with twelve (12) months of COBRA coverage, in a lump sum payment, less required tax withholding.

(d) The Company agrees to permit Employee to retain his current laptop computer after Callidus has deleted all information on it, his iPad and his mobile phone.

(e) Employee agrees that in return for this Agreement, he will receive compensation, i.e., something of value, beyond that which he was already entitled to receive before entering into this Agreement. Employee acknowledges that unless and until this Agreement is executed, and provided it is not revoked as provided herein, he is not otherwise entitled to receive the above compensation (“Severance Pay and Benefits”). Employee agrees that the Severance Pay and Benefits described in paragraphs 2 (a), (b), (c) and (d) constitute the entire amount of monetary consideration provided to him under this Agreement and that he is not entitled to any other claimed damage, costs, or attorneys' fees in connection with the matters encompassed in this Agreement.

(f) Employee acknowledges and agrees that the offer of Severance Pay and Benefits is dependent upon execution of this Agreement and that failure to sign this Agreement by May 10, 2013 will result in the revocation of this offer.

(g) Should Employee return to work for Callidus within six months of Employee’s Separation Date, either as an employee or a contractor, Employee agrees to reimburse Callidus on a pro rata basis for Severance Pay and Benefits received.

3.Payment of Salary; Approved Business Expense Reimbursement. Employee acknowledges and represents that the Company has paid all salary due to Employee through July 31, 2013, which Employee is entitled to regardless of whether he signs this Agreement. Employee acknowledges that he is not eligible for any 2013 bonus opportunities. Regardless of whether Employee signs this Agreement, the Company shall reimburse Employee for approved business expenses incurred through July 31, 2013, subject to Employee’s compliance with the Company’s policies, procedures, and rules on such expenses and documentation thereof. All expenses must be submitted within 30 days of July 31, 2013.

4.Release of All Disputes and Causes of Action. Employee hereby fully and forever releases, on behalf of himself and his respective heirs, the Company, which includes its executors, officers, directors, employees, investors, shareholders, administrators, predecessor and successor corporations, and assigns, of and from any cause of action, whether in law or in equity, relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that Employee may possess arising from any omissions, acts or facts that have occurred up until and including the date upon which the Employee executes this Agreement including, without limitation,

(a) any and all causes of action relating to or arising from Employee’s employment relationship with the Company and the separation therefrom;

(b) any and all causes of action for wrongful discharge of employment; termination in violation of public policy; discrimination; breach of contract, both express and implied; breach of the covenant of good faith and fair dealing; promissory estoppel; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; and conversion;

(c) any and all causes of action for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the Worker Adjustment and Retraining Notification Act, the Age Discrimination in Employment Act, Older Workers Benefit Protection Act, the California Fair Employment and Housing Act, and Labor Code section 201, et seq. and section 970, et seq., but excluding the Fair Labor Standards Act, the National Labor Relations Act and any other state, federal or local statute or law which prohibits the release of claims generally or absent court, agency or other approval;

(d) any and all causes of action for violation of the federal, or any state, constitution; and

(e) any and all attorneys’ fees and costs.

The Company and Employee agree that the release set forth in this section shall be and remain in effect in all respects as a complete and general release as to the matters released. It is the intention of the parties in executing this Agreement that it shall be effective as a bar to each and every matter released herein and that, should any proceeding be instituted with respect to matters released herein, this Agreement shall be deemed in full and complete accord, satisfaction and settlement of any such released matter and sufficient basis for its dismissal. This release does not extend to any obligations incurred under this Agreement.

5.Waiver of Known and Unknown Claims. The Employee represents that he is not aware of any disputes or causes of action he has other than the disputes and causes of action that are released by this Agreement. Employee acknowledges that he is familiar with the provisions of California Civil Code Section 1542, or any similar provision contained in the laws of the state in which Employee resides, which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

Employee, being aware of this code section, nonetheless agrees to expressly waive any rights he may have under it, as well as under any other statute or common law principles of similar effect.

6.Time To Consider Agreement; Knowing and Voluntary Agreement.Employee understands and agrees that: (a) Employee has 45 days within which to consider this Agreement before executing it; (b) Employee has

reviewed all aspects of this Agreement; (c) Employee has carefully read and fully understands all of the provisions of this Agreement; (d) Employee understands that in agreeing to this document he is releasing the Company from any and all causes of action or lawsuits he may have against it; (e) Employee knowingly and voluntarily agrees to all the terms set forth in this Agreement; (f) Employee was advised and hereby is advised in writing to consider the terms of this Agreement and consult with an attorney of his choice prior to executing this agreement; (g) Employee has a full seven (7) days following the execution of this Agreement and has been and hereby is advised in writing that this Agreement will not become effective or enforceable until the revocation period has expired. To revoke, the Employee must send a written statement of revocation by certified mail to Cindy Eppard, SVP Chief Talent Officer, Callidus Software Inc., 6200 Stoneridge Mall Road, Suite 500, Pleasanton, CA 94588; and (h) Employee understands that rights or claims under the Age Discrimination in Employment Act of 1967 that may arise after the date of this Agreement is executed are not waived; and (i) Employee acknowledges that he has been informed in writing of the following information:

(i)The business unit affected;

(ii) The job titles and ages of all affected individuals in the affected business units and the ages of all individuals in the same business units who were not affected as of her termination date;

(iii)The eligibility requirements of this severance program.

7.No Pending or Future Lawsuits. Except as described below, Employee agrees not to file any lawsuit or bring any cause of action against the Company or any other person or entity referred to herein, in any court or administrative agency, with regard to any dispute, demand, liability or obligation arising out of Employee’s employment with the Company or separation therefrom. Employee further represents that no claims, complaints, charges or other proceedings are pending in any court, administrative agency, commission or other forum relating directly to his employment with the Company; however, nothing in this Agreement precludes Employee from filing a charge or complaint with the Equal Employment Opportunity Commission (EEOC) or other federal, state or local governmental agency. In addition, in spite of this Agreement, the Employee still retains the right to challenge the knowing and voluntary nature of this Agreement under the OWBPA and ADEA before a court, the EEOC, or any state or local agency permitted to enforce those laws, and this release does not impose any penalty or condition for doing so. The Employee understands, however, that if he successfully pursues a claim against the Company under the OWBPA or the ADEA, the Company may seek to set off the amount paid to him for signing the release against any amount he obtains. If Employee unsuccessfully pursues a claim against the Company under the OWBPA or the ADEA, then the Company may be entitled to recover its costs and attorneys’ fees to the extent specifically authorized by federal law.

8.Violation of the Agreement. By signing this Agreement, Employee agrees that he will not pursue any causes of action or lawsuits covered by this Release. If the Employee breaks this promise and violates this Agreement, the Employee agrees to pay the Company’s costs and expenses (including reasonable attorneys’ fees) that flow from that violation, other than for claims under the Older Workers Benefit Protection Act (OWBPA) and the Age Discrimination in Employment Act (ADEA). Employee also agrees that if he violates any part of this Agreement, he will not be entitled to the Severance Pay and Benefits provided by this Agreement and will immediately repay to the Company any Severance Pay and Benefits previously paid to him consistent with federal law and paragraph 7 of this Agreement. Any such violation will immediately render the Company’s obligations and agreements hereunder null and void but the Employee’s obligations and agreements hereunder shall remain in full force and effect.

9.Confidential Information. Employee acknowledges and agrees that in the course of his employment with the Company, he has had access to and/or made use of certain confidential information relating to the business activities of the Company. Such confidential information includes, but is not limited to, technical information; personnel information; business strategies; financial results; pricing data; sourcing information, design information, market surveys and research data; and contractual agreements between the Company and vendors and other persons or entities, compilations of information and records that are owned by the Company and are regularly used in the operation of the Company’s business and other information that is kept confidential by the Company. Employee agrees that he will not disclose any such confidential information, directly or indirectly, or use any of it in any way whatsoever. Employee further represents and agrees that all files, computer programs, records, documents, lists, specifications, and similar items relating to the business activities of the Company, including any and all copies, whether prepared by Employee or otherwise coming into Employee’s possession, custody or control, are property of the Company and have been or will be returned immediately by him to the Company and that he will not remove from the premises of the Company any such property or information or any electronic or other equipment of any kind. Employee understands and agrees that the Employment, Confidential Information and Invention Assignment Agreement signed by Employee remains in full force and effect and is incorporated herein by reference.

10.Solicitation of Employees. Employee shall not for a period of twenty-four (24) months immediately following the termination of his relationship with the Company either directly or indirectly solicit, induce, recruit or encourage any of the Company's employees to leave their employment, take away such employees from the Company, or attempt to so solicit, induce, recruit, encourage or take away employees of the Company, either for himself or on behalf of any other person or entity.

11.Return of Company Equipment. The Company agrees to permit Employee to retain his current laptop computer after Callidus has deleted all information on it, his iPad and his mobile phone, but otherwise Employee acknowledges that he has returned all Company cellular telephones, PDAs, laptops, credit cards, keys, access cards, and other equipment or material in his possession or control and understands and agrees that the Company’s payment of Severance Pay is contingent upon the return of such equipment and material.

12.Cooperation. Employee agrees to reasonably cooperate in any and all complaints, administrative proceedings or other litigation matters to which Employee or the Company is or could reasonably become a party. Employee further agrees he will not act in any manner that might damage the business of the Company. Employee agrees that he will not counsel or assist any attorneys or their clients in the presentation or prosecution of any lawsuits or causes of action by any third party against the Company and/or any officer, director, employee, agent, representative, shareholder or attorney of the Company, unless under subpoena or other court order to do so. Nothing in this Agreement shall be construed to preclude Employee from testifying, assisting or participating in an investigation, proceeding or hearing conducted by the EEOC or other federal, state or local agency.

13.Non-Disparagement. Employee agrees not to disparage the Company, or any of its officers, directors or employees. The Company agrees that its executives will not disparage Employee.

14.No Representations. Each party represents that it has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement.

15.No Oral Modification. This Agreement may only be amended in writing signed by Employee and the President and Chief Executive Officer (“CEO”) of the Company.

16.Costs. The Parties shall each bear their own costs, attorneys’ fees and other fees incurred in connection with this Agreement consistent with federal law and paragraphs 7 and 8 of this Agreement.

17.Enforcement. The Parties agree that any and all disputes arising out of the terms of this Agreement, their interpretation, and any of the matters herein released, shall be heard before a neutral arbitrator selected from a list provided by and in accordance with the employment rules of the Judicial Arbitration and Mediation Service (JAMS) in the jurisdiction in which the Employee worked. The arbitrator’s decision and/or award shall be final and binding. The Parties agree that the prevailing Party shall be entitled to recover from the other Party its reasonable attorneys fees and costs incurred to enforce this Agreement.

18.Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Employee represents and warrants that he has the capacity to act on his own behalf and on behalf of all whom might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the disputes or causes of action released herein.

19.Severability. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision.

20.Governing Law. This Agreement shall be governed by the laws of the State of California.

21.Effective Date. This Agreement is effective on the eighth (8^th) day after it has been signed by both Parties provided the Employee has not revoked the Agreement during the previous seven (7) day period.

22.Non-Admission of Liability. The parties agree that this Agreement is a compromise of all claims disputed between Employee and the Company and is not and shall never be treated as an admission of liability of any kind to Employee or any other person by the Company for any purposes whatsoever.

23.Entire Agreement. This Agreement, and the other agreements referenced herein, represent the entire agreement and understanding between the Company and Employee concerning Employee’s separation from the Company, and supersede and replace any and all prior agreements and understandings concerning Employee’s relationship with the Company. Notwithstanding the above, this Agreement does not supersede the indemnification obligations of the Company in the officer Indemnification Agreement entered into by the Company and the Employee officer the terms of which are attached hereto as Exhibit A.

24.Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that:

(a) They have read this Agreement;

(b) They have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel;

(c) They understand the terms and consequences of this Agreement and of the release it contains;

(d) They are fully aware of the legal and binding effect of this Agreement.

IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below.

THE EMPLOYEE SHOULD READ THIS AGREEMENT CAREFULLY. THIS AGREEMENT CONTAINS A RELEASE OF ALL KNOWN AND UNKNOWN CAUSES OF ACTION AND WILL SERVE AS A DEFENSE TO ANY CAUSE OF ACTION OR LAWSUIT THE EMPLOYEE MAY BRING.

Callidus Software Inc.

Date: April 18, 2013By/s/ Cindy Eppard___________________

Cindy Eppard

Ronald Fior, an individual

Date: April 24, 2013By /s/ Ronald Fior______________________

Ronald Fior

Date: July 31, 2013By /s/ Ronald Fior____________________

Ronald Fior

EX-31.1

EXHIBIT 31.1

302 CERTIFICATION

I, Leslie J. Stretch, certify that:

1. I have reviewed this quarterly report of Callidus Software Inc. on Form 10-Q;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2013
	/s/ LESLIE J. STRETCH
	Leslie J. Stretch
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

302 CERTIFICATION

I, Bob L. Corey, certify that:

1. I have reviewed this quarterly report of Callidus Software Inc. on Form 10-Q;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2013
	/s/ BOB L. COREY
	Bob L. Corey
	Chief Financial Officer,
	Senior Vice President, Finance and Operations
	(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

906 CERTIFICATION

The certification set forth below is being submitted in connection with this quarterly report of Callidus Software Inc. on Form 10-Q (the Report) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the Exchange Act) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

Leslie J. Stretch, the Chief Executive Officer, and Bob L. Corey, the Chief Financial Officer, of Callidus Software Inc., each certifies that, to the best of his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Callidus Software Inc.

The foregoing certifications are not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Exchange Act, as amended, or otherwise subject to the liabilities of such Section, and are not to be incorporated by reference into any filing of Callidus Software Inc. under the Securities Act of 1933, as amended, or the Exchange Act, as amended (whether made before, on, or after the date of this Report), irrespective of any general incorporation language contained in such filing.

Date: November 7, 2013
	/s/ LESLIE J. STRETCH
	Leslie J. Stretch
	President and Chief Executive Officer
	(Principal Executive Officer)
	/s/ BOB L. COREY
	Bob L. Corey
	Chief Financial Officer,
	Senior Vice President, Finance and Operations
	(Principal Financial Officer)

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Related Party Transactions

9 Months Ended

Sep. 30, 2013

Related Party Transactions [Abstract]

Related-Party Transactions

Related-Party Transactions

In June 2013, in the normal course of business, the Company entered into agreements with Lithium Technologies, Inc. (“Lithium”). The Chief Financial Officer of Lithium is a member of the Company's Board of Directors. The Company purchased an annual subscription for Lithium's social media management solutions in the amount of $120,000.  In the same period, Lithium entered into a two year hosting agreement with the Company in the amount of $113,000. During the third quarter of 2013, the Company paid the entire annual fee of $120,000 for the social media management solution, of which $32,000 was expensed and $88,000 remains in prepaid and other current assets as of September 30, 2013. During the third quarter of 2013 the Company recognized $26,000 in revenue under the$113,000 annual hosting agreement. In addition, during the third quarter of 2013 the Company entered into an agreement with Lithium for services in the amount of $109,000, of which $62,000 was recognized during the quarter.

Webcom, a wholly-owned subsidiary of the Company, engages the services of a third-party vendor to perform product modeling and maintenance of certain equipment. The third-party vendor is owned by a relative of Webcom’s senior management. For the three and nine months ended September 30, 2013, the Company paid $40,000 and $114,000, respectively, to this vendor. For the three and nine months ended September 30, 2012, the Company paid $53,000 and $101,000, respectively, to this vendor.

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenues:
Recurring	$ 21,119	$ 17,533	$ 60,359	$ 52,446
Services and other	9,559	6,392	21,791	17,273
Total revenues	30,678	23,925	82,150	69,719
Cost of revenues:
Recurring	7,303	6,989	21,687	22,434
Services and other	4,475	5,078	14,436	14,266
Total cost of revenues	11,778	12,067	36,123	36,700
Gross profit	18,900	11,858	46,027	33,019
Operating expenses:
Sales and marketing	8,981	8,322	24,516	23,544
Research and development	4,146	3,947	12,984	12,037
General and administrative	5,757	4,785	16,889	14,639
Acquisition-related contingent consideration	0	50	0	(1,787)
Restructuring	141	(53)	1,699	561
Total operating expenses	19,025	17,051	56,088	48,994
Operating loss	(125)	(5,193)	(10,061)	(15,975)
Interest income and other income (expense), net	29	139	(92)	134
Interest expense	(860)	(860)	(2,578)	(2,594)
Loss before provision for income taxes	(956)	(5,914)	(12,731)	(18,435)
Provision for income taxes	457	444	1,700	213
Net loss	(1,413)	(6,358)	(14,431)	(18,648)
Net loss per share - basic and diluted
Net loss per share (in dollars per share)	$ (0.04)	$ (0.18)	$ (0.38)	$ (0.53)
Shares used in basic and diluted per share computation	38,648	35,853	37,873	35,070
Comprehensive loss
Net Loss	(1,413)	(6,358)	(14,431)	(18,648)
Unrealized gains (loss) on available-for-sale securities	5	22	(6)	35
Foreign currency translation adjustments	(64)	53	84	58
Comprehensive loss	$ (1,472)	$ (6,283)	$ (14,353)	$ (18,555)

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Financial Instruments

9 Months Ended

Sep. 30, 2013

Financial Instruments

Financial Instruments

Financial Instruments

As of September 30, 2013 and December 31, 2012, all investment debt securities are classified as available-for-sale and carried at estimated fair value, which is determined based on the inputs discussed below.

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

Realized gains and losses are calculated using the specific identification method. As of September 30, 2013 and December 31, 2012, the Company had no short-term investments in a material unrealized loss position.

The components of the Company’s cash, cash equivalents and investments classified as available-for-sale were as follows at September 30, 2013 and December 31, 2012 (in thousands):

September 30, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Other Than Temporary Impairment		Estimated Fair value
Cash	$	19,913	$	—	$	—	$	—	$	19,913
Cash equivalents:
Money market funds	5,279		—		—		—		5,279
Total cash equivalents	5,279		—		—		—		5,279
Total cash and cash equivalents	$	25,192	$	—	$	—	$	—	$	25,192
Short-term investments:
U.S. government and agency obligations	5,621		1		—		—		5,622
Corporate notes and obligations	3,260		4		—		—		3,264
Total short-term investments	$	8,881	$	5	$	—	$	—	$	8,886

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Other Than Temporary Impairment		Estimated Fair value
Cash	$	13,062	$	—	$	—	$	—	$	13,062
Cash equivalents:
Money market funds	3,338		—		—		—		3,338
Total cash equivalents	3,338		—		—		—		3,338
Total cash and cash equivalents	$	16,400	$	—	$	—	$	—	$	16,400
Short-term investments:
U.S. government and agency obligations	6,700		—		—		—		6,700
Corporate notes and obligations	6,061		10		—		—		6,071
Total short-term investments	$	12,761	$	10	$	—	$	—	$	12,771

The market value and the amortized cost of available-for-sale debt securities by contractual maturities as of September 30, 2013 were as follows (in thousands):

Contractual maturity	Amortized Cost		Estimated Fair value
Less than 1 year	$	6,581	$	6,586
Between 1 and 2 years	2,300		2,300
Total	$	8,881	$	8,886

At September 30, 2013, the Company had no unrealized losses related to U.S. government and agency securities.

The Company had no realized gains or losses on sales of its investments for the three and nine months ended September 30, 2013 and 2012. The Company had proceeds, net of purchases of investments, of $3.8 million and $15.3 million from maturities and sales of investments during the nine months ended September 30, 2013 and 2012, respectively.

The short-term investments in government obligations or highly rated credit securities generally have minor to moderate fluctuations in the fair values from period to period. The Company monitors credit ratings, downgrades and significant events surrounding these securities so as to assess if any of the impairments will be considered other-than-temporary. The Company did not identify any government obligations or highly rated credit securities held as of September 30, 2013 or as of December 31, 2012 for which the fair value declined significantly below amortized cost and were considered other-than-temporary impairments.

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Segment, Geographic and Customer Information (Tables)

9 Months Ended

Sep. 30, 2013

Segment Reporting [Abstract]

Summary of revenues by geographic areas

The following table summarizes revenues for the three and nine months ended September 30, 2013 and 2012 by geographic areas (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
United States	$	22,052	$	18,301	$	62,616	$	54,808
EMEA	3,050		2,484		9,227		7,919
Asia Pacific	3,273		1,650		5,783		4,038
Other	2,303		1,490		4,524		2,954
	$	30,678	$	23,925	$	82,150	$	69,719

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Subsequent Events (Notes)

9 Months Ended

Sep. 30, 2013

Subsequent Events [Abstract]

Subsequent Events

Subsequent Events

On October 24, 2013, the Company entered into an agreement with a holder of the Company's Convertible Notes whereby the Company agreed to issue 1,251,215 shares of its common stock in exchange for $9.7 million aggregate principal amount of Convertible Notes consistent with the original conversion terms of the Convertible Notes plus a negotiated market-based cash premium and $0.2 million in accrued interest expense and the cash was paid upon the closing of the deal on October 25, 2013.

On November 7, 2013, the Company entered into an agreement with a holder of the Company's Convertible Notes whereby the Company agreed to issue 518,638 shares of its common stock in exchange for $4.0 million aggregate principal amount of Convertible Notes consistent with the original conversion terms of the Convertible Notes plus a negotiated market-based cash premium and $0.1 million in accrued interest expense and the cash was paid upon the closing of the deal on November 7, 2013.

On November 5, 2013, Callidus, Xactly and Xactly's President and Chief Executive Officer entered into a binding memorandum of understanding, pursuant to which the parties agreed to enter into a definitive settlement agreement, subject to court approval, that among other things, will include an agreement by Xactly to pay the Company $2.0 million, to be paid in four equal annual installments beginning in 2013.

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Segment, Geographic and Customer Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013 customer	Sep. 30, 2012 customer	Sep. 30, 2013 customer segment	Sep. 30, 2012 customer
Segment Reporting [Abstract]
Number of operating segments			1
Revenues by geographic area
Revenues	$ 30,678	$ 23,925	$ 82,150	$ 69,719
Number of customers accounted for more than 10% of total revenues	0	0	0	0
United States
Revenues by geographic area
Revenues	22,052	18,301	62,616	54,808
EMEA
Revenues by geographic area
Revenues	3,050	2,484	9,227	7,919
Asia Pacific
Revenues by geographic area
Revenues	3,273	1,650	5,783	4,038
Other
Revenues by geographic area
Revenues	$ 2,303	$ 1,490	$ 4,524	$ 2,954

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Summary of Significant Accounting Policies Basis of Presentation (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Sep. 30, 2013
Deferred Revenue Arrangement [Line Items]
Adjustment to deferred revenue	$ (1.0)
SaaS Revenues [Member]
Deferred Revenue Arrangement [Line Items]
Adjustment to deferred revenue	(0.2)
Services and Other Revenues [Member]
Deferred Revenue Arrangement [Line Items]
Adjustment to deferred revenue	$ (0.8)

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Stock-based Compensation (Tables)

9 Months Ended

Sep. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Summary of stock-based compensation expenses

The table below sets forth a summary of stock-based compensation expense for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Stock-based compensation:
Stock options	$	181	$	143	$	642	$	713
Performance-based restricted stock units	463		210		984		387
Restricted stock units	1,750		2,849		6,263		9,281
ESPP	150		220		456		536
Total stock-based compensation	$	2,544	$	3,422	$	8,345	$	10,917

Schedule of functional classification of stock-based compensation expense

The table below sets forth the functional classification of stock-based compensation expense for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Stock-based compensation:
Cost of recurring revenues	$	234	$	351	$	612	$	1,280
Cost of services and other revenues	218		573		860		1,623
Sales and marketing	769		997		1,924		2,937
Research and development	384		477		1,317		1,376
General and administrative	939		1,024		3,632		3,701
Total stock-based compensation	$	2,544	$	3,422	$	8,345	$	10,917

Schedule of valuation assumptions for determining the fair value of stock options and employee stock purchase plans

The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table.

	Three Months Ended September 30,			Nine Months Ended September 30,
	2013	2012		2013	2012
Stock Option Plans
Expected life (in years)	6.0 to 6.1	—		5.0 to 6.1	5.0 to 6.0
Risk-free interest rate	1.69% to 1.93%	—	%	1.41% to 1.93%	0.72% to 1.33%
Volatility	61% to 62%	—	%	61% to 63%	60% to 65%
Dividend yield	None	None		None	None

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

	Nine Months Ended September 30,
	2013	2012
Employee Stock Purchase Plan
Expected life (in years)	0.50 to 1.00	0.50 to 1.00
Risk-free interest rate	0.08% to 0.17%	0.13% to 0.20%
Volatility	41% to 62%	56% to 62%
Dividend yield	None	None

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Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013		Dec. 31, 2012
Liabilities:
Liabilities, Fair Value Disclosure	$ 0		$ 1,750
Contingent consideration
Liabilities:
Liabilities, Fair Value Disclosure	0		1,750
Ongoing basis
Liabilities:
Liabilities, Fair Value Disclosure			1,750
Ongoing basis | Contingent consideration
Liabilities:
Liabilities, Fair Value Disclosure			1,750
Ongoing basis | Total
Assets:
Assets, Fair Value Disclosure	14,165		16,109
Ongoing basis | Total | Money market funds
Assets:
Assets, Fair Value Disclosure	5,279	[1]	3,338	[2]
Ongoing basis | Total | U.S. Treasury bills
Assets:
Assets, Fair Value Disclosure			1,000	[3]
Ongoing basis | Total | U.S. government and agency obligations
Assets:
Assets, Fair Value Disclosure	5,622	[4]	5,700	[3]
Ongoing basis | Total | Corporate notes and obligations
Assets:
Assets, Fair Value Disclosure	3,264	[4]	6,071	[3]
Ongoing basis | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets:
Assets, Fair Value Disclosure	5,279		4,338
Liabilities:
Liabilities, Fair Value Disclosure			0
Ongoing basis | Quoted Prices in Active Markets for Identical Assets (Level 1) | Contingent consideration
Liabilities:
Liabilities, Fair Value Disclosure			0
Ongoing basis | Quoted Prices in Active Markets for Identical Assets (Level 1) | Money market funds
Assets:
Assets, Fair Value Disclosure	5,279	[1]	3,338	[2]
Ongoing basis | Quoted Prices in Active Markets for Identical Assets (Level 1) | U.S. Treasury bills
Assets:
Assets, Fair Value Disclosure			1,000	[3]
Ongoing basis | Quoted Prices in Active Markets for Identical Assets (Level 1) | U.S. government and agency obligations
Assets:
Assets, Fair Value Disclosure	0	[4]	0	[3]
Ongoing basis | Quoted Prices in Active Markets for Identical Assets (Level 1) | Corporate notes and obligations
Assets:
Assets, Fair Value Disclosure	0	[4]	0	[3]
Ongoing basis | Significant Other Observable Inputs (Level 2)
Assets:
Assets, Fair Value Disclosure	8,886		11,771
Liabilities:
Liabilities, Fair Value Disclosure			0
Ongoing basis | Significant Other Observable Inputs (Level 2) | Contingent consideration
Liabilities:
Liabilities, Fair Value Disclosure			0
Ongoing basis | Significant Other Observable Inputs (Level 2) | Money market funds
Assets:
Assets, Fair Value Disclosure	0	[1]	0	[2]
Ongoing basis | Significant Other Observable Inputs (Level 2) | U.S. Treasury bills
Assets:
Assets, Fair Value Disclosure			0	[3]
Ongoing basis | Significant Other Observable Inputs (Level 2) | U.S. government and agency obligations
Assets:
Assets, Fair Value Disclosure	5,622	[4]	5,700	[3]
Ongoing basis | Significant Other Observable Inputs (Level 2) | Corporate notes and obligations
Assets:
Assets, Fair Value Disclosure	3,264	[4]	6,071	[3]
Ongoing basis | Significant Unobservable Inputs (Level 3)
Assets:
Assets, Fair Value Disclosure	0		0
Liabilities:
Liabilities, Fair Value Disclosure			1,750
Ongoing basis | Significant Unobservable Inputs (Level 3) | Contingent consideration
Liabilities:
Liabilities, Fair Value Disclosure			1,750
Ongoing basis | Significant Unobservable Inputs (Level 3) | Money market funds
Assets:
Assets, Fair Value Disclosure	0	[1]	0	[2]
Ongoing basis | Significant Unobservable Inputs (Level 3) | U.S. Treasury bills
Assets:
Assets, Fair Value Disclosure			0	[3]
Ongoing basis | Significant Unobservable Inputs (Level 3) | U.S. government and agency obligations
Assets:
Assets, Fair Value Disclosure	0	[4]	0	[3]
Ongoing basis | Significant Unobservable Inputs (Level 3) | Corporate notes and obligations
Assets:
Assets, Fair Value Disclosure	$ 0	[4]	$ 0	[3]

[1] Included in cash and cash equivalents on the condensed consolidated balance sheet.

[2] Included in cash and cash equivalents on the consolidated balance sheet.

[3] Included in short-term investments on the consolidated balance sheet.

[4] Included in short-term investments on the condensed consolidated balance sheet.

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Stock-based Compensation (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Stock-based compensation
Stock-based compensation expense	$ 2,544,000	$ 3,422,000	$ 8,345,000	$ 10,917,000
Options
Stock-based compensation
Stock-based compensation expense	181,000	143,000	642,000	713,000
Unrecognized compensation expense, stock options	2,800,000		2,800,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Period for Recognition			3 years 5 months 15 days
Restricted Stock Units Performance Awards [Member]
Stock-based compensation
Stock-based compensation expense	463,000	210,000	984,000	387,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Share-based Awards Other than Options	1,600,000		1,600,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Period for Recognition			10 months 24 days
Percentage of grants vested during period			50.00%
Restricted Stock Units
Stock-based compensation
Stock-based compensation expense	1,750,000	2,849,000	6,263,000	9,281,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Share-based Awards Other than Options	7,100,000		7,100,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Period for Recognition			1 year 7 months 6 days
ESPP
Stock-based compensation
Stock-based compensation expense	150,000	220,000	456,000	536,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Share-based Awards Other than Options	$ 500,000		$ 500,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Period for Recognition			10 months 2 days

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Goodwill and Intangible Assets (Details 2) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013
Minimum
Intangible assets
Estimated useful life	1 year
Maximum
Intangible assets
Estimated useful life	12 years
Developed Technology
Future expected amortization expense
Remainder of 2013	$ 792
2014	2,451
2015	2,118
2016	2,124
2017	1,813
2018	1,083
2019 and beyond	0
Total expected amortization expense	10,381
Customer Relationships
Future expected amortization expense
Remainder of 2013	220
2014	874
2015	874
2016	876
2017	768
2018	501
2019 and beyond	186
Total expected amortization expense	4,299
Trade names
Future expected amortization expense
Remainder of 2013	45
2014	179
2015	179
2016	151
2017	142
2018	101
2019 and beyond	76
Total expected amortization expense	873
Patents and Licenses
Future expected amortization expense
Remainder of 2013	89
2014	348
2015	343
2016	344
2017	343
2018	313
2019 and beyond	701
Total expected amortization expense	2,481
Other
Future expected amortization expense
Remainder of 2013	15
2014	34
2015	0
2016	0
2017	0
2018	0
2019 and beyond	0
Total expected amortization expense	$ 49

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Related Party Transactions (Details) (USD $)	3 Months Ended		9 Months Ended		1 Months Ended	3 Months Ended	1 Months Ended		3 Months Ended
	Sep. 30, 2013 Webcom	Sep. 30, 2012 Webcom	Sep. 30, 2013 Webcom	Sep. 30, 2012 Webcom	Jun. 30, 2013 Subscription Arrangement [Member] Lithium [Member]	Sep. 30, 2013 Subscription Arrangement [Member] Lithium [Member]	Jun. 30, 2013 Hosting Agreement [Member] Lithium [Member]	Jun. 30, 2013 Service Agreements [Member] Lithium [Member]	Sep. 30, 2013 Service Agreements [Member] Lithium [Member]	Sep. 30, 2013 Prepaid And Other Current Assets [Member] Subscription Arrangement [Member] Lithium [Member]
Related party transactions
Amount under related party transaction agreement					$ 120,000
Related party transaction amount						120,000	113,000	109,000		88,000
Amount expensed in period from related party transaction						32,000
Revenue recongnized in related party transaction							26,000		62,000
Product modeling and maintenance of certain equipment	$ 40,000	$ 53,000	$ 114,000	$ 101,000

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Net Loss Per Share (Tables)

9 Months Ended

Sep. 30, 2013

Earnings Per Share [Abstract]

Schedule of potential weighted average common shares excluded from computation of diluted net loss per share

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 September 30,		Nine Months Ended September 30,
	2013	2012	2013	2012
Restricted stock	1,967	3,441	2,071	3,701
Stock options	2,558	3,076	2,622	3,381
ESPP	19	32	6	11
Convertible Notes	7,680	7,680	7,680	7,680
Total	12,224	14,229	12,379	14,773

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Basis of Presentation and Summary of Accounting Policies

All amounts included herein related to the condensed consolidated financial statements as of September 30, 2013 and the three and nine months ended September 30, 2013 and 2012 are unaudited and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Callidus Software Inc.'s ("the Company's") Annual Report on Form 10-K for the year ended December 31, 2012. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the Securities and Exchange Commission ("SEC") rules and regulations regarding interim financial statements.

In the opinion of management, the accompanying 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, 2013.

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

The Company recognized an adjustment of $1.0 million which increased revenue in the three months ended September 30, 2013 as a result of a review of all outstanding deferred revenue projects, of which $0.2 million is included in SaaS revenues, and $0.8 million is included in services and other revenues. Based upon Management's review of qualitative and quantitative factors, Management believes the impact of the adjustment is not material to current or prior periods.

Use of Estimates

Preparation of the condensed consolidated financial statements in conformity with GAAP and the rules and regulations of the SEC requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed 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, uncertain tax liabilities, allowances for doubtful accounts, the useful lives of fixed assets and intangible assets, goodwill and intangible asset impairments, stock-based compensation forfeiture rates, accrued liabilities, the allocation of the value of purchase consideration for business acquisitions, 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 for continued reasonableness, using historical experience and other factors, including the current economic environment. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such evaluation. Illiquid credit markets, volatile equity and foreign currency markets and declines in Information Technology spending by companies have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ materially from those estimates. Changes in those estimates, if any, resulting from continuing changes in the economic environment, will be reflected in the condensed consolidated financial statements in future periods.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2013-11 ("ASU 2013-11"), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an entity to present unrecognized tax benefits as a reduction of a deferred tax asset, except in certain circumstances. ASU 2013-11 is effective for fiscal years and interim periods beginning after December 31, 2013, and early adoption is permitted. Based upon a preliminary review of the guidance, the Company does not anticipate that adoption will have a significant impact on the Company’s condensed consolidated financial statements.

In February 2013, FASB issued Accounting Standards Update 2013-02 ("ASU 2013-02"), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires an entity to present either on the face of the statement where comprehensive income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. ASU 2013-02 was effective for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02, which involves presentation and disclosures only, did not impact the Company’s condensed consolidated financial statements.

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Acquisitions

9 Months Ended

Sep. 30, 2013

Business Combinations [Abstract]

Acquisitions

Acquisitions

6FigureJobs.com

On May 4, 2012, the Company acquired 6FigureJobs.com (“6FigureJobs”), a premier job advertisement placement, recruitment media services and other career-related services provider to extend Hiring Cloud offerings. 6FigureJobs, a wholly-owned subsidiary of Workstream, Inc., a Canadian corporation, was purchased in exchange for $1.0 million in cash, which included an indemnity holdback of $0.3 million that was settled in May 2013.

LeadFormix, Inc.

On January 3, 2012, the Company acquired Leadformix, Inc., a leader in next-generation marketing automation and sales enablement, headquartered in the United States with operations in India, for $9.0 million in cash, which included an indemnity holdback of $1.5 million. In January 2013, $1.3 million of the indemnity holdback was paid and the remainder of the indemnity holdback was settled.

Webcom, Inc.

On October 3, 2011, the Company acquired Webcom, Inc. ("Webcom"), a U.S.-based company with operations in Serbia, a leader in Software-as-a-Service ("SaaS") based product configuration, pricing, quoting and proposal management. The total purchase price for Webcom was $10.8 million in cash, including a $1.6 million indemnity holdback and a $1.8 million earn-out condition. The full remaining balance of the earn-out condition of $1.8 million was paid in February 2013. During the third quarter of 2013, claims worth $0.1 million were applied to the indemnity holdback, and as of September 30, 2013, $0.8 million of the indemnity holdback remains accrued for potential indemnification items.

The Company’s business combinations described above did not have a material impact on the Company’s consolidated financial statements, and therefore pro forma disclosures have not been presented.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

The Company measures financial assets at fair value on an ongoing basis. The estimated fair value of the Company’s financial assets was determined using the following inputs at September 30, 2013 (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
September 30, 2013	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds (1)	$	5,279	$	5,279	$	—	$	—
U.S. government and agency obligations (2)	5,622		—		5,622		—
Corporate notes and obligations (2)	3,264		—		3,264		—
Total	$	14,165	$	5,279	$	8,886	$	—

__________________________________________________

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

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

The table below presents the changes during the nine months ended September 30, 2013 related to balances measured using significant unobservable inputs (Level 3) (in thousands):

	December 31, 2012		Additions		Payments			September 30, 2013
Liabilities:
Contingent consideration to Webcom	$	1,750	$	—	$	(1,750	)	$	—
Total	$	1,750	$	—	$	(1,750	)	$	—

During the first quarter of 2013, the Company paid earn-out consideration related to the acquisition of Webcom of $1.8 million.

The estimated fair value of the Company’s financial assets was determined using the following inputs at December 31, 2012 (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2012	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds (1)	$	3,338	$	3,338	$	—	$	—
U.S. Treasury bills (2)	1,000		1,000		—		—
Corporate notes and obligations (2)	6,071		—		6,071		—
U.S. government and agency obligations (2)	5,700		—		5,700		—
Total	$	16,109	$	4,338	$	11,771	$	—
Liabilities:
Contingent consideration (3)	$	1,750	$	—	$	—	$	1,750
Total	$	1,750	$	—	$	—	$	1,750

__________________________________________________

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

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

(3) Included in accrued expenses on the consolidated balance sheet.

Valuation of Investments

Level 1 and Level 2

The Company’s available-for-sale securities include money market funds, U.S. Treasury bills, commercial paper, corporate notes and obligations, and U.S. government and agency obligations. The Company values these securities using a pricing matrix from a pricing service provider, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs). The Company classifies all of its available-for-sale securities, except for money market funds and U.S. Treasury bills, as having Level 2 inputs. The Company validates the estimated fair value of certain securities from a pricing service provider on a quarterly basis. The valuation techniques used to measure the fair value of the financial instruments having Level 2 inputs, all of which have counterparties with high credit ratings, were derived from the following: non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments or pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data.

Level 3

Contingent consideration is defined as earn-out payments, which the Company may pay in connection with acquisitions. Contingent consideration liabilities are classified as Level 3 liabilities, as the Company uses unobservable inputs to value them, which is a probability-based income approach. Subsequent changes in the fair value of contingent consideration liabilities will be recorded within the acquisition-related contingent consideration in the Company’s condensed consolidated statements of comprehensive loss. As of September 30, 2013, the Company had no Level 3 liabilities.

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Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

Goodwill and Intangible Assets

Management determined that no changes in the $31.2 million carrying amount of goodwill were necessary during the third quarter of 2013. Intangible assets consisted of the following as of September 30, 2013 and December 31, 2012 (in thousands):

	December 31, 2012 Cost		December 31, 2012 Net		Additions		Amortization Expense			September 30, 2013 Net		Weighted Average Amortization Period (Years)
Developed technology	$	15,179	$	12,384	$	495	$	(2,498	)	$	10,381	4.5
Customer relationships	6,884		4,952		—		(653		)	4,299		5.1
Trade names	1,202		1,040		—		(167		)	873		5.4
Patents and licenses	1,525		2,744		—		(263		)	2,481		7.8
Other	182		76		13		(40		)	49		0.8
Total	$	24,972	$	21,196	$	508	$	(3,621	)	$	18,083

Intangible assets include third-party software licenses used in the Company's products and acquired assets related to the Company’s acquisitions.

Amortization expense related to intangible assets was $1.2 million and $1.3 million for the three months ended September 30, 2013 and 2012, respectively, and $3.6 million and $3.8 million for the nine months endedSeptember 30, 2013 and 2012, respectively. Amortization expense related to intangible assets was included within cost of revenues for developed technology and patents and licenses, sales and marketing expense for customer relationships and trade names, and general and administrative expense for a favorable lease and other items. Intangible assets are amortized over their estimated useful lives of one to twelve years. Total future expected amortization is as follows (in thousands):

	Developed Technology		Customer Relationships		Trade names		Patents and Licenses		Other
Quarter Ending September 30:
Remainder of 2013	$	792	$	220	$	45	$	89	$	15
2014	2,451		874		179		348		34
2015	2,118		874		179		343		—
2016	2,124		876		151		344		—
2017	1,813		768		142		343		—
2018	1,083		501		101		313		—
2019 and beyond	—		186		76		701		—
Total expected amortization expense	$	10,381	$	4,299	$	873	$	2,481	$	49

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Stock-based Compensation (Details 2) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Classification of stock-based compensation expense
Stock-based compensation expense	$ 2,544,000	$ 3,422,000	$ 8,345,000	$ 10,917,000
Cost of recurring revenues
Classification of stock-based compensation expense
Stock-based compensation expense	234,000	351,000	612,000	1,280,000
Cost of services and other revenues
Classification of stock-based compensation expense
Stock-based compensation expense	218,000	573,000	860,000	1,623,000
Sales and marketing
Classification of stock-based compensation expense
Stock-based compensation expense	769,000	997,000	1,924,000	2,937,000
Research and development
Classification of stock-based compensation expense
Stock-based compensation expense	384,000	477,000	1,317,000	1,376,000
General and administrative
Classification of stock-based compensation expense
Stock-based compensation expense	939,000	1,024,000	3,632,000	3,701,000
Restricted Stock Units Performance Awards [Member]
Classification of stock-based compensation expense
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Share-based Awards Other than Options	1,600,000		1,600,000
Stock-based compensation expense	$ 463,000	$ 210,000	$ 984,000	$ 387,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Period for Recognition			10 months 24 days

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Restructuring (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Restructuring and Related Activities [Abstract]
Restructuring expenses	$ 141	$ (53)	$ 1,699	$ 561
Changes in restructuring reserve
Balance at the beginning of the period			878	443
Cash Payments			(2,176)	(524)
Additions			1,707	719
Adjustments			(8)	(158)
Balance at the end of the period	401	480	401	480
Severance and termination-related costs
Changes in restructuring reserve
Balance at the beginning of the period			589	0
Cash Payments			(2,146)	(312)
Additions			1,707	510
Adjustments			(8)	(53)
Balance at the end of the period	142	145	142	145
Facilities related costs
Changes in restructuring reserve
Balance at the beginning of the period			289	443
Cash Payments			(30)	(212)
Additions			0	209
Adjustments				(105)
Balance at the end of the period	$ 259	$ 335	$ 259	$ 335

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Financial Instruments (Details) (USD $)	9 Months Ended				9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012	Dec. 31, 2011	Sep. 30, 2013 Cash	Dec. 31, 2012 Cash	Sep. 30, 2013 Cash equivalents	Dec. 31, 2012 Cash equivalents	Sep. 30, 2013 Money market funds	Dec. 31, 2012 Money market funds	Sep. 30, 2013 Cash and cash equivalents	Dec. 31, 2012 Cash and cash equivalents	Sep. 30, 2013 Short-term investments	Dec. 31, 2012 Short-term investments	Sep. 30, 2013 U.S. government and agency obligations	Dec. 31, 2012 U.S. government and agency obligations	Sep. 30, 2013 Corporate notes and obligations	Dec. 31, 2012 Corporate notes and obligations
Financial instruments
Proceeds from Sale and Maturity of Available-for-sale Securities	$ 3,800,000	$ 15,300,000
Cash and cash equivalents	25,192,000	6,697,000	16,400,000	17,383,000	19,913,000	13,062,000	5,279,000	3,338,000	5,279,000	3,338,000	25,192,000	16,400,000
Amortized Cost													8,881,000	12,761,000	5,621,000	6,700,000	3,260,000	6,061,000
Gross Unrealized Gains					0	0	0	0	0	0	0	0	5,000	10,000	1,000	0	4,000	10,000
Gross Unrealized Losses					0	0	0	0	0	0	0	0	0	0	0	0	0	0
Other Than Temporary Impairment					0	0	0	0	0	0	0	0	0	0	0	0	0	0
Estimated Fair Value, Cash and Cash Equivalents					19,913,000	13,062,000	5,279,000	3,338,000	5,279,000	3,338,000	25,192,000	16,400,000
Estimated FV, Available for Sale Securities													$ 8,886,000	$ 12,771,000	$ 5,622,000	$ 6,700,000	$ 3,264,000	$ 6,071,000

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Commitments and Contingencies (Details) (USD $) In Millions, unless otherwise specified	0 Months Ended
	Mar. 26, 2013
Application server software licenses obligations
Contractual cash obligations
Contractual obligation under agreement	$ 2.6
Application server software licenses related maintenance obligations
Contractual cash obligations
Contractual obligation under agreement	$ 4.3
Contractual Obligation Term	3 years

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Statement of Financial Position [Abstract]
Accounts receivable, allowances (in dollars)	$ 721	$ 485
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized	5,000	5,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	100,000	100,000
Common stock, shares issued	41,362	38,538
Common stock, shares outstanding	39,023	36,199
Treasury stock, shares	2,339	2,339

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Segment, Geographic and Customer Information

9 Months Ended

Sep. 30, 2013

Segment Reporting [Abstract]

Segment, Geographic and Customer Information

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 business segment, which is the development, marketing and sale of sales and marketing effectiveness cloud software and related services.

The following table summarizes revenues for the three and nine months ended September 30, 2013 and 2012 by geographic areas (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
United States	$	22,052	$	18,301	$	62,616	$	54,808
EMEA	3,050		2,484		9,227		7,919
Asia Pacific	3,273		1,650		5,783		4,038
Other	2,303		1,490		4,524		2,954
	$	30,678	$	23,925	$	82,150	$	69,719

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.

During the three and nine months ended September 30, 2013 and 2012, no customer accounted for more than 10% of total revenues.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities:
Net loss	$ (14,431)	$ (18,648)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation expense	3,278	2,184
Amortization of intangible assets	3,621	3,818
Provision for doubtful accounts and service remediation reserves	846	188
Stock-based compensation	8,345	10,917
Release of valuation allowance		(350)
(Loss) gain on disposal of property and equipment	2	(6)
Amortization of convertible notes issuance cost	402	402
Net amortization on investments	63	310
Acquisition-related contingent consideration	0	(1,787)
Changes in operating assets and liabilities:
Accounts receivable	(1,583)	(7,627)
Prepaid and other current assets	(1,043)	(1,809)
Other noncurrent assets	(773)	322
Accounts payable	(3,250)	(129)
Accrued expenses	1,517	741
Accrued payroll and related expenses	462	(267)
Accrued restructuring	(476)	37
Deferred revenue	10,461	1,635
Deferred income taxes	185	111
Net cash provided by (used in) operating activities	7,626	(9,958)
Cash flows from investing activities:
Purchases of investments	(5,634)	(16,536)
Proceeds from maturities and sale of investments	9,450	31,811
Purchases of property and equipment	(1,714)	(4,927)
Proceeds from disposal of property and equipment		6
Purchases of intangible assets	(634)	(4,485)
Acquisitions, net of cash acquired		(7,721)
Net cash provided by (used in) investing activities	1,468	(1,852)
Cash flows from financing activities:
Proceeds from issuance of common stock	5,375	5,222
Repurchase of common stock from employees for payment of taxes on vesting of restricted stock units	(818)	(2,079)
Payment of consideration related to acquisitions	(3,078)	(1,160)
Repayment of debt assumed through acquisition		(30)
Payment of principal under capital leases	(1,709)	(887)
Net cash (used in) provided by financing activities	(230)	1,066
Effect of exchange rates on cash and cash equivalents	(72)	58
Net increase (decrease) in cash and cash equivalents	8,792	(10,686)
Cash and cash equivalents at beginning of period	16,400	17,383
Cash and cash equivalents at end of period	25,192	6,697
Supplemental disclosures of cash flow information:
Cash paid for interest on convertible debt	1,406	2,110
Cash paid for interest on capital leases	56	83
Non-cash financing of fixed assets acquired under capital lease	$ 2,627

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 25,192	$ 16,400
Short-term investments	8,886	12,771
Accounts receivable, net of allowances of $721 and $485 at September 30, 2013 and December 31, 2012, respectively	23,304	22,567
Deferred income taxes	40	40
Prepaid and other current assets	7,761	6,718
Total current assets	65,183	58,496
Property and equipment, net	12,381	10,580
Goodwill	31,207	31,207
Intangible assets, net	18,083	21,196
Deferred income taxes, noncurrent	392	392
Deposits and other assets	3,243	2,872
Total assets	130,489	124,743
Current liabilities:
Accounts payable	1,415	4,705
Accrued payroll and related expenses	5,868	5,854
Accrued expenses	6,635	8,164
Deferred income taxes	944	944
Deferred revenue	42,054	35,483
Capital lease obligations	1,232	921
Total current liabilities	58,148	56,071
Deferred revenue, noncurrent	7,592	3,702
Deferred income taxes, noncurrent	345	160
Other liabilities	1,908	2,159
Capital lease obligations, noncurrent	1,460	8
Convertible notes	59,215	59,215
Total liabilities	128,668	121,315
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding
Common stock, $0.001 par value; 100,000 shares authorized; 41,362 and 38,538 shares issued and 39,023 and 36,199 shares outstanding at September 30, 2013 and December 31, 2012, respectively	39	34
Additional paid-in capital	268,228	255,331
Treasury stock; 2,339 shares at September 30, 2013 and December 31, 2012	(14,430)	(14,430)
Accumulated other comprehensive income	161	239
Accumulated deficit	(252,177)	(237,746)
Total stockholders’ equity	1,821	3,428
Total liabilities and stockholders’ equity	$ 130,489	$ 124,743

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Acquisitions (Details) (USD $) In Millions, unless otherwise specified	1 Months Ended		3 Months Ended		1 Months Ended	3 Months Ended
	Jan. 31, 2013 Leadformix, Inc	Jan. 03, 2012 Leadformix, Inc	Sep. 30, 2013 6FigureJobs.com, Inc.	May 04, 2012 6FigureJobs.com, Inc.	Feb. 28, 2013 Webcom	Sep. 30, 2013 Webcom	Mar. 31, 2013 Webcom	Oct. 03, 2011 Webcom
Acquisitions
Cash paid for the acquisition		$ 9.0		$ 1.0
Indemnity holdback		1.5						1.6
Indemnity holdback paid and settled	1.3		0.3
Earn-out related contingent consideration								1.8
Purchase Consideration								10.8
Claims applied to indemnity holdback						0.1
Indemnity holdback accrued						0.8
Contingent consideration paid					$ 1.8		$ 1.8

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block]

The estimated fair value of the Company’s financial assets was determined using the following inputs at December 31, 2012 (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2012	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds (1)	$	3,338	$	3,338	$	—	$	—
U.S. Treasury bills (2)	1,000		1,000		—		—
Corporate notes and obligations (2)	6,071		—		6,071		—
U.S. government and agency obligations (2)	5,700		—		5,700		—
Total	$	16,109	$	4,338	$	11,771	$	—
Liabilities:
Contingent consideration (3)	$	1,750	$	—	$	—	$	1,750
Total	$	1,750	$	—	$	—	$	1,750

__________________________________________________

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

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

(3) Included in accrued expenses on the consolidated balance sheet.

The estimated fair value of the Company’s financial assets was determined using the following inputs at September 30, 2013 (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
September 30, 2013	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds (1)	$	5,279	$	5,279	$	—	$	—
U.S. government and agency obligations (2)	5,622		—		5,622		—
Corporate notes and obligations (2)	3,264		—		3,264		—
Total	$	14,165	$	5,279	$	8,886	$	—

__________________________________________________

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

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

Schedule of changes during the period related to balances measured using significant unobservable inputs (Level 3)

The table below presents the changes during the nine months ended September 30, 2013 related to balances measured using significant unobservable inputs (Level 3) (in thousands):

	December 31, 2012		Additions		Payments			September 30, 2013
Liabilities:
Contingent consideration to Webcom	$	1,750	$	—	$	(1,750	)	$	—
Total	$	1,750	$	—	$	(1,750	)	$	—

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Subsequent Events (Details) (Subsequent Event [Member], USD $) In Millions, except Share data, unless otherwise specified	0 Months Ended
	Nov. 07, 2013	Oct. 24, 2013	Nov. 07, 2013 Convertible notes	Oct. 24, 2013 Convertible notes	Nov. 05, 2013 Positive Outcome of Litigation [Member]
Subsequent Event [Line Items]
Stock issued in exchange for debt (in shares)	518,638	1,251,215
Aggregate principal amount of Convertible Notes			$ 4.0	$ 9.7
Accrued interest expense			0.1	0.2
Litigation Settlement, Gross					$ 2.0

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Net Loss Per Share (Details) (USD $) Share data in Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Net Loss Per Share
Anti-dilutive securities excluded from computation of diluted net loss per share (in shares)	12,224	14,229	12,379	14,773
4.75 % Convertible Senior Notes due in 2016
Net Loss Per Share
Conversion rate of common stock per $1000 of principal amount of convertible notes (in shares)			130
Conversion price (in dollars per share)	$ 7.71		$ 7.71
Principal amount used for computation of conversion ratio	$ 1,000		$ 1,000
Restricted stock
Net Loss Per Share
Anti-dilutive securities excluded from computation of diluted net loss per share (in shares)	1,967	3,441	2,071	3,701
Stock options
Net Loss Per Share
Anti-dilutive securities excluded from computation of diluted net loss per share (in shares)	2,558	3,076	2,622	3,381
Weighted average exercise price (in dollars per share)	$ 4.62	$ 3.34	$ 4.22	$ 3.71
ESPP
Net Loss Per Share
Anti-dilutive securities excluded from computation of diluted net loss per share (in shares)	19	32	6	11
Convertible notes
Net Loss Per Share
Anti-dilutive securities excluded from computation of diluted net loss per share (in shares)	7,680	7,680	7,680	7,680

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Fair Value Measurements (Details 2) (USD $)	9 Months Ended	1 Months Ended	3 Months Ended	9 Months Ended
	Sep. 30, 2013	Feb. 28, 2013 Webcom	Mar. 31, 2013 Webcom	Sep. 30, 2013 Contingent consideration
Liabilities:
Balance at the beginning of the period	$ 1,750,000			$ 1,750,000
Additions	0			0
Payments	(1,750,000)			(1,750,000)
Balance at the end of the period	0			0
Contingent consideration paid		$ 1,800,000	$ 1,800,000

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Convertible Notes (Details) (USD $)	9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Convertible Notes
Aggregate principal amount of debt outstanding	$ 59,215,000	$ 59,215,000
Convertible notes
Convertible Notes
Aggregate principal amount of debt outstanding	59,200,000
Convertible Senior Notes due 2016, interest rate (as a percent)	4.75%
Fair value	74,100,000	58,000,000
Percentage of the conversion price that the closing price of the entity's common stock must exceed in order for the notes to be convertible	130.00%
Number of days within 30 consecutive trading days in which the closing price of the entity's common stock must exceed the conversion price for the notes to be redeemable	20 days
Number of consecutive trading days during which the closing price of the entity's common stock must exceed the conversion price for at least 20 days in order for the notes to be redeemable	30 days
Number of trading days prior to the date on which the entity provides notice of redemption	5 days
Redemption price as percentage of principal amount of notes, plus accrued and unpaid interest	100.00%
Conversion rate of common stock per $1000 of principal amount of convertible notes (in shares)	129.6596
Principal amount used for computation of conversion ratio	1,000
Conversion price (in dollars per share)	$ 7.71
Convertible debt issuance costs, current portion	500,000	500,000
Debt issuance costs, recorded in deposits and other assets	$ 900,000	$ 1,300,000

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Except as discussed below, there were no material changes in the Company's commitments under contractual obligations as disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2012.

On March 26, 2013, the Company entered into an agreement to procure application server software licenses and related maintenance services, payable quarterly over three years in the amount of $2.6 million and $4.3 million, respectively.

Warranties and Indemnification

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

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

Intellectual Property Litigation

On July 19, 2012, Versata Software, Inc. and Versata Development Group, Inc. (collectively, “Versata”) filed suit against Callidus in the United States District Court for the District of Delaware (“Delaware District Court”). The suit asserted that the Company infringes U.S. Patent Nos. 7,904,326, 7,908,304 and 7,958,024. The Company believes that the claims are without merit and intends to vigorously defend against these claims. On May 30, 2013, the Company answered the complaint and filed a counterclaim against Versata in the United States District Court for the District of Delaware.  The Company's counterclaim asserted that Versata infringes U.S. Patent Nos. 6,269,355, 6,850,924 and 6,473,748. As of August 30, 2013, the Company filed petitions with the United States Patent and Trademark Office Patent Trial and Appeal Board (“PTAB”) for covered business method patent review of U.S. Patent Nos. 7,904,326, 7,908,304 and 7,958,024. The Company also filed a motion with the Delaware District Court on August 30, 2013 to stay the litigation pending the completion of the patent review proceedings with the PTAB. The Company is not in a position to assess whether any loss or adverse effect on the Company's financial condition is probable, or to estimate the range of potential loss, if any.

On August 31, 2012, the Company filed suit against Xactly Corporation (“Xactly”) in the United States District Court for the Central District of California. The suit alleges that Xactly infringes U.S. Patents 8,046,387 and 7,774,378. On October 24, 2012, the Company amended its complaint to add Xactly's President and Chief Executive Officer as a defendant and to add claims for trademark infringement, false advertising, false and misleading advertising, trade libel, defamation, intentional interference with prospective economic advantage, intentional interference with contractual relations, breach of contract and unfair competition, in addition to patent infringement. On January 28, 2013, the Company further amended its complaint to allege that Xactly also infringes U.S. Patent 6,473,748 and dismiss its intentional interference with contractual relations claim. On March 14, 2013, the case was transferred to the United States District Court in the Northern District of California. On May 31, 2013, the Company and Xactly entered into a stipulated dismissal of the Company's trademark infringement claim whereby Xactly agreed that it will not use the Company's trademarks-in-suit in certain of Xactly's marketing and advertising activities going forward. The case is currently scheduled for trial in October 2014. Please refer to Note 13 for recent activity regarding this litigation.

 On December 14, 2012, TQP Development, LLC filed suit against Callidus in the United States District Court for the Eastern District of Texas Marshall Division. The suit asserts that Callidus infringes U.S. Patent No. 5,412,730. The Company believes that the claim is without merit and intends to vigorously defend against the claim. The case is currently scheduled for trial in August 2014. As of October 11, 2013, the Company filed a petition with the PTAB for covered business method patent review of U.S. Patent No. 5,412,730. The Company is not in a position to assess whether any loss or adverse effect on the Company's financial condition is probable, or to estimate the range of potential loss, if any.

Other matters

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

The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews the need for any such liability on a quarterly basis and records any necessary adjustments to reflect the effect of ongoing negotiations, contract disputes, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case in the period they become known. At September 30, 2013, the Company had not recorded any such liabilities in accordance with accounting for contingencies. However, litigation is subject to inherent uncertainties and the Company's view on these matters may change in the future.

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Goodwill and Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Goodwill and Intangible Assets Disclosure [Abstract]
Goodwill	$ 31,207		$ 31,207		$ 31,207
Changes in intangible assets during the year
Cost			24,972
Balance at the beginning of the period, net			21,196
Additions			508
Amortization Expense	(1,200)	(1,300)	(3,621)	(3,818)
Balance at the end of the period, net	18,083		18,083
Developed technology
Changes in intangible assets during the year
Cost			15,179
Balance at the beginning of the period, net			12,384
Additions			495
Amortization Expense			(2,498)
Balance at the end of the period, net	10,381		10,381
Developed technology | Weighted average
Changes in intangible assets during the year
Amortization period			4 years 5 months 15 days
Customer relationships
Changes in intangible assets during the year
Cost			6,884
Balance at the beginning of the period, net			4,952
Additions			0
Amortization Expense			(653)
Balance at the end of the period, net	4,299		4,299
Customer relationships | Weighted average
Changes in intangible assets during the year
Amortization period			5 years 1 month 13 days
Trade names
Changes in intangible assets during the year
Cost			1,202
Balance at the beginning of the period, net			1,040
Additions			0
Amortization Expense			(167)
Balance at the end of the period, net	873		873
Trade names | Weighted average
Changes in intangible assets during the year
Amortization period			5 years 4 months 27 days
Patents and Licenses
Changes in intangible assets during the year
Cost			1,525
Balance at the beginning of the period, net			2,744
Additions			0
Amortization Expense			(263)
Balance at the end of the period, net	2,481		2,481
Patents and Licenses | Weighted average
Changes in intangible assets during the year
Amortization period			7 years 9 months 18 days
Other
Changes in intangible assets during the year
Cost			182
Balance at the beginning of the period, net			76
Additions			13
Amortization Expense			(40)
Balance at the end of the period, net	$ 49		$ 49
Other | Weighted average
Changes in intangible assets during the year
Amortization period			9 months

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Stock-based Compensation (Details 3)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Minimum
Fair value assumptions using the Black-Scholes-Merton valuation model
Expected life (in years)			6 months	6 months
Risk-free interest rate, minimum (as a percent)			0.08%	0.13%
Volatility, minimum (as a percent)			41.00%	56.00%
Maximum
Fair value assumptions using the Black-Scholes-Merton valuation model
Expected life (in years)			1 year	1 year
Risk-free interest rate, maximum (as a percent)			0.17%	0.20%
Volatility, maximum (as a percent)			62.00%	62.00%
ESPP
Fair value assumptions using the Black-Scholes-Merton valuation model
Dividend Yield (as a percent)			0.00%
Stock options
Fair value assumptions using the Black-Scholes-Merton valuation model
Dividend Yield (as a percent)	0.00%	0.00%	0.00%	0.00%
Stock options | Minimum
Fair value assumptions using the Black-Scholes-Merton valuation model
Expected life (in years)	6 years	0 years	5 years	5 years
Risk-free interest rate, minimum (as a percent)	1.69%	0.00%	1.41%	0.72%
Volatility, minimum (as a percent)	61.00%	0.00%	61.00%	60.00%
Stock options | Maximum
Fair value assumptions using the Black-Scholes-Merton valuation model
Expected life (in years)	6 years 1 month 6 days	0 years	6 years 1 month 6 days	6 years
Risk-free interest rate, maximum (as a percent)	1.93%	0.00%	1.93%	1.33%
Volatility, maximum (as a percent)	62.00%	0.00%	63.00%	65.00%

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Stock-based Compensation

9 Months Ended

Sep. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-based Compensation

Stock-based Compensation

Expense Summary

The table below sets forth a summary of stock-based compensation expense for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Stock-based compensation:
Stock options	$	181	$	143	$	642	$	713
Performance-based restricted stock units	463		210		984		387
Restricted stock units	1,750		2,849		6,263		9,281
ESPP	150		220		456		536
Total stock-based compensation	$	2,544	$	3,422	$	8,345	$	10,917

As of September 30, 2013, there was $2.8 million, $1.6 million, $7.1 million and $0.5 million of total unrecognized compensation expense related to stock options, performance-based restricted stock units, restricted stock units and the ESPP shares, respectively. The expenses related to stock options, performance-based restricted stock units, restricted stock units and ESPP shares are expected to be recognized over a weighted average period of 3.5 years, 0.9 years, 1.6 years and 0.8 years, respectively.

The table below sets forth the functional classification of stock-based compensation expense for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Stock-based compensation:
Cost of recurring revenues	$	234	$	351	$	612	$	1,280
Cost of services and other revenues	218		573		860		1,623
Sales and marketing	769		997		1,924		2,937
Research and development	384		477		1,317		1,376
General and administrative	939		1,024		3,632		3,701
Total stock-based compensation	$	2,544	$	3,422	$	8,345	$	10,917

Performance-based Restricted Stock Units

During the nine months ended September 30, 2013, the Company granted performance-based restricted stock units with vesting contingent on successful attainment of predetermined SaaS revenue growth, recurring revenue gross margin targets, and days sales outstanding ("DSO") targets. The DSO targets apply only to performance-based restricted stock units granted to the Chief Financial Officer and Chief Executive Officer.

During 2012, the Company granted as compensation restricted stock units that were performance-based restricted stock units. The pre-established goals were measured against annual recurring revenue and operating income. The annual recurring revenue target for 2012 was met. As a result, 50% of those awards vested during the first quarter of 2013, with the remainder to vest quarterly through the first quarter of 2014. The operating income target for 2012 was not met, and therefore in 2012 the shares related to this target were canceled and the associated expense was reversed when the Company determined the target was not met.

Determination of Fair Value

The fair value of each restricted stock unit, relating to both performance and non-performance awards, is estimated based on the market value of the Company’s stock on the date of grant. The fair value of the performance-based award assumes that performance goals will be achieved.  If such goals are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed.  The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table.

	Three Months Ended September 30,			Nine Months Ended September 30,
	2013	2012		2013	2012
Stock Option Plans
Expected life (in years)	6.0 to 6.1	—		5.0 to 6.1	5.0 to 6.0
Risk-free interest rate	1.69% to 1.93%	—	%	1.41% to 1.93%	0.72% to 1.33%
Volatility	61% to 62%	—	%	61% to 63%	60% to 65%
Dividend yield	None	None		None	None

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

	Nine Months Ended September 30,
	2013	2012
Employee Stock Purchase Plan
Expected life (in years)	0.50 to 1.00	0.50 to 1.00
Risk-free interest rate	0.08% to 0.17%	0.13% to 0.20%
Volatility	41% to 62%	56% to 62%
Dividend yield	None	None

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Convertible Notes

9 Months Ended

Sep. 30, 2013

Debt Disclosure [Abstract]

Convertible Notes

Convertible Notes

As of September 30, 2013, the Company had an aggregate principal amount of $59.2 million of the 4.75% Convertible Senior Notes (“Convertible Notes”) due in 2016 outstanding. Interest is payable on June 1 and December 1 of each year until the maturity date of June 1, 2016 unless the Convertible Notes are converted, redeemed or repurchased. The Convertible Notes are senior unsecured obligations of the Company. Based on market prices, the fair value of the Convertible Notes was $74.1 million and $58.0 million as of September 30, 2013 and December 31, 2012, respectively.

The Convertible Notes contain an optional redemption feature, which allows the Company, any time on or after June 6, 2014, to redeem all or part of the Convertible Notes for cash if the last reported sale price per share of common stock (as described below) has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption. The redemption price would be 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest.

Holders may convert the Convertible Notes into common stock of the Company at any time at a conversion rate of 129.6596 shares of common stock per $1,000 principal amount, or approximately $7.71 per share, subject to certain adjustments. If holders convert their notes in connection with a “make-whole fundamental change,” such holders are entitled, under certain circumstances, to an increase in the conversion rate for notes surrendered. Upon conversion, the Company will satisfy its conversion obligations by delivering shares of the Company’s common stock.

The Convertible Notes are recorded as long-term debt. The current balance of the debt issuance costs associated with the issuance of the Convertible Notes is recorded within prepaid and other current assets, and the non-current balance is recorded within deposits and other assets, and is being amortized to interest expense over the terms of the Convertible Notes. At September 30, 2013 and December 31, 2012, $0.5 million of the debt issuance costs are included in prepaid and other current assets, with the remaining amounts of $0.9 million and $1.3 million, respectively, recorded in deposits and other assets.

Please refer to Note 13 for recent activity regarding the Convertible Notes.

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Restructuring

9 Months Ended

Sep. 30, 2013

Restructuring and Related Activities [Abstract]

Restructuring

Restructuring

Restructuring expenses primarily consist of costs associated with employee terminations and exit of excess facilities. These costs are recognized in accordance with the accounting guidance for exit activities and are presented as restructuring expenses in the Company's condensed consolidated statements of comprehensive loss. The Company incurred restructuring expense of $0.1 million and $(0.1) million during the three months ended September 30, 2013 and 2012, respectively, and $1.7 million and $0.6 million during the nine months ended September 30, 2013 and 2012, respectively.

The following table sets forth a summary of accrued restructuring expenses for the nine months ended September 30, 2013 and 2012, respectively (in thousands):

	December 31, 2012		Cash Payments			Additions		Adjustments			September 30, 2013
Severance and termination-related costs	$	589	$	(2,146	)	$	1,707	$	(8	)	$	142
Facilities-related costs	289		(30		)	—					259
Total accrued restructuring expenses	$	878	$	(2,176	)	$	1,707	$	(8	)	$	401

	December 31, 2011		Cash Payments			Additions		Adjustments			September 30, 2012
Severance and termination-related costs	$	—	$	(312	)	$	510	$	(53	)	$	145
Facilities-related costs	443		(212		)	209		(105		)	335
Total accrued restructuring expenses	$	443	$	(524	)	$	719	$	(158	)	$	480

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Financial Instruments (Details 2) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Contractual maturity, Amortized Cost
Less than 1 year	$ 6,581,000		$ 6,581,000
Between 1 and 2 years	2,300,000		2,300,000
Total	8,881,000		8,881,000
Contractual maturity, Estimated Fair value
Less than 1 year	6,586,000		6,586,000
Between 1 and 2 years	2,300,000		2,300,000
Total	8,886,000		8,886,000
Other disclosures pertaining to available-for-sale securities
Short-term investments in a material unrealized loss position with maturities of greater than 12 months	0		0		0
Realized gains or losses on sales of investments	0	0	0	0
Proceeds from Sale and Maturity of Available-for-sale Securities			$ 3,800,000	$ 15,300,000

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation and Summary of Accounting Policies

Basis of Presentation and Summary of Accounting Policies

All amounts included herein related to the condensed consolidated financial statements as of September 30, 2013 and the three and nine months ended September 30, 2013 and 2012 are unaudited and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Callidus Software Inc.'s ("the Company's") Annual Report on Form 10-K for the year ended December 31, 2012. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the Securities and Exchange Commission ("SEC") rules and regulations regarding interim financial statements.

In the opinion of management, the accompanying 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, 2013.

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

The Company recognized an adjustment of $1.0 million which increased revenue in the three months ended September 30, 2013 as a result of a review of all outstanding deferred revenue projects, of which $0.2 million is included in SaaS revenues, and $0.8 million is included in services and other revenues. Based upon Management's review of qualitative and quantitative factors, Management believes the impact of the adjustment is not material to current or prior periods.

Use of Estimates

Use of Estimates

Preparation of the condensed consolidated financial statements in conformity with GAAP and the rules and regulations of the SEC requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed 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, uncertain tax liabilities, allowances for doubtful accounts, the useful lives of fixed assets and intangible assets, goodwill and intangible asset impairments, stock-based compensation forfeiture rates, accrued liabilities, the allocation of the value of purchase consideration for business acquisitions, 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 for continued reasonableness, using historical experience and other factors, including the current economic environment. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such evaluation. Illiquid credit markets, volatile equity and foreign currency markets and declines in Information Technology spending by companies have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ materially from those estimates. Changes in those estimates, if any, resulting from continuing changes in the economic environment, will be reflected in the condensed consolidated financial statements in future periods.

Recently Adopted Accounting Pronouncements

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2013-11 ("ASU 2013-11"), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an entity to present unrecognized tax benefits as a reduction of a deferred tax asset, except in certain circumstances. ASU 2013-11 is effective for fiscal years and interim periods beginning after December 31, 2013, and early adoption is permitted. Based upon a preliminary review of the guidance, the Company does not anticipate that adoption will have a significant impact on the Company’s condensed consolidated financial statements.

In February 2013, FASB issued Accounting Standards Update 2013-02 ("ASU 2013-02"), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires an entity to present either on the face of the statement where comprehensive income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. ASU 2013-02 was effective for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02, which involves presentation and disclosures only, did not impact the Company’s condensed consolidated financial statements.

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Net Loss Per Share

9 Months Ended

Sep. 30, 2013

Earnings Per Share [Abstract]

Net Loss Per Share

Net Loss Per Share

Basic net loss per share is calculated by dividing net loss for the period by the weighted average common shares outstanding during the period. Diluted net loss per share is calculated by dividing the net loss for the period by the weighted average common shares outstanding, adjusted for all dilutive potential common shares, which includes shares issuable upon the conversion of the Convertible Notes, the exercise of outstanding common stock options, the release of restricted stock, and purchases of employee stock purchase plan ("ESPP") shares to the extent these shares are dilutive. For the three and nine months ended September 30, 2013 and 2012, 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 September 30,		Nine Months Ended September 30,
	2013	2012	2013	2012
Restricted stock	1,967	3,441	2,071	3,701
Stock options	2,558	3,076	2,622	3,381
ESPP	19	32	6	11
Convertible Notes	7,680	7,680	7,680	7,680
Total	12,224	14,229	12,379	14,773

The weighted average exercise price of stock options excluded for the three and nine months ended September 30, 2013 was $4.62 and $4.22, respectively. The weighted average exercise price of stock options excluded for the three and nine months ended September 30, 2012 was $3.34 and $3.71, respectively.

Holders may convert the Convertible Notes into common stock of the Company at any time at a conversion rate of 129.6596 shares of common stock per $1,000 principal amount, or approximately $7.71 per share, subject to certain adjustments. Please refer to Note 7 for details.

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Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2013

Financial Instruments

Summary of cash, cash equivalents and investments classified as available-for-sale

The components of the Company’s cash, cash equivalents and investments classified as available-for-sale were as follows at September 30, 2013 and December 31, 2012 (in thousands):

September 30, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Other Than Temporary Impairment		Estimated Fair value
Cash	$	19,913	$	—	$	—	$	—	$	19,913
Cash equivalents:
Money market funds	5,279		—		—		—		5,279
Total cash equivalents	5,279		—		—		—		5,279
Total cash and cash equivalents	$	25,192	$	—	$	—	$	—	$	25,192
Short-term investments:
U.S. government and agency obligations	5,621		1		—		—		5,622
Corporate notes and obligations	3,260		4		—		—		3,264
Total short-term investments	$	8,881	$	5	$	—	$	—	$	8,886

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Other Than Temporary Impairment		Estimated Fair value
Cash	$	13,062	$	—	$	—	$	—	$	13,062
Cash equivalents:
Money market funds	3,338		—		—		—		3,338
Total cash equivalents	3,338		—		—		—		3,338
Total cash and cash equivalents	$	16,400	$	—	$	—	$	—	$	16,400
Short-term investments:
U.S. government and agency obligations	6,700		—		—		—		6,700
Corporate notes and obligations	6,061		10		—		—		6,071
Total short-term investments	$	12,761	$	10	$	—	$	—	$	12,771

Schedule of contractual maturities of available-for-sale debt securities

The market value and the amortized cost of available-for-sale debt securities by contractual maturities as of September 30, 2013 were as follows (in thousands):

Contractual maturity	Amortized Cost		Estimated Fair value
Less than 1 year	$	6,581	$	6,586
Between 1 and 2 years	2,300		2,300
Total	$	8,881	$	8,886

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Restructuring (Tables)

9 Months Ended

Sep. 30, 2013

Restructuring and Related Activities [Abstract]

Summary of accrued restructuring expenses

The following table sets forth a summary of accrued restructuring expenses for the nine months ended September 30, 2013 and 2012, respectively (in thousands):

	December 31, 2012		Cash Payments			Additions		Adjustments			September 30, 2013
Severance and termination-related costs	$	589	$	(2,146	)	$	1,707	$	(8	)	$	142
Facilities-related costs	289		(30		)	—					259
Total accrued restructuring expenses	$	878	$	(2,176	)	$	1,707	$	(8	)	$	401

	December 31, 2011		Cash Payments			Additions		Adjustments			September 30, 2012
Severance and termination-related costs	$	—	$	(312	)	$	510	$	(53	)	$	145
Facilities-related costs	443		(212		)	209		(105		)	335
Total accrued restructuring expenses	$	443	$	(524	)	$	719	$	(158	)	$	480

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Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Oct. 31, 2013
Document and Entity Information
Entity Registrant Name	CALLIDUS SOFTWARE INC
Entity Central Index Key	0001035748
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		40,378,221
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3

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Goodwill and Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of intangible assets

Intangible assets consisted of the following as of September 30, 2013 and December 31, 2012 (in thousands):

	December 31, 2012 Cost		December 31, 2012 Net		Additions		Amortization Expense			September 30, 2013 Net		Weighted Average Amortization Period (Years)
Developed technology	$	15,179	$	12,384	$	495	$	(2,498	)	$	10,381	4.5
Customer relationships	6,884		4,952		—		(653		)	4,299		5.1
Trade names	1,202		1,040		—		(167		)	873		5.4
Patents and licenses	1,525		2,744		—		(263		)	2,481		7.8
Other	182		76		13		(40		)	49		0.8
Total	$	24,972	$	21,196	$	508	$	(3,621	)	$	18,083

Schedule of future expected amortization

Total future expected amortization is as follows (in thousands):

	Developed Technology		Customer Relationships		Trade names		Patents and Licenses		Other
Quarter Ending September 30:
Remainder of 2013	$	792	$	220	$	45	$	89	$	15
2014	2,451		874		179		348		34
2015	2,118		874		179		343		—
2016	2,124		876		151		344		—
2017	1,813		768		142		343		—
2018	1,083		501		101		313		—
2019 and beyond	—		186		76		701		—
Total expected amortization expense	$	10,381	$	4,299	$	873	$	2,481	$	49