LIVEPERSON INC - Annual Report: 2005 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
| x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the fiscal year ended December 31, 2005
Commission
File Number 000-30141
LIVEPERSON,
INC.
(Exact
name of registrant as specified in its charter)
|
DELAWARE
|
13-3861628
|
|
(State
of incorporation)
|
(I.R.S.
employer identification number)
|
|
462
SEVENTH AVENUE, 21st FLOOR
|
|
|
NEW
YORK, NEW YORK
|
10018
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(212)
609-4200
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001
per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No
x
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one). Large
accelerated filer oAccelerated
filer xNon-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
The
aggregate market value of the voting common stock held by non-affiliates of
the
registrant as of June 30, 2005 (the last business day of the registrant’s most
recently completed second fiscal quarter) was approximately $92,859,819
(computed by reference to the last reported sale price on the Nasdaq SmallCap
Market on that date). The registrant does not have any non-voting common stock
outstanding.
On
March
7, 2006, 38,472,480 shares of the registrant’s common stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement for the 2006 Annual Meeting of
Stockholders, to be filed not later than April 28, 2006, are incorporated by
reference into Items 10, 11, 12, 13 and 14 of Part III of this Form
10-K.
LIVEPERSON,
INC.
2005
ANNUAL REPORT ON FORM 10-K
|
Page
|
||
|
2
|
||
|
2
|
||
|
11
|
||
|
24
|
||
|
24
|
||
|
24
|
||
|
24
|
||
|
25
|
||
|
25
|
||
|
26
|
||
|
27
|
||
|
38
|
||
|
39
|
||
|
65
|
||
|
65
|
||
|
67
|
||
|
67
|
||
|
67
|
||
|
67
|
||
|
67
|
||
|
68
|
||
|
68
|
||
|
68
|
||
|
68
|
FORWARD-LOOKING
STATEMENTS
STATEMENTS
IN THIS REPORT ABOUT LIVEPERSON, INC. THAT ARE NOT HISTORICAL FACTS ARE
FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS,
ESTIMATES AND PROJECTIONS ABOUT LIVEPERSON AND OUR INDUSTRY. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL FUTURE EVENTS OR RESULTS TO DIFFER MATERIALLY FROM SUCH STATEMENTS.
ANY SUCH FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. IT IS
ROUTINE FOR OUR INTERNAL PROJECTIONS AND EXPECTATIONS TO CHANGE AS THE YEAR
OR
EACH QUARTER IN THE YEAR PROGRESS, AND THEREFORE IT SHOULD BE CLEARLY UNDERSTOOD
THAT THE INTERNAL PROJECTIONS AND BELIEFS UPON WHICH WE BASE OUR EXPECTATIONS
MAY CHANGE PRIOR TO THE END OF EACH QUARTER OR THE YEAR. ALTHOUGH THESE
EXPECTATIONS MAY CHANGE, WE ARE UNDER NO OBLIGATION TO INFORM YOU IF THEY DO.
OUR COMPANY POLICY IS GENERALLY TO PROVIDE OUR EXPECTATIONS ONLY ONCE PER
QUARTER, AND NOT TO UPDATE THAT INFORMATION UNTIL THE NEXT QUARTER. ACTUAL
EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN THE PROJECTIONS
OR FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED IN ITEM 1A., “RISK FACTORS.”
Overview
LivePerson,
Inc. is a provider of online conversion solutions. Our hosted software enables
companies to identify and proactively engage online visitors—increasing sales,
satisfaction and loyalty while reducing service costs.
LivePerson’s
fully-integrated multi-channel communications platform, Timpani, facilitates
real-time sales, marketing and customer service. Our technology supports and
manages key online interactions—via chat, email and
self-service/knowledgebase—in a cost-effective and secure environment. Blending
leading technology, a deep understanding of consumer behavior and industry
best
practices to create more relevant, compelling and personalized online
experiences, LivePerson maximizes the business impact of the online
channel.
Bridging
the gap between visitor traffic and successful online conversions, our solutions
deliver immediate and tangible return on investment by enabling clients
to:
|
·
|
Maximize
revenue opportunities, improve online conversion rates and reduce
abandonment rates
|
|
·
|
Increase
customer satisfaction, retention and
loyalty
|
|
·
|
Deepen
relationships and reinforce customer
advocacy
|
|
·
|
Acquire
and retain customers across multiple online
channels
|
|
·
|
Reduce
operating costs and increase
productivity
|
More
than
4,000 clients, including EarthLink, Hewlett-Packard, Microsoft, Qwest and
Verizon, have implemented our products and solutions to maximize the return
on
their marketing and e-commerce investments.
As
an
application service provider (ASP), LivePerson provides solutions on a hosted
basis, which offers benefits including low up-front costs; fast implementation;
low total cost of ownership (TCO); scalability; cost predictability and
relatively effortless upgrades. Fully hosted and maintained by LivePerson,
our
modular applications can be implemented with little or no client investment
in
server infrastructure or IT resources.
LivePerson
was incorporated in the State of Delaware in November 1995, and the LivePerson
service was initially introduced in November 1998.
Market
Opportunity
Fueled
by
the growing number of online shoppers and increasing consumer adoption of
high-speed Internet access, U.S. online retail sales are expected to grow at
a
14% compound annual growth rate for the next five years—from $172 billion in
2005 to $329 billion in 2010, according to a Forrester Research report published
in December 2005. Forrester also projected that a total of 55 million U.S.
households
will shop online by 2010, and e-commerce as a portion of all retail sales is
expected to nearly double to a 13% share by 2010.
After
more than 10 years of rapid development, online retail commerce has evolved
into
a mainstream channel, complementing brick-and-mortar retailing. According to
Forrester, a key trend currently driving e-commerce is a desire on the part
of
consumers for greater personalization of experiences and products.
With
increasing consumer adoption of high-speed Internet access, the Internet is
becoming a ubiquitous influence in the day-to-day lives of consumers, and
marketers have responded by shifting advertising online. Search engine marketing
is expected to push online ad spending to $26 billion in 2010. However, the
industry average for conversion rates—the percentage of visitors that buy or
take a desired action online—is less than 3%. An October 2005 Forrester Research
trend report revealed that shopping cart abandonment is rampant, well over
50%.
Customer
interaction quality, in both a pre- and post-sales environment, has become
a
vital differentiator in this commoditized environment, and the largest increase
in customer interactions is projected to come from the Web and email. After
interviewing executives from 176 large North American companies about their
customer experience practices for a January 2005 report, Forrester Research
found that 96% of these firms anticipate an increase in online interactions,
78%
of which expect the increase in volume to be significant.
By
providing a suite of engagement methods—chat, marketing and selling tools,
self-service/knowledgebase and email management—combined with channel-matching
technology, rules-based intelligence, routing and reporting mechanisms,
LivePerson facilitates contextual and personalized online interactions. Our
solutions enable businesses to proactively engage and connect with a targeted
subset of online visitors, directly influencing consumer buying behavior and
improving conversion rates. Promoting the resolution of service issues
in an effective and cost-efficient manner, LivePerson’s products and
solutions also promote first contact resolution and transform service
interactions into sales opportunities.
The
LivePerson Strategy
Our
objective is to strengthen our current position as a provider of online
conversion solutions. Continuing to develop and refine our engagement marketing
platform, which supports real-time sales, marketing and customer service, will
enable us to enhance our status and recognition in the marketplace. The key
elements of our strategy include:
Strengthening
our Position in Target Markets and Growing our Recurring Revenue
Base.
We
intend to extend our market position by significantly increasing our installed
client base. We plan to continue to focus primarily on the financial services,
retail, telecommunications, computer software/hardware and travel/leisure
industries, as well as the small and midsize business (SMB) sector, as our
key
target markets. As the online community is increasingly exposed to the benefits
and functionality of our solutions, we intend to capitalize on our growing
base
of existing clients by collaborating with them to optimize our added value
and
effectiveness. Broadening our client base will enable us to continue to expand
our recurring revenue stream. We also believe that greater exposure of Internet
users to our services will create additional demand for real-time sales,
marketing and customer service solutions.
Increasing
the Value of our Service to our Clients.
We
strive to continuously add new features and functionality to our live
interaction and engagement platform. Because we manage the server infrastructure,
we can make new features available immediately to our clients without client
or
end-user installation of software or hardware. We currently offer a suite of
reporting, analysis and administrative tools as part of our overall suite of
services. We will continue to develop more comprehensive tools for appropriate
sectors of our client base, while adding further interactive capabilities.
In
addition to furthering research and development investments to extend our value
proposition across additional communication channels, including outbound and
inbound email, we are evaluating innovative methods to bridge the gap between
the online and phone channels. We also intend to continue to enhance our ability
to capture, analyze and report on the significant amount of online activity
data
collected on behalf of our clients to further our clients’ online strategies. We
will also continue to refine additional service offerings that will provide
value to our clients, such as more robust consulting and advisory services
that
enable improved reporting capabilities, data storage and bridges to existing
client systems. Our clients may use these capabilities to increase productivity,
manage call center staffing, develop one-to-one marketing tactics and pinpoint
sales opportunities. Through these and other initiatives, we intend to reinforce
our value proposition to clients and increase their reliance on these benefits,
which we believe will result in additional revenue from both new and existing
clients over time.
Continuing
to Build Strong Brand Recognition.
As a
pioneer in online communications and conversion solutions, LivePerson enjoys
strong brand recognition and credibility. By strategically targeting decision
makers and influencers within key vertical markets, our goal is to generate
increased awareness and demand for our broad range of online sales, marketing
and service tools. In addition, we have developed relationships with the media
and analyst community to reinforce our position and status within the industry.
Our brand name is also highly visible to both business users and consumers.
When
a visitor engages in a text-based chat on a Web site that offers LivePerson’s
real-time technology, our brand name is usually displayed on the LivePerson
dialogue window. We believe that this high-visibility placement will create
even
greater brand awareness and increased demand for LivePerson’s
solutions.
Maintaining
our Technological Leadership Position.
We
focus on the development of tightly integrated software design and network
architecture that is both reliable and scalable. We continue to devote
significant resources to technological innovation. Specifically, we plan to
continue to expand the features and functionality of our existing services,
develop broader applications for our services and create new products and
services that will benefit our expanding client base. We evaluate emerging
technologies and industry standards and continually update our technology in
order to retain our leadership position in the real-time customer service
industry. We continuously monitor legal and technological developments in the
area of information security and confidentiality to ensure our policies and
procedures exceed the demands of the world’s largest and most demanding
corporations. We believe that these efforts will allow us to effectively
anticipate changing client and end-user requirements in our rapidly evolving
industry.
Evaluating
Strategic Alliances and Acquisitions where Appropriate.
We
continue to seek opportunities to form strategic alliances with or to acquire
other companies that can accelerate our growth or broaden our product offerings.
In October 2000, we acquired HumanClick Ltd., an Israeli-based provider of
real-time, online customer service applications to SMBs. In July 2002, we
acquired the customer contracts and associated rights of NewChannel, Inc.,
a
provider of proactive online sales services. In December 2003, we acquired
certain identifiable assets of Island Data Corporation, a provider of
knowledgebase services to large corporate clients. In July 2004, we acquired
certain identifiable assets of FaceTime Communications, Inc., a provider of
real-time communications solutions.
We
have
no commitments with respect to any strategic alliances or acquisitions, and
we
are not currently engaged in any material negotiations with respect to these
opportunities.
Expanding
our International Presence.
We have
translated the user interface for LivePerson services into eighteen languages,
including Dutch, French, German, Italian, Portuguese, Spanish and Swedish.
To
strengthen our expansion initiatives in Western Europe, we have established
a
sales, marketing and client support presence—as well as a local hosting
capability—in the United Kingdom. We are evaluating strategies to pursue further
international expansion in both Europe and the Asia/Pacific region.
Products
and Services
LivePerson’s
suite of products support and manage all online customer interactions—chat,
email and self-service/knowledgebase—from a single, unified agent desktop. By
supplying a complete, unified customer history, our solutions enable businesses
to deliver a relevant, timely, personalized and seamless customer experience.
In
addition to product offerings, LivePerson provides professional services to
support the complete deployment of our enterprise solutions.
Timpani
Sales and Marketing
Timpani
Sales and Marketing combines online site traffic monitoring software with a
sophisticated rules engine to enable LivePerson clients to proactively engage
Web site visitors. The product enables clients to maximize online revenue
opportunities, improve conversion rates and reduce shopping cart abandonment
by
proactively engaging the right visitor, using the right channel, at the right
time. The intelligent and proactive solution identifies Web site visitors—who
demonstrate the highest propensity to buy—and engages them, in real time, with
relevant content and offers, subtly steering them toward online outcomes desired
by our clients.
Timpani
Contact Center
Timpani
Contact Center provides online customer support capability via a unified,
multi-channel interface comprised of chat, email and self-service knowledgebase.
The product enables clients to improve service quality, increase agent
productivity and facilitate first-contact resolution by streamlining customer
interactions across all online channels, while reducing service costs. By
integrating all interactions, this comprehensive solution supplies a unified
customer history, enabling organizations to deliver service consistency and
continuity to customers. Timpani Contact Center is comprised of Timpani Chat,
Timpani Email and Timpani Self-Service:
|
·
|
Timpani
Chat.
Timpani Chat enhances customer service with live support, while reducing
interaction costs and churn. A real-time service, it strengthens
customer
loyalty and increases satisfaction levels while improving agent
productivity and lowering service costs. The solution’s single agent
desktop promotes multi-tasking and includes productivity tools that
speed
time to resolution.
|
|
·
|
Timpani
Email.
Timpani Email efficiently manages inbound email traffic and Web form
queries while improving customer satisfaction and increasing agent
productivity. This extensive email management solution funnels all
messages through an automated process that evaluates the business
requirement and triggers a related action—such as generating an
auto-response, routing to an agent queue, deleting spam or escalating
to
another channel—for each message.
|
|
·
|
Timpani
Self-Service.
Timpani Self-Service delivers relevant and immediate answers to Web
site
visitors searching for information while optimizing the user experience
and lowering support costs. The sophisticated knowledgebase learns
dynamically and automatically
updates based on visitor searches and behavior. It also allows issues
that
require further attention to be escalated to other communication
channels,
such as live chat, email or
telephone.
|
LivePerson
Pro
LivePerson
Pro enables SMBs to increase online sales and improve customer service with
live
chat. This economical solution supplies both real-time monitoring tools, which
are used to determine the effectiveness of online marketing campaigns and to
identify visitors who are responding, and geo-location, which facilitates
cross-sell/up-sell opportunities and prevents fraud.
LivePerson
Contact Center
LivePerson
Contact Center enables SMBs to improve agent productivity, lower service costs
and increase customer satisfaction. Developed for SMBs, the solution manages
all
communications—live chat, email, self-service and telephone logs—from an
easy-to-use, all-in-one platform.
Professional
Services
LivePerson’s
Professional Services team uses a comprehensive, customer-focused methodology
to
develop high-quality solutions, which in turn deliver a significant competitive
advantage to our enterprise clients. Dedicated members of the Professional
Services team work hand-in-hand with client teams to analyze online Web
processes, develop an optimal deployment strategy, train contact center agents
and implement ongoing performance management systems to deliver desired business
results.
As
part
of these value-added professional services offerings, we recently launched
the
LivePerson Center of Excellence (CoE). In addition to establishing a central
repository for critical assets—including intellectual capital, knowledge,
deployment methodology, training materials and industry vertical best
practices—the CoE streamlines application rollout, accelerates implementation
and creates a scalable, replicable production environment to improve the
performance of online sales and service initiatives.
Clients
Our
client base includes Fortune 1000 companies, dedicated Internet businesses
and a
broad range of online merchants. Our solutions benefit organizations of all
sizes conducting business or communicating with customers online. We plan to
continue to focus primarily on the financial services, retail,
telecommunications, computer software/hardware and travel/leisure industries,
as
well as the SMB sector, as our key target markets.
The
following is a representative list of clients among those generating at least
$100,000 in revenue during 2005:
|
Ameritrade
|
EarthLink
|
NETELLER
|
|
AT&T
|
eLuxury.com
|
Overstock.com
|
|
Bank
of America
|
FXCM
(Forex Capital Markets)
|
QVC
|
|
Bell
Canada
|
Hewlett-Packard
|
Qwest
|
|
Bell
South
|
Intel
|
Rackspace
|
|
Citibank
Home Equity
|
Kaplan
Education
|
SunTrust
Bank
|
|
Computer
Associates
|
Maersk
|
VeriSign
|
|
Digital
Insight
|
Microsoft
|
Verizon
|
Sales
and Marketing
Sales
We
sell
our products and services by leveraging a common methodology through both direct
and indirect sales channels:
|
·
|
Direct
Sales.
Our sales process focuses on how our solutions and domain expertise
deliver financial and operational value that support our clients’
strategic initiatives. The Timpani Sales and Marketing value proposition
is targeted to business executives whose primary responsibility is
to
maximize online customer acquisition. These executives have a vested
interest in improving conversion rates, increasing application completion
rates and increasing average order value. The value proposition for
Timpani Contact Center appeals to professionals who hold top- and
bottom-line responsibility for customer service and technical support
functions within their organization. Timpani Contact Center enables
these
organizations to provide effective customer service using the online
channel while deflecting costly phone calls and shifting service
interactions to more cost efficient channels. Whether we typically
engage
with individuals or teams responsible for online sales or service,
LivePerson’s Timpani platform supports any organization with a
company-wide strategic initiative to improve the overall online customer
experience.
|
Our
sales
methodology begins with in-depth research and discovery meetings that enable
us
to develop a deep understanding of the value drivers and key performance metrics
of a prospective client. We then present an analytical review detailing how
our
solutions and industry expertise can impact these value drivers and metrics.
If
necessary, we then implement a Proof of Concept (POC) engagement, typically
lasting 90 days, to validate solution capabilities and prove financial return
on
investment (ROI). Finally, we transition to an account management program that
ensures ongoing client success.
|
·
|
Indirect
Sales.
During the second half of 2005, we invested in the development of
an
indirect sales channel to develop revenue-generating programs through
original equipment manufacturer (OEM), channel and partner relationships.
By maximizing market coverage via partners who provide complementary
products and services, this channel will increase LivePerson’s revenue
opportunities and accelerate market penetration without incurring
the
traditional costs associated with direct
sales.
|
Client
Support
Our
Professional Services group provides deployment support to enterprise clients
and maintains involvement throughout the account lifecycle. All LivePerson
clients have access to 24/7 help desk services, while larger clients are
assigned account managers for ongoing support and process
improvement.
Marketing
Our
marketing efforts are organized around the needs, trends and characteristics
of
our existing and prospective client base. Our deep relationship with existing
clients fosters continuous feedback, thereby allowing us to develop and refine
marketing programs for specific industry segments. We market our products and
services to executives with profit and loss (P&L) responsibility for the
online sales channel and customer service operations with a focus on the
financial services, retail, telecommunications, computer software/hardware
and
travel/leisure industries, as well as SMBs. Our integrated marketing strategy
includes lead generation campaigns to reach potential and existing clients
using
mediums such as online initiatives, advertising, direct mail, and industry-
and
category-specific tradeshows and events.
Our
marketing strategy also encompasses public relations programs. As a result
of
relationships developed with the media and analyst community, we gain press
and
editorial coverage. Other initiatives include securing speaking opportunities
and byline articles featuring key executives, which helps raise the company
profile and reinforce our position as an industry leader.
Competition
The
market for online sales, marketing and customer service technology is intensely
competitive and characterized by aggressive marketing, evolving industry
standards, rapid technology developments and frequent new product introductions.
Relatively few substantial barriers to entry in this market exist, but include
the ability to design and build scalable software, develop and maintain strong
ongoing client relationships with clients of all sizes and, with respect to
outsourced solution providers, the ability to design, build and manage a
scalable network infrastructure.
LivePerson
competes directly with companies focused on technology that facilitates
real-time sales, email management, searchable knowledgebase applications and
customer service interaction. These markets remain fairly saturated with small
companies that compete on price and features. LivePerson faces significant
competition from online interaction solution providers, including RightNow
Technologies, Instant Service and Proficient Systems, all of which offer hosted
applications. While the online conversion market that Timpani Sales and
Marketing addresses is fragmented, LivePerson faces potential competition from
Web analytics and online marketing service providers such as WebSideStory and
SSPS. The most significant barriers to entry in this market are knowledge
of:
|
·
|
Online
consumer purchasing habits
|
|
·
|
Methodologies
to correctly engage customers
|
|
·
|
Metrics
proving return on investment
|
|
·
|
Technology
innovation opportunities
|
LivePerson
also faces potential competition from larger enterprise software companies
such
as Oracle. In addition, established technology companies such as Microsoft,
Yahoo and Google may leverage their existing relationships and capabilities
to
offer real-time sales, marketing and customer service applications.
Finally,
LivePerson competes with clients and potential clients that choose to provide
a
real-time sales, marketing and customer service solution in-house as well as,
to
a lesser extent, traditional offline customer service solutions, such as
telephone call centers.
LivePerson
believes that competition will increase as our current competitors increase
the
sophistication of their offerings and as new participants enter the market.
As
compared to LivePerson, some of our larger current and potential competitors
have:
|
·
|
Longer
operating histories
|
|
·
|
Greater
brand recognition
|
|
·
|
More
diversified lines of products and
services
|
|
·
|
Significantly
greater financial, marketing and research and development
resources
|
Some
competitors may enter into strategic or commercial relationships with larger,
more established and better-financed companies, enabling them to:
|
·
|
Undertake
more extensive marketing campaigns
|
|
·
|
Adopt
more aggressive pricing policies
|
|
·
|
Make
more attractive offers to businesses to induce them to use their
products
or services
|
Technology
Three
key
technological features distinguish the LivePerson services:
|
·
|
Our
clients are supported by a secure, scalable server infrastructure.
In
North America, our primary servers are hosted in a fully secured
third-party server center in the Eastern United States and are supported
by a backup server facility located in the Southwestern United States.
In
Europe, our primary servers are hosted in a fully secured third-party
server center in London and are supported by a backup server facility
located in the Greater London area.
|
|
·
|
Our
network, hardware and software are designed to accommodate our clients’
demand for secure, high-quality 24-hours per day/seven-days per week
service.
|
|
·
|
As
a hosted service, we are able to add additional capacity and new
features
quickly and efficiently. This has enabled us to immediately provide
these
benefits simultaneously to our entire client base. In addition, it
allows
us to maintain a relatively short development and implementation
cycle.
|
As
an
application service provider, we focus on the development of tightly integrated
software design and network architecture. We have dedicated significant
resources to designing our software and network architecture based on the
fundamental principles of security, reliability and scalability.
Software
Design.
Our
software design is based on client-server architecture. As an application
service provider, our clients install only the LivePerson software client
(Windows or Java-based) on their operators’ workstations. Visitors to our
clients’ Web sites require only a standard Web browser and do not need to
download software from LivePerson in order to interact with our clients’
operators or to use the LivePerson services.
Our
software design is also based on open standards. These standard protocols
facilitate integration with our clients’ legacy and third-party systems, and
include:
|
·
|
Java
|
|
·
|
XML
(Extensible Mark-up Language)
|
|
·
|
HTML
(Hypertext Mark-up Language)
|
|
·
|
SQL
(Structured Query Language)
|
|
·
|
HTTP
(Hypertext Transfer Protocol)
|
Network
Architecture.
The
software underlying our services is integrated with scalable and reliable
network architecture. Our network is scalable; we do not need to add new
hardware or network capacity for each new LivePerson client. This network
architecture is hosted in a third-party server center with redundant network
connections, servers and other infrastructure, ensuring minimal downtime. Our
backup server infrastructure housed at a remote location provides each primary
hosting facility with effective disaster recovery capability. For increased
security, we use advanced firewall architecture and industry encryption
standards. We also enable our clients to further encrypt their sensitive data
using industry standard encryption algorithms.
Government
Regulation
We
are
subject to federal, state and local regulation, and laws of jurisdictions
outside of the United States, including laws and regulations applicable to
computer software and access to or commerce over the Internet. Due to the
increasing use of the Internet and various online services, it is likely that
new laws and regulations will be adopted with respect to the Internet or online
services related to issues including user privacy, freedom of expression,
pricing, content, quality of products and services, taxation, advertising,
intellectual property rights and information security. The nature of such
legislation and the manner in which it may be interpreted and enforced cannot
be
fully determined and, therefore, such legislation could subject us and/or our
clients or Internet users to potential liability, which in turn could have
a
material adverse effect on our business, results of operations and financial
condition.
Intellectual
Property and Proprietary Rights
We
rely
on a combination of patent, copyright, trade secret, trademark and other common
law in the United States and other jurisdictions, as well as confidentiality
procedures and contractual provisions, to protect our proprietary technology,
processes and other intellectual property, to the extent that protection is
sought or secured at all. However, we believe that factors such as the
technological and creative
skills of our personnel, new service developments, frequent enhancements and
reliable maintenance are more essential to establishing and maintaining a
competitive advantage. Others may develop technologies that are similar or
superior to our technology. We enter into confidentiality and other written
agreements with our employees, consultants, clients, potential clients and
strategic partners, and through these and other written agreements, we attempt
to control access to and distribution of our software, documentation and other
proprietary information. Despite our efforts to protect our proprietary rights,
third parties may, in an unauthorized manner, attempt to use, copy or otherwise
obtain and market or distribute our intellectual property rights or technology
or otherwise develop a service with the same functionality as our services.
Policing unauthorized use of our services and intellectual property rights
is
difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology or intellectual property rights, particularly
in foreign countries where we do business, where our services are sold or used,
where the laws may not protect proprietary rights as fully as do the laws of
the
United States or where enforcement of laws protecting proprietary rights is
not
common or effective.
Substantial
litigation regarding intellectual property rights exists in the software
industry. In the ordinary course of our business, our services may be
increasingly subject to third-party infringement claims as the number of
competitors in our industry segment grows and the functionality of services
in
different industry segments overlaps. Some of our competitors in the market
for
real-time sales, marketing and customer service solutions may have filed or
may
intend to file patent applications covering aspects of their technology. Any
claims alleging infringement of third-party intellectual property rights could
require us to spend significant amounts in litigation (even if the claim is
invalid), distract management from other tasks of operating our business, pay
substantial damage awards, prevent us from selling our products, delay delivery
of the LivePerson services, develop non-infringing software, technology,
business processes, systems or other intellectual property (none of which might
be successful), or limit our ability to use the intellectual property that
is
the subject of any of these claims, unless we enter into license agreements
with
the third parties (which may be unavailable on commercially reasonable terms,
or
not available at all). Therefore, such claims could have a material adverse
effect on our business, results of operations and financial
condition.
Employees
As
of
March 1, 2006, we had 111 full-time employees. None of our employees are covered
by collective bargaining agreements. We believe our relations with our employees
are good.
Web
Site Access to Reports
We
make
available, free of charge, on our Web site (www.liveperson.com), our annual
reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we have electronically filed such material with,
or
furnished it to, the Securities and Exchange Commission.
Risks
Related to Our Business
We
have a history of losses, we had an accumulated deficit of $101.4 million as
of
December 31, 2005 and we may incur losses in the
future.
Although
we have achieved profitability in each three-month period from and including
the
period ended September 30, 2003, we may, in the future, incur losses and
experience negative cash flow, either
or
both of which may be significant. We recorded net losses of $6.8 million for
the
year ended December 31, 2002 and $816,000 for the year ended
December 31, 2003. We recorded net income of $2.1 million for the year
ended December 31, 2004 and $2.5 million for the year ended
December 31, 2005. As of December 31, 2005, our accumulated deficit
was approximately $101.4 million. We cannot assure you that we can sustain
or
increase profitability on a quarterly or annual basis in the future. Failure
to
maintain profitability may materially and adversely affect the market price
of
our common stock.
Our
quarterly revenue and operating results are subject to significant fluctuations,
which may adversely affect the trading price of our common
stock.
Our
quarterly revenue and operating results may fluctuate significantly in the
future due to a variety of factors, including the following factors which are
in
part within our control, and in part outside of our control:
|
·
|
market
acceptance by companies doing business online of real-time sales,
marketing and customer service
solutions;
|
|
·
|
our
clients’ business success;
|
|
·
|
our
clients’ demand for our services;
|
|
·
|
our
ability to attract and retain
clients;
|
|
·
|
the
amount and timing of capital expenditures and other costs relating
to the
expansion of our operations, including those related to
acquisitions;
|
|
·
|
the
introduction of new services by us or our competitors;
and
|
|
·
|
changes
in our pricing policies or the pricing policies of our
competitors.
|
Our
revenue and results may also fluctuate significantly in the future due to the
following factors that are entirely outside of our control:
|
·
|
economic
conditions specific to the Internet, electronic commerce and online
media;
and
|
|
·
|
general
economic and political conditions.
|
Period-to-period
comparisons of our operating results may not be meaningful because of these
factors. You should not rely upon these comparisons as indicators of our future
performance.
Due
to
the foregoing factors, it is possible that our results of operations in one
or
more future quarters may fall below the expectations of securities analysts
and
investors. If this occurs, the trading price of our common stock could
decline.
We
may be unable to respond to the rapid technological change and changing client
preferences in the online sales, marketing and customer service industry and
this may harm our business.
If
we are
unable, for technological, legal, financial or other reasons, to adapt in a
timely manner to changing market conditions in the online sales, marketing
and
customer service industry or our clients’ or Internet users’ requirements, our
business, results of operations and financial condition would be materially
and
adversely affected. Business on the Internet is characterized by rapid
technological change.
In addition, the market for online sales, marketing and customer service
solutions is relatively new. Sudden changes in client and Internet user
requirements and preferences, frequent new product and service introductions
embodying new technologies, such as broadband communications, and the emergence
of new industry standards and practices could render the LivePerson services
and
our proprietary technology and systems obsolete. The rapid evolution of these
products and services will require that we continually improve the performance,
features and reliability of our services. Our success will depend, in part,
on
our ability to:
|
·
|
enhance
the features and performance of the LivePerson
services;
|
|
·
|
develop
and offer new services that are valuable to companies doing business
online and Internet users; and
|
|
·
|
respond
to technological advances and emerging industry standards and practices
in
a cost-effective and timely manner.
|
If
any of
our new services, including upgrades to our current services, do not meet our
clients’ or Internet users’ expectations, our business may be harmed. Updating
our technology may require significant additional capital expenditures and
could
materially and adversely affect our business, results of operations and
financial condition.
If
new
services require us to grow rapidly, this could place a significant strain
on
our managerial, operational, technical and financial resources. In order to
manage our growth, we could be required to implement new or upgraded operating
and financial systems, procedures and controls. Our failure to expand our
operations in an efficient manner could cause our expenses to grow, our revenue
to decline or grow more slowly than expected and could otherwise have a material
adverse effect on our business, results of operations and financial
condition.
If
we are not competitive in the market for real-time sales, marketing and customer
service solutions, our business could be harmed.
The
market for online sales, marketing and customer service technology is intensely
competitive and characterized by aggressive marketing, evolving industry
standards, rapid technology developments and frequent new product introductions.
Relatively few substantial barriers to entry in this market exist, but include
the ability to design and build scalable software, develop and maintain strong
ongoing client relationships with clients of all sizes and, with respect to
outsourced solution providers, the ability to design, build and manage a
scalable network infrastructure. Established or new entities may enter this
market in the near future, including those that provide real-time interaction
online, with or without the user’s request.
We
compete directly with companies focused on technology that facilitates real-time
sales, email management, searchable knowledgebase applications and customer
service interaction. These markets remain fairly saturated with small companies
that compete on price and features. We face significant competition from online
interaction solution providers, including RightNow Technologies, Instant Service
and Proficient Systems, all of which offer hosted applications. While the online
conversion market that Timpani Sales and Marketing addresses is fragmented,
we
face potential competition from Web analytics and online marketing service
providers such as WebSideStory and SSPS. The most significant barriers to entry
in this market are knowledge of:
|
·
|
Online
consumer purchasing habits
|
|
·
|
Methodologies
to correctly engage customers
|
|
·
|
Metrics
proving return on investment
|
|
·
|
Technology
innovation opportunities
|
Furthermore,
many of our competitors offer a broader range of customer relationship
management products and services than we currently offer. We may be
disadvantaged and our business may be harmed if companies doing business online
choose real-time sales, marketing and customer service solutions from such
providers.
We
also
face potential competition from larger enterprise software companies such as
Oracle. In addition, established technology companies such as Microsoft, Yahoo
and Google may leverage their existing relationships and capabilities to offer
real-time sales, marketing and customer service applications.
Finally,
we face competition from clients and potential clients that choose to provide
a
real-time sales, marketing and customer service solution in-house as well as,
to
a lesser extent, traditional offline customer service solutions, such as
telephone call centers.
We
believe that competition will increase as our current competitors increase
the
sophistication of their offerings and as new participants enter the market.
Many
of our larger current and potential competitors have:
|
·
|
longer
operating histories;
|
|
·
|
greater
brand recognition;
|
|
·
|
more
diversified lines of products and services;
and
|
|
·
|
significantly
greater financial, marketing and research and development
resources.
|
Some
competitors may enter into strategic or commercial relationships with larger,
more established and better-financed companies. These competitors may be able
to:
|
·
|
undertake
more extensive marketing campaigns;
|
|
·
|
adopt
more aggressive pricing policies;
and
|
|
·
|
make
more attractive offers to businesses to induce them to use their
products
or services.
|
Any
delay
in the general market acceptance of the real-time sales, marketing and customer
service solution business model would likely harm our competitive position.
Delays would allow our competitors additional time to improve their service
or
product offerings, and would also provide time for new competitors to develop
real-time sales, marketing, customer service and Web analytics applications
and
solicit prospective clients within our target markets. Increased competition
could result in pricing pressures, reduced operating margins and loss of market
share.
The
success of our business is dependent on the retention of existing clients and
their purchase of additional LivePerson services.
Our
LivePerson services agreements typically have twelve month terms and are
terminable upon 30 to 90 days’ notice without penalty. If a significant number
of our clients, or any one client to whom we provide a significant amount of
services, were to terminate these services agreements, or reduce the amount
of
services purchased or fail to purchase additional services, our results of
operations may be negatively and materially affected. Dissatisfaction with
the
nature or quality of our services could also lead clients to terminate our
service. We depend on monthly fees from the LivePerson services for
substantially all of our revenue. If our retention rate declines, our revenue
could decline unless we are able to obtain additional clients or alternate
revenue sources. Further, because of the historically small amount of services
sold in initial orders, we depend on sales to new clients and sales of
additional services to our existing clients.
We
are dependent on technology systems that are beyond our
control.
The
success of the LivePerson services depends in part on our clients’ online
services as well as the Internet connections of visitors to their Web sites,
both of which are outside of our control. As a result, it may be difficult
to
identify the source of problems if they occur. In the past, we have experienced
problems related to connectivity which have resulted in slower than normal
response times to Internet user chat requests and messages and interruptions
in
service. The LivePerson services rely both on the Internet and on our
connectivity vendors for data transmission. Therefore, even when connectivity
problems are not caused by the LivePerson services, our clients or Internet
users may attribute the problem to us. This could diminish our brand and harm
our business, divert the attention of our technical personnel from our product
development efforts or cause significant client relations problems.
In
addition, we rely on two third-party Web hosting service providers for Internet
connectivity and network infrastructure hosting, security and maintenance.
These
providers have, in the past, experienced problems that have resulted in slower
than normal response times and interruptions in service. If we are unable to
continue utilizing the services of our existing Web hosting providers or if
our
Web hosting services experience interruptions or delays, it is possible that
our
business could be harmed.
Our
service also depends on third parties for hardware and software, which products
could contain defects. Problems arising from our use of such hardware or
software could require us to incur significant costs or divert the attention
of
our technical personnel from our product development efforts. To the extent
any
such problems require us to replace such hardware or software, we may not be
able to do so on acceptable terms, if at all.
Technological
defects could disrupt our services, which could harm our business and
reputation.
We
face
risks related to the technological capabilities of the LivePerson services.
We
expect the number of interactions between our clients’ operators and Internet
users over our system to increase significantly as we expand our client base.
Our network hardware and software may not be able to accommodate this additional
volume. Additionally, we must continually upgrade our software to improve the
features and functionality of the LivePerson services in order to be competitive
in our market. If future versions of our software contain undetected errors,
our
business could be harmed. As a result of major software upgrades at LivePerson,
our client sites have, from time to time, experienced slower than normal
response times and interruptions in service. If we experience system failures
or
degraded response times, our reputation and brand could be harmed. We may also
experience technical problems in
the
process of installing and initiating the LivePerson services on new Web hosting
services. These problems, if unremedied, could harm our business.
The
LivePerson services also depend on complex software which may contain defects,
particularly when we introduce new versions onto our servers. We may not
discover software defects that affect our new or current services or
enhancements until after they are deployed. It is possible that, despite testing
by us, defects may occur in the software. These defects could result
in:
|
·
|
damage
to our reputation;
|
|
·
|
lost
sales;
|
|
·
|
delays
in or loss of market acceptance of our products;
and
|
|
·
|
unexpected
expenses and diversion of resources to remedy
errors.
|
Our
clients may experience adverse business conditions that could adversely affect
our business.
Some
of
our clients may experience difficulty in supporting their current operations
and
implementing their business plans. These clients may reduce their spending
on
our services, or may not be able to discharge their payment and other
obligations to us. These circumstances are influenced by general economic and
industry-specific conditions, and could have a material adverse impact on our
business, financial condition and results of operations. In addition, as a
result of these conditions, our clients, in particular our Internet-related
clients that may experience (or that anticipate experiencing) difficulty raising
capital, may elect to scale back the resources they devote to customer service
technology, including services such as ours. If the current environment for
our
clients, including, in particular, our Internet-related clients, does not
improve, our business, results of operations and financial condition could
be
materially adversely affected. In addition, the non-payment or late payment
of
amounts due to us from a significant number of clients would negatively impact
our financial condition. During 2005, we increased our allowance for doubtful
accounts by $30,000 to approximately $84,000, principally due to an increase
in
accounts receivable as a result of increased sales, and we wrote off
approximately $17,000 of previously reserved accounts, leaving a net allowance
of $67,000 at December 31, 2005. During 2004, we increased our allowance
for doubtful accounts by $30,000 to approximately $94,000, principally due
to an
increase in accounts receivable as a result of increased sales, and we wrote
off
approximately $40,000 of previously reserved accounts, leaving a net allowance
of $54,000 at December 31, 2004.
Our
business is significantly dependent on our ability to retain our current key
personnel, to attract new personnel, and to manage staff
attrition.
Our
future success depends to a significant extent on the continued services of
our
senior management team, including Robert P. LoCascio, our founder and Chief
Executive Officer. The loss of the services of any member of our senior
management team, in particular Mr. LoCascio, could have a material and
adverse effect on our business, results of operations and financial condition.
We cannot assure you that we would be able to successfully integrate newly-hired
senior managers who would work together successfully with our existing
management team.
We
may be
unable to attract, integrate or retain other highly qualified employees in
the
future. If our retention efforts are ineffective, employee turnover could
increase and our ability to provide services to our clients would be materially
and adversely affected. Furthermore, the new requirement to expense stock
options may discourage us from granting the size or type of stock option awards
that job candidates may require to join our company.
Any
staff
attrition we experience, whether initiated by the departing employees or by
us,
could place a significant strain on our managerial, operational, financial
and
other resources. To the extent that we do not initiate or seek any staff
attrition that occurs, there can be no assurance that we will be able to
identify and hire adequate replacement staff promptly, if at all, and even
that
if such staff is replaced, we will be successful in integrating these employees.
In addition, we may not be able to outsource certain functions. We expect to
evaluate our needs and the performance of our staff on a periodic basis, and
may
choose to make adjustments in the future. If the size of our staff is
significantly reduced, either by our choice or otherwise, it may become more
difficult for us to manage existing, or establish new, relationships with
clients and other counter-parties, or to expand and improve our service
offerings. It may also become more difficult for us to implement changes to
our
business plan or to respond promptly to opportunities in the marketplace.
Further, it may become more difficult for us to devote personnel resources
necessary to maintain or improve existing systems, including our financial
and
managerial controls, billing systems, reporting systems and procedures. Thus,
any significant amount of staff attrition could cause our business and financial
results to suffer.
We
believe our reported financial results may be adversely affected by changes
in
accounting principles generally accepted in the United
States.
Generally
accepted accounting principles in the United States are subject to
interpretation by the FASB, the American Institute of Certified Public
Accountants, the SEC, and various bodies formed to promulgate and interpret
appropriate accounting principles. A change in these principles or
interpretations could have a significant effect on our reported financial
results, and could affect the reporting of transactions completed before the
announcement of a change.
For
example, in December 2004, the FASB announced its decision to require companies
to expense employee stock options by issuing SFAS No. 123 (revised 2004),
“Share-Based Payment.” In April 2005, the SEC announced a new rule that delays
the implementation of SFAS No. 123(R) until the fiscal year that begins after
June 15, 2005. We will adopt the provisions of SFAS No. 123(R) as of January
1,
2006. We believe this change in accounting will have a material adverse effect
on our reported results of operations. Based upon the current number of
outstanding stock options, we expect that the impact of this accounting change
will decrease net income per common share by approximately $0.05 for the fiscal
year ended 2006. This figure may change based upon additional stock options
grants, methodology refinement or other factors.
We
cannot predict our future capital needs to execute our business strategy and
we
may not be able to secure additional financing.
We
believe that our current cash and cash equivalents and cash generated from
operations, if any, will be sufficient to fund our working capital and capital
expenditure requirements for at least the next twelve months. To the extent
that
we require additional funds to support our operations or the expansion of our
business, or to pay for acquisitions, we may need to sell additional equity,
issue debt or convertible securities or obtain credit facilities through
financial institutions. In the past, we have obtained financing principally
through the sale of preferred stock, common stock and warrants. If additional
funds are raised through the issuance of debt or preferred equity securities,
these securities could have rights, preferences and privileges senior to holders
of common stock, and could have terms that impose restrictions on our
operations. If additional funds are raised through the issuance of additional
equity or convertible securities, our stockholders could suffer dilution. We
cannot assure you that additional funding, if required, will be available to
us
in amounts or on terms acceptable to us. If sufficient funds are not
available
or are not available on acceptable terms, our ability to fund any potential
expansion, take advantage of acquisition opportunities, develop or enhance
our
services or products, or otherwise respond to competitive pressures would be
significantly limited. Those limitations would materially and adversely affect
our business, results of operations and financial condition.
If
we do not successfully integrate potential future acquisitions, our business
could be harmed.
In
the
future, we may acquire or invest in complementary companies, products or
technologies. Acquisitions and investments involve numerous risks to us,
including:
|
·
|
difficulties
in integrating operations, technologies, products and personnel with
LivePerson;
|
|
·
|
diversion
of financial and management resources from efforts related to the
LivePerson services or other then-existing operations; risks of entering
new markets beyond providing real-time sales, marketing and customer
service solutions for companies doing business
online;
|
|
·
|
potential
loss of either our existing key employees or key employees of any
companies we acquire; and
|
|
·
|
our
inability to generate sufficient revenue to offset acquisition or
investment costs.
|
These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations.
Furthermore, we may incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders.
We
could face additional regulatory requirements, tax liabilities and other risks
as we expand internationally.
In
October 2000, we acquired HumanClick, an Israeli-based provider of real-time
online customer service applications. In addition, we have recently established
a sales, marketing and client support presence in the United Kingdom in support
of expansion efforts into Western Europe. There are risks related to doing
business in international markets, such as changes in regulatory requirements,
tariffs and other trade barriers, fluctuations in currency exchange rates,
more
stringent rules relating to the privacy of Internet users and adverse tax
consequences. In addition, there are likely to be different consumer preferences
and requirements in specific international markets. Furthermore, we may face
difficulties in staffing and managing any foreign operations. One or more of
these factors could harm any future international operations.
Our
reputation depends, in part, on factors which are entirely outside of our
control.
Our
services typically appear as a LivePerson-branded, Timpani-branded or a
custom-created icon on our clients’ Web sites. The customer service operators
who respond to the inquiries of our clients’ Internet users are employees or
agents of our clients; they are not our employees. As a result, we have no
way
of controlling the actions of these operators. In addition, an Internet user
may
not know that the operator is an employee or agent of our client, rather than
a
LivePerson employee. If an Internet user were to have a negative experience
in a
LivePerson-powered real-time dialogue, it is possible that this experience
could
be attributed to us, which could diminish our brand and harm our business.
Finally, we believe
the success of our services depend on the prominent placement of the icon on
the
client’s Web site, over which we also have no control.
Our
business and prospects would suffer if we are unable to protect and enforce
our
intellectual property rights.
Our
success and ability to compete depend, in part, upon the protection of our
intellectual property rights relating to the technology underlying the
LivePerson services. It is possible that:
|
·
|
any
issued patent or patents issued in the future may not be broad enough
to
protect our intellectual property
rights;
|
|
·
|
any
issued patent or any patents issued in the future could be successfully
challenged by one or more third parties, which could result in our
loss of
the right to prevent others from exploiting the inventions claimed
in the
patents;
|
|
·
|
current
and future competitors may independently develop similar technologies,
duplicate our services or design around any patents we may have;
and
|
|
·
|
effective
patent protection may not be available in every country in which
we do
business, where our services are sold or used, where the laws may
not
protect proprietary rights as fully as do the laws of the U.S. or
where
enforcement of laws protecting proprietary rights is not common or
effective.
|
Further,
to the extent that the invention described in any U.S. patent was made public
prior to the filing of the patent application, we may not be able to obtain
patent protection in certain foreign countries. We also rely upon copyright,
trade secret, trademark and other common law in the U.S. and other
jurisdictions, as well as confidentiality procedures and contractual provisions,
to protect our proprietary technology, processes and other intellectual
property, to the extent that protection is sought or secured at all. Any steps
we might take may not be adequate to protect against infringement and
misappropriation of our intellectual property by third parties. Similarly,
third
parties may be able to independently develop similar or superior technology,
processes or other intellectual property. Policing unauthorized use of our
services and intellectual property rights is difficult, and we cannot be certain
that the steps we have taken will prevent misappropriation of our technology
or
intellectual property rights, particularly in foreign countries where we do
business, where our services are sold or used, where the laws may not protect
proprietary rights as fully as do the laws of the United States or where
enforcement of laws protecting proprietary rights is not common or effective.
The unauthorized reproduction or other misappropriation of our intellectual
property rights could enable third parties to benefit from our technology
without paying us for it. If this occurs, our business, results of operations
and financial condition could be materially and adversely affected. In addition,
disputes concerning the ownership or rights to use intellectual property could
be costly and time-consuming to litigate, may distract management from operating
our business and may result in our loss of significant rights.
Our
products and services may infringe upon intellectual property rights of third
parties and any infringement could require us to incur substantial costs and
may
distract our management.
We
are
subject to the risk of claims alleging infringement of third-party proprietary
rights. Substantial litigation regarding intellectual property rights exists
in
the software industry. In the ordinary course of our business, our services
may
be increasingly subject to third-party infringement claims as the number of
competitors in our industry segment grows and the functionality of services
in
different industry segments overlaps. Some of our competitors in the market
for
real-time sales, marketing and customer
service solutions may have filed or may intend to file patent applications
covering aspects of their technology. Any claims alleging infringement of
third-party intellectual property rights could require us to spend significant
amounts in litigation (even if the claim is invalid), distract management from
other tasks of operating our business, pay substantial damage awards, prevent
us
from selling our products, delay delivery of the LivePerson services, develop
non-infringing software, technology, business processes, systems or other
intellectual property (none of which might be successful), or limit our ability
to use the intellectual property that is the subject of any of these claims,
unless we enter into license agreements with the third parties (which may be
unavailable on commercially reasonable terms, or not available at all).
Therefore, such claims could have a material adverse effect on our business,
results of operations and financial condition.
We
may be liable if third parties misappropriate personal information belonging
to
our clients’ Internet users.
We
maintain dialogue transcripts of the text-based chats and email interactions
between our clients and Internet users and store on our servers information
supplied voluntarily by these Internet users in surveys. We provide this
information to our clients to allow them to perform Internet user analyses
and
monitor the effectiveness of our services. Some of the information we collect
may include personal information, such as contact and demographic information.
If third parties were able to penetrate our network security or otherwise
misappropriate personal information relating to our clients’ Internet users or
the text of customer service inquiries, we could be subject to liability. We
could be subject to negligence claims or claims for misuse of personal
information. These claims could result in litigation, which could have a
material adverse effect on our business, results of operations and financial
condition. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by such breaches.
The
need
to physically secure and securely transmit confidential information online
has
been a significant barrier to electronic commerce and online communications.
Any
well-publicized compromise of security could deter people from using online
services such as the ones we offer, or from using them to conduct transactions,
which involve transmitting confidential information. Because our success depends
on the general acceptance of our services and electronic commerce, we may incur
significant costs to protect against the threat of security breaches or to
alleviate problems caused by these breaches.
Political,
economic and military conditions in Israel could negatively impact our Israeli
operations.
Our
product development staff, help desk and online sales personnel are located
in
Israel. As of December 31, 2005, we had 51 full-time employees in Israel
and as of December 31, 2004, we had 30 full-time employees in Israel.
Although substantially all of our sales to date have been made to customers
outside Israel, we are directly influenced by the political, economic and
military conditions affecting Israel. Since the establishment of the State
of
Israel in 1948, a number of armed conflicts have taken place between Israel
and
its Arab neighbors. A state of hostility, varying in degree and intensity,
has
caused security and economic problems in Israel. Further, since September 2000,
there has been a significant deterioration in the relationship between Israel
and the Palestinian Authority and serious violence has ensued, the peace process
between the parties has stagnated, and Israel’s relationship with several Arab
countries has been adversely affected. Moreover, hostilities during 2002, 2003
and 2004 escalated significantly, with increased attacks in Israel and an armed
conflict between Israel and the Palestinians in the West Bank and Gaza. Efforts
to resolve the conflict have failed to result in an agreeable solution. The
future of relations between the Palestinian Authority and Israel is uncertain,
and the execution of Israel’s plan of a unilateral disengagement from Gaza and
some parts of the West Bank may negatively affect the overall stability of
the
region. Continued hostilities between the Palestinian community
and Israel and any failure to settle the conflict could adversely affect our
operations in Israel and our business. Further deterioration of the situation
into a full-scale armed conflict might require more widespread military reserve
service by some of our Israeli employees and might result in a significant
downturn in the economic or financial condition of Israel, either of which
could
have a material adverse effect on our operations in Israel and our business.
In
addition, several Arab countries still restrict business with Israeli companies.
Our operations in Israel could be adversely affected by restrictive laws or
policies directed towards Israel and Israeli businesses.
Risks
Related to Our Industry
We
are dependent on the continued use of the Internet as a medium for
commerce.
We
cannot
be sure that a sufficiently broad base of consumers will continue to use the
Internet as a medium for commerce. Convincing our clients to offer real-time
sales, marketing and customer service technology may be difficult.
|
·
|
The
continuation of the Internet as a viable commercial marketplace is
subject
to a number of factors, including:
|
|
·
|
continued
growth in the number of users;
|
|
·
|
concerns
about transaction security;
|
|
·
|
continued
development of the necessary technological
infrastructure;
|
|
·
|
development
of enabling technologies;
|
|
·
|
uncertain
and increasing government regulation;
and
|
|
·
|
the
development of complementary services and
products.
|
We
depend on the continued viability of the infrastructure of the
Internet.
To
the
extent that the Internet continues to experience growth in the number of users
and frequency of use by consumers resulting in increased bandwidth demands,
we
cannot assure you that the infrastructure for the Internet will be able to
support the demands placed upon it. The Internet has experienced outages and
delays as a result of damage to portions of its infrastructure. Outages or
delays could adversely affect online sites, email and the level of traffic
on
the Internet. We also depend on Internet service providers that provide our
clients and Internet users with access to the LivePerson services. In the past,
users have experienced difficulties due to system failures unrelated to our
service. In addition, the Internet could lose its viability due to delays in
the
adoption of new standards and protocols required to handle increased levels
of
Internet activity. Insufficient availability of telecommunications services
to
support the Internet also could result in slower response times and negatively
impact use of the Internet generally, and our clients’ sites (including the
LivePerson dialogue windows) in particular. If the use of the Internet fails
to
grow or grows more slowly than expected, if the infrastructure for the Internet
does not effectively support growth that may occur or if the Internet does
not
become a viable commercial marketplace, we may not maintain profitability and
our business, results of operations and financial condition will
suffer.
We
may become subject to burdensome government regulation and legal
uncertainties.
We
are
subject to federal, state and local regulation, and laws of jurisdictions
outside of the United States, including laws and regulations applicable to
computer software and access to or commerce over the Internet. Due to the
increasing popularity and use of the Internet and various other online services,
it is likely that a number of new laws and regulations will be adopted with
respect to the Internet or other online services covering issues such as user
privacy, freedom of expression, pricing, content and quality of products and
services, taxation, advertising, intellectual property rights and information
security. The nature of such legislation and the manner in which it may be
interpreted and enforced cannot be fully determined and, therefore, such
legislation could subject us and/or our clients or Internet users to potential
liability, which in turn could have a material adverse effect on our business,
results of operations and financial condition.
As
a
result of collecting data from live online Internet user dialogues, our clients
may be able to analyze the commercial habits of Internet users. Privacy concerns
may cause Internet users to avoid online sites that collect such behavioral
information and even the perception of security and privacy concerns, whether
or
not valid, may indirectly inhibit market acceptance of our services. In
addition, we or our clients may be harmed by any laws or regulations that
restrict the ability to collect or use this data. The European Union and many
countries within the E.U. have adopted privacy directives or laws that strictly
regulate the collection and use of personally identifiable information of
Internet users. The United States has adopted legislation which governs the
collection and use of certain personal information. The U.S. Federal Trade
Commission has also taken action against Web site operators who do not comply
with their stated privacy policies. Furthermore, other foreign jurisdictions
have adopted legislation governing the collection and use of personal
information. These and other governmental efforts may limit our clients’ ability
to collect and use information about their Internet users through our services.
As a result, such laws and efforts could create uncertainty in the marketplace
that could reduce demand for our services or increase the cost of doing business
as a result of litigation costs or increased service delivery costs, or could
in
some other manner have a material adverse effect on our business, results of
operations and financial condition.
For
example, the LivePerson services allow our clients to capture and save
information about Internet users, possibly without their knowledge.
Additionally, our service uses a tool, commonly referred to as a “cookie,” to
uniquely identify each of our clients’ Internet users. To the extent that
additional legislation regarding Internet user privacy is enacted, such as
legislation governing the collection and use of information regarding Internet
users through the use of cookies, the effectiveness of the LivePerson services
could be impaired by restricting us from collecting information which may be
valuable to our clients. The foregoing could have a material adverse effect
our
business, results of operations and financial condition.
In
addition to privacy legislation, any new legislation or regulation regarding
the
Internet, or the application of existing laws and regulations to the Internet,
could harm us. Additionally, as we operate outside the U.S., the international
regulatory environment relating to the Internet could have a material adverse
effect on our business, results of operations and financial
condition.
Security
concerns could hinder commerce on the Internet.
User
concerns about the security of confidential information online has been a
significant barrier to commerce on the Internet and online communications.
Any
well-publicized compromise of security could deter people from using the
Internet or other online services or from using them to conduct transactions
that involve the transmission of confidential information. If Internet commerce
is inhibited as a result of such security concerns, our business would be
harmed.
Other
Risks
Our
stockholders who each own greater than five percent of the outstanding common
stock, and our executive officers and directors, will be able to influence
matters requiring a stockholder vote.
Our
stockholders who each own greater than five percent of the outstanding common
stock and their affiliates, and our executive officers and directors, in the
aggregate, beneficially own approximately 43.1% of our outstanding common stock.
As a result, these stockholders, if acting together, will be able to
significantly influence all matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership could also have the effect of
delaying or preventing a change in control.
The
future sale of shares of our common stock may negatively affect our stock
price.
If
our
stockholders sell substantial amounts of our common stock, including shares
issuable upon the exercise of outstanding options and warrants in the public
market, or if our stockholders are perceived by the market as intending to
sell
substantial amounts of our common stock, the market price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
securities in the future at a time and price that we deem appropriate. The
number of shares of common stock subject to the registration statement we filed
in January 2004, registering our issuance and sale from time to time of up
to
4,000,000 shares of common stock, is much greater than the average weekly
trading volume for our shares. No prediction can be made as to the effect,
if
any, that market sales of these or other shares of our common stock will have
on
the market price of our common stock.
Our
stock price has been highly volatile and may experience extreme price and volume
fluctuations in the future, which could reduce the value of your investment
and
subject us to litigation.
Fluctuations
in market price and volume are particularly common among securities of Internet
and other technology companies. The market price of our common stock has
fluctuated significantly in the past and may continue to be highly volatile,
with extreme price and volume fluctuations, in response to the following
factors, some of which are beyond our control:
|
·
|
variations
in our quarterly operating results;
|
|
·
|
changes
in market valuations of publicly-traded companies in general and
Internet
and other technology companies in
particular;
|
|
·
|
our
announcements of significant client contracts, acquisitions and our
ability to integrate these acquisitions, strategic partnerships,
joint
ventures or capital commitments;
|
|
·
|
our
failure to complete significant
sales;
|
|
·
|
additions
or departures of key personnel;
|
|
·
|
future
sales of our common stock;
|
|
·
|
changes
in financial estimates by securities analysts;
and
|
|
·
|
terrorist
attacks against the United States or in Israel, the engagement in
hostilities or an escalation of hostilities by or against the United
States or Israel, or the declaration of war or national emergency
by the
United States or Israel.
|
In
the
past, companies that have experienced volatility in the market price of their
stock have been the subject of securities class action litigation. We may in
the
future be the target of similar litigation, which could result in substantial
costs and distract management from other important aspects of operating our
business.
Anti-takeover
provisions in our charter documents and Delaware law may make it difficult
for a
third party to acquire us.
Provisions
of our amended and restated certificate of incorporation, such as our staggered
Board of Directors, the manner in which director vacancies may be filled and
provisions regarding the calling of stockholder meetings, could make it more
difficult for a third party to acquire us, even if doing so might be beneficial
to our stockholders. In addition, provisions of our amended and restated bylaws,
such as advance notice requirements for stockholder proposals, and applicable
provisions of Delaware law, such as the application of business combination
limitations, could impose similar difficulties. Further, provisions of our
amended and restated certificate of incorporation relating to directors,
stockholder meetings, limitation of director liability, indemnification and
amendment of the certificate of incorporation and bylaws may not be amended
without the affirmative vote of not less than 66.67% of the outstanding shares
of our capital stock entitled to vote generally in the election of directors
(considered for this purpose as a single class) cast at a meeting of our
stockholders called for that purpose. Our amended and restated bylaws may not
be
amended without the affirmative vote of at least 66.67% of our Board of
Directors or without the affirmative vote of not less than 66.67% of the
outstanding shares of our capital stock entitled to vote generally in the
election of directors (considered for this purpose as a single class) cast
at a
meeting of our stockholders called for that purpose.
None.
We
currently lease approximately 13,000 square feet at our headquarters location
in
New York City, through October 2007.
Our
wholly-owned subsidiary, HumanClick Ltd., maintains offices in Raanana, Israel
of approximately 6,000 square feet, under leases expiring in July 2006. We
expect to be able to extend these leases on terms comparable to the existing
arrangements.
In
September 2005, we received written notification from a former employee alleging
claims related to improper termination of employment. We believe the claims
are
without merit, and, in the event this matter proceeds further, we intend to
vigorously defend against any such claims. We have not accrued for this
contingency as of December 31, 2005, because the amount of loss, if any,
cannot be reasonably estimated at this time.
We
are
not currently party to any legal proceedings. From time to time, we may be
subject to various claims and legal actions arising in the ordinary course
of
business.
No
matters were submitted to a vote of stockholders through the solicitation of
proxies or otherwise during the fourth quarter of the fiscal year ending
December 31, 2005.
PRICE
RANGE OF COMMON STOCK
Our
common stock is quoted on the Nasdaq Capital Market (known as the Nasdaq
SmallCap Market until September 27, 2005) under the symbol LPSN. The
following table sets forth, for each full quarterly period within the two most
recent fiscal years, the range of high and low bid information (in dollars
per
share) of our common stock as quoted on the Nasdaq Capital Market / SmallCap
Market:
|
High
|
Low
|
||||||
|
Year
ended December 31, 2004:
|
|||||||
|
First
Quarter
|
$
|
6.13
|
$
|
3.52
|
|||
|
Second
Quarter
|
$
|
6.23
|
$
|
2.98
|
|||
|
Third
Quarter
|
$
|
3.78
|
$
|
2.07
|
|||
|
Fourth
Quarter
|
$
|
3.55
|
$
|
1.87
|
|||
|
Year
ended December 31, 2005:
|
|||||||
|
First
Quarter
|
$
|
3.23
|
$
|
2.29
|
|||
|
Second
Quarter
|
$
|
3.30
|
$
|
2.24
|
|||
|
Third
Quarter
|
$
|
4.10
|
$
|
2.83
|
|||
|
Fourth
Quarter
|
$
|
5.71
|
$
|
3.79
|
|||
HOLDERS
As
of
March 3, 2006, there were approximately 148 holders of record of our common
stock.
DIVIDEND
POLICY
We
have
not declared or paid any cash dividends on our capital stock since our
inception. We intend to retain earnings, if any, to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in
the
foreseeable future.
RECENT
SALES OF UNREGISTERED SECURITIES
We
issued
3,632 shares of Common Stock on November 10, 2005 upon the exercise of a
warrant, in consideration of the termination of the right to purchase an
additional 7,618 shares of Common Stock, pursuant to the warrant’s net exercise
provision. The warrant was exercised by a former employee of Genesis Select
Corp., a firm that provides investor relations services to us, after Genesis
Select had assigned the warrant that we issued it in May 2004 to certain
of its
employees. The issuances were made under the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, because
the
issuances did not involve any public offering.
ISSUER
PURCHASES OF EQUITY SECURITIES
We
did
not repurchase any of our securities during any month within the quarter ended
December 31, 2005.
The
selected consolidated financial data with respect to our consolidated balance
sheets as of December 31, 2005 and 2004 and the related consolidated
statements of operations for the years ended December 31, 2005, 2004 and
2003 have been derived from our audited consolidated financial statements which
are included herein. The selected financial data with respect to our balance
sheets as of December 31, 2003, 2002 and 2001 and the related statements of
operations for the years ended December 31, 2002 and 2001 have been derived
from our audited financial statements which are not included herein. The
following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto and the
information contained in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
|
Year
Ended December 31,
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
(in
thousands, except share and per share data)
|
||||||||||||||||
|
Consolidated
Statement of Operations Data:
|
||||||||||||||||
|
Revenue
|
$
|
22,277
|
$
|
17,392
|
$
|
12,023
|
$
|
8,234
|
$
|
7,806
|
||||||
|
Operating
expenses:
|
||||||||||||||||
|
Cost
of revenue
|
4,297
|
2,888
|
2,028
|
1,604
|
6,547
|
|||||||||||
|
Product
development
|
2,699
|
2,000
|
1,641
|
1,283
|
3,328
|
|||||||||||
|
Sales
and marketing
|
6,975
|
5,183
|
3,555
|
2,177
|
5,465
|
|||||||||||
|
General
and administrative
|
4,458
|
4,456
|
3,610
|
3,176
|
6,369
|
|||||||||||
|
Amortization
of goodwill and intangibles
|
931
|
792
|
1,014
|
357
|
2,975
|
|||||||||||
|
Non-cash
compensation credit related to restructuring, net
|
—
|
—
|
—
|
—
|
(1,720
|
)
|
||||||||||
|
Restructuring
and impairment charges
|
—
|
—
|
1,024
|
1,186
|
12,740
|
|||||||||||
|
Total
operating expenses
|
19,360
|
15,319
|
12,872
|
9,783
|
35,704
|
|||||||||||
|
Income
(loss) from operations
|
2,917
|
2,073
|
(849
|
)
|
(1,549
|
)
|
(27,898
|
)
|
||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Other
income (expense)
|
—
|
—
|
(8
|
)
|
—
|
109
|
||||||||||
|
Interest
income
|
300
|
77
|
41
|
126
|
538
|
|||||||||||
|
Interest
expense
|
—
|
—
|
—
|
(10
|
)
|
(10
|
)
|
|||||||||
|
Total
other income, net
|
300
|
77
|
33
|
116
|
637
|
|||||||||||
|
Income
(loss) before cumulative effect of accounting change
|
3,217
|
2,150
|
(816
|
)
|
(1,433
|
)
|
(27,261
|
)
|
||||||||
|
Cumulative
effect of accounting change (1)
|
—
|
—
|
—
|
(5,338
|
)
|
—
|
||||||||||
|
Income
(loss) before provision for income taxes
|
3,217
|
2,150
|
(816
|
)
|
(6,771
|
)
|
(27,261
|
)
|
||||||||
|
Provision
for income taxes
|
675
|
58
|
—
|
—
|
—
|
|||||||||||
|
Net
income (loss) attributable to common stockholders
|
$
|
2,542
|
2,092
|
$
|
(816
|
)
|
$
|
(6,771
|
)
|
$
|
(27,261
|
)
|
||||
|
Basic
net income (loss) per common share:
|
||||||||||||||||
|
Income
(loss) before cumulative effect of accounting change
|
$
|
0.07
|
0.06
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
$
|
(0.80
|
)
|
||||
|
Cumulative
effect of accounting change
|
—
|
—
|
—
|
(0.16
|
)
|
—
|
||||||||||
|
Net
income (loss)
|
$
|
0.07
|
0.06
|
$
|
(0.02
|
)
|
$
|
(0.20
|
)
|
$
|
(0.80
|
)
|
||||
|
Diluted
net income (loss) per common share:
|
||||||||||||||||
|
Income
(loss) before cumulative effect of accounting change
|
$
|
0.06
|
0.05
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
$
|
(0.80
|
)
|
||||
|
Cumulative
effect of accounting change
|
—
|
—
|
—
|
(0.16
|
)
|
—
|
||||||||||
|
Net
income (loss)
|
$
|
0.06
|
0.05
|
$
|
(0.02
|
)
|
$
|
(0.20
|
)
|
$
|
(0.80
|
)
|
||||
|
Weighted
average shares outstanding used in basic net income (loss) per common
share calculation
|
37,557,722
|
37,263,378
|
34,854,802
|
34,028,702
|
33,987,895
|
|||||||||||
|
Weighted
average shares outstanding used in diluted net income (loss) per
common
share calculation
|
39,885,328
|
39,680,304
|
34,854,802
|
34,028,702
|
33,987,895
|
|||||||||||
(1) Cumulative
effect of accounting change relates to the impairment of the carrying value
of
goodwill.
|
December
31,
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Consolidated
Balance Sheet Data:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
17,117
|
$
|
12,425
|
$
|
10,898
|
$
|
8,004
|
$
|
10,136
|
||||||
|
Working
capital
|
15,668
|
11,283
|
8,486
|
6,137
|
7,878
|
|||||||||||
|
Total
assets
|
21,426
|
17,150
|
13,537
|
10,837
|
17,627
|
|||||||||||
|
Total
stockholders’ equity
|
17,213
|
13,554
|
9,336
|
7,888
|
14,271
|
|||||||||||
Critical
Accounting Policies and Estimates
General
Our
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which are prepared in
conformity with accounting principles generally accepted in the United States
of
America. As such, we are required to make certain estimates, judgments and
assumptions that management believes are reasonable based upon the information
available. We base these estimates on our historical experience, future
expectations and various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for our judgments
that may not be readily apparent from other sources. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenue and expenses during
the
reporting periods. These estimates and assumptions relate to estimates of
collectibility of accounts receivable, the expected term of a client
relationship, accruals and other factors. We evaluate these estimates on an
ongoing basis. Actual results could differ from those estimates under different
assumptions or conditions, and any differences could be material.
The
significant accounting policies which we believe are the most critical to aid
in
fully understanding and evaluating the reported consolidated financial results
include the following:
Revenue
Recognition
LivePerson
is a provider of online conversion solutions. Our hosted software enables
companies to identify and proactively engage online visitors—increasing sales,
satisfaction and loyalty while reducing service costs.
LivePerson’s
fully-integrated multi-channel communications platform, Timpani, facilitates
real-time sales, marketing and customer service. Our technology supports and
manages key online interactions—via chat, email and
self-service/knowledgebase—in a cost-effective and secure environment. Blending
leading technology, a deep understanding of consumer behavior and industry
best
practices to create more relevant, compelling and personalized online
experiences, LivePerson maximizes the business impact of the online
channel.
We
charge
a monthly fee, which varies by service and client usage. Certain of our larger
clients, who require more sophisticated implementation and training, may also
pay an initial non-refundable set-up fee and professional service fees related
to implementation. We also occasionally charge professional service fees related
to additional training and business consulting and analysis.
The
initial set-up fee is intended to recover certain costs (principally customer
service, training and other administrative costs) prior to the deployment of
our
services. Such fees are recorded as deferred revenue and recognized ratably
over
a period of 24 months, representing the estimated term of the client
relationships. Although we believe this estimate is reasonable, this estimate
may change in the future. In instances where we do charge a set-up fee, we
typically do not charge an additional set-up fee if an existing client adds
more
services. Unamortized deferred fees, if any, are recognized upon termination
of
the agreement with the customer. We recognized set-up fees due to client
attrition of $1,000, $2,000 and $0 in 2005, 2004 and 2003,
respectively.
-27-
We
also
sell certain of the LivePerson services directly via Internet download. These
services are marketed as LivePerson Pro and LivePerson Contact Center for
SMBs,
and are paid for almost exclusively by credit card. Credit card payments
accelerate cash flow and reduce our collection risk, subject to the merchant
bank’s right to hold back cash pending settlement of the transactions. Sales of
LivePerson Pro and LivePerson Contact Center may occur with or without the
assistance of an online sales representative, rather than through face-to-face
or telephone contact that is typically required for traditional direct sales.
These sales typically have no set-up fee, because we do not provide the customer
with training and administrative costs are minimal.
We
record
revenue based upon a monthly fee charged for the LivePerson services, provided
that no significant Company obligations remain and collection of the resulting
receivable is probable. We recognize monthly service fees as services are
provided. Our service agreements typically have twelve month terms and are
terminable upon 30 to 90 days’ notice without penalty. We recognize professional
service fees upon completion and customer acceptance of the professional service
engagement.
Accounts
Receivable
Our
customers are primarily concentrated in the United States. We perform ongoing
credit evaluations of our customers’ financial condition (except for customers
who purchase the LivePerson services by credit card via Internet download)
and
have established an allowance for doubtful accounts based upon factors
surrounding the credit risk of customers, historical trends and other
information that we believe to be reasonable, although they may change in the
future. If there is a deterioration of a customer’s credit worthiness or actual
write-offs are higher than our historical experience, our estimates of
recoverability for these receivables could be adversely affected. Our
concentration of credit risk is limited due to the large number of customers.
No
single customer accounted for or exceeded 10% of our total revenue in 2005,
2004
and 2003. No single customer accounted for or exceeded 10% of accounts
receivable at December 31, 2005. One customer accounted for approximately
10% of accounts receivable at December 31, 2004.
Impairment
of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,”
long-lived assets, such as property, plant and equipment and purchased
intangibles subject to amortization are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may
not
be recoverable. Recoverability of assets to be held and used is measured by
a
comparison of the carrying value of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying value of
an
asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying value of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying value or the
fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance
sheet.
Use
of Estimates
The
preparation of our consolidated financial statements in accordance with
generally accepted accounting principles requires our management to make a
number of estimates and assumptions relating to the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date
of the consolidated financial statements, and the reported amounts of revenue
and expenses during the period. Significant items subject to such estimates
and
assumptions include the carrying amount of property
and equipment, intangibles, valuation allowances for deferred income tax assets,
accounts receivable, the expected term of a client relationship, accruals and
other factors. Actual results could differ from those estimates.
Restructuring
Activities
Restructuring
activities, prior to January 1, 2003, were accounted for in accordance with
the guidance provided in the consensus opinion of the Emerging Issues Task
Force
(“EITF”), in connection with EITF Issue No. 94-3, “Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in Restructuring).” EITF Issue No. 94-3
generally requires, with respect to the recognition of severance expenses,
management approval of the restructuring plan, the determination of the
employees to be terminated and communication of benefit arrangement to
employees.
In
July
2002, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities,” which supersedes EITF Issue No. 94-3. SFAS No. 146
requires that costs associated with an exit or disposal plan be recognized
when
incurred rather than at the date of a commitment to an exit or disposal
plan.
Recently
Issued Accounting Pronouncements
In
May
2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.” SFAS
No. 150 established standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 also includes required disclosures for financial
instruments within its scope. SFAS No. 150 was effective for our
instruments entered into or modified after May 31, 2003 and otherwise was
effective as of January 1, 2004, except for mandatorily redeemable
financial instruments. For these mandatorily redeemable financial instruments,
SFAS No. 150 was effective for us on January 1, 2005. The effective
date has been deferred indefinitely for certain other types of mandatorily
redeemable financial instruments. We do not have any financial instruments
that
are within the scope of SFAS No. 150; therefore the issuance of SFAS
No. 150 did not have an impact on our financial position, cash flows or
results of operations.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment,” which addresses the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, with a primary focus
on
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) is a revision to SFAS No. 123,
“Accounting for Stock-Based Compensation,” and supersedes Accounting Principles
Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”
and its related implementation guidance. SFAS No. 123(R) requires
measurement of the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award (with
limited exceptions). Incremental compensation costs arising from subsequent
modifications of awards after the grant date must be recognized. In April 2005,
the SEC announced a new rule that delays the implementation of SFAS
No. 123(R) until the fiscal year that begins after June 15, 2005. We
will adopt the provisions of SFAS No. 123(R) as of January 1, 2006. We
are still evaluating the impact that adopting SFAS No. 123(R) will have on
our financial position, cash flows and results of operations, but we believe
this change in accounting will have a material adverse effect on our reported
results of operations. Based upon the current number of outstanding stock
options, we expect that the impact of this accounting change will decrease
net
income per common share by approximately $0.05 for the fiscal year ending
December 31, 2006. This figure may change based upon additional stock options
grants, methodology refinement or other
factors. See Note 1(l), “Stock-based Compensation,” of our consolidated
financial statements for pro forma disclosure assuming a fair value based method
of accounting for stock-based awards.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets,” which eliminates an exception in APB Opinion No. 29, “Accounting
for Nonmonetary Transactions,” for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. SFAS No. 153 will be
effective for us for nonmonetary asset exchanges occurring on or after
January 1, 2006. The adoption of SFAS No. 153 is not expected to have a
material impact on our financial position, cash flows or results of
operations.
In
May
2005, the FASB has issued SFAS No. 154, “Accounting Changes and Error
Corrections.” This new standard replaces APB Opinion No. 20, “Accounting
Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
Statements,” and is part of FASB’s stated goal to converge its standards with
those issued by the International Accounting Standards Board. Among other
changes, SFAS No. 154 requires that a voluntary change in accounting principle
be applied retrospectively with all prior period financial statements presented
on the new accounting principle, unless it is impracticable to do so. SFAS
No.
154 also provides that (1) a change in method of depreciating or amortizing
a
long-lived nonfinancial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and
(2)
correction of errors in previously issued financial statements should be termed
a “restatement.” The new standard is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005.
Early adoption of this standard is permitted for accounting changes and
correction of errors made in fiscal years beginning after June 1,
2005.
In
November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards,”
which provides an alternative transition method to establish the beginning
balance of the additional paid-in capital pool (“APIC pool”) related to the tax
effects of employee stock-based compensation, and to determine the subsequent
impact on the APIC pool and consolidated statements of cash flows of the tax
effects of employee stock-based compensation awards that are outstanding upon
adoption of SFAS No. 123(R).
Overview
LivePerson
is a provider of online conversion solutions. Our hosted software enables
companies to identify and proactively engage online visitors—increasing sales,
satisfaction and loyalty while reducing service costs.
LivePerson’s
fully-integrated multi-channel communications platform, Timpani, facilitates
real-time sales, marketing and customer service. Our technology supports and
manages key online interactions—via chat, email and
self-service/knowledgebase—in a cost-effective and secure environment. Blending
leading technology, a deep understanding of consumer behavior and industry
best
practices to create more relevant, compelling and personalized online
experiences, LivePerson maximizes the business impact of the online
channel.
We
were
incorporated in the State of Delaware in November 1995 and the LivePerson
service was introduced initially in November 1998.
In
July
2002, we acquired all of the existing customer contracts of NewChannel, Inc.
and
associated rights. The purchase price was based, in part, on projected revenue
from each of the former NewChannel clients at the time of their successful
conversion to the LivePerson software platform. The total
acquisition costs were approximately $1.4 million. The total acquisition cost
has been allocated to customer contracts and was amortized ratably over a period
of 18 months, representing the then expected term of the client relationships.
As of December 31, 2003, the total purchase had been completely
amortized.
In
December 2003, we acquired certain identifiable assets of Island Data
Corporation. The purchase price was based on projected revenue from the acquired
customer contracts at the time of their assignment to us. We paid approximately
$370,000 in cash, and issued 370,894 shares of our common stock, in connection
with the acquisition. The total acquisition costs were approximately $2.1
million. Of the total purchase price, we have allocated approximately $65,000
to
non-compete agreements which is being amortized over a period of 24 months,
representing the terms of the agreements. The remainder of the purchase price
has been allocated to customer contracts and is being amortized over a period
of
36 months, representing our current estimate of the term of the acquired client
relationships. The net acquisition costs of $685,000 and $1.4 million are
included in “Assets - Intangibles, net” on our December 31, 2005 and
December 31, 2004 balance sheets, respectively.
In
January 2004, we filed a registration statement with the Securities and Exchange
Commission to register the resale of up to 500,000 shares of our common stock
by
Island Data. Our registration of the resale of the shares was required by our
agreement with Island Data. The shares registered for resale on the registration
statement, but not actually issued to Island Data pursuant to the agreement,
will be deregistered. We did not receive any proceeds from the sale of the
shares of common stock covered by the Island Data registration
statement.
In
January 2004, we filed a shelf registration statement with the Securities and
Exchange Commission relating to 4,000,000 shares of our common stock that we
may
issue from time to time. We have no immediate plans to offer or sell any shares
under this shelf registration. We presently intend to use the net proceeds
from
any sale of the registered shares for general corporate purposes, working
capital and potential strategic acquisitions. We would announce the terms of
any
issuance in a filing with the Securities and Exchange Commission at the time
we
offer or sell the shares.
In
July
2004, we acquired certain identifiable assets of FaceTime Communications, Inc.
The transaction transferred certain existing customer contracts of FaceTime
to
us. The purchase price was based in part on future revenue generated by us
from
the former FaceTime client base. The total acquisition costs were approximately
$394,000. The total acquisition cost is being amortized ratably over a period
of
24 months, representing our current estimate of the term of the acquired client
relationships. The net acquisition costs of $105,000 and $320,000 are included
in “Assets - Intangibles, net” on our December 31, 2005 and
December 31, 2004 balance sheets, respectively.
Revenue
Our
clients pay us a monthly fee, which varies by service and client usage. Certain
of our larger clients, who require more sophisticated implementation and
training, may also pay an initial non-refundable set-up fee and professional
service fees related to implementation. Our set-up fee is intended to recover
certain costs incurred by us (principally customer service, training and other
administrative costs) prior to deployment of our services. Such fees are
recorded as deferred revenue and recognized over a period of 24 months,
representing the estimated term of the client relationships. As a result of
recognizing set-up fees in this manner, combined with the fact that a small
proportion of our clients are charged a set-up fee, revenue attributable to
our
monthly service fee accounted for 95%, 96%, and 98% of total LivePerson services
revenue for the years ended December 31, 2005, 2004 and 2003, respectively.
In
addition, because we typically do not charge a set-up fee for sales generated
via Internet download, we expect the set-up fee to continue to represent a
small
percentage of total revenue. In instances where we do
charge
a set-up fee, we typically do not charge an additional set-up fee if an existing
client adds more services. Our service agreements typically have twelve month
terms and are terminable upon 30 to 90 days’ notice without penalty. We
recognize monthly service fees and professional service fees as services are
provided. Professional service fees consist of additional training and business
consulting and analysis provided to customers, both at the initial launch and
over the term of the contract. Given the time required to schedule training
for
our clients’ operators and our clients’ resource constraints, we have
historically experienced a lag between signing a client contract and generating
revenue from that client. This lag has recently ranged from 30 to 90 days.
There
is no lag for sales generated via Internet download, because our services are
immediately available and fully functional upon download.
We
also
sell certain of the LivePerson services directly via Internet download. These
services are marketed as LivePerson Pro and LivePerson Contact Center for SMBs,
and are paid for almost exclusively by credit card. Credit card payments
accelerate cash flow and reduce our collection risk, subject to the merchant
bank’s right to hold back cash pending settlement of the transactions. Sales of
LivePerson Pro and LivePerson Contact Center may occur with or without the
assistance of an online sales representative, rather than through face-to-face
or telephone contact which is typically required for traditional direct sales.
These sales typically have no set-up fee, because we do not provide the customer
with training, and administrative costs are minimal. We recognize monthly
service fees from the sale of LivePerson Pro and LivePerson Contact Center
during the month in which services are provided.
We
also
have entered into contractual arrangements that complement our direct sales
force and online sales efforts. These are primarily with Web hosting and call
center service companies, pursuant to which LivePerson is paid a commission
based on revenue generated by these service companies from our referrals. To
date, revenue from such commissions has not been material.
Operating
Expenses
Our
cost
of revenue has principally been associated with the LivePerson services and
has
consisted of:
|
·
|
compensation
costs relating to employees who provide customer service to our
clients;
|
|
·
|
compensation
costs relating to our network support
staff;
|
|
·
|
allocated
occupancy costs and related overhead;
and
|
|
·
|
the
cost of supporting our infrastructure, including expenses related
to
server leases and Internet connectivity, as well as depreciation
of
certain hardware and software.
|
Our
product development expenses consist primarily of compensation and related
expenses for product development personnel, allocated occupancy costs and
related overhead, outsourced labor and expenses for testing new versions of
our
software. Product development expenses are charged to operations as
incurred.
Our
sales
and marketing expenses consist of compensation and related expenses for sales
personnel and marketing personnel, allocated occupancy costs and related
overhead, advertising, sales commissions, marketing programs, public relations,
promotional materials, travel expenses and trade show exhibit
expenses.
Our
general and administrative expenses consist primarily of compensation and
related expenses for executive, accounting and human resources personnel,
allocated occupancy costs and related overhead, professional fees, provision
for
doubtful accounts and other general corporate expenses.
During
2005, we increased our allowance for doubtful accounts by $30,000 to
approximately $84,000, principally due to an increase in accounts receivable
as
a result of increased sales, and we wrote off approximately $17,000 of
previously reserved accounts, leaving a net allowance of $67,000 at
December 31, 2005. During 2004, we increased our allowance for doubtful
accounts by $30,000 to approximately $94,000, principally due to an increase
in
accounts receivable as a result of increased sales, and we wrote off
approximately $40,000 of previously reserved accounts, leaving a net allowance
of $54,000 at December 31, 2004. We base our allowance for doubtful
accounts on specifically identified credit risks of customers, historical trends
and other information that we believe to be reasonable. We adjust our allowance
for doubtful accounts when accounts previously reserved have been
collected.
Non-cash
Compensation Expense
The
net
non-cash compensation amounts for the years ended December 31, 2005, 2004
and 2003 consist of:
|
2005
|
2004
|
2003
|
||||||||
|
(in
thousands)
|
||||||||||
|
December
2002 warrant granted for investor relations services (discussed
below)
|
$
|
—
|
$
|
—
|
$
|
298
|
||||
|
Acceleration
of deferred compensation charges related to certain employee
terminations
|
—
|
—
|
45
|
|||||||
|
May
2004 warrant granted for investor relations services (discussed
below)
|
—
|
246
|
—
|
|||||||
|
Total
|
$
|
—
|
$
|
246
|
$
|
343
|
||||
In
December 2002, we issued a warrant to purchase up to 150,000 shares of common
stock at $0.69 per share to Genesis Select Corp. in exchange for investor
relations services. The warrant vested such that 12,500 shares became
exercisable on each monthly anniversary of the warrant issuance date for the
first 12 months of the warrant’s five-year term. Some or all of the purchase
price may be paid by canceling a portion of the warrant. As of December 31,
2005, the warrant was fully vested and remained outstanding to purchase up
to
124,500 shares of common stock. We recorded non-cash compensation expense of
$298,000 related to this warrant during 2003.
In
May
2004, we issued a warrant to purchase up to 75,000 shares of common stock at
$3.25 per share to Genesis Select Corp. in exchange for investor relations
services. The warrant vested such that the shares underlying the warrant could
not be sold until after December 31, 2004. Some or all of the purchase
price may be paid by canceling a portion of the warrant. As of December 31,
2005, the warrant was fully vested and remained outstanding to purchase 63,750
shares of common stock. We recorded non-cash compensation expense of $246,000
related to this warrant during 2004.
Restructuring
In
the
first quarter of 2001, following a review of our business in connection with
our
acquisition of the private Israeli company HumanClick Ltd. in October 2000,
we
commenced restructuring initiatives to streamline our operations, including
the
consolidation of our two San Francisco Bay area offices. The restructuring
resulted in a reduction of our workforce by approximately 90 people as of the
end of the first quarter of 2001. In the first quarter of 2001, we recorded
a
charge of approximately $3.4 million for severance
and other expenses related to the restructuring. In the third quarter of 2001,
in a continued effort to streamline our operations, we initiated additional
restructuring initiatives and recorded a charge of approximately $9.3 million.
These initiatives resulted in the elimination of redundant staff positions,
and
the decision to relocate our principal executive offices, which included the
termination of an office space lease (and the entering into of a new three-year
lease that commenced in November 2001). The restructuring resulted in a
reduction of our workforce by approximately 20 people, the write-off of impaired
computer equipment and software and the write-off of certain furniture,
equipment and building improvements. For the year ended December 31, 2001,
we recorded net charges of approximately $12.7 million for our various
restructuring initiatives.
In
the
fourth quarter of 2002, in accordance with EITF 94-3, we incurred an additional
restructuring charge related to our 2001 restructuring initiatives. This $1.2
million charge primarily related to the unfavorable settlement of a previously
disclosed legal proceeding in excess of the provision initially provided for
in
connection with our original restructuring plan. The legal proceeding was the
result of the termination of an operating lease for computer equipment that
supported our application platform prior to the consolidation of all clients
onto a single application platform in the third quarter of 2001.
In
the
second quarter of 2003, we recorded an additional restructuring charge of
approximately $1.0 million related to our 2001 restructuring initiatives. This
charge reflected the amount of the judgment in a previously disclosed
arbitration proceeding in excess of the $350,000 provision initially provided
for by us in connection with our original restructuring plan in 2001. The
arbitration proceeding was related to a hosted software service contract
terminated during 2001.
Results
of Operations
Due
to
our acquisition of certain identifiable assets of FaceTime in July 2004, our
acquisition of certain identifiable assets of Island Data in December 2003,
our
acquisition of the NewChannel customer contracts and associated rights in July
2002 and our limited operating history, we believe that comparisons of our
2005,
2004 and 2003 operating results with each other, or with those of prior periods,
are not meaningful and that our historical operating results should not be
relied upon as indicative of future performance.
Comparison
of Fiscal Years Ended December 31, 2005 and 2004
Revenue.
Total
revenue increased by 28% to $22.3 million for the year ended December 31,
2005, from $17.4 million for the year ended December 31, 2004. This
increase is primarily attributable to revenue from new clients of approximately
$3.9 million as well as increased revenue from existing clients of approximately
$0.5 million and an increase in professional services revenue of approximately
$0.4 million.
Cost
of Revenue.
Cost of
revenue consists of compensation costs relating to employees who provide
customer service to our clients, compensation costs relating to our network
support staff, the cost of supporting our infrastructure, including expenses
related to server leases and Internet connectivity, as well as depreciation
of
certain hardware and software, and allocated occupancy costs and related
overhead. Cost of revenue increased by 49% to $4.3 million in 2005, from $2.9
million in 2004. This increase is attributable to costs related to additional
account management personnel to support increased client activity from existing
clients and the addition of new clients in the amount of approximately $662,000
and to increased spending for primary and backup server facilities of
approximately $498,000. As a result, our gross margin in 2005 decreased as
compared to 2004. The proportion of our new clients that are large corporations
is increasing. These companies typically have more significant implementation
requirements and more stringent data security standards. As a result, we have
invested additional resources to support this change in the customer base and
in
anticipation of a continuation of this trend, which has increased our cost
of
revenue and decreased our gross margin.
Product
Development.
Our
product development expenses consist primarily of compensation and related
expenses for product development personnel as well as allocated occupancy costs
and related overhead. Product development costs increased by 35% to $2.7 million
in 2005, from $2.0 million in 2004. This increase is primarily attributable
to
an increase in the number of LivePerson product development personnel, at a
cost
of approximately $489,000, to support both the launch of a significant new
release of the LivePerson services under the Timpani brand name and to the
continuing development of our product line as we broaden the range of services
we offer to include a fully integrated, multi-channel software
platform.
Sales
and Marketing.
Our
sales and marketing expenses consist of compensation and related expenses for
sales and marketing personnel, as well as advertising, public relations and
trade show exhibit expenses. Sales and marketing expenses increased by 35%
to
$7.0 million in 2005, from $5.2 million in 2004. This increase is primarily
attributable to an increase in costs related to additional sales and marketing
personnel of approximately $1.0 million, and to a lesser extent, an increase
in
advertising and trade show expenses of approximately $321,000 related to our
efforts to enhance our brand recognition and increase sales lead activity.
A
significant portion of this increase is driven by our recent move to increase
our internal marketing resources and external market presence, through an
increased focus on public relations and press activity, trade show participation
and promotional and advertising efforts designed to increase the inbound sales
lead flow to our direct sales force.
General
and Administrative.
Our
general and administrative expenses consist primarily of compensation and
related expenses for executive, accounting, human resources and administrative
personnel. General and administrative expenses, at $4.5 million, remained flat
in 2005 compared to 2004. In 2005, personnel and related costs increased
approximately $281,000 and accounting fees increased approximately $227,000
due
primarily to an increase in accounting expenses related to the audit of our
internal control over financial reporting as required by the Sarbanes-Oxley
Act.
Legal fees decreased in 2005 by approximately $480,000 due primarily to the
settlement of a previously disclosed legal matter in 2004.
Amortization
of Intangibles.
Amortization expense was $931,000 and $792,000 in the years ended
December 31, 2005 and 2004, respectively, and relates to acquisition costs
recorded as a result of our acquisition of certain identifiable assets of Island
Data and FaceTime in December 2003 and July 2004, respectively.
Other
Income.
Interest income was $300,000 and $77,000 in 2005 and 2004, respectively, and
consists of interest earned on cash and cash equivalents generated by the
receipt of proceeds from our initial public offering in 2000 and preferred
stock
issuances in 2000 and 1999 and to a lesser extent, cash provided by operating
activities. This increase is primarily attributable to increases in short-term
interest rates.
Provision
for Income Taxes.
Income
tax expense was $675,000 and $58,000 in 2005 and 2004, respectively. This
increase is primarily attributable to the fact that our federal net operating
loss carryforward available for 2005 is related to the exercise of employee
stock options. Accordingly, the resulting tax benefit was recorded as an
increase in Additional paid-in capital and not as a reduction in income tax
expense.
Net
Income (Loss).
We had
net income of $2.5 million in 2005 compared to net income of $2.1 million in
2004.
Comparison
of Fiscal Years Ended December 31, 2004 and 2003
Revenue.
Total
revenue increased by 45% to $17.4 million for the year ended December 31,
2004, from $12.0 million for the year ended December 31, 2003. This
increase is primarily attributable to increased revenue from existing clients,
the addition of new clients and, to a lesser extent, to our acquisition of
certain identifiable assets of Island Data and FaceTime in December 2003 and
July 2004, respectively. Revenue in 2004 and 2003 included the recognition
of
set-up fees due to client attrition of $2,000 and $0, respectively. Unamortized
deferred fees, if any, are recognized upon termination of the agreement with
the
client.
Cost
of Revenue.
Cost of
revenue increased by 42% to $2.9 million in 2004, from $2.0 million in 2003.
This increase is attributable to an increase in the number of account management
personnel to support both increased client activity as well as activity driven
by our acquisition of certain identifiable assets of Island Data in December
2003, increased spending for backup server facilities, increased usage from
existing clients, the addition of new clients and, to a lesser extent, to the
acquisition of certain identifiable assets of FaceTime in July
2004.
Product
Development.
Product
development costs increased by 22% to $2.0 million in 2004, from $1.6 million
in
2003. This increase is attributable to an increase in the number of LivePerson
product development personnel to support both the launch of a significant new
release of the LivePerson services under the Timpani brand name and, to a lesser
extent, an increase in outsourced labor costs related to the continuing
development of our product line.
Sales
and Marketing.
Sales
and marketing expenses increased by 46% to $5.2 million in 2004, from $3.6
million in 2003. This increase is primarily attributable to an increase in
sales
and marketing personnel as a result of the expansion of our sales force, and,
to
a lesser extent, to an increase in online advertising and marketing expenses
related to our efforts to enhance our brand recognition and increase sales
lead
activity.
General
and Administrative.
General
and administrative expenses increased by 23% to $4.5 million in 2004, from
$3.6
million in 2003. This increase is primarily related to the settlement of a
previously disclosed legal matter and increases in legal expenses, accounting
expenses and recruitment costs related to the expansion of our sales force,
as
well as an increase in compensation and related expenses, partially offset
by a
decrease in non-cash compensation expense.
Amortization
of Intangibles.
Amortization expense was $792,000 in the year ended December 31, 2004 and
relates to acquisition costs recorded as a result of our acquisition of certain
identifiable assets of Island Data and FaceTime in December 2003 and July 2004,
respectively. Amortization expense was $1.0 million in the year ended
December 31, 2003 and relates to acquisition costs recorded as a result of
our acquisition of the NewChannel customer contracts and associated rights
in
July 2002.
Restructuring
Charge.
Restructuring charge was $0 and $1.0 million in the years ended
December 31, 2004, and 2003, respectively. In the second quarter of 2003,
we recorded an additional restructuring charge of approximately $1.0 million
related to our 2001 restructuring initiatives. This charge reflected the amount
of the judgment in a previously disclosed arbitration proceeding in excess
of
the $350,000 provision initially provided for in connection with our original
restructuring plan in 2001.
Other
Income.
Interest income was $77,000 and $41,000 in 2004 and 2003, respectively, and
consists of interest earned on cash and cash equivalents generated by the
receipt of proceeds from our initial public offering in 2000 and preferred
stock
issuances in 2000 and 1999, and to a lesser extent, to cash provided by
operating activities. Other expense was $0 and $8,000 in 2004 and 2003,
respectively, and was related to the write-off of our accumulated other
comprehensive loss in connection with the closing of our then-existing
operations in the United Kingdom.
Net
Income (Loss).
We had
net income of $2.1 million in 2004 compared to a net loss of $816,000 in 2003.
The net loss for 2003 includes the additional restructuring charge of
approximately $1.0 million recorded in the second quarter of 2003 described
above under “Restructuring Charge.”
Liquidity
And Capital Resources
As
of
December 31, 2005, we had $17.1 million in cash and cash equivalents, an
increase of $4.7 million from December 31, 2004. This increase is primarily
attributable to net cash provided by operating activities. We regularly invest
excess funds in short-term money market funds.
Net
cash
provided by operating activities was $4.6 million in the year ended
December 31, 2005 and consisted of net income and non-cash expenses related
to the amortization of intangibles, depreciation and income taxes partially
offset by increases in accounts receivable and prepaid expenses. Net cash
provided operating activities was $2.1 million in the year ended
December 31, 2004 and consisted of net income and non-cash expenses related
to the amortization of intangibles, non-cash compensation and depreciation
offset by a decrease in accrued expenses, and increases in accounts receivable
and prepaid expenses.
Net
cash
used in investing activities was $362,000 in the year ended December 31,
2005 and was due to the purchase of fixed assets. Net cash used in investing
activities was $662,000 in the year ended December 31, 2004 and was due to
the acquisition of the FaceTime customer contracts in July 2004 and the purchase
of fixed assets.
Net
cash
provided by financing activities was $451,000 in the year ended
December 31, 2005 and was attributable to proceeds from the issuance of
common stock in connection with the exercise of stock options by employees.
Net
cash provided by financing activities was $122,000 in the year ended
December 31, 2004 and was attributable to proceeds from the issuance of
common stock in connection with the exercise of stock options by
employees.
We
have
incurred significant costs to develop our technology and services, to hire
employees in our customer service, sales, marketing and administration
departments, and for the amortization of goodwill and intangible assets, as
well
as non-cash compensation costs. Historically, we incurred significant quarterly
net losses from inception through June 30, 2003, significant negative cash
flows
from operations in our quarterly periods from inception through
December 31, 2002 and negative cash flows from operations of $124,000 in
the three month period ended March 31, 2004. As of December 31, 2005, we
had an accumulated deficit of approximately $101.4 million. These losses have
been funded primarily through the issuance of common stock in our initial public
offering and, prior to the initial public offering, the issuance of convertible
preferred stock.
We
anticipate that our current cash and cash equivalents will be sufficient to
satisfy our working capital and capital requirements for at least the next
12
months. However, we cannot assure you that we will not require additional funds
prior to such time, and we would then seek to sell additional equity or debt
securities through public financings, or seek alternative sources of financing.
We cannot assure you that additional funding will be available on favorable
terms, when needed, if at all. If we are unable to obtain
any necessary additional financing, we may be required to further reduce the
scope of our planned sales and marketing and product development efforts, which
could materially adversely affect our business, financial condition and
operating results. In addition, we may require additional funds in order to
fund
more rapid expansion, to develop new or enhanced services or products or to
invest in complementary businesses, technologies, services or
products.
Contractual
Obligations and Commitments
We
do not
have any special purposes entities, and other than operating leases, which
are
described below, we do not engage in off-balance sheet financing
arrangements.
We
lease
facilities and certain equipment under agreements accounted for as operating
leases. These leases generally require us to pay all executory costs such as
maintenance and insurance. Rental expense for operating leases for the years
ended December 31, 2005 and 2004 was approximately $658,000 and $502,000,
respectively.
As
of
December 31, 2005, our principal commitments were approximately $1.2
million under various operating leases, of which approximately $679,000 is
due
in 2006. We do not currently expect that our principal commitments for the
year
ending December 31, 2006 will exceed $1.0 million in the aggregate. Our
capital expenditures are not currently expected to exceed $500,000 in 2006.
Our
contractual obligations at December 31, 2005 are summarized as
follows:
|
Payments
due by period
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
|||||||||||
|
Operating
leases
|
$
|
1,225
|
$
|
679
|
$
|
546
|
$
|
—
|
$
|
—
|
||||||
|
Total
|
$
|
1,225
|
$
|
679
|
$
|
546
|
$
|
—
|
$
|
—
|
||||||
Currency
Rate Fluctuations
Through
December 31, 2005, our results of operations, financial condition and cash
flows have not been materially affected by changes in the relative values of
non-U.S. currencies to the U.S. dollar. The functional currency of our
wholly-owned Israeli subsidiary, HumanClick Ltd., is the U.S. dollar. We do
not
use derivative financial instruments to limit our foreign currency risk
exposure.
Collection
Risk
Our
accounts receivable are subject, in the normal course of business, to collection
risks. We regularly assess these risks and have established policies and
business practices to protect against the adverse effects of collection risks.
During 2005, we increased our allowance for doubtful accounts by $30,000 to
approximately $84,000, principally due to an increase in accounts receivable
as
a result of increased sales, and we wrote off approximately $17,000 of
previously reserved accounts, leaving a net allowance of $67,000 at
December 31, 2005. During 2004, we increased our allowance for doubtful
accounts by $30,000 to approximately $94,000, principally due to an increase
in
accounts receivable as a result of increased sales, and we wrote off
approximately $40,000 of previously reserved accounts, leaving a net allowance
of $54,000 at December 31, 2004.
Interest
Rate Risk
Our
investments consist of cash and cash equivalents. Therefore, changes in the
market’s interest rates do not affect in any material respect the value of the
investments as recorded by us.
INDEX
|
40
|
|
|
41
|
|
|
42
|
|
|
43
|
|
|
44
|
|
|
45
|
|
|
46
|
To
the
Board of Directors and Stockholders
LivePerson,
Inc.
We
have
audited the accompanying consolidated balance sheet of LivePerson, Inc. and
subsidiaries ("LivePerson, Inc.") as of December 31, 2005 and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of LivePerson, Inc. at
December 31, 2005, and the results of their operations and their cash flows
for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of LivePerson, Inc.’s
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our
report dated March 10, 2006 expressed an unqualified opinion
thereon.
/s/
BDO
Seidman, LLP
New York,
New York
March
10,
2006
The
Board
of Directors and Stockholders
LivePerson,
Inc.:
We
have
audited the accompanying consolidated balance sheet of LivePerson, Inc. and
subsidiaries as of December 31, 2004, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
years in the two-year period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of LivePerson, Inc. and
subsidiaries as of December 31, 2004 and the results of their operations
and their cash flows for each of the years in the two-year period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
/s/
KPMG
LLP
New
York,
New York
March
16,
2005
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
17,117
|
$
|
12,425
|
|||
|
Accounts
receivable, less allowance for doubtful accounts of $67 and $54,
in 2005
and 2004, respectively
|
1,727
|
1,641
|
|||||
|
Prepaid
expenses and other current assets
|
591
|
475
|
|||||
|
Total
current assets
|
19,435
|
14,541
|
|||||
|
Property
and equipment, net
|
575
|
384
|
|||||
|
Intangibles,
net
|
790
|
1,721
|
|||||
|
Security
deposits
|
180
|
166
|
|||||
|
Other
assets
|
446
|
338
|
|||||
|
Total
assets
|
$
|
21,426
|
$
|
17,150
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
346
|
$
|
262
|
|||
|
Accrued
expenses
|
1,803
|
1,666
|
|||||
|
Deferred
revenue
|
1,618
|
1,330
|
|||||
|
Total
current liabilities
|
3,767
|
3,258
|
|||||
|
Other
liabilities
|
446
|
338
|
|||||
|
Commitments
and contingencies
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Preferred
stock, $.001 par value per share; 5,000,000 shares authorized, 0
issued
and outstanding at December 31, 2005 and 2004
|
—
|
—
|
|||||
|
Common
stock, $.001 par value per share; 100,000,000 shares authorized,
37,979,271 shares issued and outstanding at December 31, 2005; 37,380,732
shares issued and outstanding at December 31, 2004
|
38
|
37
|
|||||
|
Additional
paid-in capital
|
118,556
|
117,440
|
|||||
|
Accumulated
deficit
|
(101,381
|
)
|
(103,923
|
)
|
|||
|
Total
stockholders’ equity
|
17,213
|
13,554
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
21,426
|
$
|
17,150
|
|||
See
accompanying notes to consolidated financial statements.
LIVEPERSON,
INC.
(In
thousands, except share and per share data)
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Revenue
|
$
|
22,277
|
$
|
17,392
|
$
|
12,023
|
||||
|
Operating
expenses:
|
||||||||||
|
Cost
of revenue
|
4,297
|
2,888
|
2,028
|
|||||||
|
Product
development
|
2,699
|
2,000
|
1,641
|
|||||||
|
Sales
and marketing
|
6,975
|
5,183
|
3,555
|
|||||||
|
General
and administrative
|
4,458
|
4,456
|
3,610
|
|||||||
|
Amortization
of intangibles
|
931
|
792
|
1,014
|
|||||||
|
Restructuring
and impairment charges
|
—
|
—
|
1,024
|
|||||||
|
Total
operating expenses
|
19,360
|
15,319
|
12,872
|
|||||||
|
Income
(loss) from operations
|
2,917
|
2,073
|
(849
|
)
|
||||||
|
Other
income (expense):
|
||||||||||
|
Other
expense
|
—
|
—
|
(8
|
)
|
||||||
|
Interest
income
|
300
|
77
|
41
|
|||||||
|
Total
other income, net
|
300
|
77
|
33
|
|||||||
|
Income
(loss) before provision for income taxes
|
3,217
|
2,150
|
(816
|
)
|
||||||
|
Provision
for income taxes
|
675
|
58
|
—
|
|||||||
|
Net
income (loss)
|
2,542
|
2,092
|
(816
|
)
|
||||||
|
Basic
net income (loss) per common share
|
$
|
0.07
|
$
|
0.06
|
$
|
(0.02
|
)
|
|||
|
Diluted
net income (loss) per common share
|
$
|
0.06
|
$
|
0.05
|
$
|
(0.02
|
)
|
|||
|
Weighted
average shares outstanding used in basic net income (loss) per
common
share calculation
|
37,557,722
|
37,263,378
|
34,854,802
|
|||||||
|
Weighted
average shares outstanding used in diluted net income (loss) per
common
share calculation
|
39,885,328
|
39,680,304
|
34,854,802
|
|||||||
See
accompanying notes to consolidated financial statements.
|
Common
Stock
|
Additional
Paid-in
|
Deferred
|
Accumulated |
Accumulated
Other
Comprehensive
Income
|
||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
Deficit
|
(loss)
|
Total
|
||||||||||||||||
|
Balance
at December 31, 2002
|
34,060,881
|
$
|
34
|
$
|
113,061
|
$
|
—
|
$
|
(105,199
|
)
|
$
|
(8
|
)
|
$
|
7,888
|
|||||||
|
Issuance
of common stock upon exercise of stock options and
warrants
|
2,755,534
|
2
|
1,911
|
—
|
—
|
—
|
1,913
|
|||||||||||||||
|
Deferred
stock based compensation
|
—
|
—
|
298
|
(298
|
)
|
—
|
—
|
—
|
||||||||||||||
|
Acceleration
of employee stock options
|
—
|
—
|
45
|
—
|
—
|
—
|
45
|
|||||||||||||||
|
Amortization
of deferred compensation
|
—
|
—
|
—
|
298
|
—
|
—
|
298
|
|||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
(816
|
)
|
—
|
(816
|
)
|
|||||||||||||
|
Other
comprehensive loss
|
—
|
—
|
—
|
—
|
—
|
8
|
8
|
|||||||||||||||
|
Comprehensive
loss
|
(808
|
)
|
||||||||||||||||||||
|
Balance
at December 31, 2003
|
36,816,415
|
36
|
115,315
|
—
|
(106,015
|
)
|
—
|
9,336
|
||||||||||||||
|
Issuance
of common stock upon exercise of stock options and
warrants
|
193,423
|
—
|
122
|
—
|
—
|
—
|
122
|
|||||||||||||||
|
Issuance
of common stock related to asset acquisition
|
370,894
|
1
|
1,749
|
—
|
—
|
—
|
1,750
|
|||||||||||||||
|
Deferred
stock based compensation
|
—
|
—
|
246
|
(246
|
)
|
—
|
—
|
—
|
||||||||||||||
|
Amortization
of deferred compensation
|
—
|
—
|
—
|
246
|
—
|
—
|
246
|
|||||||||||||||
|
Tax
benefit from exercise of employee stock options
|
—
|
—
|
8
|
—
|
—
|
—
|
8
|
|||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
2,092
|
—
|
2,092
|
|||||||||||||||
|
Balance
at December 31, 2004
|
37,380,732
|
37
|
117,440
|
—
|
(103,923
|
)
|
—
|
13,554
|
||||||||||||||
|
Issuance
of common stock upon exercise of stock options and
warrants
|
598,539
|
1
|
450
|
—
|
—
|
—
|
451
|
|||||||||||||||
|
Tax
benefit from exercise of employee stock options
|
—
|
—
|
666
|
—
|
—
|
—
|
666
|
|||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
2,542
|
—
|
2,542
|
|||||||||||||||
|
Balance
at December 31, 2005
|
37,979,271
|
$
|
38
|
$
|
118,556
|
$
|
—
|
$
|
(101,381
|
)
|
$
|
—
|
$
|
17,213
|
||||||||
See
accompanying notes to consolidated financial statements.
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income (loss)
|
$
|
2,542
|
$
|
2,092
|
$
|
(816
|
)
|
|||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||
|
Non-cash
compensation expense, net
|
—
|
246
|
343
|
|||||||
|
Depreciation
|
171
|
217
|
321
|
|||||||
|
Amortization
of intangibles
|
931
|
792
|
1,014
|
|||||||
|
Provision
for doubtful accounts, net
|
30
|
30
|
15
|
|||||||
|
Deferred
income taxes
|
666
|
8
|
—
|
|||||||
|
Changes
in operating assets and liabilities, net of
acquisition:
|
||||||||||
|
Accounts
receivable
|
(116
|
)
|
(432
|
)
|
(648
|
)
|
||||
|
Prepaid
expenses and other current assets
|
(116
|
)
|
(157
|
)
|
(19
|
)
|
||||
|
Security
deposits
|
(14
|
)
|
(37
|
)
|
(5
|
)
|
||||
|
Other
assets and liabilities
|
—
|
19
|
—
|
|||||||
|
Accounts
payable
|
84
|
146
|
(21
|
)
|
||||||
|
Accrued
expenses
|
137
|
(911
|
)
|
454
|
||||||
|
Deferred
revenue
|
288
|
54
|
476
|
|||||||
|
Net
cash provided by operating activities
|
4,603
|
2,067
|
1,114
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Purchases
of property and equipment, including capitalized software
|
(362
|
)
|
(260
|
)
|
(67
|
)
|
||||
|
Acquisition
of Island Data customer contracts
|
—
|
(8
|
)
|
(75
|
)
|
|||||
|
Acquisition
of FaceTime customer contracts
|
—
|
(394
|
)
|
—
|
||||||
|
Net
cash used in investing activities
|
(362
|
)
|
(662
|
)
|
(142
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds
from issuance of common stock in connection with the exercise of
options
and warrants
|
451
|
122
|
1,914
|
|||||||
|
Net
cash provided by financing activities
|
451
|
122
|
1,914
|
|||||||
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
—
|
—
|
8
|
|||||||
|
Net
increase in cash and cash equivalents
|
4,692
|
1,527
|
2,894
|
|||||||
|
Cash
and cash equivalents at the beginning of the year
|
12,425
|
10,898
|
8,004
|
|||||||
|
Cash
and cash equivalents at the end of the year
|
$
|
17,117
|
$
|
12,425
|
$
|
10,898
|
||||
|
Supplemental
disclosures:
|
||||||||||
|
Cash
paid during the year for Income taxes:
|
18
|
88
|
—
|
|||||||
Supplemental
disclosure of non-cash investing and financing activities:
During
the year ended December 31, 2005, 3,632 shares of common stock were issued
in
connection with the cashless exercise of warrants.
During
the year ended December 31, 2004, 22,198 shares of common stock were issued
in connection with the cashless exercise of warrants.
During
the year ended December 31, 2004, the Company issued 370,894 shares of
common stock in connection with the acquisition of certain identifiable assets
of Island Data Corporation.
See
accompanying notes to consolidated financial
statements.
LIVEPERSON,
INC.
(In
thousands, except share and per share data)
|
(1)
|
Summary
of Operations and Significant Accounting
Policies
|
|
(a)
|
Summary
of Operations
|
LivePerson,
Inc. (the “Company” or “LivePerson”) was incorporated in the State of Delaware
in 1995. The Company commenced operations in 1996. LivePerson is a provider
of
online conversion solutions. The Company’s hosted software enables companies to
identify and proactively engage online visitors—increasing sales, satisfaction
and loyalty while reducing service costs.
The
Company’s fully-integrated multi-channel communications platform, Timpani,
facilitates real-time sales, marketing and customer service. Its technology
supports and manages key online interactions—via chat, email and
self-service/knowledgebase—in a cost-effective and secure environment. Blending
leading technology, a deep understanding of consumer behavior and industry
best
practices to create more relevant, compelling and personalized online
experiences, the Company maximizes the business impact of the online
channel.
The
Company’s primary revenue source is from the sale of the LivePerson services
under the brand name Timpani, which is conducted within one operating segment.
The Company’s product development staff, help desk and online sales support are
located in Israel.
|
(b)
|
Principles
of Consolidation
|
The
consolidated financial statements reflect the operations of LivePerson and
its
wholly-owned subsidiary. All significant intercompany balances and transactions
have been eliminated in consolidation.
|
(c)
|
Use
of Estimates
|
The
preparation of the consolidated financial statements in accordance with
generally accepted accounting principles requires the Company’s management to
make a number of estimates and assumptions relating to the reported amounts
of
assets and liabilities, the disclosure of contingent assets and liabilities
at
the date of the consolidated financial statements, and the reported amounts
of
revenue and expenses during the period. Significant items subject to such
estimates and assumptions include the carrying amount of property and equipment,
intangibles, valuation allowances for deferred income tax assets, accounts
receivable, the expected term of a client relationship, accruals and other
factors. Actual results could differ from those estimates.
|
(d)
|
Cash
and Cash Equivalents
|
The
Company considers all highly liquid securities with original maturities of
three
months or less when acquired to be cash equivalents.
|
(e)
|
Property
and Equipment
|
Property
and equipment are stated at cost, net of accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over
the
estimated useful lives of the related assets, generally three to five years
for
equipment and software. Leasehold improvements are amortized using
the
straight-line method over the shorter of the lease term or the estimated
useful
life of the asset. Total depreciation for the years ended December 31,
2005, 2004 and 2003 was $171, $217, and $321, respectively, and was recorded
in
Cost of revenue and General and administrative expense for each
year.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
|
(f)
|
Impairment
of Long-Lived Assets
|
In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,”
long-lived assets, such as property, plant and equipment and purchased
intangibles subject to amortization are reviewed for impairment whenever
events
or changes in circumstances indicate that the carrying value of an asset
may not
be recoverable. Recoverability of assets to be held and used is measured
by a
comparison of the carrying value of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying value of
an
asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying value of the asset exceeds
the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying value or the
fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance
sheet.
|
(g)
|
Accounts
Receivable
|
Accounts
receivable are recorded at the invoiced amount and do not bear interest.
The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts receivable. The
Company determines the allowance based on historical write-off experience.
The
Company reviews its allowance for doubtful accounts monthly. Past due balances
over 90 days and over a specified amount are reviewed individually for
collectibility. All other balances are reviewed on a pooled basis. Account
balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote.
The
Company does not have any off-balance sheet credit exposure related to its
customers.
|
(h)
|
Revenue
Recognition
|
The
Company charges a monthly fee, which varies by service and client usage.
Certain
of the Company’s larger clients, who require more sophisticated implementation
and training, may also pay an initial non-refundable set-up fee and professional
service fees related to implementation. The Company also occasionally charges
professional service fees related to additional training and business consulting
and analysis.
The
initial set-up fee is intended to recover certain costs (principally customer
service, training and other administrative costs) prior to the deployment
of the
LivePerson services. Such fees are recorded as deferred revenue and recognized
ratably over a period of 24 months, representing the estimated term of the
client relationships. Although the Company believes this estimate is reasonable,
this estimate may change in the future. In instances where the Company does
charge a set-up fee, the Company typically does not charge an additional
set-up
fee if an existing client adds more services. Unamortized deferred fees,
if any,
are recognized upon termination of the agreement with the customer.
The
Company recognized set-up fees due to client
attrition of $1, $2, and $0 in 2005, 2004 and 2003, respectively.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
The
Company also sells certain of the LivePerson services directly via Internet
download. These services are marketed as LivePerson Pro and LivePerson Contact
Center for SMBs, and are paid for almost exclusively by credit card. Credit
card
payments accelerate cash flow and reduce the Company’s collection risk, subject
to the merchant bank’s right to hold back cash pending settlement of the
transactions. Sales of LivePerson Pro and LivePerson Contact Center may occur
with or without the assistance of an online sales representative, rather
than
through face-to-face or telephone contact that is typically required for
traditional direct sales. These sales typically have no set-up fee, because
the
Company does not provide the customer with training and administrative costs
are
minimal.
The
Company records revenue based upon a monthly fee charged for the LivePerson
services, provided that no significant Company obligations remain and collection
of the resulting receivable is probable. The Company recognizes monthly service
fees as services are provided. The Company’s service agreements typically have
twelve month terms and are terminable upon 30 to 90 days’ notice without
penalty. The Company recognizes professional service fees upon completion
and
customer acceptance of the professional service engagement.
|
(i)
|
Income
Taxes
|
Income
taxes are accounted for under the asset and liability method. Under this
method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to
be
recovered or settled. The effect on deferred tax assets and liabilities of
a
change in tax rates is recognized in results of operations in the period
that
the tax change occurs. Valuation allowances are established, when necessary,
to
reduce deferred tax assets to the amount expected to be realized.
|
(j)
|
Advertising
Costs
|
The
Company expenses the cost of advertising and promoting its services as incurred.
Such costs totaled approximately $1,223, $902, and $208 for the years ended
December 31, 2005, 2004 and 2003, respectively.
|
(k)
|
Financial
Instruments and Concentration of Credit
Risk
|
The
Company’s business is characterized by rapid technological change, new product
development and evolving industry standards. Inherent in the Company’s business
are various risks and uncertainties, including its limited operating history,
unproven business model and the limited history of commerce on the Internet.
The
Company’s success may depend, in part, upon the emergence of the Internet as a
commerce medium, prospective product development efforts and the acceptance
of
the Company’s solutions by the marketplace.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash and cash equivalents and accounts
receivable which approximate fair value at December 31, 2005 because of the
short-term nature of these instruments. The Company invests its cash and
cash
equivalents with financial institutions that it believes are of high quality,
and performs periodic evaluations of these instruments and the relative credit
standings of the institutions with which it invests. At certain times, the
Company’s cash balances with any one financial institution may exceed Federal
Deposit Insurance Corporation insurance limits. The Company believes it
mitigates its risk by depositing its cash balances with high credit, quality
financial institutions.
The
Company’s customers are primarily concentrated in the United States. The Company
performs ongoing credit evaluations of its customers’ financial condition
(except for customers who purchase the LivePerson services by credit card
via
Internet download) and has established an allowance for doubtful accounts
based
upon factors surrounding the credit risk of customers, historical trends
and
other information. Concentration of credit risk is limited due to the Company’s
large number of customers. No single customer accounted for or exceeded 10%
of
revenue in 2005, 2004 or 2003. No single customer accounted for or exceeded
10%
of accounts receivable at December 31, 2005. One customer accounted for
approximately 10% of accounts receivable at December 31, 2004.
|
(l)
|
Stock-based
Compensation
|
The
Company applies the intrinsic value-based method of accounting prescribed
by
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
Issued to Employees,” and related interpretations including Financial Accounting
Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain
Transactions Involving Stock Compensation: An Interpretation of APB Opinion
No. 25” (issued in March 2000), to account for its fixed plan stock
options. Under this method, compensation expense is recorded on the date
of
grant only if the current market price of the underlying stock exceeded the
exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation,”
and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and
Disclosure” (an amendment to SFAS No. 123), established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As permitted by existing accounting
standards, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123, as amended by SFAS No. 148. The Company
amortizes deferred compensation on a graded vesting methodology in accordance
with FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights
and Other Variable Stock Award Plans.”
The
Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option grants to employees. Accordingly, except
as
mentioned below, no compensation expense has been recognized relating to
these
stock option grants in the consolidated financial statements. Had compensation
cost for the Company’s stock option grants been determined based on the fair
value at the grant date for awards consistent with the method of SFAS
No. 123, the Company’s net income attributable to common stockholders for
2005 and 2004 would have decreased and the net loss attributable to common
stockholders for 2003 would have increased to the pro forma amounts presented
below. The Company did not have any employee stock options outstanding prior
to
January 1, 1998.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
The
Company determined after the end of the second quarter of 2004 that it had
misapplied certain provisions of SFAS No. 123 when calculating the disclosure
requirements for its stock-based employee compensation plan using a fair-value
based method of accounting. The misapplication primarily related to the
amortization period used when computing the pro forma compensation expense
impact of issued stock options on net income (loss) and basic and diluted
net
income (loss) per common share. The previously restated pro forma amounts
do not
affect our reported results of operations for any period. The table below
includes the previously restated pro forma amounts for 2003.
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Net
income (loss) as reported
|
$
|
2,542
|
$
|
2,092
|
$
|
(816
|
)
|
|||
|
Add:
Stock-based compensation expense included in net income (loss)
as
reported
|
—
|
—
|
45
|
|||||||
|
Deduct:
Pro forma stock-based compensation cost
|
(2,055
|
)
|
(1,308
|
)
|
(945
|
)
|
||||
|
Pro
forma net income (loss)
|
$
|
487
|
$
|
784
|
$
|
(1,716
|
)
|
|||
|
Basic
net income (loss) per common share:
|
||||||||||
|
As
reported
|
$
|
0.07
|
$
|
0.06
|
$
|
(0.02
|
)
|
|||
|
Pro
forma
|
$
|
0.01
|
$
|
0.02
|
$
|
(0.05
|
)
|
|||
|
Diluted
net income (loss) per common share:
|
||||||||||
|
As
reported
|
$
|
0.06
|
$
|
0.05
|
$
|
(0.02
|
)
|
|||
|
Pro
forma
|
$
|
0.01
|
$
|
0.02
|
$
|
(0.05
|
)
|
|||
The
per
share weighted average fair value of stock options granted during 2005, 2004
and
2003, was $2.25, $2.04 and $1.68, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants in
2005,
2004 and 2003: dividend yield of zero percent for all years; risk-free interest
rates of 4.3%, 4.6% and 4.1%, respectively; and expected life of five years
for
all years. During 2005, 2004 and 2003, the Company used a volatility factor
of
82%, 89% and 146%, respectively.
|
(m)
|
Basic
and Diluted Net Income (Loss) Per
Share
|
The
Company calculates earnings per share in accordance with the provisions of
SFAS
No. 128, “Earnings Per Share (“EPS”),” and the guidance of the Securities
and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 98. Under
SFAS No. 128, basic EPS excludes dilution for common stock equivalents and
is computed by dividing net income or loss attributable to common shareholders
by the weighted average number of common shares outstanding for the period.
All
options, warrants or other potentially dilutive instruments issued for nominal
consideration are required to be included in the calculation of basic and
diluted net income (loss) attributable to common stockholders. The Company
has
included 17,339 shares of common stock in the calculation of basic and diluted
net income (loss) attributable to common stockholders from October 2000 which
relate to certain options that were originally issued by HumanClick Ltd.
for
nominal consideration and subsequently assumed by the Company in connection
with
its acquisition of HumanClick in October 2000. Diluted EPS is calculated
using
the treasury stock method and reflects the potential dilution that could
occur
if securities or other contracts to issue common stock were exercised or
converted into common stock and resulted in the issuance
of common stock. Diluted net loss per share presented is equal to basic net
loss
per share since all common stock equivalents are anti-dilutive for the year
ended December 31, 2003.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
Diluted
net income per common share for the year ended December 31, 2005 includes
the effect of options to purchase 7,255,292 shares of common stock with
a
weighted average exercise price of $1.51 and warrants to purchase 188,250
shares
of common stock with a weighted average exercise price of $1.56. Diluted
net
income per common share for the year ended December 31, 2005 does not include
the effect of options to purchase 1,044,761 shares of common stock. Diluted
net
income per common share for the year ended December 31, 2004 includes the
effect of options to purchase 6,491,025 shares of common stock with a weighted
average exercise price of $1.30 and warrants to purchase 202,802 shares
of
common stock with a weighted average exercise price of $1.65. Diluted net
income
per common share for the year ended December 31, 2004 does not include
the
effect of options to purchase 895,250 shares of common stock. Diluted net
loss
per common share for the year ended December 31, 2003 does not include the
effects of options to purchase 4,816,500 shares of common stock and warrants
to
purchase 150,000 shares of common stock as the effect of their inclusion
is
anti-dilutive during the period.
A
reconciliation of shares used in calculating basic and diluted earnings
per
share follows:
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Basic
|
37,557,722
|
37,263,378
|
34,854,802
|
|||||||
|
Effect
of assumed exercised options
|
2,327,606
|
2,416,926
|
—
|
|||||||
|
Diluted
|
39,885,328
|
39,680,304
|
34,854,802
|
|||||||
|
(n)
|
Segment
Reporting
|
The
Company accounts for its segment information in accordance with the provisions
of SFAS No. 131, “Disclosures About Segments of an Enterprise and Related
Information.” SFAS No. 131 establishes annual and interim reporting
standards for operating segments of a company. SFAS No. 131 requires
disclosures of selected segment-related financial information about products,
major customers, and geographic areas. The Company is organized in a single
operating segment for purposes of making operating decisions and assessing
performance. The chief operating decision-maker evaluates performance,
makes
operating decisions, and allocates resources based on financial data consistent
with the presentation in the accompanying consolidated financial statements.
The
Company’s revenue has been earned primarily from customers in the United States.
The Company's foreign long-lived assets are insignificant for all periods
presented.
|
(o)
|
Comprehensive
Income (loss)
|
SFAS
No. 130, “Reporting Comprehensive Income,” requires the Company to report
in its consolidated financial statements, in addition to its net income
(loss),
comprehensive income (loss), which includes all changes in equity during
a
period from non-owner sources including, as applicable, foreign currency
items,
minimum pension liability adjustments and unrealized gains and losses on
certain
investments in debt and equity securities. There were no material differences
between the Company’s comprehensive income (loss) and its net income (loss) for
all periods presented.
-51-
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share
data)
| (p) |
Computer
Software
|
In
April
1998, the American Institute of Certified Public Accountants issued Statement
of
Position 98-1, “Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.” SOP 98-1 provides guidance for determining whether
computer software is internal-use software and on accounting for the proceeds
of
computer software originally developed or obtained for internal use and then
subsequently sold to the public. It also provides guidance on capitalization
of
the costs incurred for computer software developed or obtained for internal
use.
The Company adopted SOP 98-1 in 1999 and capitalized $1,047 as of
December 31, 2005 and $929 as of December 31, 2004.
|
(q)
|
Intangible
Assets
|
The
Company adopted the provisions of SFAS No. 142, “Goodwill and Other
Intangible Assets,” on January 1, 2002. Pursuant to SFAS No. 142,
goodwill and intangible assets acquired in a purchase business combination
and
determined to have an indefinite useful life are not amortized, but instead
tested for impairment at least annually. SFAS No. 142 also requires that
intangible assets with estimatable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, “Accounting for
Impairment or Disposal of Long-Lived Assets.”
Intangible
assets are stated net of accumulated amortization of $1,723 and $792 as of
December 31, 2005 and 2004, respectively. Intangible assets relate to the
acquisition of certain identifiable assets of FaceTime in July 2004 and the
acquisition of the Island Data customer contracts in 2003, and are being
amortized over the expected period of benefit of 24 months and 36 months,
respectively (see Note 2).
|
(r)
|
Deferred
Rent
|
The
Company records rent expense on a straight-line basis over the term of the
related lease. The difference between the rent expense recognized for financial
reporting purposes and the actual payments made in accordance with the lease
agreement is recognized as deferred rent liability.
|
(s)
|
Product
Development Costs
|
The
Company accounts for product development costs in accordance with SFAS
No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed,” under which certain software development costs incurred
subsequent to the establishment of technological feasibility are capitalized
and
amortized over the estimated lives of the related products. Technological
feasibility is established upon completion of a working model. To date,
completion of a working model of the Company’s products and general release have
substantially coincided. As a result, the Company has not capitalized any
software development costs and such costs have not been significant. Through
December 31, 2005, all development costs have been charged to product
development expense in the accompanying consolidated statements of
operations.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
| (t) |
Foreign
Currency Translation
|
Assets
and liabilities in foreign functional currencies are translated at the exchange
rate as of the balance sheet date. Translation adjustments are recorded as
a
separate component of stockholders’ equity. Revenue, costs and expenses
denominated in foreign functional currencies are translated at the weighted
average exchange rate for the period. The Company had no translation adjustment
for the years ended December 31, 2005 and 2004. The translation adjustment
for the year ended December 31, 2003 is related to a dormant subsidiary.
The
functional currency of our wholly-owned Israeli subsidiary is the U.S.
dollar.
|
(u)
|
Restructuring
Activities
|
Restructuring
activities, prior to January 1, 2003, were accounted for in accordance with
the guidance provided in the consensus opinion of the Emerging Issues Task
Force
(“EITF”), in connection with EITF Issue No. 94-3, “Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in Restructuring).” EITF Issue No. 94-3
generally requires, with respect to the recognition of severance expenses,
management approval of the restructuring plan, the determination of the
employees to be terminated and communication of benefit arrangement to
employees.
In
July
2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities,” which supersedes EITF Issue No. 94-3. SFAS
No. 146 requires that costs associated with an exit or disposal plan be
recognized when incurred rather than at the date of a commitment to an exit
or
disposal plan. The adoption of SFAS No. 146, effective January 1,
2003, did not have any impact on the Company’s financial condition or results of
operations.
|
(v)
|
Recently
Issued Accounting
Pronouncements
|
In
May
2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.” SFAS
No. 150 established standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 also includes required disclosures for financial
instruments within its scope. For the Company, SFAS No. 150 was effective
for instruments entered into or modified after May 31, 2003 and otherwise
was
effective as of January 1, 2004, except for mandatorily redeemable
financial instruments. For these mandatorily redeemable financial instruments,
SFAS No. 150 will be effective for the Company on January 1, 2005. The
effective date has been deferred indefinitely for certain other types of
mandatorily redeemable financial instruments. The Company does not have any
financial instruments that are within the scope of SFAS No. 150; therefore
the issuance of SFAS No. 150 did not have an impact on the Company’s
financial position, cash flows or results of operations.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment,” which addresses the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, with a primary focus
on
transactions in which an entity obtains employee services in share-based
payment
transactions. SFAS No. 123(R) is a revision to SFAS No. 123 and
supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”
and its related implementation guidance. SFAS No. 123(R) requires
measurement of the cost of employee services received in exchange for an
award
of equity instruments based on the grant-date fair value of the award (with
limited exceptions). Incremental compensation costs arising from subsequent
modifications of awards after the grant date must
be
recognized. In April 2005, the SEC announced a new rule that delays the
implementation of SFAS No. 123(R) until the fiscal year that begins after
June
15, 2005. The Company will adopt the provisions of SFAS No. 123(R) as of
January
1, 2006. The Company is still evaluating the impact that adopting SFAS
No. 123(R) will have on its financial position, cash flows and results of
operations, but the Company believes this change in accounting will have
a
material adverse effect on its reported results of operations. Based upon
the
current number of outstanding stock options, the Company expects that the
impact
of this accounting change will decrease net income per common share by
approximately $0.05 for the fiscal year ended 2006. This figure may change
based
upon additional stock options grants, methodology refinement or other factors.
See Note 1(l) for pro forma disclosure assuming a fair value based method
of
accounting for stock-based awards.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets,” which eliminates an exception in APB Opinion No. 29, “Accounting
for Nonmonetary Transactions,” for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. The adoption of SFAS No. 153
is
not expected to have a material impact on the Company’s financial position, cash
flows or results of operations.
In
May
2005, the FASB has issued SFAS No. 154, “Accounting Changes and Error
Corrections.” This new standard replaces APB Opinion No. 20, “Accounting
Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
Statements,” and is part of FASB’s stated goal to converge its standards with
those issued by the International Accounting Standards Board. Among other
changes, SFAS No. 154 requires that a voluntary change in accounting principle
be applied retrospectively with all prior period financial statements presented
on the new accounting principle, unless it is impracticable to do so. SFAS
No.
154 also provides that (1) a change in method of depreciating or amortizing
a
long-lived nonfinancial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and
(2)
correction of errors in previously issued financial statements should be
termed
a “restatement.” The new standard is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005.
Early adoption of this standard is permitted for accounting changes and
correction of errors made in fiscal years beginning after June 1,
2005.
In
November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards,”
which provides an alternative transition method to establish the beginning
balance of the additional paid-in capital pool (“APIC pool”) related to the tax
effects of employee stock-based compensation, and to determine the subsequent
impact on the APIC pool and consolidated statements of cash flows of the
tax
effects of employee stock-based compensation awards that are outstanding
upon
adoption of SFAS No. 123(R).
|
(w)
|
Fair
Value of Financial
Instruments
|
The
fair
value of a financial instrument is the amount at which the instrument could
be
exchanged in a current transaction between willing parties. Cash and cash
equivalents, accounts receivable, prepaid expenses, security deposits, other
assets, accounts payable, accrued expenses and deferred revenue carrying
amounts
approximate fair value because of the short maturity of these
instruments.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
| (x) |
Intangible
Assets
|
Amortization
of intangible assets is summarized as follows:
Acquired
Intangible Assets
|
As
of December 31, 2005
|
||||||||||
|
Gross
Carrying
Amount
|
Weighted
Average
Amortization
Period
|
Accumulated
Amortization
|
||||||||
|
Amortizing
intangible assets:
|
||||||||||
|
Certain
identifiable assets of Island Data
|
$
|
2,119
|
3.0
years
|
$
|
1,434
|
|||||
|
Certain
identifiable assets of FaceTime
|
394
|
2.0
years
|
289
|
|||||||
|
Total
|
$
|
2,513
|
$
|
1,723
|
||||||
|
As
of December 31, 2004
|
||||||||||
|
Gross
Carrying
Amount
|
Weighted
Average
Amortization
Period
|
Accumulated
Amortization
|
||||||||
|
Amortizing
intangible assets:
|
||||||||||
|
Certain
identifiable assets of Island Data
|
$
|
2,119
|
3.0
years
|
$
|
717
|
|||||
|
Certain
identifiable assets of FaceTime
|
394
|
2.0
years
|
75
|
|||||||
|
Total
|
$
|
2,513
|
$
|
792
|
||||||
Aggregate
amortization expense for intangible assets was $931 and $792 for the years
ended
December 31, 2005 and 2004, respectively. Estimated amortization expense
for the next five years is: $790 in 2006, $0 in 2007, $0 in 2008, $0 in 2009
and
$0 in 2010.
|
(2)
|
Asset
Acquisitions
|
Island
Data
In
December 2003, the Company acquired certain identifiable assets of Island
Data
Corporation. The purchase price was based on projected revenue from the acquired
customer contracts at the time of their assignment to the Company. The Company
paid approximately $370 in cash, and issued 370,894 shares of its common
stock,
in connection with the acquisition. The total acquisition costs were
approximately $2,119. Of the total purchase price, the Company has allocated
approximately $65 to non-compete agreements which is being amortized over
a
period of 24 months, representing the terms of the agreements. The remainder
of
the purchase has been allocated to customer contracts and is being amortized
over a period of 36 months, representing the current estimate of the term
of the
acquired client relationships. The net acquisition costs of $685 and $1,401
are
included in “Assets - Intangibles, net” on The Company’s December 31, 2005
and 2004 balance sheets, respectively.
FaceTime
In
July
2004, the Company acquired certain identifiable assets of FaceTime
Communications, Inc. The transaction transferred certain existing customer
contracts of FaceTime to the Company. The purchase price was based in part
on
future revenue generated from the former FaceTime client base. The total
acquisition costs were approximately $394. The total acquisition cost is
being
amortized ratably over a period of 24 months, representing the current estimate
of the term of the acquired client relationships. The net acquisition costs
of
$105 and $320 are included in “Assets - Intangibles, net” on the Company’s
December 31, 2005 and 2004 balance sheets, respectively.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
|
(3)
|
Balance
Sheet Components
|
Property
and Equipment
Property
and equipment is summarized as follows:
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Computer
equipment and software
|
$
|
1,936
|
$
|
1,712
|
|||
|
Furniture,
equipment and building improvements
|
182
|
44
|
|||||
|
2,118
|
1,756
|
||||||
|
Less
accumulated depreciation
|
1,543
|
1,372
|
|||||
|
Total
|
$
|
575
|
$
|
384
|
|||
Accrued
Expenses
Accrued
expenses consist of the following:
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Payroll
and related costs
|
$
|
1,182
|
$
|
1,102
|
|||
|
Professional
services and consulting fees
|
461
|
448
|
|||||
|
Sales
commissions
|
99
|
90
|
|||||
|
Other
|
61
|
26
|
|||||
|
Total
|
$
|
1,803
|
$
|
1,666
|
|||
|
(4)
|
Capitalization
|
In
December 2002, the Company issued a warrant to purchase up to 150,000 shares
of
common stock at $0.69 per share to Genesis Select Corp. in exchange for investor
relations services. The warrant vested such that 12,500 shares became
exercisable on each monthly anniversary of the warrant issuance date for
the
first 12 months of the warrant’s five-year term. Some or all of the purchase
price may be paid by canceling a portion of the warrant. The Company recorded
non-cash compensation expense of $298 related to this warrant during 2003.
The
Company accounted for this warrant in accordance with EITF Abstract
No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”
Pursuant to EITF No. 96-18, the Company values the warrant at each balance
sheet date using a Black-Scholes pricing model as of each balance sheet date.
Had the warrant been accounted for with the method established by SFAS
No. 123, the Company’s pro forma net loss would not have been materially
different. During the year ended December 31, 2004, the Company issued an
aggregate of 22,198 shares of common stock upon the partial exercise of the
warrant, in consideration of the termination of the right to purchase an
additional 3,302 shares of common stock in the aggregate, pursuant to the
warrant’s net exercise provisions. As of December 31,
2005, the warrant was fully vested and remained outstanding to purchase up
to
124,500 shares of common stock.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
During
the year ended December 31, 2003, the Company issued an aggregate of
276,910 shares of common stock upon the exercise of warrants issued in 1999,
in
consideration of the termination of the right to purchase an additional 180,910
shares of common stock in the aggregate, pursuant to the warrants’ net exercise
provisions.
In
January 2004, the Company filed a registration statement with the SEC to
register the resale of up to 500,000 shares of its common stock by Island Data.
The registration of the resale of the shares was required by the Company’s
agreement with Island Data. The shares registered for resale on the registration
statement, but not actually issued to Island Data pursuant to the agreement,
will be deregistered. The Company did not receive any proceeds from the sale
of
the shares of common stock covered by the Island Data registration
statement.
In
January 2004, the Company filed a shelf registration statement with the SEC
relating to 4,000,000 shares of its common stock that the Company may issue
from
time to time. The Company has no immediate plans to offer or sell any shares
under this shelf registration. The Company presently intends to use the net
proceeds from any sale of the registered shares for general corporate purposes,
working capital and potential strategic acquisitions. The Company would announce
the terms of any issuance in a filing with the SEC at the time the Company
offers or sells the shares.
In
May
2004, the Company issued a warrant to purchase up to 75,000 shares of common
stock at $3.25 per share to Genesis Select Corp. in exchange for investor
relations services. The warrant vested such that the shares underlying the
warrant could not be sold until after December 31, 2004. The warrant
expires in May 2009. Some or all of the purchase price may be paid by canceling
a portion of the warrant. The Company recorded non-cash compensation expense
of
$246 related to this warrant during 2004. The Company accounted for this warrant
in accordance with EITF Abstract No. 96-18. Had the warrant been accounted
for with the method established by SFAS No. 123, the Company’s pro forma
net income would not have been materially different. During the year ended
December 31, 2005, the Company issued an aggregate of 3,632 shares of common
stock upon the partial exercise of the warrant, in consideration of the
termination of the right to purchase an additional 7,618 shares of common stock
in the aggregate, pursuant to the warrant’s net exercise provisions. As of
December 31, 2005, the warrant was fully vested and remained outstanding to
purchase up to 63,750 shares of common stock.
|
(5)
|
Stock
Options and Employee Stock Purchase
Plan
|
During
1998, the Company established the Stock Option and Restricted Stock Purchase
Plan (the “1998 Plan”). Under the 1998 Plan, the Board of Directors could issue
incentive stock options or nonqualified stock options to purchase up to
5,850,000 shares of common stock.
The
Company established a successor to the 1998 Plan, the 2000 Stock Incentive
Plan
(the “2000 Plan”). Under the 2000 Plan, the options which had been outstanding
under the 1998 Plan were incorporated into the 2000 Plan and the Company
increased the number of shares available for issuance under the plan by
approximately 4,150,000, thereby reserving for issuance 10,000,000 shares of
common stock in the aggregate. Options to acquire common stock granted
thereunder have ten-year terms.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
Pursuant
to the provisions of the 2000 Plan, the number of shares of common stock
available for issuance thereunder automatically increases on the first trading
day in each calendar year by an amount equal to three percent (3%) of the total
number of shares of the Company’s common stock outstanding on the last trading
day of the immediately preceding calendar year, but in no event shall such
annual increase exceed 1,500,000 shares. As of December 31, 2005,
approximately 11,758,000 shares of common stock were reserved for issuance
under
the 2000 Plan (taking into account all option exercises through
December 31, 2005). On the first trading day in January 2006, approximately
1,139,000 additional shares of common stock were reserved for issuance under
the
2000 Plan pursuant to its automatic increase provisions.
In
March
2000, the Company adopted the 2000 Employee Stock Purchase Plan with 450,000
shares of common stock initially reserved for issuance. Pursuant to the Employee
Stock Purchase Plan, 0 and 4,000 shares were issued in 2002 and 2001,
respectively. Pursuant to the provisions of the Employee Stock Purchase Plan,
the number of shares of common stock available for issuance thereunder
automatically increases on the first trading day in each calendar year by an
amount equal to one-half of one percent (0.5%) of the total number of shares
of
the Company’s common stock outstanding on the last trading day of the
immediately preceding calendar year, but in no event shall such annual increase
exceed 150,000 shares. As of December 31, 2005, approximately 1,170,000
shares of common stock were reserved for issuance under the Employee Stock
Purchase Plan (taking into account all share purchases through December 31,
2005). On the first trading day in January 2006, 150,000 additional shares
of
common stock were reserved for issuance under the Employee Stock Purchase Plan
pursuant to its automatic increase provisions. Effective October 2001, the
Company suspended the Employee Stock Purchase Plan until further
notice.
A
summary
of the Company’s stock option activity and weighted average exercise prices is
as follows:
|
Options
|
Weighted
Average
Exercise Price
|
||||||
|
Options
outstanding at December 31, 2002
|
7,828,334
|
$
|
1.23
|
||||
|
Options
granted
|
590,000
|
$
|
1.85
|
||||
|
Options
exercised
|
(2,478,624
|
)
|
$
|
0.77
|
|||
|
Options
cancelled
|
(216,710
|
)
|
$
|
2.05
|
|||
|
Options
outstanding at December 31, 2003
|
5,723,000
|
$
|
1.46
|
||||
|
Options
granted
|
2,090,000
|
$
|
2.80
|
||||
|
Options
exercised
|
(171,225
|
)
|
$
|
0.71
|
|||
|
Options
cancelled
|
(255,500
|
)
|
$
|
2.25
|
|||
|
Options
outstanding at December 31, 2004
|
7,386,275
|
$
|
1.83
|
||||
|
Options
granted
|
2,178,000
|
$
|
3.19
|
||||
|
Options
exercised
|
(603,277
|
)
|
$
|
0.78
|
|||
|
Options
cancelled
|
(660,945
|
)
|
$
|
3.20
|
|||
|
Options
outstanding at December 31, 2005
|
8,300,053
|
$
|
2.16
|
||||
|
Options
exercisable at December 31, 2003
|
2,672,447
|
$
|
2.21
|
||||
|
Options
exercisable at December 31, 2004
|
3,710,795
|
$
|
1.79
|
||||
|
Options
exercisable at December 31, 2005
|
4,472,803
|
$
|
1.72
|
||||
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
The
net
non-cash compensation amounts for the years ended December 31, 2005, 2004
and 2003 consist of:
|
2005
|
2004
|
2003
|
||||||||
|
December
2002 warrant granted for investor relations services
|
$
|
—
|
$
|
—
|
$
|
298
|
||||
|
Acceleration
of deferred compensation charges related to certain employee
terminations
|
—
|
—
|
45
|
|||||||
|
May
2004 warrant granted for investor relations services
|
—
|
246
|
—
|
|||||||
|
Total
|
$
|
—
|
$
|
246
|
$
|
343
|
||||
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2005:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Exercise
Price
|
Number
Outstanding
|
Weighted
Average Remaining
Contractual
Life
|
Weighted
Average Exercise Price
|
Number
Outstanding
|
Weighted
Average Exercise Price
|
|||||||||||
|
$0.00-$1.00
|
3,202,270
|
6.05
|
$
|
0.58
|
2,640,520
|
$
|
0.55
|
|||||||||
|
$1.01-$2.00
|
1,171,283
|
6.44
|
1.93
|
761,283
|
1.94
|
|||||||||||
|
$2.01-$5.00
|
3,517,375
|
8.42
|
3.14
|
715,625
|
3.24
|
|||||||||||
|
$5.01-$11.00
|
409,125
|
4.29
|
6.68
|
355,375
|
6.87
|
|||||||||||
|
8,300,053
|
$
|
2.16
|
4,472,803
|
$
|
1.72
|
|||||||||||
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2004:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Exercise
Price
|
Number
Outstanding
|
Weighted
Average Remaining
Contractual
Life
|
Weighted
Average Exercise Price
|
Number
Outstanding
|
Weighted
Average Exercise Price
|
|||||||||||
|
$0.00-$1.00
|
3,708,836
|
7.04
|
$
|
0.57
|
2,188,356
|
$
|
0.53
|
|||||||||
|
$1.01-$2.00
|
1,556,689
|
7.72
|
1.93
|
706,689
|
1.92
|
|||||||||||
|
$2.01-$5.00
|
1,558,625
|
8.15
|
3.06
|
457,375
|
3.49
|
|||||||||||
|
$5.01-$11.00
|
562,125
|
6.46
|
6.46
|
358,375
|
7.05
|
|||||||||||
|
7,386,275
|
$
|
1.83
|
3,710,795
|
$
|
1.79
|
|||||||||||
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2003:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Exercise
Price
|
Number
Outstanding
|
Weighted
Average Remaining
Contractual
Life
|
Weighted
Average Exercise Price
|
Number
Outstanding
|
Weighted
Average Exercise Price
|
|||||||||||
|
$0.00-$1.00
|
4,008,311
|
7.88
|
$
|
0.58
|
1,248,851
|
$
|
0.55
|
|||||||||
|
$1.01-$2.00
|
700,189
|
5.00
|
1.88
|
660,002
|
1.93
|
|||||||||||
|
$2.01-$5.00
|
637,375
|
7.08
|
3.29
|
415,875
|
3.58
|
|||||||||||
|
$5.01-$11.00
|
377,125
|
6.36
|
6.96
|
347,719
|
7.05
|
|||||||||||
|
5,723,000
|
1.46
|
2,672,447
|
$
|
2.21
|
||||||||||||
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
| (6) |
Restructuring
and Impairment Charges
|
In
the
first quarter of 2001, following a review of the Company’s business in
connection with its acquisition of HumanClick, the Company commenced
restructuring initiatives to streamline its operations, including the
consolidation of its two San Francisco Bay area offices. The restructuring
resulted in a reduction of the Company’s workforce by approximately 90 people as
of the end of the first quarter of 2001. In the first quarter of 2001, the
Company recorded a charge of $3,391 for severance and other expenses related
to
the restructuring.
In
the
third quarter of 2001, in a continued effort to streamline its operations,
the
Company initiated additional restructuring initiatives. These initiatives
resulted in the elimination of redundant staff positions, the consolidation
of
all clients onto a single application platform and the decision to relocate
its
principal executive offices, which included the termination of an office
space
lease. These initiatives resulted in a reduction of the Company’s workforce by
approximately 20 people, the write-off of impaired computer equipment and
software and the write-off of certain furniture, equipment and building
improvements. In the third quarter of 2001, the Company recorded a charge
of
$9,232 for severance and other expenses related to the additional
restructuring.
As
a
result of the various restructuring initiatives, for the year ended
December 31, 2001, the Company recorded restructuring and impairment
charges of approximately $12,740, in the aggregate. In addition, for the
year
ended December 31, 2001, the Company also recognized a net non-cash
compensation credit in the amount of approximately $1,720 associated with
LivePerson employees who were terminated as part of the Company’s restructuring
initiatives in the first quarter of 2001. The net non-cash compensation credit
of $1,720 for the year ended December 31, 2001 represents the reversal of
$3,228 of previously recognized amortization of deferred compensation related
to
options of employees which did not vest due to their termination of employment
in connection with the Company’s restructuring initiatives, offset by the
acceleration of vesting of certain other employee options of $1,508 also
in
connection with the restructuring initiatives. Approximately $446 of the
$1,508
represents additional compensation related to the intrinsic value of options
at
the date of modification recorded during the first quarter of 2001.
The
balance of the accrued restructuring charges as of December 31, 2003 is as
follows:
|
Balance
as of
January
1, 2003
|
Provision
for
the
year ended
December
31, 2003
|
Net
(utilization)
reversals
during
the
year ended
December
31, 2003
|
Balance
as of
December
31, 2003
|
||||||||||
|
Contract
terminations (a)
|
$
|
615
|
$
|
1,024
|
$
|
(1,639
|
)
|
$
|
—
|
||||
|
Total
|
$
|
615
|
$
|
1,024
|
$
|
(1,639
|
)
|
$
|
—
|
||||
| (a) |
In
the second quarter of 2003, the Company recorded an additional
restructuring charge of approximately $1,024 related to its 2001
restructuring initiatives. This charge reflected the amount of
the
judgment in a previously disclosed arbitration proceeding in excess
of the
$350 provision initially provided for in connection with the Company’s
original restructuring plan in
2001.
|
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
|
(7)
|
Valuation
and Qualifying Accounts
|
|
Balance
at
Beginning
of
Period
|
Additions
Charged
to
Costs
and
Expenses
|
Deductions/
Write-offs
|
Balance
at
End
of
Period
|
||||||||||
|
For
the year ended December 31, 2005
Allowance
for doubtful accounts
|
$
|
54
|
$
|
30
|
$
|
(17
|
)
|
$
|
67
|
||||
|
For
the year ended December 31, 2004
Allowance
for doubtful accounts
|
$
|
64
|
$
|
30
|
$
|
(40
|
)
|
$
|
54
|
||||
|
For
the year ended December 31, 2003
Allowance
for doubtful accounts
|
$
|
70
|
$
|
15
|
$
|
(21
|
)
|
$
|
64
|
||||
|
(8)
|
Income
Taxes
|
Income
taxes are accounted for under the asset and liability method. Under this
method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets
and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to
be
recovered or settled. 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 not 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 are expected to become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies
in
making this assessment.
Under
Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s use
of its federal net operating loss (“NOL”) carryforwards may be limited if the
Company has experienced an ownership change, as defined in Section 382. The
Company completed its previously disclosed Section 382 analysis during 2004
and
determined that an ownership change had occurred as of December 7, 2001.
As a
result, there is a material limitation on the Company’s use of its federal NOL
carryforwards. As of December 31, 2005 and 2004, the Company had
approximately $7,955 and $9,341, respectively, of federal NOL carryforwards
available to offset future taxable income after considering the Section 382
limitation. Because certain deductions may be taken during the five year
recognition period following the date of the ownership change, additional
limitations may apply. These carryforwards expire in various years through
2023.
In
order
to fully realize the deferred tax assets, the Company will need to generate
future taxable income of approximately $21,000 prior to the expiration of
the
NOL carryforwards in 2023. If the entire deferred tax asset at December 31,
2005
is realized, approximately $2,687 will be allocated to Additional paid-in
capital with the remainder reducing income tax expense. Based upon the level
of
historical taxable losses and after considering projections for future taxable
income over the periods in which the deferred tax assets are expected to
be
deductible, management believes it is more likely than not that the Company
will
not realize the benefits of these deductible differences at December 31,
2005. Accordingly, the Company has recorded a full valuation allowance against
its deferred tax assets. Management will continue to assess the valuation
allowance. To the extent it is determined that a valuation allowance is no
longer required with respect to certain deferred tax assets, the tax benefit,
if
any, of such deferred tax assets will be recognized in the future.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
Income
taxes relating to the Company’s operations are as follows:
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Current
incomes taxes:
|
||||||||||
|
U.S.
Federal
|
$
|
675
|
$
|
58
|
$
|
—
|
||||
|
State
and local
|
—
|
—
|
—
|
|||||||
|
Foreign
|
—
|
—
|
—
|
|||||||
|
Total
current income taxes
|
$
|
675
|
$
|
58
|
$
|
—
|
||||
The
effects of temporary differences and tax loss carryforwards that give rise
to
significant portions of federal deferred tax assets and deferred tax liabilities
at December 31, 2005 and 2004 are presented below:
|
2005
|
2004
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Net
operating loss carryforwards
|
$
|
3,500
|
$
|
4,017
|
|||
|
Accounts
payable and accrued expenses
|
90
|
13
|
|||||
|
Deferred
revenue
|
—
|
396
|
|||||
|
Non-cash
compensation
|
2,059
|
2,012
|
|||||
|
Goodwill
and intangibles amortization
|
3,431
|
3,585
|
|||||
|
Allowance
for doubtful accounts
|
30
|
23
|
|||||
|
Other
|
76
|
58
|
|||||
|
Gross
deferred tax assets
|
9,186
|
10,104
|
|||||
|
Less:
valuation allowance
|
(9,163
|
)
|
(10,030
|
)
|
|||
|
Net
deferred tax assets
|
23
|
74
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Plant
and equipment, principally due to differences in
depreciation
|
(23
|
)
|
(74
|
)
|
|||
|
Gross
deferred tax liabilities
|
(23
|
)
|
(74
|
)
|
|||
|
Net
deferred taxes
|
$
|
—
|
$
|
—
|
|||
The
difference between the statutory federal income tax rate and the Company’s
effective tax rate is principally due to the release of the valuation allowance
related to the utilization of federal and state net operating loss carryforwards
generated as a result of the Company incurring net operating losses for which
no
tax benefit was recorded for the years ending December 31, 2005 and December
31,
2004, respectively. Because a portion of the federal and state net operating
losses are related to the exercise of employee stock options, the resulting
tax
benefit is recorded as an increase in Additional paid-in capital and not
a
reduction in income tax expense for the year ended December 31,
2005.
|
(9)
|
Commitments
and Contingencies
|
The
Company leases facilities and certain equipment under agreements accounted
for
as operating leases. These leases generally require the Company to pay all
executory costs such as maintenance and insurance. Rental expense for operating
leases for the years ending December 31, 2005, 2004 and 2003 was
approximately $658, $502 and $430, respectively.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
In
October 2004, the Company modified the existing lease for its principal
executive offices in New York City. The modification included the extension
of
the term of the current lease to October 2007 as well as the addition of
new
space.
Future
minimum lease payments under non-cancelable operating leases (with an initial
or
remaining lease terms in excess of one year) are as follows:
|
Year
ending December 31,
|
Operating
Leases
|
|||
|
2006
|
$
|
679
|
||
|
2007
|
474
|
|||
|
2008
|
72
|
|||
|
Thereafter
|
—
|
|||
|
Total
minimum lease payments
|
$
|
1,225
|
||
|
(10)
|
Legal
Matters
|
In
September 2005, the Company received written notification from a former employee
alleging claims related to improper termination of employment. The Company
believes the claims are without merit, and, in the event this matter proceeds
further, the Company intends to vigorously defend against any such claims.
The
Company has not accrued for this contingency as of December 31, 2005,
because the amount of loss, if any, cannot be reasonably estimated at this
time.
The
Company is not currently party to any legal proceedings. From time to time,
the
Company may be subject to various claims and legal actions arising in the
ordinary course of business.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
| (11) |
Unaudited
Supplementary Financial Information - Quarterly Results of
Operations
|
The
following table sets forth, for the periods indicated, the Company’s financial
information for the eight most recent quarters ended December 31, 2005. In
the
Company’s opinion, this unaudited information has been prepared on a basis
consistent with the annual consolidated financial statements and includes
all
adjustments, consisting only of normal recurring adjustments, necessary for
a
fair presentation of the unaudited information for the periods presented.
This
information should be read in conjunction with the consolidated financial
statements, including the related notes, included herein.
|
Quarter
Ended
|
|||||||||||||||||||||||||
|
Dec.
31,
2005
|
Sept.
30,
2005
|
June
30,
2005
|
Mar.
31,
2005
|
Dec.
31,
2004
|
Sept.
30,
2004
|
June
30,
2004
|
Mar.
31,
2004
|
||||||||||||||||||
|
Revenue
|
$
|
6,316
|
$
|
5,724
|
$
|
5,283
|
$
|
4,954
|
$
|
4,596
|
$
|
4,381
|
$
|
4,342
|
$
|
4,073
|
|||||||||
|
Operating
expenses:
|
|||||||||||||||||||||||||
|
Cost
of revenue
|
1,300
|
1,114
|
1,019
|
863
|
771
|
730
|
694
|
693
|
|||||||||||||||||
|
Product
development
|
672
|
663
|
688
|
675
|
530
|
515
|
516
|
439
|
|||||||||||||||||
|
Sales
and marketing
|
2,086
|
1,715
|
1,690
|
1,485
|
1,462
|
1,327
|
1,240
|
1,154
|
|||||||||||||||||
|
General
and administrative
|
1,058
|
1,034
|
1,096
|
1,271
|
1,325
|
1,222
|
988
|
921
|
|||||||||||||||||
|
Amortization
of intangibles
|
232
|
232
|
232
|
235
|
230
|
204
|
179
|
179
|
|||||||||||||||||
|
Total
operating expenses
|
5,348
|
4,758
|
4,725
|
4,529
|
4,318
|
3,998
|
3,617
|
3,386
|
|||||||||||||||||
|
Income
from operations
|
968
|
966
|
558
|
425
|
278
|
383
|
725
|
687
|
|||||||||||||||||
|
Other
income (expense), net:
|
|||||||||||||||||||||||||
|
Interest
income
|
117
|
81
|
59
|
43
|
36
|
18
|
11
|
12
|
|||||||||||||||||
|
Total
other income, net
|
117
|
81
|
59
|
43
|
36
|
18
|
11
|
12
|
|||||||||||||||||
|
Income
before (benefit from) provision for income taxes
|
1,085
|
1,047
|
617
|
468
|
314
|
401
|
736
|
699
|
|||||||||||||||||
|
(Benefit
from) provision for income taxes
|
(63
|
)
|
358
|
216
|
164
|
—
|
25
|
33
|
—
|
||||||||||||||||
|
Net
income
|
$
|
1,148
|
$
|
689
|
$
|
401
|
$
|
304
|
$
|
314
|
$
|
376
|
$
|
703
|
$
|
699
|
|||||||||
|
Basic
net income per common share
|
$
|
0.03
|
$
|
0.02
|
$
|
0.01
|
$
|
0.01
|
$
|
0.01
|
$
|
0.01
|
$
|
0.02
|
$
|
0.02
|
|||||||||
|
Diluted
net income per common share
|
$
|
0.03
|
$
|
0.02
|
$
|
0.01
|
$
|
0.01
|
$
|
0.01
|
$
|
0.01
|
$
|
0.02
|
$
|
0.02
|
|||||||||
|
Weighted
average shares outstanding used in basic net income per common
share
calculation
|
37,750,875
|
37,555,696
|
37,487,015
|
37,433,446
|
37,370,093
|
37,336,792
|
37,318,804
|
37,010,432
|
|||||||||||||||||
|
Weighted
average shares outstanding used in diluted net income per common
share
calculation
|
40,616,738
|
39,839,001
|
39,400,983
|
39,448,922
|
39,410,072
|
39,294,832
|
39,590,800
|
39,385,526
|
|||||||||||||||||
The
Company’s provision for income taxes decreased by $443 in the last quarter of
2005. This decrease was due to a reduction in the Company’s effective rate
in the fourth quarter of 2005 as the result of a change in accounting method
for
income tax purposes.
None.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as that term is defined in Rule 13a-15(f)
promulgated under the Exchange Act. Our management, including the Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of
our internal control over financial reporting as of December 31, 2005 based
on the framework established in “Internal Control—Integrated Framework,” issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, our management concluded that our internal control
over financial reporting was effective as of December 31,
2005.
Our
management’s assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005 has been audited by BDO
Seidman, LLP, an independent registered public accounting firm, as stated in
that firm’s report, which is included herein.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2005 identified in connection with the
evaluation thereof by our management, including the Chief Executive Officer
and
Chief Financial Officer, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
Evaluation
of Disclosure Controls and Procedures
Our
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our “disclosure controls and procedures,” as that
term is defined in Rule 13a-15(e) promulgated under the Exchange Act, as of
December 31, 2005. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2005 to ensure that the
information we are required to disclose in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission’s rules and
forms, and to ensure that such information is accumulated and communicated
to
our management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders
LivePerson,
Inc.
We
have
audited management’s assessment, included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting, that LivePerson,
Inc. and subsidiaries (the “Company”) maintained effective internal control over
financial reporting as of December 31, 2005, based on the criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the criteria established in Internal
Control—Integrated Framework issued by COSO. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria established in Internal
Control—Integrated Framework issued by COSO.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of the
Company as of December 31, 2005 and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the year then ended and our
report dated March 10, 2006 expressed an unqualified opinion.
/s/
BDO
Seidman, LLP
New York,
New York
March
10,
2006
None.
The
information required by this Item 10 is incorporated by reference from
sections captioned “Election of Directors,” “Executive Officers,” “Section 16(a)
Beneficial Ownership Reporting Compliance” and “Corporate Governance Documents”
from the definitive proxy statement for our 2006 Annual Meeting of Stockholders,
to be filed not later than April 28, 2006.
The
information required by this Item 11 is incorporated by reference from the
sections captioned “Executive Compensation and Other Information” and “Director
Compensation” from the definitive proxy statement for our 2006 Annual Meeting of
Stockholders, to be filed not later than April 28, 2006.
The
information required by this Item 12 with respect to the security ownership
of certain beneficial owners and management is incorporated by reference from
the section captioned “Ownership of Securities” from the definitive proxy
statement for our 2006 Annual Meeting of Stockholders, to be filed not later
than April 28, 2006.
The
following table provides certain information regarding the common stock
authorized for issuance under our equity compensation plans, as of
December 31, 2005.
|
Plan
Category
|
Number
of Securities to be Issued Upon
Exercise
of Outstanding
Options,
Warrants and Rights
(a)
|
Weighted-Average
Exercise
Price of Outstanding Options, Warrants and Rights
(b)
|
Number
of Securities Remaining Available for Future
Issuance
Under
Equity
Compensation
Plans (3)
(c)
|
|||||||
|
Equity
compensation plans approved by stockholders (1)
|
8,363,803
|
$
|
2.16
|
4,564,330
|
||||||
|
Equity
compensation plans not approved by stockholders (2)
|
124,500
|
$
|
0.69
|
—
|
||||||
|
Total
|
8,488,303
|
$
|
2.14
|
4,564,330
|
||||||
| (1) |
Our
equity compensation plans which were approved by our stockholders
are the
2000 Stock Incentive Plan, as amended and restated, and the Employee
Stock
Purchase Plan.
|
| (2) |
On
December 11, 2002, we issued a warrant to purchase 150,000 shares
of
common stock at $0.69 per share to Genesis Select Corp. in exchange
for
investor relations services. Because approval was not required at
the
time, our stockholders did not approve the issuance of the
warrant.
|
| (3) |
Excludes
securities reflected in column (a). The number of shares of common
stock
available for issuance under the 2000 Stock Incentive Plan automatically
increases on the first trading day in each calendar year by an amount
equal to three percent (3%) of the total number of shares of our
common
stock outstanding on the last trading day of the immediately preceding
calendar year, but in no event shall such annual increase exceed
1,500,000
shares. The number of shares of common stock available for issuance
under
our Employee Stock Purchase Plan automatically increases on the first
trading day in each calendar year by an amount equal to one-half
of one
percent (0.5%) of the total number of shares of our common stock
outstanding on the last trading day of the immediately preceding
calendar
year, but in no event shall such annual increase exceed 150,000 shares.
Effective October 2001, we suspended our Employee Stock Purchase
Plan
until further notice. Also see Note 5 to our consolidated financial
statements.
|
The
information required by this Item 13 is incorporated by reference from the
section captioned “Certain Relationships and Related Transactions” from the
definitive proxy statement for our 2006 Annual Meeting of Stockholders, to
be
filed not later than April 28, 2006.
The
information required by this Item 14 is incorporated by reference from the
section captioned “Ratification of Independent Registered Public Accounting
Firm” from the definitive proxy statement for our 2006 Annual Meeting of
Stockholders, to be filed not later than April 28, 2006.
The
following documents are filed as part of this Annual Report on Form
10-K:
| 1. |
Financial
Statements.
|
Incorporated
by reference to the index of consolidated financial statements included in
Item
8 of this Annual Report on Form 10-K.
| 2. |
Financial
Statement Schedules.
|
None.
| 3. |
Exhibits.
|
Incorporated
by reference to the Exhibit Index immediately preceding the exhibits attached
to
this Annual Report on Form 10-K.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on
its
behalf by the undersigned, thereunto duly authorized, on March 15,
2006.
| LIVEPERSON, INC. | ||
| |
|
|
| By: | /s/ ROBERT P. LOCASCIO | |
|
|
||
|
Name:
Robert P. LoCascio
Title:
Chief Executive Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 15, 2006.
|
Signature
|
Title(s)
|
|
|
/s/
ROBERT P. LOCASCIO
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
|
|
Robert
P. LoCascio
|
(principal executive officer) | |
|
/s/
TIMOTHY E. BIXBY
|
President,
Chief Financial Officer, Secretary and Director
|
|
|
Timothy
E. Bixby
|
(principal financial and accounting officer) | |
|
|
||
|
/s/
STEVEN BERNS
|
Director
|
|
|
Steven
Berns
|
||
|
/s/
EMMANUEL GILL
|
Director
|
|
|
Emmanuel
Gill
|
||
|
/s/
KEVIN C. LAVAN
|
Director
|
|
|
Kevin
C. Lavan
|
||
|
/s/
WILLIAM G. WESEMANN
|
Director
|
|
|
William
G. Wesemann
|
EXHIBIT INDEX
|
Number
|
Description
|
|
|
2.1
|
Stock
Purchase Agreement, dated as of October 12, 2000, among LivePerson,
HumanClick Ltd. and the shareholders of HumanClick Ltd. named in
Schedule
I thereto (incorporated by reference to Exhibit 2 to LivePerson’s Current
Report on Form 8-K, dated October 12, 2000 and filed October 19,
2000)
|
|
|
3.1
|
Fourth
Amended and Restated Certificate of Incorporation (incorporated by
reference to the identically-numbered exhibit to LivePerson’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 and
filed March 30, 2001 (the “2000 Form 10-K”))
|
|
|
3.2
|
Second
Amended and Restated Bylaws, as amended (incorporated by reference
to the
identically-numbered exhibit to the 2000 Form 10-K)
|
|
|
4.1
|
Specimen
common stock certificate (incorporated by reference to the
identically-numbered exhibit to LivePerson’s Registration Statement on
Form S-1, as amended (Registration No. 333-96689) (“Registration
No. 333-96689”))
|
|
|
4.2
|
Second
Amended and Restated Registration Rights Agreement, dated as of
January 27, 2000, by and among LivePerson, the several persons and
entities named on the signature pages thereto as Investors, and Robert
LoCascio (incorporated by reference to the identically-numbered exhibit
to
Registration No. 333-96689)
|
|
|
4.3
|
See
Exhibits 3.1 and 3.2 for further provisions defining the rights of
holders
of common stock of LivePerson
|
|
|
10.1
|
Employment
Agreement between LivePerson and Robert P. LoCascio, dated as of
January 1, 1999 (incorporated by reference to the
identically-numbered exhibit to Registration
No. 333-96689)*
|
|
|
10.2
|
Employment
Agreement between LivePerson and Timothy E. Bixby, dated as of June
23,
1999 (incorporated by reference to Exhibit 10.3 to Registration
No. 333-96689)*
|
|
|
10.2.1
|
Modification
to Employment Agreement between LivePerson, Inc. and Timothy E. Bixby,
dated as of April 1, 2003 (incorporated by reference to the
identically-numbered exhibit to LivePerson’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003 and filed August 13,
2003)*
|
|
|
10.3
|
Amended
and Restated 2000 Stock Incentive Plan, amended as of April 21, 2005
(incorporated by reference to the identically-numbered exhibit to
LivePerson’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2005 and filed August 8, 2005)*
|
|
|
10.4
|
Employee
Stock Purchase Plan (incorporated by reference to the identically-numbered
exhibit to the 2000 Form 10-K)*
|
|
|
21.1
|
Subsidiaries
(incorporated by reference to the identically-numbered exhibit to
the 2000
Form 10-K)
|
|
|
23.1
|
Consent
of BDO Seidman, LLP
|
|
|
23.2
|
Consent
of KPMG LLP
|
|
|
31.1
|
Certification
by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
31.2
|
Certification
by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
32.1
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2
|
Certification
by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
| * |
Management
contract or compensatory plan or
arrangement
|
-70-