Annual Statements Open main menu

LIVEPERSON INC - Quarter Report: 2005 September (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended SEPTEMBER 30, 2005
 
or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the transition period from ____________________ to ____________________
 
Commission file number: 0-30141
 
LIVEPERSON, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
 
13-3861628
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer Identification No.)

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)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x No o
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
 
Yes x No 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
 
As of November 2, 2005, there were 37,589,595 shares of the issuer’s common stock outstanding.
 

 
 
 
 

 


LIVEPERSON, INC.
SEPTEMBER 30, 2005
FORM 10-Q
INDEX
   
 
PAGE
4
   
4
   
4
   
5
   
6
   
7
   
13
   
30
   
30
   
31
   
31
   
31
   


 
-2-

 

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 THE SECTION CAPTIONED “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—RISK FACTORS THAT MAY AFFECT FUTURE RESULTS.”


 
-3-

 

PART I. FINANCIAL INFORMATION
 
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
LIVEPERSON, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
           
   
September 30, 2005
 
December 31, 2004
 
   
(Unaudited)
 
(Note 1(B))
 
ASSETS
         
Current assets:
         
Cash and cash equivalents
 
$
15,242
 
$
12,425
 
Accounts receivable, net of allowances for doubtful accounts of $84 and $54 as of September 30, 2005 and December 31, 2004, respectively
   
1,482
   
1,641
 
Prepaid expenses and other current assets
   
567
   
475
 
Total current assets
   
17,291
   
14,541
 
Property and equipment, net
   
509
   
384
 
Intangibles, net
   
1,022
   
1,721
 
Security deposits
   
170
   
166
 
Other assets
   
404
   
338
 
Total assets
 
$
19,396
 
$
17,150
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Current liabilities:
             
Accounts payable
 
$
158
 
$
262
 
Accrued expenses
   
1,375
   
1,666
 
Deferred revenue
   
1,701
   
1,330
 
Total current liabilities
   
3,234
   
3,258
 
Other liabilities
   
404
   
338
 
               
Commitments and contingencies
             
Stockholders’ equity:
             
Preferred stock, $.001 par value per share; 5,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2005 and December 31, 2004
   
   
 
Common stock, $.001 par value per share; 100,000,000 shares authorized, 37,589,595 shares issued and outstanding at September 30, 2005 and 37,380,732 shares issued and outstanding at December 31, 2004
   
38
   
37
 
Additional paid-in capital
   
118,249
   
117,440
 
Accumulated deficit
   
(102,529
)
 
(103,923
)
Total stockholders’ equity
   
15,758
   
13,554
 
Total liabilities and stockholders’ equity
 
$
19,396
 
$
17,150
 
               
               
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
 

 
-4-

 

LIVEPERSON, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
UNAUDITED
           
   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2005
 
2004
 
2005
 
2004
 
Revenue
 
$
5,724
 
$
4,381
 
$
15,960
 
$
12,796
 
Operating expenses:
                         
Cost of revenue
   
1,114
   
730
   
2,997
   
2,116
 
Product development expense
   
663
   
515
   
2,027
   
1,470
 
Sales and marketing expense
   
1,715
   
1,327
   
4,889
   
3,721
 
General and administrative expense
   
1,034
   
1,222
   
3,400
   
3,131
 
Amortization of intangibles
   
232
   
204
   
699
   
563
 
Total operating expenses
   
4,758
   
3,998
   
14,012
   
11,001
 
Income from operations
   
966
   
383
   
1,948
   
1,795
 
Other income:
                         
Interest income
   
81
   
18
   
184
   
41
 
Total other income
   
81
   
18
   
184
   
41
 
Income before provision for income taxes
   
1,047
   
401
   
2,132
   
1,836
 
Provision for income taxes
   
358
   
25
   
738
   
58
 
Net income
 
$
689
 
$
376
 
$
1,394
 
$
1,778
 
Basic net income per common share
 
$
0.02
 
$
0.01
 
$
0.04
 
$
0.05
 
Diluted net income per common share
 
$
0.02
 
$
0.01
 
$
0.04
 
$
0.04
 
Weighted average shares outstanding used in basic net income per common share calculation
   
37,555,696
   
37,336,792
   
37,492,285
   
37,222,428
 
Weighted average shares outstanding used in diluted net income per common share calculation
   
39,839,001
   
39,294,832
   
39,528,089
   
39,535,593
 
                           
                           
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.

 
-5-

 
 
LIVEPERSON, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
       
   
Nine Months Ended
September 30,
 
   
2005
 
2004
 
CASH FLOWS FROM OPERATING ACTIVITIES:
         
Net income
 
$
1,394
 
$
1,778
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Non-cash compensation expense
   
--
   
187
 
Depreciation
   
115
   
172
 
Amortization of intangibles
   
699
   
563
 
Deferred income taxes
   
697
   
--
 
Provision for doubtful accounts, net
   
30
   
15
 
               
CHANGES IN OPERATING ASSETS AND LIABILITIES:
             
Accounts receivable
   
129
   
33
 
Prepaid expenses and other current assets
   
(92
)
 
(200
)
Security deposits
   
(4
)
 
(8
)
Accounts payable
   
(104
)
 
168
 
Accrued expenses
   
(291
)
 
(713
)
Deferred revenue
   
371
   
(222
)
Other assets and other liabilities, net
   
--
   
19
 
Net cash provided by operating activities
   
2,944
   
1,792
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
             
Purchases of property and equipment, including capitalized software
   
(240
)
 
(293
)
Acquisition costs
   
--
   
(206
)
Net cash used in investing activities
   
(240
)
 
(499
)
               
CASH FLOWS FROM FINANCING ACTIVITIES:
             
Proceeds from issuance of common stock in connection with the exercise of options
   
113
   
96
 
Net cash provided by financing activities
   
113
   
96
 
Net increase in cash and cash equivalents
   
2,817
   
1,389
 
Cash and cash equivalents at the beginning of the period
   
12,425
   
10,898
 
Cash and cash equivalents at the end of the period
 
$
15,242
 
$
12,287
 

Supplemental Disclosures:
         
Cash paid during the period for:
         
Income taxes
 
$
18
 
$
51
 

Supplemental Disclosure of Non-cash Investing Activities:

During the nine months ended September 30, 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 UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.

 

 
-6-

 

LIVEPERSON, INC.
 
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 hosted software solutions for online communications. LivePerson’s fully-integrated multi-channel communications platform, Timpani, enables companies to monitor website traffic, to identify likely buyers based on online behavior and to proactively engage those visitors primarily via text-based chat. The Company’s technology supports and manages key online interaction channels—chat, email and self-service/knowledgebase.
 
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)
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 
The accompanying interim condensed consolidated financial statements as of September 30, 2005 and for the three and nine months ended September 30, 2005 and 2004 are unaudited. In the opinion of management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the consolidated financial position of LivePerson as of September 30, 2005, and the consolidated results of operations and cash flows for the interim periods ended September 30, 2005 and 2004. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to these periods are unaudited. The results of operations for any interim period are not necessarily indicative of the results of operations for any other future interim period or for a full fiscal year. The condensed consolidated balance sheet at December 31, 2004 has been derived from audited consolidated financial statements at that date.
 
Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2004, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2005, as amended on May 2, 2005.
 
(C)
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 $0 and $1 in the three and nine months ended September 30, 2005, respectively, and $0 and $2 in the three and nine months ended September 30, 2004, respectively.
 
 
-7-

 
 
The Company also sells certain of the LivePerson services directly via Internet download. These services are marketed as Timpani SB for small- and medium-sized businesses, 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 Timpani SB 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.
 
(D)
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. Statement of Financial Accounting Standards (“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 the three and nine months ended September 30, 2005 and 2004 would have decreased to the pro forma amounts presented below. The Company did not have any employee stock options outstanding prior to January 1, 1998.
 

 
-8-

 
 
   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2005
 
2004
 
2005
 
2004
 
Net income as reported
 
$
689
 
$
376
 
$
1,394
 
$
1,778
 
Deduct: Pro forma stock-based compensation cost
 
$
(493
)
$
(304
)
$
(1,501
)
$
(943
)
Pro forma net income (loss)
 
$
196
 
$
72
 
$
(107
)
$
835
 
Basic net income (loss) per common share:
                         
As reported
 
$
0.02
 
$
0.01
 
$
0.04
 
$
0.05
 
Pro forma
 
$
0.01
 
$
0.00
 
$
(0.00
)
$
0.02
 
Diluted net income (loss) per common share:
                         
As reported
 
$
0.02
 
$
0.01
 
$
0.04
 
$
0.04
 
Pro forma
 
$
0.00
 
$
0.00
 
$
(0.00
)
$
0.02
 
 
The per share weighted average fair value of stock options granted during the three months ended September 30, 2005 and 2004, was $2.19 and $2.47, 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 and 2004: dividend yield of zero percent for all periods; risk-free interest rates of 4.6% and 4.6%, respectively; and expected life of five years for all periods. During 2005 and 2004, the Company used a volatility factor of 84.0% and 91.0%, respectively.
 
(E)
BASIC AND DILUTED NET INCOME 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 SEC Staff Accounting Bulletin 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 attributable to common stockholders. The Company has included 17,339 shares of common stock in the calculation of basic and diluted net income 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 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 income per common share for the three and nine month periods ended September 30, 2005 includes the effect of options to purchase 7,604,597 and 6,225,597 shares of common stock with a weighted average exercise price of $1.58 and $1.27, respectively, and warrants to purchase 127,802 shares of common stock with a weighted average exercise price of $0.69. Diluted net income per common share for the three and nine month periods ended September 30, 2005 does not include the effect of options to purchase 1,046,000 and 2,425,000 shares of common stock, respectively, or warrants to purchase 75,000 shares of common stock. Diluted net income per common share for the three and nine month periods ended September 30, 2004 includes the effect of options to purchase 5,349,650 and 5,702,150 shares of common stock with a weighted average exercise price of $1.06 and $1.20, respectively, and warrants to purchase 202,802 shares of common stock with a weighted average exercise price of $1.64. Diluted net income per common share for the three and nine month periods ended September 30, 2004 does not include the effect of options to purchase 1,296,500 and 944,000 shares of common stock, respectively.
 
(F)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
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 expects to 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(D) for pro forma disclosure assuming a fair value based method of accounting for stock-based awards.
 
 
-9-

 
 
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 the Company for nonmonetary asset exchanges occurring on or after January 1, 2006.
 
(2)
BALANCE SHEET COMPONENTS
 
Property and equipment is summarized as follows:
 
   
September 30, 2005
 
December 31, 2004
 
   
(Unaudited)
     
           
Computer equipment and software
 
$
1,819
 
$
1,712
 
Furniture, equipment and building improvements
   
177
   
44
 
     
1,996
   
1,756
 
Less accumulated depreciation
   
1,487
   
1,372
 
Total
 
$
509
 
$
384
 

Accrued expenses consist of the following:
 
   
September 30, 2005
 
December 31, 2004
 
   
(Unaudited)
     
           
Payroll and related costs
 
$
808
 
$
1,102
 
Professional services and consulting fees
   
401
   
448
 
Sales commissions
   
97
   
90
 
Other
   
69
   
26
 
Total
 
$
1,375
 
$
1,666
 
 
(3)
ASSET ACQUISITIONS
 
In December 2003, the Company acquired certain identifiable assets of Island Data Corporation (“Island Data”). 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 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 will be 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 will be amortized over a period of 36 months, representing the current estimate of the term of the acquired client relationships. The net acquisition costs of $864 and $1,401 are included in “Assets - Intangibles, net” on the Company’s September 30, 2005 and December 31, 2004 balance sheets, respectively.
 
 
-10-

 
 
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 will be 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 $158 and $320 are included in “Assets - Intangibles, net” on the Company’s September 30, 2005 and December 31, 2004 balance sheets, respectively.
 
(4)
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. 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. 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. 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.
 
As of December 31, 2004, the Company had approximately $9,341 of federal net operating loss (“NOL”) carryforwards available to offset future taxable income. These NOL carryforwards expire in various years through 2023. Because a significant portion of the carryforwards is attributable to tax deductions related to the exercise of employee stock options in excess of deductions recognized for financial reporting purposes, the tax benefit must be allocated to Additional paid-in capital with the remainder reducing income tax expense. Accordingly, the Company recorded income tax expense for the three and nine months ended September 30, 2005 of $358 and $738, respectively, with corresponding increases in Additional paid-in capital of $344 and $697, respectively. The difference between the amounts recorded as income tax expense and the increases in Additional paid-in capital are due to the impact of the federal alternative minimum tax. The Company recorded income tax expense of $25 and $58 in the three and nine months ended September 30, 2004, respectively, because it had sufficient NOL carryforwards to offset taxable income.
 
The difference between the statutory federal income tax rate and the Company’s effective tax rate for the three and nine months ended September 30, 2005 and 2004, is due principally to the release of the valuation allowance related to the utilization of federal and state net operating loss carryforwards.
 
(5)
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 three and nine months ended September 30, 2005 was approximately $173 and $483, respectively, and approximately $128 and $362 for the three and nine months ended September 30, 2004, respectively.
 
 
-11-

 
 
(6)
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 September 30, 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.
 
 
 
-12-

 
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
GENERAL
 
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited interim condensed 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 hosted software solutions for online communications. Our fully-integrated multi-channel communications platform, Timpani, enables companies to monitor website traffic, to identify likely buyers based on online behavior and to proactively engage those visitors primarily via text-based chat. Our technology supports and manages key online interaction channels - chat, email and self-service/knowledgebase.
 
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 $0 and $1,000 in the three and nine months ended September 30, 2005, respectively, and $0 and $2,000 in the three and nine months ended September 30, 2004, respectively.
 
We also sell certain of the LivePerson services directly via Internet download. These services are marketed as Timpani SB for small- and medium-sized businesses, 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 Timpani SB 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.
 
 
-13-

 
 
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 the three and nine months ended September 30, 2005 and 2004. One customer accounted for approximately 12% of accounts receivable at September 30, 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.
 
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
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 expect to 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. See Note 1(D), “Stock-based Compensation,” to our unaudited interim condensed 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. We are still evaluating the impact that adopting SFAS No. 153 will have on our financial position, cash flows and results of operations.
 
 
-14-

 
 
OVERVIEW
 
LivePerson is a provider of hosted software solutions for online communications. Our fully-integrated multi-channel communications platform, Timpani, enables companies to monitor website traffic, to identify likely buyers based on online behavior and to proactively engage those visitors primarily via text-based chat. Our technology supports and manages key online interaction channels - chat, email and self-service/knowledgebase.
 
We were incorporated in the State of Delaware in November 1995 and the initial LivePerson service was introduced 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 will be 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 will be amortized over a period of 36 months, representing our current estimate of the term of the acquired client relationships. The net acquisition costs of $864,000 and $1.4 million are included in “Assets - Intangibles, net” on our September 30, 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 will be 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 $158,000 and $320,000 are included in “Assets - Intangibles, net” on our September 30, 2005 and December 31, 2004 balance sheets, respectively.
 
In February 2005, we corrected an assumption in the methodology for the calculation of weighted average shares outstanding used in diluted net income (loss) per common share, which affected the weighted average shares outstanding used in diluted net income per common share in all quarterly periods in 2004. These corrections had no impact on reported diluted net income per common share in these periods because of the convention of rounding earnings per share to the nearest penny.
 
 
-15-

 
 
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% and 95% of total LivePerson services revenue for the three and nine months ended September 30, 2005, respectively, and 97% and 96% of total LivePerson services revenue for the three and nine months ended September 30, 2004, 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 days to 60 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 Timpani SB for small- and medium-sized businesses, 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 Timpani SB 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 Timpani SB 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.
 
 
-16-

 
 
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.
 
In the nine months ended September 30, 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. 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.
 
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 operating results for the three and nine months ended September 30, 2005 and 2004 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 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
 
Revenue. Total revenue increased to $5.7 million and $16.0 million in the three and nine months ended September 30, 2005, respectively, from $4.4 million and $12.8 million in the comparable periods in 2004. This increase is primarily attributable to revenue from new clients of approximately $1.2 million and $2.8 million, respectively.
 
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 to $1.1 million and $3.0 million in the three and nine months ended September 30, 2005, respectively, from $730,000 and $2.1 million in the comparable periods in 2004. This increase is attributable to increased spending for primary and backup server facilities of approximately $117,000 and $361,000, respectively, and 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 $187,000 and $386,000, respectively. As a result, the gross margin in both periods of 2005 decreased as compared to the comparable periods in 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. Product development costs increased to $663,000 and $2.0 million for the three and nine months ended September 30, 2005, respectively, from $515,000 and $1.5 million in the comparable periods in 2004. This increase is primarily attributable to costs related to additional product development personnel 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 and public relations expenses. Sales and marketing expenses increased to $1.7 million and $4.9 million in the three and nine months ended September 30, 2005, respectively, from $1.3 million and $3.7 million in the comparable periods in 2004. This increase is primarily attributable to an increase in costs related to additional sales and marketing personnel of approximately $302,000 and $566,000, respectively, and to a lesser extent, an increase in advertising and trade show expenses of approximately $312,000 in the nine months ended September 30, 2005 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.
 
 
-17-

 
 
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 decreased to $1.0 million in the three months ended September 30, 2005 from $1.2 million in the comparable period in 2004. This decrease is primarily attributable to a decrease in legal expenses of approximately $299,000 due to the settlement of a previously disclosed legal matter in 2004. General and administrative expenses increased to $3.4 million in the nine months ended September 30, 2005 from $3.1 million in the comparable period in 2004. This increase is primarily attributable to an increase in costs related to additional administrative personnel and related occupancy costs in the amount of approximately $436,000 partially offset by a decrease in accounting fees related to an audit of our internal control over financial reporting as required by the Sarbanes-Oxley Act in the amount of approximately $349,000. This decrease is due to higher costs related to documentation of our processes in 2004, the initial year of implementation, which required minimal changes in 2005.
 
Amortization of Intangibles. Amortization expense was $232,000 and $699,000 in the three and nine months ended September 30, 2005, respectively, and relates to acquisition costs recorded as a result of our acquisition of certain identifiable assets of Island Data Corporation and FaceTime in December 2003 and July 2004, respectively. Amortization expense was $204,000 and $563,000 in the three and nine months ended September 30, 2004, respectively, and relates to acquisition costs recorded as a result of our acquisition of certain identifiable assets of Island Data Corporation and FaceTime in December 2003 and July 2004, respectively.
 
Other Income. Interest income was $81,000 and $184,000 in the three and nine months ended September 30, 2005, respectively, and $18,000 and $41,000 in the comparable periods in 2004 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 $358,000 and $738,000 in the three and nine months ended September 30, 2005, respectively, and $25,000 and $58,000 in the comparable periods in 2004. This increase is due primarily to the fact that a significant portion of the remaining federal net operating loss carryforwards available to offset 2005 taxable income are attributable to tax deductions related to the exercise of employee stock options in excess of deductions recognized for financial reporting purposes.
 
Net Income. We had net income of $689,000 and $1.4 million in the three and nine months ended September 30, 2005, respectively, compared to $376,000 and $1.8 million for the comparable periods in 2004.
 
LIQUIDITY AND CAPITAL RESOURCES
 
As of September 30, 2005, we had approximately $15.2 million in cash and cash equivalents, an increase of $2.8 million from December 31, 2004. This increase is primarily attributable to net cash provided by operating activities offset in part by net cash used in investing activities. We regularly invest excess funds in short-term money market funds.
 
Net cash provided by operating activities was $2.9 million for the nine months ended September 30, 2005 and consisted primarily of net income and non-cash expenses related to the amortization of intangibles and an increase in deferred income taxes, partially offset by decreases in accrued expenses and accounts payable. Net cash provided by operating activities was $1.8 million for the nine months ended September 30, 2004 and consisted of net income and non-cash expenses related to the amortization of intangibles, non-cash compensation and depreciation offset by decreases in accrued expenses and deferred revenue and an increase in prepaid expenses.
 
 
-18-

 
 
Net cash used in investing activities was $240,000 in the nine months ended September 30, 2005 and was due primarily to the purchase of fixed assets. Net cash used in investing activities was $499,000 in the nine months ended September 30, 2004 and was due primarily to the purchase of fixed assets and the acquisition of the FaceTime customer contracts in July 2004.
 
Net cash provided by financing activities was $113,000 and $96,000 for the nine months ended September 30, 2005 and 2004, respectively, and consisted of 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 September 30, 2005, we had an accumulated deficit of approximately $102.5 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 three and nine months ended September 30, 2005 was approximately $173,000 and $483,000, respectively, and approximately $128,000 and $362,000 for the three and nine months ended September 30, 2004, respectively.
 
As of September 30, 2005, our principal commitments were approximately $1.2 million under various operating leases, of which approximately $165,000 is due in 2005. We do not currently expect that our principal commitments for the year ending December 31, 2005 will exceed $500,000 in the aggregate. Our capital expenditures are not currently expected to exceed $500,000 in 2005. Our contractual obligations at September 30, 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
 
$
1,171
 
$
165
 
$
1,006
 
$
 
$
 
Total
 
$
1,171
 
$
165
 
$
1,006
 
$
 
$
 
 
 
 
-19-

 
 
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
 
Risks Related to Our Business
 
We have a history of losses, we had an accumulated deficit of $102.5 million as of September 30, 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 a net loss 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 in the year ended December 31, 2004 and $1.4 million in the nine months ended September 30, 2005. As of September 30, 2005, our accumulated deficit was approximately $102.5 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.
 
 
-20-

 
 
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 sales 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 exist in this market, other than the ability to design and build scalable software and, with respect to outsourced solution providers, the ability to design, build and manage scalable network architecture. 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 also face competition from three customer service software providers, InstantService, Proficient Systems and RightNow Technologies, which offer hosted solutions. 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 and SAP. In addition, established technology companies, including Aspect Communications, Avaya, Genesys Telecommunications Laboratories, IBM and Microsoft, may also leverage their existing relationships and capabilities to offer real-time sales, marketing and customer service applications.
 
 
-21-

 
 
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 other 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 and customer service 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.
 
 
-22-

 
 
In addition, we rely on a third-party Web hosting service provider for Internet connectivity and network infrastructure hosting, security and maintenance. The provider has, 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 provider 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. We increased our allowance for doubtful accounts by $30,000 to approximately $84,000 in the nine months ended September 30, 2005, principally due to an increase in accounts receivable as a result of increased sales. During the year ended December 31, 2004, we increased our allowance for doubtful accounts by $30,000, 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.
 
 
-23-

 
 
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 expect to 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.
 
 
-24-

 
 
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 are testing an outsourced sales and marketing service provider to sell the LivePerson services in 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.
 
 
-25-

 
 
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.
 
 
-26-

 
 
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 September 30, 2005, we had 37 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.
 
 
 
-27-

 
 
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.
 
 
-28-

 
 
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 45.5% 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.
 
 
 
-29-

 
 
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.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Currency Rate Fluctuations
 
Through September 30, 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. We increased our allowance for doubtful accounts by $30,000 to approximately $84,000 in the nine months ended September 30, 2005, principally due to an increase in accounts receivable as a result of increased sales. During the year ended December 31, 2004, we increased our allowance for doubtful accounts by $30,000, 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.
 
ITEM 4.
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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2005. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 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.
 
 
-30-

 
 
There were no changes in our internal control over financial reporting during the quarter ended September 30, 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.
 
PART II. OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
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 September 30, 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.
 
ITEM 6.
EXHIBITS
 
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
 
 
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
 

 

 
-31-

 

SIGNATURES
 
Pursuant to the requirements 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.
 
     
  LIVEPERSON, INC.
 
 
 
 
 
 
Date: November 9, 2005 By:   /s/ ROBERT P. LOCASCIO
 
 
Name:   Robert P. LoCascio
Title:     Chief Executive Officer (duly authorized officer)
 
     
Date: November 9, 2005 By:   /s/ TIMOTHY E. BIXBY
 
 
Name:   Timothy E. Bixby
Title:     President, Chief Financial Officer and Secretary
              (principal financial and accounting officer)
 

 
 
-32-

 

EXHIBIT INDEX
 
 
EXHIBIT
 
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