UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 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 JUNE 30, 2009
or
¨ 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
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 ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one).
Large
accelerated filer ¨
|
|
Accelerated
filer x
|
Non-accelerated
filer ¨
|
|
Smaller
reporting company ¨
|
(Do
not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
August 3, 2009, there were 47,781,048 shares of the issuer’s common stock
outstanding.
LIVEPERSON,
INC.
JUNE
30, 2009
FORM
10-Q
INDEX
|
|
|
PAGE
|
PART I.
|
FINANCIAL
INFORMATION
|
|
4
|
|
|
|
|
ITEM 1.
|
FINANCIAL
STATEMENTS
|
|
4
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2009 (UNAUDITED) AND DECEMBER
31, 2008
|
|
4
|
|
|
|
|
|
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 2009 AND 2008
|
|
5
|
|
|
|
|
|
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
|
|
6
|
|
|
|
|
|
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
7
|
|
|
|
|
ITEM 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
20
|
|
|
|
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
|
30
|
|
|
|
|
ITEM 4.
|
CONTROLS
AND PROCEDURES
|
|
30
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|
|
|
|
PART II.
|
OTHER
INFORMATION
|
|
32
|
|
|
|
|
ITEM 1.
|
LEGAL
PROCEEDINGS
|
|
32
|
|
|
|
|
ITEM 1A.
|
RISK
FACTORS
|
|
32
|
|
|
|
|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
33
|
|
|
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
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33
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|
|
|
|
ITEM 6.
|
EXHIBITS
|
|
34
|
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 PART II, ITEM 1A, “RISK
FACTORS.”
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
LIVEPERSON,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Note 1(B))
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
31,267 |
|
|
$ |
25,500 |
|
Accounts
receivable, net of allowance for doubtful accounts of $340 as of June 30,
2009 and December 31, 2008, respectively
|
|
|
7,824 |
|
|
|
7,574 |
|
Prepaid
expenses and other current assets
|
|
|
1,719 |
|
|
|
1,706 |
|
Deferred
tax assets, net
|
|
|
1,261 |
|
|
|
1,772 |
|
Total
current assets
|
|
|
42,071 |
|
|
|
36,552 |
|
Property
and equipment, net
|
|
|
8,894 |
|
|
|
7,473 |
|
Intangibles,
net
|
|
|
3,161 |
|
|
|
4,319 |
|
Goodwill
|
|
|
23,903 |
|
|
|
24,388 |
|
Deferred
tax assets, net
|
|
|
7,544 |
|
|
|
7,330 |
|
Deferred
implementation costs
|
|
|
147 |
|
|
|
147 |
|
Security
deposits
|
|
|
323 |
|
|
|
349 |
|
Other
assets
|
|
|
1,489 |
|
|
|
1,390 |
|
Total
assets
|
|
$ |
87,532 |
|
|
$ |
81,948 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
3,625 |
|
|
$ |
3,555 |
|
Accrued
expenses
|
|
|
9,073 |
|
|
|
9,088 |
|
Deferred
revenue
|
|
|
4,143 |
|
|
|
3,985 |
|
Total
current liabilities
|
|
|
16,841 |
|
|
|
16,628 |
|
Deferred
revenue, net of current
|
|
|
409 |
|
|
|
347 |
|
Other
liabilities
|
|
|
1,489 |
|
|
|
1,390 |
|
Total
liabilities
|
|
|
18,739 |
|
|
|
18,365 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value per share; 5,000,000 shares authorized, 0 shares
issued and outstanding at June 30, 2009 and December 31,
2008
|
|
|
— |
|
|
|
— |
|
Common
stock, $.001 par value per share; 100,000,000 shares authorized,
47,691,532 shares issued and outstanding at June 30, 2009 and 47,357,017
shares issued and outstanding at December 31, 2008
|
|
|
48 |
|
|
|
47 |
|
Additional
paid-in capital
|
|
|
183,692 |
|
|
|
180,869 |
|
Accumulated
deficit
|
|
|
(114,790 |
) |
|
|
(117,195 |
) |
Accumulated
other comprehensive loss
|
|
|
(157 |
) |
|
|
(138 |
) |
Total
stockholders’ equity
|
|
|
68,793 |
|
|
|
63,583 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
87,532 |
|
|
$ |
81,948 |
|
SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS.
LIVEPERSON,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
UNAUDITED
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
20,541 |
|
|
$ |
18,588 |
|
|
$ |
40,460 |
|
|
$ |
35,673 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
5,228 |
|
|
|
5,234 |
|
|
|
9,513 |
|
|
|
10,120 |
|
Product
development
|
|
|
3,138 |
|
|
|
3,503 |
|
|
|
5,839 |
|
|
|
6,577 |
|
Sales
and marketing
|
|
|
6,908 |
|
|
|
6,443 |
|
|
|
13,412 |
|
|
|
12,241 |
|
General
and administrative
|
|
|
3,157 |
|
|
|
3,455 |
|
|
|
6,679 |
|
|
|
6,635 |
|
Amortization
of intangibles
|
|
|
272 |
|
|
|
391 |
|
|
|
544 |
|
|
|
782 |
|
Total
operating expenses
|
|
|
18,703 |
|
|
|
19,026 |
|
|
|
35,987 |
|
|
|
36,355 |
|
Income
(loss) from operations
|
|
|
1,838 |
|
|
|
(438 |
) |
|
|
4,473 |
|
|
|
(682 |
) |
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income (expense)
|
|
|
23 |
|
|
|
37 |
|
|
|
(96 |
) |
|
|
(2 |
) |
Interest
income
|
|
|
21 |
|
|
|
71 |
|
|
|
56 |
|
|
|
191 |
|
Total
other income (expense), net
|
|
|
44 |
|
|
|
108 |
|
|
|
(40 |
) |
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for (benefit from) income taxes
|
|
|
1,882 |
|
|
|
(330 |
) |
|
|
4,433 |
|
|
|
(493 |
) |
Provision
for (benefit from) income taxes
|
|
|
748 |
|
|
|
(139 |
) |
|
|
2,028 |
|
|
|
(90 |
) |
Net
income (loss)
|
|
$ |
1,134 |
|
|
$ |
(191 |
) |
|
$ |
2,405 |
|
|
$ |
(403 |
) |
Basic
net income (loss) per common share
|
|
$ |
0.02 |
|
|
$ |
(0.00 |
) |
|
$ |
0.05 |
|
|
$ |
(0.01 |
) |
Diluted
net income (loss) per common share
|
|
$ |
0.02 |
|
|
$ |
(0.00 |
) |
|
$ |
0.05 |
|
|
$ |
(0.01 |
) |
Weighted
average shares outstanding used in basic net income (loss) per common
share calculation
|
|
|
47,611,657 |
|
|
|
47,182,068 |
|
|
|
47,540,614 |
|
|
|
47,537,385 |
|
Weighted
average shares outstanding used in diluted net income (loss) per common
share calculation
|
|
|
48,650,478 |
|
|
|
47,182,068 |
|
|
|
48,301,914 |
|
|
|
47,537,385 |
|
Income
from operations for the three and six months ended June 30, 2009 includes
stock-based compensation expense related to SFAS No. 123(R) in the amount of
$1,118 and $2,279, respectively. Loss from operations for the three and six
months ended June 30, 2008 includes stock-based compensation expense related to
SFAS No. 123(R) in the amount of $1,204 and $2,164, respectively. See Note
1(E).
SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS.
LIVEPERSON,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN
THOUSANDS)
UNAUDITED
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
2,405 |
|
|
$ |
(403 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
2,279 |
|
|
|
2,164 |
|
Depreciation
|
|
|
1,627 |
|
|
|
798 |
|
Amortization
of intangibles
|
|
|
1,158 |
|
|
|
1,396 |
|
Deferred
income taxes
|
|
|
297 |
|
|
|
(251 |
) |
Provision
for doubtful accounts
|
|
|
— |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
CHANGES
IN OPERATING ASSETS AND LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(250 |
) |
|
|
(707 |
) |
Prepaid
expenses and other current assets
|
|
|
(2 |
) |
|
|
(313 |
) |
Deferred
implementation costs
|
|
|
— |
|
|
|
(52 |
) |
Security
deposits
|
|
|
26 |
|
|
|
150 |
|
Accounts
payable
|
|
|
278 |
|
|
|
1,545 |
|
Accrued
expenses
|
|
|
541 |
|
|
|
(1,656 |
) |
Deferred
revenue
|
|
|
220 |
|
|
|
865 |
|
Net
cash provided by operating activities
|
|
|
8,579 |
|
|
|
3,604 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment, including capitalized software
|
|
|
(3,259 |
) |
|
|
(2,988 |
) |
Acquisition
of Kasamba
|
|
|
— |
|
|
|
(108 |
) |
Acquisition
of Proficient
|
|
|
(81 |
) |
|
|
(104 |
) |
Net
cash used in investing activities
|
|
|
(3,340 |
) |
|
|
(3,200 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repurchase
of common stock
|
|
|
(28 |
) |
|
|
(3,680 |
) |
Excess
tax benefit from the exercise of employee stock options
|
|
|
305 |
|
|
|
— |
|
Proceeds
from issuance of common stock in connection with the exercise of
options
|
|
|
267 |
|
|
|
516 |
|
Net
cash provided by (used in) financing activities
|
|
|
544 |
|
|
|
(3,164 |
) |
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
(16 |
) |
|
|
(12 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
5,767 |
|
|
|
(2,772 |
) |
Cash
and cash equivalents at the beginning of the period
|
|
|
25,500 |
|
|
|
26,222 |
|
Cash
and cash equivalents at the end of the period
|
|
$ |
31,267 |
|
|
$ |
23,450 |
|
Supplemental
disclosure of non-cash investing activities:
During
the six months ended June 30, 2009, the Company settled a pre-acquisition
contingency resulting in a decrease in accrued expenses in the amount of
$566.
Cash
flows from investing for the six months ended June 30, 2009 does not include the
purchases of approximately $65 of capitalized equipment related to the Company’s
colocation facility as the corresponding invoices are included in accounts
payable at June 30, 2009, and therefore did not have an impact on cash flows for
the period.
Cash
flows from investing for the six months ended June 30, 2008 does not include the
purchases of approximately $1,400 of capitalized equipment related to the
Company’s colocation facility as the corresponding invoices are included in
accounts payable at June 30, 2008, and therefore did not have an impact on cash
flows for the period.
SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS.
LIVEPERSON,
INC.
NOTES
TO UNAUDITED 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 provides online
engagement solutions that facilitate real-time assistance and expert
advice.
The
Company’s primary revenue source is from the sale of the LivePerson services to
businesses of all sizes. The Company also facilitates online transactions
between independent service providers (“Experts”) who provide expert online
advice to individual consumers (“Users”). Headquartered in New York City, the
Company’s product development staff, help desk and online sales support are
located in Israel. The Company also maintains sales and professional services
offices in Atlanta and the United Kingdom.
(B) UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The
accompanying condensed consolidated financial statements as of June 30, 2009 and
for the three and six months ended June 30, 2009 and 2008 are unaudited. In the
opinion of management, the unaudited 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 June 30, 2009, and the consolidated results of operations and cash flows for
the interim periods ended June 30, 2009 and 2008. 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, 2008 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, 2008, included in the Company’s Annual Report on Form 10-K filed with the
SEC on March 13, 2009.
The
Company has evaluated subsequent events through August 6, 2009, which is the
date the financial statements were available to be issued.
(C) RECLASSIFICATIONS
Certain
prior year financial information has been reclassified to conform with fiscal
2009 financial statement presentation.
(D) REVENUE
RECOGNITION
The
majority of the Company’s revenue is generated from monthly service revenues and
related professional services from the sale of the LivePerson services. Because
the Company provides its application as a service, the Company follows the
provisions of SEC Staff Accounting Bulletin No. 104, “Revenue Recognition” and
Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables”. The Company charges a monthly fee, which varies by service and
client usage. The majority of the Company’s larger clients also pay a
professional services fee related to implementation. The Company defers these
implementation fees and associated direct costs and recognizes them ratably over
the expected term of the client relationship upon commencement of the hosting
services. The Company may also charge professional service fees related to
additional training, business consulting and analysis in support of the
LivePerson services.
The
Company also sells certain of the LivePerson services directly via Internet
download. These services are marketed as LivePerson Pro and LivePerson Contact
Center for small and mid-sized businesses (“SMBs”), and are paid for almost
exclusively by credit card. Credit card payments accelerate cash flow and reduce
the Company’s collection risk, subject to the merchant bank’s right to hold back
cash pending settlement of the transactions. Sales of LivePerson Pro and
LivePerson Contact Center may occur with or without the assistance of an online
sales representative, rather than through face-to-face or telephone contact that
is typically required for traditional direct sales.
The
Company recognizes monthly service revenue based upon the fee charged for the
LivePerson services, provided that there is persuasive evidence of an
arrangement, no significant Company obligations remain, collection of the
resulting receivable is probable and the amount of fees to be paid is fixed or
determinable. The Company’s service agreements typically have twelve month terms
and, in some cases, are terminable or may terminate upon 30 to 90 days’ notice
without penalty. When professional service fees provide added value to the
customer on a standalone basis, the Company recognizes professional service fees
upon completion and customer acceptance because they have established objective
and reliable evidence of the fair value of the undelivered hosting services. If
a professional services arrangement does not qualify for separate accounting,
the Company recognizes the fees, and the related labor costs, ratably over a
period of 36 months, representing the Company’s current estimate of the term of
the client relationship.
For
revenue generated from online transactions between Experts and Users, the
Company recognizes revenue net of the expert fees in accordance with Emerging
Issues Task Force (“EITF”) 99-19, “Reporting Revenue Gross as a Principle versus
Net as an Agent” due to the fact that the Company performs as an agent without
any risk of loss for collection. The Company collects a fee from the consumer
and retains a portion of the fee, and then remits the balance to the Expert.
Revenue from these transactions is recognized when there is persuasive evidence
of an arrangement, no significant Company obligations remain, collection of the
resulting receivable is probable and the amount of fees to be paid is fixed or
determinable.
(E) STOCK-BASED
COMPENSATION
The
Company follows Statement of Financial Accounting Standards SFAS No. 123(R)
“Share-Based Payment (revised 2004)” (“SFAS No. 123(R)”), 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.
The
Company adopted SFAS No. 123(R) using the modified prospective transition
method, which requires the application of the accounting standard as of January
1, 2006. The Company’s Consolidated Financial Statements as of and for the three
and six months ended June 30, 2009 and 2008 reflect the impact of SFAS No.
123(R). SFAS No. 123(R) requires companies to estimate the fair value of
share-based payment awards on the date of grant using an option-pricing model.
The value of the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods in the Company’s
Consolidated Statements of Operations. Stock-based compensation recognized in
the Company’s Consolidated Statements of Operations for the three and six months
ended June 30, 2009 and 2008 includes compensation expense for share-based
awards granted prior to, but not fully vested as of January 1, 2006 based on the
grant date fair value estimated in accordance with SFAS No. 123 as well as
compensation expense for share-based awards granted subsequent to January 1,
2006 in accordance with SFAS No. 123(R). The Company currently uses the
Black-Scholes option pricing model to determine grant date fair
value.
The
following table summarizes stock-based compensation expense related to employee
stock options under SFAS No. 123(R) included in Company’s Statements of
Operations for the three and six months ended June 30, 2009 and
2008:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
$ |
207 |
|
|
$ |
161 |
|
|
$ |
366 |
|
|
$ |
275 |
|
Product
development expense
|
|
|
372 |
|
|
|
422 |
|
|
|
673 |
|
|
|
714 |
|
Sales
and marketing expense
|
|
|
292 |
|
|
|
300 |
|
|
|
600 |
|
|
|
589 |
|
General
and administrative expense
|
|
|
247 |
|
|
|
321 |
|
|
|
640 |
|
|
|
586 |
|
Total
stock based compensation included in operating expenses
|
|
$ |
1,118 |
|
|
$ |
1,204 |
|
|
$ |
2,279 |
|
|
$ |
2,164 |
|
The per
share weighted average fair value of stock options granted and assumed during
the three and six months ended June 30, 2009 was $1.73 and $1.15, respectively.
The per share weighted average fair value of stock options granted and assumed
during the three and six months ended June 30, 2008 was $1.97. 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:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
|
|
0.0%
|
|
|
|
0.0%
|
|
Risk-free
interest rate
|
|
|
3.2%-3.9%
|
|
|
|
1.9%-3.9%
|
|
|
|
2.8%-3.9%
|
|
|
|
1.9%-3.9%
|
|
Expected
life (in years)
|
|
|
5.0
|
|
|
|
4.9
|
|
|
|
5.0
|
|
|
|
4.2-4.9
|
|
Historical
volatility
|
|
|
65.0%-65.6%
|
|
|
|
69.9%-70.5%
|
|
|
|
65.0%-68.2%
|
|
|
|
69.9%-71.5%
|
|
During
1998, the Company established the Stock Option and Restricted Stock Purchase
Plan (the “1998 Plan”). Under the 1998 Plan, the Board of Directors could issue
incentive stock options or nonqualified stock options to purchase up to
5,850,000 shares of common stock. The 2000 Stock Incentive Plan (the “2000
Plan”) succeeded the 1998 Plan. Under the 2000 Plan, the options which had been
outstanding under the 1998 Plan were incorporated in the 2000 Plan increasing
the number of shares available for issuance under the plan by approximately
4,150,000, thereby reserving for issuance 10,000,000 shares of common stock in
the aggregate. Pursuant to the provisions of the 2000 Plan, the number of shares
of common stock available for issuance thereunder automatically increases on the
first trading day in each calendar year by an amount equal to three percent (3%)
of the total number of shares of the Company’s common stock outstanding on the
last trading day of the immediately preceding calendar year, but in no event
shall such annual increase exceed 1,500,000 shares. As of December
31, 2008, approximately 12,385,000 shares of common stock were reserved for
issuance under the 2000 Plan (taking into account all option exercises through
December 31, 2008).
The
Company established the 2009 Stock Incentive Plan (the “2009 Plan”) as a
successor to the 2000 Plan. Under the 2009 Plan, the options which had been
outstanding under the 2000 Plan were incorporated into the 2009 Plan and the
Company increased the number of shares available for issuance under the plan by
6,000,000, thereby reserving for issuance 19,567,744 shares of common stock in
the aggregate. Options to acquire common stock granted thereunder have ten-year
terms. As of June 30, 2009, approximately 19,528,000 shares of common stock were
reserved for issuance under the 2009 Plan (taking into account all option
exercises through June 30, 2009). As of June 30, 2009, there was $8,949 of total
unrecognized compensation cost related to nonvested share-based compensation
arrangements. That cost, as of June 30, 2009, is expected to be recognized over
a weighted average period of approximately 1.9 years.
A summary
of the Company’s stock option activity and weighted average exercise prices is
as follows:
|
|
|
|
|
Weighted
Average
Exercise Price
|
|
Options
outstanding at December 31, 2008
|
|
|
9,939,045 |
|
|
$ |
3.67 |
|
Options
granted
|
|
|
1,505,000 |
|
|
|
1.97 |
|
Options
exercised
|
|
|
(340,738 |
) |
|
|
0.69 |
|
Options
cancelled
|
|
|
(660,677 |
) |
|
|
3.49 |
|
Options
outstanding at June 30, 2009
|
|
|
10,442,630 |
|
|
|
3.51 |
|
Options
exercisable at June 30, 2009
|
|
|
5,961,027 |
|
|
$ |
3.53 |
|
The total
intrinsic value of stock options exercised during the period ended June 30, 2009
was approximately $540. The total intrinsic value of options exercisable at June
30, 2009 was approximately $6,338. The total intrinsic value of options expected
to vest is approximately $4,576.
A summary
of the status of the Company’s nonvested shares as of December 31, 2008, and
changes during the six months ended June 30, 2009 is as follows:
|
|
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Nonvested
Shares at December 31, 2008
|
|
|
4,471,251 |
|
|
$ |
2.59 |
|
Granted
|
|
|
1,505,000 |
|
|
|
1.15 |
|
Vested
|
|
|
(1,137,923 |
) |
|
|
2.75 |
|
Cancelled
|
|
|
(356,725 |
) |
|
|
2.33 |
|
Nonvested
Shares at June 30, 2009
|
|
|
4,481,603 |
|
|
$ |
2.09 |
|
(F) 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 (“SAB”) No. 98. Under SFAS No. 128, basic EPS excludes dilution for
common stock equivalents and is computed by dividing net income or loss
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. All options, warrants or other potentially
dilutive instruments issued for nominal consideration are required to be
included in the calculation of basic and diluted net income attributable to
common stockholders. Diluted EPS is calculated using the treasury stock method
and reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
and resulted in the issuance of common stock.
Diluted
net income per common share for the three and six months ended June 30, 2009
includes the effect of options to purchase 4,204,317 and 1,864,067 shares,
respectively, of common stock with a weighted average exercise price of $1.83
and $1.31, respectively. Diluted net income per common share for the three and
six months ended June 30, 2008 does not include the effect of assumed exercised
options or warrants because the Company reported a net loss from continuing
operations and, therefore, all common stock equivalents are anti-dilutive.
Diluted net income per common share for the three and six months ended June 30,
2008 does not include the effect of options and warrants to purchase 6,724,454
and 6,284,516 shares of common stock.
A
reconciliation of shares used in calculating basic and diluted earnings per
share follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
47,611,657 |
|
|
|
47,182,068 |
|
|
|
47,540,614 |
|
|
|
47,537,385 |
|
Effect
of assumed exercised options and warrants
|
|
|
1,038,821 |
|
|
|
- |
|
|
|
761,300 |
|
|
|
- |
|
Diluted
|
|
|
48,650,478 |
|
|
|
47,182,068 |
|
|
|
48,301,914 |
|
|
|
47,537,385 |
|
(G) SEGMENT
REPORTING
The
Company accounts for its segment information in accordance with the provisions
of SFAS No. 131, “Disclosures About Segments of an Enterprise and Related
Information” (“SFAS No. 131”). SFAS No. 131 establishes annual and interim
reporting standards for operating segments of a company. SFAS No. 131 requires
disclosures of selected segment-related financial information about products,
major customers, and geographic areas based on the Company’s internal accounting
methods. Due to the acquisition of Kasamba Inc. in October 2007, the Company is
organized into two operating segments for purposes of making operating decisions
and assessing performance. The Company may reorganize its operations in the
future when the integration of its products and services are complete. The
Business segment supports and manages real-time online interactions – chat,
voice/click-to-call, email and self-service/knowledgebase and sells its products
and services to global corporations of all sizes. The Consumer segment
facilitates online transactions between Experts and Users and sells its services
to consumers. Both segments currently generate their revenue primarily in the
U.S. The chief operating decision-makers evaluate performance, make operating
decisions, and allocate resources based on the operating income of each segment.
The reporting segments follow the same accounting polices used in the
preparation of the Company’s consolidated financial statements and are described
in the summary of significant accounting policies. The Company allocates cost of
revenue, sales and marketing and amortization of purchased intangibles to the
segments, but it does not allocate product development, general and
administrative, non cash-compensation expenses and income taxes because
management does not use this information to measure performance of the operating
segments. There are currently no inter-segment sales.
Summarized
financial information by segment for the three months ended June 30, 2009, based
on the Company’s internal financial reporting system utilized by the Company’s
chief operating decision makers, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hosted
services — Business
|
|
$ |
16,943 |
|
|
$ |
— |
|
|
$ |
16,943 |
|
|
$ |
— |
|
Hosted
services — Consumer
|
|
|
2,878 |
|
|
|
— |
|
|
|
— |
|
|
|
2,878 |
|
Professional
services
|
|
|
720 |
|
|
|
— |
|
|
|
720 |
|
|
|
— |
|
Total
revenue
|
|
|
20,541 |
|
|
|
— |
|
|
|
17,663 |
|
|
|
2,878 |
|
Cost
of revenue
|
|
|
5,228 |
|
|
|
— |
|
|
|
4,340 |
|
|
|
888 |
|
Sales
and marketing
|
|
|
6,908 |
|
|
|
— |
|
|
|
5,005 |
|
|
|
1,903 |
|
Amortization
of intangibles
|
|
|
272 |
|
|
|
— |
|
|
|
200 |
|
|
|
72 |
|
Unallocated
corporate expenses
|
|
|
6,295 |
|
|
|
6,295 |
|
|
|
— |
|
|
|
— |
|
Operating
income (loss)
|
|
$ |
1,838 |
|
|
$ |
(6,295 |
) |
|
$ |
8,118 |
|
|
$ |
15 |
|
Summarized
financial information by segment for the three months ended June 30, 2008, based
on the Company’s internal financial reporting system utilized by the Company’s
chief operating decision makers, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hosted
services — Business
|
|
$ |
14,779 |
|
|
$ |
— |
|
|
$ |
14,779 |
|
|
$ |
— |
|
Hosted
services — Consumer
|
|
|
2,801 |
|
|
|
— |
|
|
|
— |
|
|
|
2,801 |
|
Professional
services
|
|
|
1,008 |
|
|
|
— |
|
|
|
1,008 |
|
|
|
— |
|
Total
revenue
|
|
|
18,588 |
|
|
|
— |
|
|
|
15,787 |
|
|
|
2,801 |
|
Cost
of revenue
|
|
|
5,234 |
|
|
|
— |
|
|
|
4,258 |
|
|
|
976 |
|
Sales
and marketing
|
|
|
6,443 |
|
|
|
— |
|
|
|
4,701 |
|
|
|
1,742 |
|
Amortization
of intangibles
|
|
|
391 |
|
|
|
— |
|
|
|
242 |
|
|
|
149 |
|
Unallocated
corporate expenses
|
|
|
6,958 |
|
|
|
6,958 |
|
|
|
— |
|
|
|
— |
|
Operating
(loss) income
|
|
$ |
(438 |
) |
|
$ |
(6,958 |
) |
|
$ |
6,586 |
|
|
$ |
(66 |
) |
Revenues
attributable to domestic and foreign operations for the three months ended June
30, 2009 and 2008, follows:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
15,841 |
|
|
$ |
14,379 |
|
United
Kingdom
|
|
|
2,218 |
|
|
|
2,112 |
|
Other
Countries
|
|
|
2,482 |
|
|
|
2,097 |
|
Total
revenue
|
|
$ |
20,541 |
|
|
$ |
18,588 |
|
Summarized
financial information by segment for the six months ended June 30, 2009, based
on the Company’s internal financial reporting system utilized by the Company’s
chief operating decision makers, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hosted
services — Business
|
|
$ |
33,658 |
|
|
$ |
— |
|
|
$ |
33,658 |
|
|
$ |
— |
|
Hosted
services — Consumer
|
|
|
5,407 |
|
|
|
— |
|
|
|
— |
|
|
|
5,407 |
|
Professional
services
|
|
|
1,395 |
|
|
|
— |
|
|
|
1,395 |
|
|
|
— |
|
Total
revenue
|
|
|
40,460 |
|
|
|
— |
|
|
|
35,053 |
|
|
|
5,407 |
|
Cost
of revenue
|
|
|
9,513 |
|
|
|
— |
|
|
|
7,766 |
|
|
|
1,747 |
|
Sales
and marketing
|
|
|
13,412 |
|
|
|
— |
|
|
|
9,909 |
|
|
|
3,503 |
|
Amortization
of intangibles
|
|
|
544 |
|
|
|
— |
|
|
|
400 |
|
|
|
144 |
|
Unallocated
corporate expenses
|
|
|
12,518 |
|
|
|
12,518 |
|
|
|
— |
|
|
|
— |
|
Operating
income (loss)
|
|
$ |
4,473 |
|
|
$ |
(12,518 |
) |
|
$ |
16,978 |
|
|
$ |
13 |
|
Summarized
financial information by segment for the six months ended June 30, 2008, based
on the Company’s internal financial reporting system utilized by the Company’s
chief operating decision makers, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hosted
services — Business
|
|
$ |
28,488 |
|
|
$ |
|
|
|
$ |
28,488 |
|
|
$ |
— |
|
Hosted
services — Consumer
|
|
|
5,485 |
|
|
|
|
|
|
|
— |
|
|
|
5,485 |
|
Professional
services
|
|
|
1,700 |
|
|
|
|
|
|
|
1,700 |
|
|
|
— |
|
Total
revenue
|
|
|
35,673 |
|
|
|
|
|
|
|
30,188 |
|
|
|
5,485 |
|
Cost
of revenue
|
|
|
10,120 |
|
|
|
|
|
|
|
8,252 |
|
|
|
1,868 |
|
Sales
and marketing
|
|
|
12,241 |
|
|
|
|
|
|
|
8,784 |
|
|
|
3,457 |
|
Amortization
of intangibles
|
|
|
782 |
|
|
|
|
|
|
|
484 |
|
|
|
298 |
|
Unallocated
corporate expenses
|
|
|
13,212 |
|
|
|
13,212 |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
(682 |
) |
|
$ |
(13,212 |
) |
|
$ |
12,668 |
|
|
$ |
(138 |
) |
Revenues
attributable to domestic and foreign operations for the six months ended June
30, 2009 and 2008, follows:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
31,402 |
|
|
$ |
27,711 |
|
United
Kingdom
|
|
|
4,396 |
|
|
|
3,885 |
|
Other
Countries
|
|
|
4,662 |
|
|
|
4,077 |
|
Total
revenue
|
|
$ |
40,460 |
|
|
$ |
35,673 |
|
Long-lived
assets by geographic region follows:
|
|
|
|
|
|
|
United
States
|
|
$ |
31,192 |
|
|
$ |
29,664 |
|
Israel
|
|
|
14,269 |
|
|
|
15,732 |
|
Total
long-lived assets
|
|
$ |
45,461 |
|
|
$ |
45,396 |
|
(H) GOODWILL
AND INTANGIBLE ASSETS
The
changes in the carrying amount of goodwill for the six months ended June 30,
2009 are as follows:
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2008
|
|
$ |
24,388 |
|
|
$ |
15,798 |
|
|
$ |
8,590 |
|
Adjustments
to goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
earnout payments
|
|
|
81 |
|
|
|
81 |
|
|
|
— |
|
Settlement
of pre-acquisition contingency
|
|
|
(566 |
) |
|
|
— |
|
|
|
(566 |
) |
Balance
as of June 30, 2009
|
|
$ |
23,903 |
|
|
$ |
15,879 |
|
|
$ |
8,024 |
|
The
changes in the carrying amount of goodwill for the year ended December 31, 2008
are as follows:
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
$ |
51,684 |
|
|
$ |
18,744 |
|
|
$ |
32,940 |
|
Adjustments
to goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
(23,501 |
) |
|
|
— |
|
|
|
(23,501 |
) |
Release
of valuation reserve on deferred tax asset
|
|
|
(3,867 |
) |
|
|
(3,025 |
) |
|
|
(842 |
) |
Other
|
|
|
72 |
|
|
|
79 |
|
|
|
(7 |
) |
Balance
as of December 31, 2008
|
|
$ |
24,388 |
|
|
$ |
15,798 |
|
|
$ |
8,590 |
|
Intangible
assets are summarized as follows (see Note 3):
Acquired
Intangible Assets
|
|
|
|
|
|
|
|
Weighted
Average
Amortization
Period
|
|
|
|
Amortizing
intangible assets:
|
|
|
|
|
|
|
|
Technology
|
|
$ |
5,410 |
|
3.8 years
|
|
|
2,648 |
|
Customer
contracts/customer lists
|
|
|
2,400 |
|
3.0 years
|
|
|
2,361 |
|
Trade
names
|
|
|
630 |
|
3.0 years
|
|
|
368 |
|
Non-compete
agreements
|
|
|
410 |
|
1.2 years
|
|
|
410 |
|
Other
|
|
|
235 |
|
3.0 years
|
|
|
137 |
|
Total
|
|
$ |
9,085 |
|
|
|
$ |
5,924 |
|
|
|
|
|
|
|
|
|
Weighted
Average
Amortization
Period
|
|
|
|
Amortizing
intangible assets:
|
|
|
|
|
|
|
|
Technology
|
|
$ |
5,410 |
|
3.8 years
|
|
|
2,034 |
|
Customer
contracts/customer lists
|
|
|
2,400 |
|
3.0 years
|
|
|
1,961 |
|
Trade
names
|
|
|
630 |
|
3.0 years
|
|
|
263 |
|
Non-compete
agreements
|
|
|
410 |
|
1.2 years
|
|
|
410 |
|
Other
|
|
|
235 |
|
3.0 years
|
|
|
98 |
|
Total
|
|
$ |
9,085 |
|
|
|
$ |
4,766 |
|
Amortization
expense is calculated on a straight-line basis over the estimated useful life of
the asset. Aggregate amortization expense for intangible assets was $579 and
$1,158 for the three and six months ended June 30, 2009, respectively, and $698
and $1,396 for the three and six months ended June 30, 2008, respectively.
Estimated amortization expense for the next five years is: $797 in 2009, $1,444
in 2010, $921 in 2011, and $0 in 2012 and 2013.
(I) RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In July
2009, the FASB issued Statement No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles — a
replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168
established the FASB Accounting Standards Codification as the single source of
authoritative U.S. generally accepted accounting principles (U.S. GAAP)
recognized by the FASB to be applied by nongovernmental entities. SFAS No. 168
will supersede all existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in SFAS No.
168 will become nonauthoritative. Following SFAS No. 168, the FASB
will not issue new standards in the form of Statements, FASB Staff Positions, or
Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting
Standards Updates, which will serve only to: (a) update the Codification; (b)
provide background information about the guidance; and (c) provide the bases for
conclusions on the change(s) in the Codification. SFAS No. 168 and the
Codification are effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of SFAS No. 168 is
not expected to have a material impact on the Company’s consolidated financial
statements.
In May
2009, the FASB issued Statement No. 165, “Subsequent Events” (SFAS No. 165).
SFAS No. 165 established general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, SFAS No. 165 provides;
(a) the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; (b) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and (c) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS No. 165 is effective for interim or
annual financial periods ending after June 15, 2009, and shall be applied
prospectively. The adoption of this FASB did not have a material impact on the
Company’s consolidated financial statements.
In April
2009, the FASB issued FASB Staff Position (“FSP”) 107-1 and Accounting
Principles Board (“APB”) 28-1, Interim Disclosures about Fair Value
of Financial Instruments (“FSP 107-1”). FSP 107-1 amends SFAS No. 107,
Disclosures About Fair Value
of Financial Instrument, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. FSP 107-1 also amends APB Opinion No.
28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. FSP 107-1 is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. FSP 107-1 does not require disclosures for
earlier periods presented for comparative purposes at initial adoption. In
periods after initial adoption, FSP 107-1 requires comparative disclosures only
for periods ending after initial adoption. The adoption of this FSP did not have
a material impact on the Company’s consolidated financial
statements.
In April
2009, the FASB issued FSP 141(R) -1, “Accounting for Assets Acquired and
Liabilities assumed in a Business Combination That Arise from Contingencies — an
amendment of FASB Statement No. 141 (Revised December 2007), Business
Combinations” (“FSP 141(R) -1”). FSP 141(R) -1 addresses application issues
raised by preparers, auditors, and members of the legal profession on initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. FSP 141(R) -1 is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. FSP 141(R) -1 will have an impact on the Company’s accounting
for any future acquisitions and its consolidated financial
statements.
In April
2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets”. FSP 142-3 is effective for fiscal years beginning after December 15,
2008. The adoption of this FSP did not have a material impact on the Company’s
consolidated financial statements.
In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No.
133” (“SFAS No. 161”). SFAS No. 161, requires enhanced disclosures
regarding derivatives and hedging activities, including: (a) the manner in which
an entity uses derivative instruments; (b) the manner in which derivative
instruments and related hedged items are accounted for under Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative Instruments
and Hedging Activities”; and (c) the effect of derivative instruments and
related hedged items on an entity’s financial position, financial performance,
and cash flows. SFAS No. 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. As SFAS No.
161 relates specifically to disclosures, it currently has no impact on the
Company’s consolidated financial statements.
In
December 2007, the FASB issued Statement No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) established principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree, and the goodwill acquired. SFAS No.
141(R) also established disclosure requirements to enable the evaluation of the
nature and financial effects of the business combination. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008. SFAS No. 141(R)
will have an impact on its accounting for any future acquisitions and its
consolidated financial statements.
In
September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
("SFAS No. 157"), which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. SFAS
No. 157 applies to other accounting pronouncements that require or permit fair
value measurements, but does not require any new fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years, with the
exception of all non-financial assets and liabilities which will be effective
for years beginning after November 15, 2008. The Company adopted the required
provisions of SFAS No. 157 that became effective in its first quarter of 2008.
The adoption of these provisions did not have a material impact on the Company’s
consolidated financial statements. In February 2008, the FASB issued FASB Staff
Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP
157-2”). FSP 157-2 delays the effective date of SFAS No. 157 for nonfinancial
assets and nonfinancial liabilities, except for certain items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). In October 2008, the FASB issued FASB Staff Position
No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 applies to financial
assets within the scope of accounting pronouncements that require or permit fair
value measurements in accordance with SFAS No. 157. This FSP clarifies the
application of SFAS No. 157 in determining the fair values of assets or
liabilities in a market that is not active. In April 2009, the FASB
issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 does not change the
definition of fair value as detailed in FAS 157, but provides additional
guidance for estimating fair value in accordance with FAS 157 when the volume
and level of activity for the asset or liability have significantly decreased.
The provisions of FSP 157-4 are effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. If early adoption is elected for either FAS 115-2
or FAS 107-1 and APB 28-1, FSP 157-4 must also be adopted early. There were no
non-financial assets and non-financial liabilities requiring initial measurement
or subsequent remeasurement during the second quarter of 2009.
(J) FAIR
VALUE OF FINANCIAL INSTRUMENTS
The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. Cash and cash
equivalents, accounts receivable, security deposits, accounts payable and
deferred revenue carrying amounts approximate fair value because of the short
time maturity of these instruments.
(2) BALANCE
SHEET COMPONENTS
Property
and equipment is summarized as follows:
|
|
|
|
|
|
|
Computer
equipment and software
|
|
$ |
14,702 |
|
|
$ |
11,690 |
|
Furniture,
equipment and building improvements
|
|
|
777 |
|
|
|
741 |
|
|
|
|
15,479 |
|
|
|
12,431 |
|
Less
accumulated depreciation
|
|
|
6,585 |
|
|
|
4,958 |
|
Total
|
|
$ |
8,894 |
|
|
$ |
7,473 |
|
Accrued
expenses consist of the following:
|
|
|
|
|
|
|
Payroll
and other employee related costs
|
|
$ |
5,046 |
|
|
$ |
5,536 |
|
Professional
services and consulting and other vendor fees
|
|
|
2,264 |
|
|
|
2,879 |
|
Sales
commissions
|
|
|
408 |
|
|
|
256 |
|
Other
|
|
|
1,355 |
|
|
|
417 |
|
Total
|
|
$ |
9,073 |
|
|
$ |
9,088 |
|
(3) ASSET
ACQUISITIONS
Proficient
Systems
On July
18, 2006, the Company acquired Proficient Systems, Inc. (“Proficient”), a
provider of hosted proactive chat solutions that help companies generate revenue
on their web sites. This transaction was accounted for under the purchase method
of accounting and, accordingly, the operating results of Proficient were
included in the Company’s consolidated results of operations from the date of
acquisition. The acquisition added several U.K. based financial services clients
and provided an innovative product marketing team. The Company incurred
additional costs related to litigation resulting from an earn-out dispute in the
amount of $79, net and reduced the valuation reserve on acquired net operating
losses in the amount of $3,025, resulting in a net decrease in goodwill in the
amount of $2,946 in the twelve months ended December 31, 2008. The Company
incurred additional costs related to the earn-out litigation in the amount of
$81, resulting in an increase in goodwill in the six months ended June 30,
2009.
Based on
the achievement of certain revenue targets as of March 31, 2007, LivePerson was
contingently required to issue up to an additional 2,050,000 shares of common
stock. Based on these targets, the Company issued 1,127,985 shares of common
stock valued at $8,894, based on the quoted market price of the Company’s common
stock on the date the contingency was resolved, and made a cash payment of $20
related to this contingency. At March 31, 2007, the value of these shares has
been allocated to goodwill with a corresponding increase in equity. All
1,127,985 shares are included in the weighted average shares outstanding used in
basic and diluted net income per common share as of March 31,
2007. In accordance with the purchase agreement, the earn-out
consideration is subject to review by Proficient’s Shareholders’
Representative. On July 31, 2007, the Company was served with a
complaint filed in the United States District Court for the Southern District of
New York by the Shareholders’ Representative of Proficient. The complaint filed
by the Shareholders’ Representative sought certain documentation relating to
calculation of the earn-out consideration, and demands payment of damages on the
grounds that substantially all of the remaining contingently issuable earn-out
shares should have been paid. The Company believes the claims are
without merit, intends to vigorously defend against this lawsuit, and does not
currently expect that the calculation of the total shares issued will differ
significantly from the amount issued to date.
The
components of the intangible assets are as follows:
|
|
Weighted
Average Useful
Life (months)
|
|
|
|
|
Customer
relationships
|
|
36
|
|
|
$ |
2,400 |
|
Technology
|
|
18
|
|
|
|
500 |
|
Non-compete
agreements
|
|
24
|
|
|
|
100 |
|
|
|
|
|
|
$ |
3,000 |
|
The net
intangible assets of $39 and $439 are included in “Assets - Intangibles, net” on
the Company’s June 30, 2009 and December 31, 2008 balance sheets,
respectively.
Kasamba
Inc.
On
October 3, 2007, the Company acquired Kasamba Inc. (“Kasamba”), an online
provider of live expert advice delivered to consumers via real-time chat. This
transaction was accounted for under the purchase method of accounting and,
accordingly, the operating results of Kasamba were included in the Company’s
consolidated results of operations from October 3, 2007. The acquisition
represents the Company’s initial expansion beyond its historical
business-to-business focus into the business-to-consumer market, and is also
expected to extend the value the Company delivers to its growing base of
business customers through a community that connects consumers with experts in a
range of categories. During the twelve months ended December 31, 2008, the
Company reduced accrued acquisitions costs in the amount of $7, reduced the
valuation reserve on acquired net operating losses in the amount of $842 and
recorded an impairment charge in the amount of $23,501, resulting in a decrease
in goodwill in the amount of $24,350. During the six months ended June 30, 2009,
the Company settled a pre-acquisition contingency resulting in a $566 decrease
in goodwill.
The
components of the intangible assets are as follows:
|
|
Weighted
Average Useful
Life (months)
|
|
|
|
|
Technology
|
|
48
|
|
|
$ |
4,910 |
|
Trade
name
|
|
36
|
|
|
|
630 |
|
Expert
network
|
|
36
|
|
|
|
235 |
|
Non-compete
agreements
|
|
12
|
|
|
|
310 |
|
Total
|
|
|
|
|
$ |
6,085 |
|
The net
intangible assets of $3,122 and $3,880 are included in “Assets - Intangibles,
net” on the Company’s June 30, 2009 and December 31, 2008 balance sheets,
respectively.
(4) FAIR
VALUE MEASUREMENTS
Effective
January 1, 2008, the Company adopted the Financial Accounting Standards Board
("FASB") Statement No. 157, Fair Value Measurements ("FAS 157"), for financial
assets and liabilities. This statement defines fair value, establishes a
framework for measuring fair value and expands the related disclosure
requirements. The statement indicates, among other things, that a fair value
measurement assumes a transaction to sell an asset or transfer a liability
occurs in the principal market for the asset or liability or, in the absence of
a principal market, the most advantageous market for the asset or liability. As
noted in Note 1(h) above, the Company adopted the provisions of FAS 157 with
respect to its non-financial assets and liabilities during the first quarter of
fiscal 2009. However, there were no non-financial assets or liabilities
requiring initial measurement or subsequent remeasurement during the second
quarter of 2009.
In order
to increase consistency and comparability in fair value measurements, SFAS No.
157 establishes a hierarchy for observable and unobservable inputs used to
measure fair value into three broad levels, which are described
below:
|
·
|
Level
1: Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities. The fair value hierarchy gives
the highest priority to Level 1
inputs.
|
|
·
|
Level
2: Observable prices that are based on inputs not quoted on
active markets, but corroborated by market
data.
|
|
·
|
Level
3: Unobservable inputs are used when little or no market data
is available. The fair value hierarchy gives the lowest priority to Level
3 inputs.
|
In
determining fair value, the Company utilizes valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs to the
extent possible as well as considers counterparty credit risk in its assessment
of fair value.
On a
nonrecurring basis, the Company uses fair value measures when analyzing asset
impairment. Long-lived tangible assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If it is determined such indicators are present and the
review indicates that the assets will not be fully recoverable, based on
undiscounted estimated cash flows over the remaining amortization periods, their
carrying values are reduced to estimated fair value. The Company uses an Income
approach and inputs that constitute level 3. During the third quarter
of each year, the Company evaluates goodwill and indefinite-lived intangibles
for impairment at the reporting unit level. The Company uses a discounted cash
flow analysis to determine the fair market value of the reporting unit. This
measurement would be classified based on level 3 input.
(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 six months ended June 30, 2009 was approximately $1,182
and $2,223, respectively. Rental expense for operating leases for the three and
six months ended June 30, 2008 was approximately $636 and $1,195,
respectively.
(6) LEGAL
MATTERS
On July
31, 2007, the Company was served with a complaint filed in the United States
District Court for the Southern District of New York by the Shareholders’
Representative of Proficient Systems, Inc. In connection with the July 2006
acquisition of Proficient, the Company was contingently required to issue up to
2,050,000 shares of common stock based on the terms of an earn-out provision in
the merger agreement. In accordance with the terms of the earn-out provision,
the Company issued 1,127,985 shares of LivePerson common stock in the second
quarter of 2007 to the former shareholders of Proficient. The complaint filed by
the Shareholders’ Representative sought certain documentation relating to
calculation of the earn-out consideration, and demands payment of damages on the
grounds that substantially all of the remaining contingently issuable earn-out
shares should have been paid. The Company believes the claims are without merit,
intends to vigorously defend against this lawsuit, and does not currently expect
that the calculation of the total shares issued will differ significantly from
the amount issued to date.
On
January 29, 2008, the Company filed a complaint in the United States District
Court for the District of Delaware against NextCard, LLC and Marshall Credit
Strategies, LLC, seeking a declaratory judgment that a patent purportedly owned
by the defendants is invalid and not infringed by the Company’s products. On
April 30, 2008, NextCard, LLC filed a complaint in the United States District
Court for the Eastern District of Texas, concerning the same subject matter as
the Delaware case, asserting patent infringement by the Company, and seeking
monetary damages and an injunction. The parties entered into a settlement
agreement in August 2009. The settlement terms under the
agreement are confidential, and will not have a material effect on the
Company’s results of operations, financial condition or cash flows.
On May
15, 2009, the Company filed a complaint in the United States District Court for
the Southern District of New York against InstantService, Inc. asserting claims
that InstantService infringes the U.S. Patent Nos. 6,519,628 and 7,526,439 owned
by the Company. The Company is seeking damages for infringement and an
injunction against future infringement of its patents. On June 2, 2009, the
Company filed a first amended complaint seeking a declaratory judgment that a
patent purportedly owned by InstantService is invalid and not infringed by the
Company’s products. InstantService has not answered the complaint and
has not filed counterclaims, but did file a motion to dismiss one of four causes
of action. The case is in its early stages. The Company
believes its claims have merit and that InstantService’s motion to dismiss is
without merit. The Company intends to vigorously pursue its
claims.
The
Company is not currently party to any other legal proceedings. From time to
time, the Company may be subject to various claims and legal actions arising in
the ordinary course of business.
(7) SUBSEQUENT
EVENTS
On August
3, 2009, the Company entered into an asset purchase agreement to acquire two
patents. The patents grant the Company proprietary rights for certain
applications of its technology. The patents will be amortized over their
remaining life of 11 years as the patented technology is expected to generate
cash flow for at least that period.
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 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 the
carrying amount of goodwill, intangibles, stock based-compensation, valuation
allowances for deferred income taxes, 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.
LivePerson
provides online engagement solutions that facilitate real-time assistance and
expert advice. Connecting businesses and independent experts with individual
consumers seeking help on the Web, our hosted software platform creates more
relevant, compelling and personalized online experiences. We were incorporated
in the State of Delaware in November 1995 and the LivePerson service was
introduced initially in November 1998.
The
Company is organized into two operating segments. The Business segment
facilitates real-time online interactions — chat, voice/click-to-call, email and
self-service/knowledgebase for global corporations of all sizes. The Consumer
segment facilitates online transactions between independent Experts and
individual consumers.
On July
18, 2006, we acquired Proficient Systems, Inc., (“Proficient”) a provider of
hosted proactive chat solutions that help companies generate revenue on their
websites. The acquisition added several U.K. based financial services clients
and provided an innovative product marketing team. Under the terms of the
agreement, we acquired all of the outstanding capital stock of Proficient in
exchange for 2.0 million shares of our common stock, valued at $9.9 million,
paid at closing, and up to an additional 2.05 million shares based on the
achievement of certain revenue targets as of March 31, 2007. Based on these
targets, we issued approximately 1.1 million additional shares valued at $8.9
million. At March 31, 2007, the value of these shares has been allocated to
goodwill and we have included these shares in the weighted average shares
outstanding used in basic and diluted net income per share. The net intangibles
of $39,000 and $439,000 are included in “Assets - Intangibles, net” on our June
30, 2009 and December 31, 2008 balance sheets, respectively.
On
October 3, 2007, we acquired Kasamba Inc., (“Kasamba”) a facilitator of online
transactions between service Experts who provide online advice to consumers for
total consideration of approximately $35.9 million. The acquisition accelerated
our expansion into the business-to-consumer market, and is expected to extend
the value we deliver to our growing base of business customers through a
community that will connect consumers with Experts in a range of categories.
Under the terms of the agreement, we acquired all of the outstanding capital
stock of Kasamba in exchange for 4,130,776 shares of our common stock, $9.0
million in cash and the assumption of 623,824 Kasamba options. The net
intangibles of $3.1 and $3.9 million are included in “Assets - Intangibles, net”
on our June 30, 2009 and December 31, 2008 balance sheets,
respectively.
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
The
majority of our revenue is generated from monthly service revenues and related
professional services from the sale of the LivePerson services. Because we
provide our application as a service, we follow the provisions of SEC Staff
Accounting Bulletin No. 104, “Revenue Recognition” and Emerging Issues Task
Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”. We
charge a monthly fee, which varies by service and client usage. The majority of
our larger clients also pay a professional services fee related to
implementation. We defer these implementation fees and associated direct costs
and recognize them ratably over the expected term of the client relationship
upon commencement of the hosting services. We may also charge professional
service fees related to additional training, business consulting and analysis in
support of the LivePerson services.
We also
sell certain of the LivePerson services directly via Internet download. These
services are marketed as LivePerson Pro and LivePerson Contact Center for small
and mid-sized businesses (“SMBs”), and are paid for almost exclusively by credit
card. Credit card payments accelerate cash flow and reduce our collection risk,
subject to the merchant bank’s right to hold back cash pending settlement of the
transactions. Sales of LivePerson Pro and LivePerson Contact Center may occur
with or without the assistance of an online sales representative, rather than
through face-to-face or telephone contact that is typically required for
traditional direct sales.
We
recognize monthly service revenue based upon the fee charged for the LivePerson
services, provided that there is persuasive evidence of an arrangement, no
significant Company obligations remain, collection of the resulting receivable
is probable and the amount of fees to be paid is fixed or determinable. Our
service agreements typically have twelve month terms and are terminable or may
terminate upon 30 to 90 days’ notice without penalty. When professional service
fees provide added value to the customer on a standalone basis, we recognize
professional service fees upon completion and customer acceptance because we
have established objective and reliable evidence of the fair value of the
undelivered hosting services. If a professional services arrangement does not
qualify for separate accounting, we recognize the fees, and the related labor
costs, ratably over a period of 36 months, representing our current estimate of
the term of the client relationship.
For
revenue generated from online transactions between Experts and Users, we
recognize revenue net of expert fees in accordance with Emerging Issues Task
Force (“EITF”) 99-19, “Reporting Revenue Gross as a Principle versus Net as an
Agent due to the fact that we perform as an agent without any risk of
loss for collection. We collect a fee from the consumer and retain a portion of
the fee, and then remit the balance to the expert. Revenue from these
transactions is recognized when there is persuasive evidence of an arrangement,
no significant Company obligations remain, collection of the resulting
receivable is probable and the amount of fees to be paid is fixed or
determinable.
STOCK-BASED
COMPENSATION
We
follow Statement of Financial Accounting Standards (“SFAS”) No. 123 (R)
(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.
We
adopted SFAS No. 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006. Our
Consolidated Financial Statements as of and for the years ended December 31,
2008, 2007 and 2006 reflect the impact of SFAS No. 123(R). In
accordance with the modified prospective transition method, our Consolidated
Financial Statements for prior periods have not been restated to reflect, and do
not include, the impact of SFAS No. 123(R).
SFAS No.
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our Consolidated Statements of
Operations. Stock-based compensation recognized in our Consolidated Statement of
Operations for the years December 31, 2008, 2007 and 2006 includes compensation
expense for share-based awards granted prior to, but not fully vested as of
January 1, 2006 based on the grant date fair value estimated in accordance with
SFAS No. 123 as well as compensation expense for share-based awards granted
subsequent to January 1, 2006 in accordance with SFAS No. 123(R). We currently
use the Black-Scholes option pricing model to determine grant date fair
value.
As of
June 30, 2009, there was approximately $8.9 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements.
That cost is expected to be recognized over a weighted average period of
approximately 1.9 years.
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 six months ended June 30, 2009 and 2008. One customer accounted for
approximately 13% of accounts receivable at June 30, 2009. No single customer
accounted for or exceeded 10% of accounts receivable at December 31, 2008. There
was no change in our allowance for doubtful accounts in the six months ended
June 30, 2009.
GOODWILL
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill
and indefinite-lived intangible assets are not amortized, but reviewed for
impairment upon the occurrence of events or changes in circumstances that would
reduce the fair value below its carrying amount. Goodwill is required to be
tested for impairment at least annually. Determining the fair value of a
reporting unit under the first step of the goodwill impairment test and
determining the fair value of individual assets and liabilities of a reporting
unit (including unrecognized intangible assets) under the second step of the
goodwill impairment test is judgmental in nature and often involves the use of
significant estimates and assumptions. Similarly, estimates and assumptions are
used in determining the fair value of other intangible assets. These estimates
and assumptions could have a significant impact on whether or not an impairment
charge is recognized and also the magnitude of any such charge. To assist in the
process of determining goodwill impairment, we will obtain appraisals from an
independent valuation firm. In addition to the use of an independent valuation
firm, we will perform internal valuation analyses and consider other market
information that is publicly available. Estimates of fair value are primarily
determined using discounted cash flows and market comparisons. These approaches
use significant estimates and assumptions including projected future cash flows
(including timing), discount rates reflecting the risk inherent in future cash
flows, perpetual growth rates, determination of appropriate market comparables
and the determination of whether a premium or discount should be applied to
comparables.
IMPAIRMENT
OF LONG-LIVED ASSETS
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-lived Assets,” long-lived assets, such as property, plant and equipment and
purchased intangibles subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying value of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying value of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying value of the
asset exceeds the fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the lower of the
carrying value or the fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.
USE
OF ESTIMATES
The
preparation of our consolidated financial statements in accordance with
accounting principles generally accepted in the U.S. requires our management to
make a number of estimates and assumptions relating to the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
revenue and expenses during the period. Significant items subject to such
estimates and assumptions include the carrying amount of goodwill, intangibles,
stock-based compensation, valuation allowances for deferred income tax assets,
accounts receivable, the expected term of a client relationship, accruals and
other factors. Actual results could differ from those estimates.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In July
2009, the FASB issued Statement No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles — a
replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168
established the FASB Accounting Standards Codification as the single source of
authoritative U.S. generally accepted accounting principles (U.S. GAAP)
recognized by the FASB to be applied by nongovernmental entities. SFAS No. 168
will supersede all existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in SFAS No.
168 will become nonauthoritative. Following SFAS No. 168, the FASB
will not issue new standards in the form of Statements, FASB Staff Positions, or
Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting
Standards Updates, which will serve only to: (a) update the Codification; (b)
provide background information about the guidance; and (c) provide the bases for
conclusions on the change(s) in the Codification. SFAS No. 168 and the
Codification are effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of SFAS No. 168 is
not expected to have a material impact on our consolidated financial
statements.
In May
2009, the FASB issued Statement No. 165, “Subsequent Events” (SFAS No. 165).
SFAS No. 165 established general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, SFAS No. 165 provides;
(a) the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; (b) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and (c) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS No. 165 is effective for interim or
annual financial periods ending after June 15, 2009, and shall be applied
prospectively. The adoption of this FASB did not have a material impact on our
consolidated financial statements.
In April
2009, the FASB issued FSP 107-1 and Accounting Principles Board (“APB”) 28-1,
Interim Disclosures about Fair
Value of Financial Instruments (“FSP 107-1”). FSP 107-1 amends SFAS No.
107, Disclosures About Fair
Value of Financial Instruments, to require disclosures about fair value
of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. FSP 107-1 also amends APB
Opinion No. 28, Interim
Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods. FSP 107-1 is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. FSP 107-1 does not require disclosures for
earlier periods presented for comparative purposes at initial adoption. In
periods after initial adoption, FSP 107-1 requires comparative disclosures only
for periods ending after initial adoption. The adoption of this FSP did not have
a material impact on our consolidated financial statements.
In April
2009, the FASB issued FSP 141(R) -1, “Accounting for Assets Acquired and
Liabilities assumed in a Business Combination That Arise from Contingencies — an
amendment of FASB Statement No. 141 (Revised December 2007), Business
Combinations” (“FSP 141(R) -1”). FSP 141(R) -1 addresses application issues
raised by preparers, auditors, and members of the legal profession on initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. FSP 141(R) -1is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. FSP 141(R) -1 will have an impact on our accounting for any
future acquisitions and its consolidated financial statements.
In April
2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets”. FSP 142-3 is effective for fiscal years beginning after December 15,
2008. The adoption of this FSP did not have a material impact on our
consolidated financial statements.
In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No. 133”
(“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures regarding
derivatives and hedging activities, including: (a) the manner in which an entity
uses derivative instruments; (b) the manner in which derivative instruments and
related hedged items are accounted for under Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative Instruments and Hedging
Activities”; and (c) the effect of derivative instruments and related hedged
items on an entity’s financial position, financial performance, and cash flows.
SFAS No. 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. As SFAS No. 161 relates
specifically to disclosures, it currently has no impact on our consolidated
financial statements.
In
December 2007, the FASB issued Statement No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) established principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree, and the goodwill acquired. SFAS No.
141(R) also established disclosure requirements to enable the evaluation of the
nature and financial effects of the business combination. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008. SFAS No. 141(R)
will have an impact on our accounting for any future acquisitions and on our
consolidated financial statements.
In
September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
("SFAS No. 157"), which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. SFAS
No. 157 applies to other accounting pronouncements that require or permit fair
value measurements, but does not require any new fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years, with the
exception of all non-financial assets and liabilities which will be effective
for years beginning after November 15, 2008. We adopted the required provisions
of SFAS No. 157 that became effective in our first quarter of 2008. The adoption
of these provisions did not have a material impact on our consolidated financial
statements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2,
“Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the
effective date of SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities, except for certain items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active.” (“FSP 157-3”). FSP 157-3 applies to financial assets within the scope
of accounting pronouncements that require or permit fair value measurements in
accordance with SFAS No. 157. This FSP clarifies the application of SFAS No. 157
in determining the fair values of assets or liabilities in a market that is not
active. In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP
157-4”). FSP 157-4 does not change the definition of fair value as detailed in
FAS 157, but provides additional guidance for estimating fair value in
accordance with FAS 157 when the volume and level of activity for the asset or
liability have significantly decreased. The provisions of FSP 157-4 are
effective for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009. If early
adoption is elected for either FAS 115-2 or FAS 107-1 and APB 28-1, FSP 157-4
must also be adopted early. There were no non-financial assets and non-financial
liabilities requiring initial measurement or subsequent remeasurement during the
second quarter of 2009.
REVENUE
The
majority of our revenue is generated from monthly service revenues and related
professional services from the sale of the LivePerson services. We charge a
monthly fee, which varies by service and client usage. The majority of our
larger clients also pay a professional services fee related to implementation. A
large proportion of our revenue from new clients comes from large corporations.
These companies typically have more significant implementation requirements and
more stringent data security standards. Such clients also have more
sophisticated data analysis and performance reporting requirements, and are
likely to engage our professional services organization to provide such analysis
and reporting on a recurring basis.
Revenue
from our Business segment accounted for 86% and 87% of total revenue for the
three and six months ended June 30, 2009, respectively. Revenue attributable to
our monthly hosted Business services accounted for 96% of total Business revenue
for the three and six months ended June 30, 2009. Revenue from our Business
segment accounted for 85% of total revenue for the three and six months ended
June 30, 2008. Revenue attributable to our monthly hosted Business services
accounted for 93% and 94% of total Business revenue for the three and six months
ended June 30, 2008, respectively. Our service agreements typically have twelve
month terms and, in some cases, are terminable or may terminate upon 30 to 90
days’ notice without penalty. 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 recognizing
revenue from that client. This lag has recently ranged from 30 to 90
days.
Revenue
generated from online transactions between Experts and Users is recognized net
of expert fees and accounted for approximately 14% and 13% of total revenue for
the three and six months ended June 30, 2009, respectively. Revenue generated
from online transactions between Experts and Users accounted for approximately
15% of total revenue for the three and six months ended June 30,
2008.
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 consists of:
|
·
|
compensation
costs relating to employees who provide customer support and
implementation services to our
clients;
|
|
·
|
compensation
costs relating to our network support
staff;
|
|
·
|
depreciation
of certain hardware and software;
|
|
·
|
allocated
occupancy costs and related
overhead;
|
|
·
|
the
cost of supporting our infrastructure, including expenses related to
server leases, infrastructure support costs and Internet
connectivity;
|
|
·
|
the
credit card fees and related processing costs associated with the Consumer
and SMB services; and
|
|
·
|
amortization
of certain intangibles.
|
Our
product development expenses consist primarily of compensation and related
expenses for product development personnel, allocated occupancy costs and
related overhead, outsourced labor and expenses for testing new versions of our
software. Product development expenses are charged to operations as
incurred.
Our sales
and marketing expenses consist of compensation and related expenses for sales
personnel and marketing personnel, online marketing, allocated occupancy costs
and related overhead, advertising, sales commissions, 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, legal and human resources personnel,
allocated occupancy costs and related overhead, professional fees, provision for
doubtful accounts and other general corporate expenses.
During
the six months ended June 30, 2009, we did not increase our allowance for
doubtful accounts. During 2008, we increased our allowance for doubtful accounts
by $148,000 to approximately $356,000, principally due to an increase in
accounts receivable as a result of increased sales and to the fact that a larger
proportion of receivables are due from larger corporate clients that typically
have longer payment cycles, and we wrote off approximately $16,000 of previously
reserved accounts, leaving a net allowance for doubtful accounts of $340,000. We
base our allowance for doubtful accounts on specifically identified credit risks
of customers, historical trends and other information that we believe to be
reasonable. We adjust our allowance for doubtful accounts when accounts
previously reserved have been collected.
NON-CASH
COMPENSATION EXPENSE
The net
non-cash compensation amounts for the three and six months ended June 30, 2009
and 2008 consist of:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense related to SFAS No. 123(R)
|
|
$ |
1,118 |
|
|
$ |
1,204 |
|
|
$ |
2,279 |
|
|
$ |
2,164 |
|
Total
|
|
$ |
1,118 |
|
|
$ |
1,204 |
|
|
$ |
2,279 |
|
|
$ |
2,164 |
|
Due to
our acquisition of Kasamba in October 2007, Proficient in July 2006, and our
limited operating history, we believe that comparisons of our operating results
for the three and six months ended June 30, 2009 and 2008 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.
The
Company is organized into two operating segments. The Business segment
facilitates real-time online interactions — chat, voice/click-to-call, email and
self-service/knowledgebase for global corporations of all sizes. The Consumer
segment facilitates online transactions between independent Experts and
individual Users.
Comparison
of Three and Six Months Ended June 30, 2009 and 2008
Revenue - Business. Revenue
increased by 12% and 16% to $17.7 million and $35.1 million in the three and six
months ended June 30, 2009, respectively, from $15.8 million and $30.2 million
in the comparable periods in 2008. This increase is primarily attributable to
increased revenue from existing clients in the amount of approximately $1.5
million and $3.5 million, respectively, net of cancellations and, to a lesser
extent, to revenue from new clients in the amount of approximately $762,000 and
$1.9 million, respectively, partially offset by a decrease in professional
services revenue of approximately $288,000 and $304,000, respectively. Our
revenue growth has typically been driven by a mix of revenue from newly added
clients as wells as expansion of existing clients.
Revenue - Consumer. Revenue
increased by 3% to $2.9 million in the three months ended June 30, 2009, from
$2.8 million in the comparable period in 2008. This increase is primarily
attributable to a 15% increase in the fee we charge Experts which resulted in an
increase in net revenue of approximately $340,000, partially offset by lower
total gross revenue. Revenue decreased by 1% to $5.4 million in the six months
ended June 30, 2009, from $5.5 million in the comparable period in 2008. This
decrease is primarily attributable to lower total gross revenue, partially
offset by the fee increase, which resulted in an increase in net revenue of
approximately $545,000.
Cost of Revenue - Business.
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 server and network infrastructure and
allocated occupancy costs and related overhead. Cost of revenue remained flat at
$4.3 million in the three months ended June 30, 2009 compared to the same period
in 2008. An increase in expenses for primary and backup server facilities of
approximately $265,000 was offset by a decrease in total compensation costs
related to customer service and network operations personnel in the amount of
approximately $250,000. Cost of revenue decreased by 6% to $7.8 million in the
six months ended June 30, 2009, from $8.3 million in the comparable period in
2008. This decrease is primarily attributable to lower total compensation costs
related to customer service and network operations personnel in the amount of
approximately $650,000 partially offset by an increase in expenses for primary
and backup server facilities of approximately $99,000.
Cost of Revenue - Consumer.
Cost of revenue consists of compensation costs relating to employees who provide
customer service to Experts and Users, compensation costs relating to our
network support staff, the cost of supporting our server and network
infrastructure, credit card and transaction processing fees and related costs,
and allocated occupancy costs and related overhead. Cost of revenue decreased by
9% and 6% to $888,000 and $1.7 million in the three and six months ended June
30, 2009, respectively, from $976,000 and $1.9 million in the comparable periods
in 2008. This decrease is primarily attributable to lower total compensation
costs for our customer service and network support personnel in the amount of
$38,000 and $54,000, respectively, and to a lesser extent, to lower credit card
processing fees as a result of processing fewer transactions.
Product Development. Our
product development expenses consist primarily of compensation and related
expenses for product development personnel as well as allocated occupancy costs
and related overhead. Product development costs decreased by 10% and 11% to $3.1
million and $5.8 million in the three and six months ended June 30, 2009,
respectively, from $3.5 million and $6.6 million in the comparable periods in
2008. This decrease is primarily attributable to lower total compensation costs
for product development personnel as a result of favorable currency rate
movements related to our Israeli operations as compared to the same periods in
2008.
Sales and Marketing -
Business. Our sales and marketing expenses consist of compensation and
related expenses for sales and marketing personnel, as well as advertising,
public relations and trade show exhibit expenses. Sales and marketing expenses
increased by 6% and 13% to $5.0 million and $9.9 million in the three and six
months ended June 30, 2009, respectively, from $4.7 million and $8.8 million in
the comparable periods in 2008. This increase is primarily attributable to an
increase in costs related to additional sales and marketing personnel of
approximately $416,000 and $1.2 million for the three and six months ended June
30, 2009, respectively. This increase relates to our continued efforts to
enhance our brand recognition and increase sales lead activity.
Sales and Marketing -
Consumer. Our sales and marketing expenses consist of compensation and
related expenses for marketing personnel, as well as online promotion, public
relations and trade show exhibit expenses. Sales and marketing expenses
increased by 9% to $1.9 million in the three months ended June 30, 2009 from
$1.7 million in the comparable period in 2008. This increase is primarily
attributable to an increase in compensation and allocated overhead for marketing
personnel of $282,000, partially offset by a decrease in advertising and
promotional expenses of approximately $98,000. Sales and marketing expense
remained flat at $3.5 in the six months ended June 30, 2009 compared to the same
period in 2008. An increase in compensation and allocated overhead for marketing
personnel in the amount of $658,000 was partially offset by a decrease in
advertising and promotional expenses of $548,000.
General and Administrative.
Our general and administrative expenses consist primarily of compensation and
related expenses for executive, accounting, legal, human resources and
administrative personnel. General and administrative expenses decreased by 9% to
$3.2 million in the three months ended June 30, 2009, from $3.5 million in the
comparable period in 2008. This decrease is primarily attributable to
a decrease in franchise taxes, bank fees, and recruiting costs in the amount of
approximately $355,000, partially offset by an increase in compensation and
related expenses in the amount of $193,000. General and administrative expenses
increased by less than 1% to $6.7 million in the six months ended June 30, 2009,
from $6.6 million in the comparable period in 2008. An increase in compensation
and related expenses in the amount of $479,000 was partially offset by decreases
in recruiting, legal and accounting expenses in the amount of approximately
$435,000.
Amortization of Intangibles.
Amortization expense was $579,000 and $1.2 million in the three and six months
ended June 30, 2009, respectively, as compared to $698,000 and $1.4 million in
the comparable periods in 2008, respectively. Amortization expense included in
cost of revenue – consumer was $307,000 and $614,000 in the three and six months
ended June 30, 2009 and 2008, respectively. Amortization expense in 2009 and
2008 relates primarily to intangible assets as a result of our acquisitions of
Kasamba in October 2007 and Proficient in July 2006. Amortization expense is
expected to be approximately $2.0 million in the year ended December 31,
2009.
Other Income (Expense).
Financial income was $23,000 and $37,000 in the three months ended June 30, 2009
and 2008, respectively, and relates to favorable currency rate movements related
to our Israeli operations. Financial expense was $96,000 and $2,000 in the six
months ended June 30, 2009 and 2008, respectively, and relates to unfavorable
currency rate movements related to our Israeli operations. Interest
income was $21,000 and $56,000 in the three and six months ended June 30, 2009,
as compared to $71,000 and $191,000 in the comparable periods in 2008,
respectively, and consists of interest earned on cash and cash equivalents.
These decreases are primarily attributable to decreases in short-term interest
rates.
Provision for (Benefit from) Income
Taxes. Provision for income taxes was $748,000 and $2.0 million in the
three and six months ended June 30, 2009, respectively. In the three and six
months ended June 30, 2008, we recorded a benefit from income taxes in the
amount of $139,000 and $90,000, respectively.
Net Income (Loss). We had net
income of $1.1 million and $2.4 million in the three and six months ended June
30, 2009, as compared to a net loss of $191,000 and $403,000 for the comparable
periods in 2008, respectively. Revenue increased by $2.0 million and $4.8
million, respectively, while operating expenses decreased by $323,000 and
$368,000, respectively, contributing to a net increase in income from operations
of approximately $2.3 million and $5.2 million, respectively. Our increase in
income from operations is partially offset by decreases in other income of
$64,000 and $229,000, for the three and six months ended June 30, 2009,
respectively, and increases in income taxes of $887,000 and $2.1 million in the
three and six months ended June 30, 2009, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
As of
June 30, 2009, we had approximately $31.3 million in cash and cash equivalents,
an increase of approximately $5.8 million from December 31,
2008.
Net cash
provided by operating activities was $8.6 million for the six months ended June
30, 2009 and consisted primarily of net income, non-cash expenses related to
SFAS No. 123(R), amortization of intangibles and depreciation, and to increases
in accrued expenses and accounts payable partially offset by an increase in
accounts receivable. Net cash provided by operating activities was $3.6 million
for the six months ended June 30, 2008 and consisted primarily of non-cash
expenses related to the adoption of SFAS No. 123(R), to the amortization of
intangibles, and to increases in accounts payable and deferred revenue,
partially offset by a net loss, a decrease in accrued expenses, and an increase
in accounts receivable.
Net cash
used in investing activities was $3.3 million and $3.2 million in the six months
ended June 30, 2009 and 2008, respectively, and was due primarily to the
purchase of fixed assets.
Net cash
provided by financing activities was $544,000 for the six months ended June 30,
2009 and consisted primarily of the excess tax benefit from exercise of employee
stock options and the proceeds from issuance of common stock in connection with
the exercise of stock options by employees partially offset by the repurchase of
common stock. Net cash used in financing activities was $3.2 million for the six
months ended June 30, 2008 and consisted primarily of the repurchase of common
stock partially offset by the 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 intangible assets, as well as non-cash
compensation costs. As of June 30, 2009, we had an accumulated deficit of
approximately $114.8 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
six months ended June 30, 2009 was approximately $1.2 million and $2.2 million,
respectively, and approximately $636,000 and $1.2 million for the three and six
months ended June 30, 2008, respectively.
As of
June 30, 2009, our principal commitments were approximately $7.1 million under
various operating leases, of which approximately $2.1 million is due in 2009. We
do not currently expect that our principal commitments for the year ending
December 31, 2009 will exceed $5.0 million in the aggregate. Our capital
expenditures are not currently expected to exceed $9.0 million in 2009. Our
contractual obligations at June 30, 2009 are summarized as
follows:
|
|
|
|
|
|
(in thousands)
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
$ |
7,122 |
|
|
$ |
2,146 |
|
|
$ |
4,976 |
|
$ |
—
|
|
$ |
— |
|
Total
|
|
$ |
7,122 |
|
|
$ |
2,146 |
|
|
$ |
4,976 |
|
$ |
—
|
|
$ |
— |
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Currency
Rate Fluctuations
The
functional currency of our wholly-owned Israeli subsidiaries, LivePerson Ltd.
(formerly HumanClick Ltd.) and Kasamba Ltd., is the U.S. dollar and the
functional currency of our operations in the United Kingdom is the British
pound.
As a
result of the expanding scope of our Israeli operations, our currency rate
fluctuation risk associated with the exchange rate movement of the U.S. dollar
against the New Israeli Shekel (“NIS”) has increased. During the year ended
December 31, 2008, the depreciation of the U.S. dollar against the NIS had an
increased adverse impact on our results of operations and financial condition
compared to earlier periods. During the six months ended June 30, 2009, the U.S.
dollar appreciated against the NIS to levels more consistent with the recent
historical average which had a positive impact on our results of operations and
financial conditions when compared to 2008. During the six month period ended
June 30, 2009, expenses generated by our Israeli operations totaled $11.8
million.
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 did not increase our allowance for doubtful accounts in the six months ended
June 30, 2009. During 2008, we increased our allowance for doubtful accounts by
$148,000 to approximately $356,000, principally due to an increase in accounts
receivable as a result of increased sales and to the fact that a larger
proportion of receivables are due from larger corporate clients that typically
have longer payment cycles and we wrote off approximately $16,000 of previously
reserved accounts, leaving a net allowance for doubtful accounts of $340,000 at
December 31, 2008.
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
Evaluation
of Disclosure Controls and Procedures
Our
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our “disclosure controls and procedures,” as that
term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), as of June 30, 2009. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of June 30, 2009
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.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended June 30, 2009 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.
Limitations
of the Effectiveness of Internal Control
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the internal control system are
met. Because of the inherent limitations of any internal control system, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
On July
31, 2007, we were served with a complaint filed in the United States District
Court for the Southern District of New York by the Shareholders’ Representative
of Proficient Systems, Inc. In connection with the July 2006 acquisition of
Proficient, we were contingently required to issue up to 2,050,000 shares of
common stock based on the terms of an earn-out provision in the merger
agreement. In accordance with the terms of the earn-out provision, we issued
1,127,985 shares of LivePerson common stock in the second quarter of 2007 to the
former shareholders of Proficient. The complaint filed by the Shareholders’
Representative sought certain documentation relating to calculation of the
earn-out consideration, and demands payment of damages on the grounds that
substantially all of the remaining contingently issuable earn-out shares should
have been paid. We believe the claims are without merit, intend to vigorously
defend against this lawsuit, and do not currently expect that the calculation of
the total shares issued will differ significantly from the amount issued to
date.
On
January 29, 2008, we filed a complaint in the United States District Court for
the District of Delaware against NextCard, LLC and Marshall Credit Strategies,
LLC, seeking a declaratory judgment that a patent purportedly owned by the
defendants is invalid and not infringed by our products. On April 30, 2008,
NextCard, LLC filed a complaint in the United States District Court for the
Eastern District of Texas, concerning the same subject matter as the Delaware
case, asserting patent infringement by us, and seeking monetary damages and an
injunction. The parties entered into a settlement agreement in August 2009.
The settlement terms under the agreement are confidential, and
will not have a material effect on our results of operations, financial
condition or cash flows.
On May
15, 2009, we filed a complaint in the United States District Court for the
Southern District of New York against InstantService, Inc. asserting claims that
InstantService infringes the U.S. Patent Nos. 6,519,628 and 7,526,439 owned by
us. We are seeking damages for infringement and an injunction against future
infringement of our patents. On June 2, 2009, we filed a first amended complaint
seeking a declaratory judgment that a patent purportedly owned by InstantService
is invalid and not infringed by our products. InstantService has not
answered the complaint and has not filed counterclaims, but did file a motion to
dismiss one of four causes of action. The case is in its early
stages. We believe our claims have merit and that InstantService’s
motion to dismiss is without merit. We intend to vigorously pursue
our claims.
We are
not currently party to any other legal proceedings. From time to time, we may be
subject to various claims and legal actions arising in the ordinary course of
business.
Risks
that could have a material and adverse impact on our business, results of
operations and financial condition include the following: potential fluctuations
in our quarterly and annual results; competition in the real-time sales,
marketing and customer service solutions market; risks related to adverse
business conditions experienced by our clients; risks related to the operational
integration of acquisitions; additional regulatory requirements, tax
liabilities, or currency exchange rate fluctuations could impact our business;
potential goodwill impairments; continued use by our clients of the LivePerson
services and their purchase of additional services; responding to rapid
technological change and changing client preferences; technology systems beyond
our control and technology-related issues or defects that could disrupt or
compromise the LivePerson services; the services provided to consumers via our
technology platforms could result in legal liability and/or negative publicity;
payment-related risks from credit and debit cards; risks related to the
regulation or possible misappropriation of personal information; risks related
to protecting our intellectual property rights or potential infringement of the
intellectual property rights of third parties; our history of losses; our
ability to license necessary third party software for use in our products and
services or successfully integrate third party software; our dependence on key
employees; competition for qualified personnel; the impact of new accounting
rules; the possible unavailability of financing as and if needed; risks related
to our international operations, particularly our operations in Israel, and the
civil and political unrest in that region; and our dependence on the continued
use of the Internet as a medium for commerce and the viability of the
infrastructure of the Internet. This list is intended to identify only certain
of the principal factors that could have a material and adverse impact on our
business, results of operations and financial condition. A more detailed
description of each of these and other important risk factors can be found under
the caption “Risk Factors” in our most recent Annual Report on Form 10-K, filed
on March 13, 2009.
There are
no material changes to the risk factors described in the Form
10-K.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
On March
5, 2009, our Board of Directors approved an extension of our existing stock
repurchase program through March 31, 2010. The program, originally announced in
February 2007 and first extended on March 10, 2008, was due to expire at the end
of the first quarter of 2009.
Under the
stock repurchase program, we are authorized to repurchase shares of our common
stock, in the open market or privately negotiated transactions, at times and
prices considered appropriate by our Board of Directors depending upon
prevailing market conditions and other corporate considerations, up to an
aggregate purchase price of $8.0 million. As of June 30, 2009, $3.9 million
remained available for purchase under the program. Our Board of Directors may
discontinue the program at any time.
The
following table summarizes repurchases of our common stock under our stock
repurchase program during the quarter ended June 30, 2009:
|
|
Total Number of
Shares Purchased
|
|
|
Average Price
Paid per Share
|
|
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
|
|
|
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/1/2009
– 4/30/2009
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
3,946,000 |
|
5/1/2009
– 5/31/2009
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,946,000 |
|
6/1/2009
– 6/30/2009
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,946,000 |
|
Total
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
3,946,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
The
Company held its Annual Meeting of Stockholders on June 9, 2009.
The
stockholders elected Kevin C. Lavan and Robert P. LoCascio to the class of
directors whose terms expire at the 2012 Annual Meeting of Stockholders or until
their successors are elected and have qualified.
The
stockholders approved the LivePerson, Inc. 2009 Stock Incentive
Plan.
The
stockholders ratified the appointment of BDO Seidman, LLP as the Company’s
independent registered public accounting firm for the calendar year ending
December 31, 2009.
Shares of
common stock were voted as follows:
Director Nominee or Proposal
|
|
For
|
|
Against/Withheld
|
|
Abstentions
|
|
Broker Non-Votes
|
|
|
|
|
|
|
|
|
|
|
|
Kevin
C. Lavan
|
|
41,302,452
|
|
300,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
P. LoCascio
|
|
41,317,561
|
|
285,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
Stock Incentive Plan
|
|
27,184,565
|
|
7,070,968
|
|
|
|
7,333,513
|
|
|
|
|
|
|
|
|
|
|
|
Ratification
of Auditors
|
|
41,527,002
|
|
63,613
|
|
|
|
|
|
The
following exhibits are filed as part of this Quarterly Report on Form
10-Q:
10.1
|
|
LivePerson,
Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 99.1
of the Company's Registration Statement on Form S-8, filed with the
Securities and Exchange Commission on June 9, 2009)
|
|
|
|
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
|
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.
(Registrant)
|
Date:
August 7, 2009
|
By:
|
/s/ ROBERT P. LOCASCIO
|
|
Name:
|
Robert
P. LoCascio
|
|
Title:
|
Chief
Executive Officer (duly authorized officer)
|
|
|
|
Date:
August 7, 2009
|
By:
|
/s/ TIMOTHY E. BIXBY
|
|
Name:
|
Timothy
E. Bixby
|
|
Title:
|
President
and Chief Financial Officer (principal financial and accounting
officer)
|
EXHIBIT
INDEX
|
|
|
|
|
|
10.1
|
|
LivePerson,
Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 99.1
of the Company's Registration Statement on Form S-8, filed with the
Securities and Exchange Commission on June 9, 2009)
|
|
|
|
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
|