Callidus Software�Inc.

The following is a geographical breakdown of consolidated income (loss) before income taxes by income tax jurisdiction (in thousands):



�	Year Ended December�31,
�	2017			�	2016			�	2015
United States	$	(21,253	)	�	$	(19,164	)	�	$	(13,000	)
Foreign	760			�	1,326			�	643
Total	$	(20,493	)	�	$	(17,838	)	�	$	(12,357	)

The provision for income taxes consists of the following (in thousands):



�	Year Ended December�31,
�	2017			�	2016			�	2015
Current:	�			�	�			�	�
Federal	$	(19	)	�	$	(20	)	�	$	4
State	�			�	(4		)	�	3
Foreign	1,306			�	973			�	992
Deferred:	�			�	�			�	�
Federal	(1,176		)	�	272			�	148
State	62			�	21			�	1
Foreign	(393		)	�	(114		)	�	(357		)
Provision (benefit) for income taxes	$	(220	)	�	$	1,128		�	$	791

Provision for income tax was a benefit in 2017 compared to an expense in 2016 which was primarily due to the benefits obtained from the Tax Cuts and Jobs Act of 2017 (the �Tax Act�) in which the Company's initial analysis of the impact of this Tax Act resulted in a provisional federal discrete tax benefit of $1.6 million in the period ending December 31, 2017. The tax benefit is primarily driven by the corporate rate reduction and the reassessment of the realizability of our deferred tax assets and liabilities. Since the Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the deferred tax re-measurements, realizability of net deferred tax assets/liabilities, and transition tax to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with the SEC staff issued Staff Accounting Bulletin 118 (�SAB 118�). This benefit was offset by an increase in sales to foreign customers subject to withholding taxes.

On December 22, 2017, this Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December�31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities.

SAB 118 provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. However, in accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company�s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The provision for income taxes differs from the expected tax benefit computed by applying the statutory federal income tax rates to consolidated loss before income taxes as follows (in thousands):



�	Year Ended December�31,
�	2017			�	2016			�	2015
Federal tax at statutory rate	$	(6,968	)	�	$	(6,065	)	�	$	(4,200	)
State taxes, net of benefit	�			�	�			�	4
Non-deductible expenses	4,043			�	2,156			�	781
Deductible expenses	(8,364		)	�	(210		)	�	(181		)
Foreign taxes	656			�	408			�	415
Tax benefit due to the reduction of valuation allowance	12,698			�	5,476			�	4,423
Research and experimentation credit	(726		)	�	(637		)	�	(451		)
Impact of tax reform on goodwill deferred tax liabilities	(1,559		)	�	�			�	�
Provision for income taxes	$	(220	)	�	$	1,128		�	$	791



�	December�31,
�	2017			�	2016
Deferred tax assets:	�			�	�
Net operating loss carryforwards	$	55,508		�	$	58,215
Accrued expenses	580			�	1,600
Unrealized gain/loss on investments	120			�	72
Research and experimentation credit carryforwards	18,051			�	15,086
Capitalized research and experimentation costs	16,064			�	19,558
Deferred stock compensation	4,232			�	7,717
Gross deferred tax assets	94,555			�	102,248
Less valuation allowance	(92,582		)	�	(101,698		)
Total deferred tax assets, net of valuation allowance	1,973			�	550
Deferred tax liabilities:	�			�	�
Property and equipment and intangibles	(2,697		)	�	(1,479		)
Goodwill	(1,303		)	�	(574		)
Gross deferred tax liabilities	(4,000		)	�	(2,053		)
Net deferred tax liabilities	$	(2,027	)	�	$	(1,503	)

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the level of historical taxable income and projections for future taxable income over the period in which the temporary differences are deductible, the Company recorded a valuation allowance against the deferred tax assets for which it believes it is not more likely than not to be realized. As of December�31, 2017 and 2016, a valuation allowance has been recorded on all deferred tax assets, except the deferred tax assets related to some of its foreign subsidiaries, based on the analysis of profitability for those subsidiaries.

The net decrease in the valuation allowance for 2017 was $9.1 million, mainly due to the release of the valuation allowance because of the Tax Act driven by the rate reduction and the reassessment of the realizability of the Company's deferred assets and liabilities. In 2016, the valuation allowance increased by $5.1 million.

As of December�31, 2017, the Company had net operating loss carryforwards for federal and California income tax purposes of $221.3 million and $43.0 million, respectively, available to reduce future income subject to income taxes. The

The Company also has research credit carryforwards for federal and California income tax purposes of approximately $10.6 million and $11.8 million, respectively, available to reduce future income taxes. The federal research credit carryforward, if not utilized, will expire over 20 years beginning in 2019. The California research credit carries forward indefinitely.

Federal and California tax laws impose restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an ownership change, as defined in Section�382 of the Internal Revenue Code. The Company's ability to utilize its net operating loss and tax credit carryforwards are subject to limitations under these provisions.

The Company has not provided for federal income taxes on all of the non-U.S. subsidiaries' undistributed earnings because such earnings are intended to be indefinitely reinvested. The residual U.S. tax liability, if such amounts were remitted, would be nominal.



�	Year Ended December�31,
�	2017			�	2016			�	2015
Beginning balance	$	3,467		�	$	3,213		�	$	3,037
Decreases related to prior year tax positions	(39		)	�	(31		)	�	(59		)
Increases related to current year tax positions	359			�	313			�	239
Reductions to unrecognized tax benefits as a result of a lapse of applicable statute of limitations	(51		)	�	(28		)	�	(4		)
Ending balance�(1) (2)	$	3,736		�	$	3,467		�	$	3,213

If recognized, $0.4 million of the unrecognized tax benefits at December�31, 2017 would reduce the Company's annual effective tax rate. The Company also accrued an immaterial amount of potential penalties and interest related to these unrecognized tax benefits during 2017, and in total, as of December�31, 2017, the Company recorded a liability for potential penalties and interest of $0.1 million. The Company recognized interest and penalties related to unrecognized tax benefits within the provision for income tax (benefit) expense line in the consolidated statement of comprehensive loss. Accrued interest and penalties are included in the other non-current liability line on the consolidated balance sheets. The Company classified the unrecognized tax benefits as a non-current liability on the consolidated balance sheets, as it does not expect any payment of incremental taxes over the next 12�months. The Company also does not expect its unrecognized tax benefits to change significantly over the next 12�months.