Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the quarterly period ended MARCH 31, 2006
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
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one).Large
accelerated filer Accelerated
filer Non-accelerated
filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes
No
As
of May
5, 2006, there were 38,879,018 shares of the issuer’s common stock
outstanding.
LIVEPERSON,
INC.
MARCH
31, 2006
FORM
10-Q
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PAGE
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6
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7
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14
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21
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22
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22
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22
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22
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23
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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.”
LIVEPERSON,
INC.
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
| |
|
|
|
|
|
| |
|
March
31,
2006
|
|
December
31,
2005
|
|
| |
|
(Unaudited)
|
|
(Note
1(B))
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
19,121
|
|
$
|
17,117
|
|
|
Accounts
receivable, net of allowances for doubtful accounts of $67 and $67
as of
March 31, 2006 and December 31, 2005, respectively
|
|
|
1,816
|
|
|
1,727
|
|
|
Prepaid
expenses and other current assets
|
|
|
553
|
|
|
591
|
|
|
Deferred
tax assets
|
|
|
221
|
|
|
|
|
|
Total
current assets
|
|
|
21,711
|
|
|
19,435
|
|
|
Property
and equipment, net
|
|
|
568
|
|
|
575
|
|
|
Intangibles,
net
|
|
|
558
|
|
|
790
|
|
|
Security
deposits
|
|
|
188
|
|
|
180
|
|
|
Other
assets
|
|
|
454
|
|
|
446
|
|
|
Total
assets
|
|
$
|
23,479
|
|
$
|
21,426
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
450
|
|
$
|
346
|
|
|
Accrued
expenses
|
|
|
1,741
|
|
|
1,803
|
|
|
Deferred
revenue
|
|
|
1,842
|
|
|
1,618
|
|
|
Total
current liabilities
|
|
|
4,033
|
|
|
3,767
|
|
|
Other
liabilities
|
|
|
454
|
|
|
446
|
|
| |
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
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Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value per share; 5,000,000 shares authorized, 0
shares
issued and outstanding at March 31, 2006 and December 31,
2005
|
|
|
—
|
|
|
|
|
|
Common
stock, $.001 par value per share; 100,000,000 shares authorized,
38,879,018 shares issued and outstanding at March 31, 2006 and 37,979,271
shares issued and outstanding at December 31, 2005
|
|
|
39
|
|
|
38
|
|
|
Additional
paid-in capital
|
|
|
120,038
|
|
|
118,556
|
|
|
Accumulated
deficit
|
|
|
(101,082
|
)
|
|
(101,381
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(3
|
)
|
|
|
|
|
Total
stockholders’ equity
|
|
|
18,992
|
|
|
17,213
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
23,479
|
|
$
|
21,426
|
|
SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS.
LIVEPERSON,
INC.
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
UNAUDITED
| |
|
|
|
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Revenue
|
|
$
|
6,877
|
|
$
|
4,954
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
1,462
|
|
|
863
|
|
|
Product
development
|
|
|
880
|
|
|
675
|
|
|
Sales
and marketing
|
|
|
2,646
|
|
|
1,485
|
|
|
General
and administrative
|
|
|
1,501
|
|
|
1,271
|
|
|
Amortization
of intangibles
|
|
|
232
|
|
|
235
|
|
|
Total
operating expenses
|
|
|
6,721
|
|
|
4,529
|
|
|
Income
from operations
|
|
|
156
|
|
|
425
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
143
|
|
|
43
|
|
|
Total
other income
|
|
|
143
|
|
|
43
|
|
|
Income
before provision for income taxes
|
|
|
299
|
|
|
468
|
|
|
Provision
for income taxes
|
|
|
|
|
|
164
|
|
|
Net
income
|
|
$
|
299
|
|
$
|
304
|
|
|
Basic
net income per common share
|
|
$
|
0.01
|
|
$
|
0.01
|
|
|
Diluted
net income per common share
|
|
$
|
0.01
|
|
$
|
0.01
|
|
|
Weighted
average shares outstanding used in basic net income per common share
calculation
|
|
|
38,253,681
|
|
|
37,433,446
|
|
|
Weighted
average shares outstanding used in diluted net income per common
share
calculation
|
|
|
40,504,248
|
|
|
39,448,922
|
|
Net
income for the three months ended March 31, 2006 includes stock-based
compensation expense related to the adoption of SFAS No. 123(R) in the amount
of
$583. There was no stock-based compensation in the three months ended March
31,
2005 because the Company was not required to adopt SFAS No. 123(R) until January
1, 2006. Net loss including pro forma stock-based compensation expense as
previously disclosed in the notes to the Consolidated Financial Statements
for
the three months ended March 31, 2005 was $190 or $0.01 per diluted common
share. See note 1(D).
SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS.
LIVEPERSON,
INC.
(IN
THOUSANDS)
UNAUDITED
| |
|
|
|
| |
|
Three
Months Ended
March
31,
|
|
| |
|
2006
|
|
2005
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
299
|
|
$
|
304
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
583
|
|
|
|
|
|
Depreciation
|
|
|
62
|
|
|
48
|
|
|
Amortization
of intangibles
|
|
|
232
|
|
|
235
|
|
|
Tax
benefit from employee stock option exercises
|
|
|
|
|
|
152
|
|
|
Provision
for doubtful accounts, net
|
|
|
|
|
|
30
|
|
| |
|
|
|
|
|
|
|
|
CHANGES
IN OPERATING ASSETS AND LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(89
|
)
|
|
(384
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
31
|
|
|
67
|
|
|
Security
deposits
|
|
|
(8
|
)
|
|
2
|
|
|
Other
assets
|
|
|
|
|
|
(26
|
)
|
|
Accounts
payable
|
|
|
104
|
|
|
176
|
|
|
Accrued
expenses
|
|
|
(62
|
)
|
|
(467
|
)
|
|
Deferred
revenue
|
|
|
224
|
|
|
102
|
|
|
Other
liabilities
|
|
|
|
|
|
25
|
|
|
Net
cash provided by operating activities
|
|
|
1,376
|
|
|
264
|
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment, including capitalized software
|
|
|
(55
|
)
|
|
(41
|
)
|
|
Net
cash used in investing activities
|
|
|
(55
|
)
|
|
(41
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock in connection with the exercise of
options
|
|
|
686
|
|
|
31
|
|
|
Net
cash provided by financing activities
|
|
|
686
|
|
|
31
|
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
(3
|
)
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
2,004
|
|
|
254
|
|
|
Cash
and cash equivalents at the beginning of the period
|
|
|
17,117
|
|
|
12,425
|
|
|
Cash
and cash equivalents at the end of the period
|
|
$
|
19,121
|
|
$
|
12,679
|
|
SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS.
LIVEPERSON,
INC.
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY
OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(A) SUMMARY
OF OPERATIONS
LivePerson,
Inc. (the “Company” or “LivePerson”) was incorporated in the State of Delaware
in 1995. The Company commenced operations in 1996. LivePerson is a provider
of
online conversion solutions. The Company’s hosted software enables companies to
identify and proactively engage online visitors—increasing sales, satisfaction
and loyalty while reducing service costs.
The
Company’s fully-integrated multi-channel communications platform, Timpani,
facilitates real-time sales, marketing and customer service. Its technology
supports and manages key online interactions—via chat, email and
self-service/knowledgebase—in a cost-effective and secure environment. Blending
leading technology, a deep understanding of consumer behavior and industry
best
practices to create more relevant, compelling and personalized online
experiences, the Company maximizes the business impact of the online
channel.
The
Company’s primary revenue source is from the sale of the LivePerson services
under the brand name Timpani and LivePerson, which is conducted within one
operating segment. Headquartered in New York City, the Company’s product
development staff, help desk and online sales support are located in
Israel.
(B) UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The
accompanying condensed consolidated financial statements as of March 31, 2006
and for the three months ended March 31, 2006 and 2005 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 March 31, 2006, and the consolidated results of operations and cash flows
for
the interim periods ended March 31, 2006 and 2005. 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, 2005 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, 2005, included in the Company’s Annual Report on Form 10-K filed with the
SEC on March 15, 2006.
(C) REVENUE
RECOGNITION
The
Company charges a monthly fee, which varies by service and client usage. Certain
of the Company’s larger clients, who require more sophisticated implementation
and training, may also pay an initial non-refundable set-up fee and professional
service fees related to implementation. The Company may also charge professional
service fees related to additional training, business consulting and analysis
in
support of the LivePerson services.
The
initial set-up fee is intended to recover certain costs (principally customer
service, training and other administrative costs) prior to the deployment of
the
LivePerson services. Such fees are recorded as deferred revenue and recognized
ratably over a period of 24 months, representing the estimated term of the
client relationships. Although the Company believes this estimate is reasonable,
this estimate may change in the future. In instances where the Company does
charge a set-up fee, the Company typically does not charge an additional set-up
fee if an existing client adds more services. Unamortized deferred fees, if
any,
are recognized upon termination of the agreement with the customer. The Company
did not recognize any set-up fees due to client attrition in the three months
ended March 31, 2006 and 2005, respectively.
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. These sales typically have
no set-up fee, because the Company typically does not provide the customer
with
onsite training, and administrative costs are minimal.
The
Company records revenue based upon the monthly fee charged for the LivePerson
services, provided that no significant Company obligations remain and collection
of the resulting receivable is probable. The Company recognizes monthly service
fees as services are provided. The Company’s service agreements typically have
twelve month terms and are terminable upon 30 to 90 days’ notice without
penalty. The Company recognizes professional service fees upon completion and
customer acceptance of the professional service engagement.
(D) STOCK-BASED
COMPENSATION
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” which addresses the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services, with a primary focus on transactions in which an entity
obtains employee services in share-based payment transactions. SFAS
No. 123(R) is a revision to SFAS No. 123, “Accounting for Stock-Based
Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees,” and its related
implementation guidance. SFAS No. 123(R) requires measurement of the cost
of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited exceptions).
Incremental compensation costs arising from subsequent modifications of awards
after the grant date must be recognized.
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 first day of the Company’s fiscal year. The Company’s Consolidated
Financial Statements as of and for the three months ended March 31, 2006 reflect
the impact of SFAS No. 123(R). In accordance with the modified prospective
transition method, the Company’s 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 the Company’s Consolidated
Statements of Income. Stock-based compensation recognized in the Company’s
Consolidated Statement of Income for the three months ended March 31, 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).
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 Statement of Income
for the three months ended March 31, 2006:
|
|
|
Three
Months Ended
March
31, 2006
|
|
|
Cost
of revenue
|
|
$
|
44
|
|
|
Product
development expense
|
|
|
127
|
|
|
Sales
and marketing expense
|
|
|
183
|
|
|
General
and administrative expense
|
|
|
229
|
|
|
Total
stock based compensation included in operating expenses
|
|
$
|
583
|
|
The
per
share weighted average fair value of stock options granted during the three
months ended March 31, 2006 was $3.25. 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
March
31, 2006
|
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
Risk-free
interest rate
|
|
|
4.8
|
%
|
|
Expected
life (in years)
|
|
|
4
|
|
|
Historical
volatility
|
|
|
80.0
|
%
|
Prior
to
the adoption of SFAS No. 123(R) on January 1, 2006, the Company applied the
intrinsic value-based method of accounting prescribed by APB Opinion No. 25
and
related interpretations including Financial Accounting Standards Board (“FASB”)
Interpretation No. 44, “Accounting for Certain Transactions Involving Stock
Compensation: An Interpretation of APB Opinion No. 25” (issued in March 2000),
to account for its fixed plan stock options. Under this method, compensation
expense was recorded on the date of grant only if the current market price
of
the underlying stock exceeded the exercise price. SFAS No. 123 and SFAS No.
148,
“Accounting for Stock-Based Compensation - Transition and Disclosure” (an
amendment to SFAS No. 123), established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As permitted by the accounting standards, the Company had
elected to continue to apply the intrinsic value-based method of accounting
described above, and had adopted the disclosure requirements of SFAS No. 123,
as
amended by SFAS No. 148. The Company amortized deferred compensation on a graded
vesting methodology in accordance with FASB Interpretation No. 28, “Accounting
for Stock Appreciation Rights and Other Variable Stock Award
Plans.”
The
Company applied APB Opinion No. 25 and related interpretations in accounting
for
its stock option grants to employees. Accordingly, except as mentioned below,
no
compensation expense had been recognized relating to these stock option grants
in the consolidated financial statements. Had compensation cost for the
Company’s stock option grants been determined based on the fair value at the
grant date for awards consistent with the method of SFAS No. 123, the Company’s
net income attributable to common stockholders for the three months ended March
31, 2005 would have decreased to the pro forma amount presented below. The
Company did not have any employee stock options outstanding prior to January
1,
1998.
|
|
|
Three
Months Ended
March
31, 2005
|
|
|
Net
income as reported
|
|
$
|
304
|
|
|
Deduct:
Pro forma stock-based compensation cost
|
|
$
|
(494
|
)
|
|
Pro
forma net (loss)
|
|
$
|
(190
|
)
|
|
Basic
net income (loss) per common share:
|
|
|
|
|
|
As
reported
|
|
$
|
0.01
|
|
|
Pro
forma
|
|
$
|
(0.01
|
)
|
|
Diluted
net income (loss) per common share:
|
|
|
|
|
|
As
reported
|
|
$
|
0.01
|
|
|
Pro
forma
|
|
$
|
(0.01
|
)
|
The
per
share weighted average fair value of stock options granted during the three
months ended March 31, 2005 was $2.09. 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: dividend yield of zero percent,
risk-free interest rate of 4.6%, expected life of five years and a volatility
factor of 90.0%.
During
1998, the Company established the Stock Option and Restricted Stock Purchase
Plan (the “1998 Plan”). Under the 1998 Plan, the Board of Directors could issue
incentive stock options or nonqualified stock options to purchase up to
5,850,000 shares of common stock.
The
Company established a successor to the 1998 Plan, the 2000 Stock Incentive
Plan
(the “2000 Plan”). Under the 2000 Plan, the options which had been outstanding
under the 1998 Plan were incorporated into the 2000 Plan and the Company
increased the number of shares available for issuance under the plan by
approximately 4,150,000, thereby reserving for issuance 10,000,000 shares
of
common stock in the aggregate. Options to acquire common stock granted
thereunder have ten-year terms. 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
March
31, 2006, approximately 11,997,000 shares of common stock were reserved for
issuance under the 2000 Plan (taking into account all option exercises through
March 31, 2006).
A
summary
of the Company's stock option activity and weighted average exercise prices
is
as follows:
| |
|
|
|
Weighted
|
|
| |
|
|
|
Average
Exercise
|
|
| |
|
Options
|
|
Price
|
|
|
Options
outstanding at December 31, 2005
|
|
|
8,300,053
|
|
$
|
2.16
|
|
|
Options
granted
|
|
|
243,000
|
|
$
|
5.28
|
|
|
Options
exercised
|
|
|
(899,747
|
)
|
$
|
0.78
|
|
|
Options
cancelled
|
|
|
(259,125
|
)
|
$
|
2.15
|
|
|
Options
outstanding at March 31, 2006
|
|
|
7,384,181
|
|
$
|
2.41
|
|
| |
|
|
|
|
|
|
|
|
Options
exercisable at March 31, 2006
|
|
|
3,781,556
|
|
$
|
2.01
|
|
The
following table summarizes information about stock options outstanding and
exercisable at March 31, 2006:
|
Options
Outstanding
|
|
Options
Exercisable
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
Remaining
|
|
Average
|
|
Number
|
|
Average
|
|
|
Exercise
Price
|
|
Outstanding
|
|
Contractual
Life
|
|
Exercise
Price
|
|
Outstanding
|
|
Exercise
Price
|
|
|
$0.00-$1.00
|
|
|
2,288,482
|
|
|
5.82
|
|
$
|
0.58
|
|
|
1,797,357
|
|
$
|
0.54
|
|
|
$1.01-$2.00
|
|
|
1,104,449
|
|
|
6.35
|
|
$
|
1.93
|
|
|
696,949
|
|
$
|
1.93
|
|
|
$2.01-$5.00
|
|
|
3,376,625
|
|
|
8.25
|
|
$
|
3.12
|
|
|
940,625
|
|
$
|
3.12
|
|
|
$5.01-$11.00
|
|
|
614,625
|
|
|
6.59
|
|
$
|
6.21
|
|
|
346,625
|
|
$
|
6.83
|
|
| |
|
|
7,384,181
|
|
|
|
|
|
|
|
|
3,781,556
|
|
|
|
|
A
summary
of the status of the Company's nonvested shares as of December 31, 2005,
and
changes during the three months ended March 31, 2006 is as
follows:
| |
|
|
|
Weighted
|
|
| |
|
|
|
Average
|
|
| |
|
|
|
Grant-Date
|
|
| |
|
Shares
|
|
Fair
Value
|
|
|
Nonvested
Shares at January 1, 2006
|
|
|
3,827,250
|
|
$
|
1.65
|
|
|
Granted
|
|
|
243,000
|
|
$
|
3.25
|
|
|
Vested
|
|
|
(322,250
|
)
|
$
|
2.09
|
|
|
Cancelled
|
|
|
(145,375
|
)
|
$
|
2.15
|
|
|
Nonvested
Shares at March 31, 2006
|
|
|
3,602,625
|
|
$
|
1.70
|
|
As
of
March 31, 2006, there was $5.7 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 3.1
years.
(E) BASIC
AND DILUTED NET INCOME PER SHARE
The
Company calculates earnings per share in accordance with the provisions of
SFAS
No. 128, “Earnings Per Share (“EPS”),” and the guidance of the SEC Staff
Accounting Bulletin No. 98. Under SFAS No. 128, basic EPS excludes dilution
for common stock equivalents and is computed by dividing net income or loss
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. All options, warrants or other potentially
dilutive instruments issued for nominal consideration are required to be
included in the calculation of basic and diluted net income attributable to
common stockholders. 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 months ended March 31, 2006
includes the effect of options to purchase 7,613,244 shares of common stock
with
a weighted average exercise price of $2.07 and warrants to purchase 188,250
shares of common stock with a weighted average exercise price of $1.56. Diluted
net income per common share for the three months ended March 31, 2006 does
not
include the effect of options to purchase 321,625 shares of common stock.
Diluted net income per common share for the three months ended March 31,
2005 includes the effect of options to purchase 6,194,497 shares of common
stock
with a weighted average exercise price of $1.22 and warrants to purchase 127,802
shares of common stock with a weighted average exercise price of $0.69. Diluted
net income per common share for the three months ended March 31, 2005 does
not
include the effect of options to purchase 2,320,500 shares of common stock.
A
reconciliation of shares used in calculating basic and diluted earnings per
share follows:
| |
|
Three
Months Ended
March
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Basic
|
|
|
38,253,681
|
|
|
37,433,446
|
|
|
Effect
of assumed exercised options
|
|
|
2,250,567
|
|
|
2,015,476
|
|
|
Diluted
|
|
|
40,504,248
|
|
|
39,448,922
|
|
(F) RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets,” which eliminates an exception in APB Opinion No. 29, “Accounting
for Nonmonetary Transactions,” for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. SFAS No. 153 is effective for
the Company for nonmonetary asset exchanges occurring on or after
January 1, 2006. The adoption of SFAS No. 153 did not have a material
impact on the Company’s financial position, cash flows or results of
operations.
In
May
2005, the FASB has issued SFAS No. 154, “Accounting Changes and Error
Corrections.” This new standard replaces APB Opinion No. 20, “Accounting
Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
Statements,” and is part of FASB’s stated goal to converge its standards with
those issued by the International Accounting Standards Board. Among other
changes, SFAS No. 154 requires that a voluntary change in accounting principle
be applied retrospectively with all prior period financial statements presented
on the new accounting principle, unless it is impracticable to do so. SFAS
No.
154 also provides that (1) a change in method of depreciating or amortizing
a
long-lived nonfinancial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and
(2)
correction of errors in previously issued financial statements should be termed
a “restatement.” The new standard is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005.
Early adoption of this standard is permitted for accounting changes and
correction of errors made in fiscal years beginning after June 1,
2005.
In
November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards,”
which provides an alternative transition method to establish the beginning
balance of the additional paid-in capital pool (“APIC pool”) related to the tax
effects of employee stock-based compensation, and to determine the subsequent
impact on the APIC pool and consolidated statements of cash flows of the tax
effects of employee stock-based compensation awards that are outstanding upon
adoption of SFAS No. 123(R).
(2) BALANCE
SHEET COMPONENTS
Property
and equipment is summarized as follows:
| |
|
March
31,
2006
|
|
December
31,
2005
|
|
| |
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Computer
equipment and software
|
|
$
|
1,986
|
|
$
|
1,936
|
|
|
Furniture,
equipment and building improvements
|
|
|
187
|
|
|
182
|
|
| |
|
|
2,173
|
|
|
2,118
|
|
|
Less
accumulated depreciation
|
|
|
1,605
|
|
|
1,543
|
|
|
Total
|
|
$
|
568
|
|
$
|
575
|
|
Accrued
expenses consist of the following:
| |
|
March
31,
2006
|
|
December
31,
2005
|
|
| |
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Payroll
and related costs
|
|
$
|
1,207
|
|
$
|
1,182
|
|
|
Professional
services and consulting fees
|
|
|
257
|
|
|
461
|
|
|
Sales
commissions
|
|
|
228
|
|
|
99
|
|
|
Other
|
|
|
49
|
|
|
61
|
|
|
Total
|
|
$
|
1,741
|
|
$
|
1,803
|
|
(3) ASSET
ACQUISITIONS
Island
Data
In
December 2003, the Company acquired certain identifiable assets of Island Data
Corporation. The purchase price was based on projected revenue from the acquired
customer contracts at the time of their assignment to the Company. The Company
paid approximately $370 in cash, and issued 370,894 shares of its common stock,
in connection with the acquisition. The total acquisition costs were
approximately $2,119. Of the total purchase price, the Company has allocated
approximately $65 to non-compete agreements which is being amortized over a
period of 24 months, representing the terms of the agreements. The remainder
of
the purchase has been allocated to customer contracts and is being amortized
over a period of 36 months, representing the current estimate of the term of
the
acquired client relationships. The net acquisition costs of $506 and $685 are
included in “Assets - Intangibles, net” on the Company’s March 31, 2006 and
December 31, 2005 balance sheets, respectively.
FaceTime
In
July
2004, the Company acquired certain identifiable assets of FaceTime
Communications, Inc. The transaction transferred certain existing customer
contracts of FaceTime to the Company. The purchase price was based in part
on
future revenue generated from the former FaceTime client base. The total
acquisition costs were approximately $394. The total acquisition cost is being
amortized ratably over a period of 24 months, representing the current estimate
of the term of the acquired client relationships. The net acquisition costs
of
$52 and $105 are included in “Assets - Intangibles, net” on the Company’s
March 31, 2006 and December 31, 2005 balance sheets,
respectively.
(4) INCOME
TAXES
Income
taxes are accounted for under the asset and liability method. Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or
all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences are expected to become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment.
Under
Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s use
of its federal net operating loss (“NOL”) carryforwards may be limited if the
Company has experienced an ownership change, as defined in Section 382. The
Company completed its previously disclosed Section 382 analysis during 2004
and
determined that an ownership change had occurred as of December 7, 2001. As
a
result, there is a material limitation on the Company’s use of its federal NOL
carryforwards. As of December 31, 2005 and 2004, the Company had approximately
$7,955 and $9,341, respectively, of federal NOL carryforwards available to
offset future taxable income after considering the Section 382 limitation.
Because certain deductions may be taken during the five year recognition period
following the date of the ownership change, additional limitations may apply.
These carryforwards expire in various years through 2023.
In
order
to fully realize the deferred tax assets, the Company will need to generate
future taxable income of approximately $21,000 prior to the expiration of the
NOL carryforwards in 2023. If the entire deferred tax asset at December 31,
2005
is realized, approximately $2,687 will be allocated to Additional paid-in
capital with the remainder reducing income tax expense. At December 31, 2005,
based upon the level of historical taxable losses and after considering
projections for future taxable income over the periods in which the deferred
tax
assets are expected to be deductible, management believed it was more likely
than not that the Company would not realize the benefits of these deductible
differences. Accordingly, the Company recorded a full valuation allowance
against its deferred tax assets. At March 31, 2006, management determined that
is more likely than not that the Company would realize a portion of the benefits
of these deductible differences. Accordingly, the Company reduced its valuation
allowance resulting in a net effective tax rate of zero. As a result, the
Company recorded a deferred tax asset in the amount of $221 with an offsetting
increase to Additional paid-in capital as there are no current taxes
payable. Management will continue to assess the remaining valuation
allowance. To the extent it is determined that the valuation allowance is no
longer required with respect to certain deferred tax assets, the tax benefit,
if
any, of such deferred tax assets will be recognized in the future.
(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 months ended March 31, 2006 and 2005 was approximately
$172
and $157, respectively.
(6) LEGAL
MATTERS
In
September 2005, the Company received written notification from a former employee
alleging claims related to improper termination of employment. The Company
believes the claims are without merit, and, in the event this matter proceeds
further, the Company intends to vigorously defend against any such claims.
The
Company has not accrued for this contingency as of December 31, 2005, or
March 31, 2006, because the amount of loss, if any, cannot be reasonably
estimated at this time.
The
Company is not currently party to any legal proceedings. From time to time,
the
Company may be subject to various claims and legal actions arising in the
ordinary course of business.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
GENERAL
Our
discussion and analysis of our financial condition and results of operations
are
based upon our unaudited condensed consolidated financial statements, which
are
prepared in conformity with accounting principles generally accepted in the
United States of America. As such, we are required to make certain estimates,
judgments and assumptions that management believes are reasonable based upon
the
information available. We base these estimates on our historical experience,
future expectations and various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
our
judgments that may not be readily apparent from other sources. These estimates
and assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenue and expenses during
the
reporting periods. These estimates and assumptions relate to estimates of
collectibility of accounts receivable, the expected term of a client
relationship, accruals and other factors. We evaluate these estimates on an
ongoing basis. Actual results could differ from those estimates under different
assumptions or conditions, and any differences could be material.
The
significant accounting policies which we believe are the most critical to aid
in
fully understanding and evaluating the reported consolidated financial results
include the following:
REVENUE
RECOGNITION
LivePerson
is a provider of online conversion solutions. Our hosted software enables
companies to identify and proactively engage online visitors—increasing sales,
satisfaction and loyalty while reducing service costs.
LivePerson’s
fully-integrated multi-channel communications platform, Timpani, facilitates
real-time sales, marketing and customer service. Our technology supports and
manages key online interactions—via chat, email and
self-service/knowledgebase—in a cost-effective and secure environment. Blending
leading technology, a deep understanding of consumer behavior and industry
best
practices to create more relevant, compelling and personalized online
experiences, LivePerson maximizes the business impact of the online
channel.
We
charge
a monthly fee, which varies by service and client usage. Certain of our larger
clients, who require more sophisticated implementation and training, may also
pay an initial non-refundable set-up fee and professional service fees related
to implementation. We may also charge professional service fees related to
additional training, business consulting and analysis in support of the
LivePerson services. The proportion of our new clients that are large
corporations is increasing. These companies typically have more significant
implementation requirements and more stringent data security standards. As
a
result, our professional services revenue has begun to increase. Such clients
also have more sophisticated data analysis and performance reporting
requirements, and are more like to engage our professional services organization
to provide such analysis and reporting on a recurring basis. As a result, it
is
likely that a greater proportion of our future revenue will be generated from
such ongoing professional services work.
The
initial set-up fee is intended to recover certain costs (principally customer
service, training and other administrative costs) prior to the deployment of
our
services. Such fees are recorded as deferred revenue and recognized ratably
over
a period of 24 months, representing the estimated term of the client
relationships. Although we believe this estimate is reasonable, this estimate
may change in the future. In instances where we do charge a set-up fee, we
typically do not charge an additional set-up fee if an existing client adds
more
services. Unamortized deferred fees, if any, are recognized upon termination
of
the agreement with the customer. We did not recognize any set-up fees due to
client attrition in the three months ended March 31, 2006 and 2005,
respectively.
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. These sales typically have no set-up fee, because
we
typically do not provide the customer with onsite training, and administrative
costs are minimal.
We
record
revenue based upon the monthly fee charged for the LivePerson services, provided
that no significant Company obligations remain and collection of the resulting
receivable is probable. We recognize monthly service fees as services are
provided. Our service agreements typically have twelve month terms and are
terminable upon 30 to 90 days’ notice without penalty. We recognize professional
service fees upon completion and customer acceptance of the professional service
engagement.
STOCK-BASED
COMPENSATION
On
January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)
No. 123 (revised 2004), “Share-Based Payment,” which addresses the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services, with a primary focus on transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) is a
revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” and
supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees,” and its related implementation guidance. SFAS No.
123(R) requires measurement of the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exceptions). Incremental compensation costs arising
from subsequent modifications of awards after the grant date must be
recognized.
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,
the
first day of our fiscal year. Our Consolidated Financial Statements as of and
for the three months ended March 31, 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
Income. Stock-based compensation recognized in our Consolidated Statement of
Income for the three months ended March 31, 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 March 31, 2006, there was $5.7 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 3.1 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
months ended March 31, 2006 and 2005. One customer accounted for approximately
12% of accounts receivable at March 31, 2006. No single customer accounted
for
or exceeded 10% of accounts receivable at December 31, 2005.
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.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets,” which eliminates an exception in APB Opinion No. 29, “Accounting
for Nonmonetary Transactions,” for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. SFAS No. 153 is effective for
us for nonmonetary asset exchanges occurring on or after January 1, 2006.
The adoption of SFAS No. 153 did not have a material impact on our financial
position, cash flows or results of operations.
In
May
2005, the FASB has issued SFAS No. 154, “Accounting Changes and Error
Corrections.” This new standard replaces APB Opinion No. 20, “Accounting
Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
Statements,” and is part of FASB’s stated goal to converge its standards with
those issued by the International Accounting Standards Board. Among other
changes, SFAS No. 154 requires that a voluntary change in accounting principle
be applied retrospectively with all prior period financial statements presented
on the new accounting principle, unless it is impracticable to do so. SFAS
No.
154 also provides that (1) a change in method of depreciating or amortizing
a
long-lived nonfinancial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and
(2)
correction of errors in previously issued financial statements should be termed
a “restatement.” The new standard is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005.
Early adoption of this standard is permitted for accounting changes and
correction of errors made in fiscal years beginning after June 1,
2005.
In
November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards,”
which provides an alternative transition method to establish the beginning
balance of the additional paid-in capital pool (“APIC pool”) related to the tax
effects of employee stock-based compensation, and to determine the subsequent
impact on the APIC pool and consolidated statements of cash flows of the tax
effects of employee stock-based compensation awards that are outstanding upon
adoption of SFAS No. 123(R).
OVERVIEW
LivePerson
is a provider of online conversion solutions. Our hosted software enables
companies to identify and proactively engage online visitors—increasing sales,
satisfaction and loyalty while reducing service costs.
LivePerson’s
fully-integrated multi-channel communications platform, Timpani, facilitates
real-time sales, marketing and customer service. Our technology supports and
manages key online interactions—via chat, email and
self-service/knowledgebase—in a cost-effective and secure environment. Blending
leading technology, a deep understanding of consumer behavior and industry
best
practices to create more relevant, compelling and personalized online
experiences, LivePerson maximizes the business impact of the online
channel.
We
were
incorporated in the State of Delaware in November 1995 and the LivePerson
service was introduced initially in November 1998.
In
July
2002, we acquired all of the existing customer contracts of NewChannel, Inc.
and
associated rights. The purchase price was based, in part, on projected revenue
from each of the former NewChannel clients at the time of their successful
conversion to the LivePerson software platform. The total acquisition costs
were
approximately $1.4 million. The total acquisition cost has been allocated to
customer contracts and was amortized ratably over a period of 18 months,
representing the then expected term of the client relationships. As of
December 31, 2003, the total purchase had been completely
amortized.
In
December 2003, we acquired certain identifiable assets of Island Data
Corporation. The purchase price was based on projected revenue from the acquired
customer contracts at the time of their assignment to us. We paid approximately
$370,000 in cash, and issued 370,894 shares of our common stock, in connection
with the acquisition. The total acquisition costs were approximately $2.1
million. Of the total purchase price, we have allocated approximately $65,000
to
non-compete agreements which is being amortized over a period of 24 months,
representing the terms of the agreements. The remainder of the purchase price
has been allocated to customer contracts and is being amortized over a period
of
36 months, representing our current estimate of the term of the acquired client
relationships. The net acquisition costs of $506,000 and $685,000 are included
in “Assets - Intangibles, net” on our March 31, 2006 and December 31,
2005 balance sheets, respectively.
In
January 2004, we filed a registration statement with the Securities and Exchange
Commission to register the resale of up to 500,000 shares of our common stock
by
Island Data. Our registration of the resale of the shares was required by our
agreement with Island Data. The shares registered for resale on the registration
statement, but not actually issued to Island Data pursuant to the agreement,
will be deregistered. We did not receive any proceeds from the sale of the
shares of common stock covered by the Island Data registration
statement.
In
January 2004, we filed a shelf registration statement with the Securities and
Exchange Commission relating to 4,000,000 shares of our common stock that we
may
issue from time to time. We have no immediate plans to offer or sell any shares
under this shelf registration. We presently intend to use the net proceeds
from
any sale of the registered shares for general corporate purposes, working
capital and potential strategic acquisitions. We would announce the terms of
any
issuance in a filing with the Securities and Exchange Commission at the time
we
offer or sell the shares.
In
July
2004, we acquired certain identifiable assets of FaceTime Communications, Inc.
The transaction transferred certain existing customer contracts of FaceTime
to
us. The purchase price was based in part on future revenue generated by us
from
the former FaceTime client base. The total acquisition costs were approximately
$394,000. The total acquisition cost is being amortized ratably over a period
of
24 months, representing our current estimate of the term of the acquired client
relationships. The net acquisition costs of $52,000 and $105,000 are included
in
“Assets - Intangibles, net” on our March 31, 2006 and December 31,
2005 balance sheets, respectively.
REVENUE
Our
clients pay us a monthly fee, which varies by service and client usage. Certain
of our larger clients, who require more sophisticated implementation and
training, may also pay an initial non-refundable set-up fee and professional
service fees related to implementation. Our set-up fee is intended to recover
certain costs incurred by us (principally customer service, training and other
administrative costs) prior to deployment of our services. Such fees are
recorded as deferred revenue and recognized over a period of 24 months,
representing the estimated term of the client relationships. The proportion
of
our new clients that are large corporations is increasing. These companies
typically have more significant implementation requirements and more stringent
data security standards. As a result, our professional services revenue has
begun to increase. Such clients also have more sophisticated data analysis
and
performance reporting requirements, and are more like to engage our professional
services organization to provide such analysis and reporting on a recurring
basis. As a result, it is likely that a greater proportion of our future revenue
will be generated from such ongoing professional services work.
Revenue
attributable to our monthly service fee accounted for 93%, and 96% of total
LivePerson services revenue for the three months ended March 31, 2006 and 2005,
respectively. Our service agreements typically have twelve month terms and
are
terminable upon 30 to 90 days’ notice without penalty. We recognize monthly
service fees and professional service fees as services are provided.
Professional service fees consist of additional training and business consulting
and analysis provided to customers, both at the initial launch and over the
term
of the contract. Given the time required to schedule training for our clients’
operators and our clients’ resource constraints, we have historically
experienced a lag between signing a client contract and generating revenue
from
that client. This lag has recently ranged from 30 to 90 days. There is no lag
for sales generated via Internet download, because our services are immediately
available and fully functional upon download.
We
also
sell certain of the LivePerson services directly via Internet download. These
services are marketed as LivePerson Pro and LivePerson Contact Center for SMBs,
and are paid for almost exclusively by credit card. Credit card payments
accelerate cash flow and reduce our collection risk, subject to the merchant
bank’s right to hold back cash pending settlement of the transactions. Sales of
LivePerson Pro and LivePerson Contact Center may occur with or without the
assistance of an online sales representative, rather than through face-to-face
or telephone contact which is typically required for traditional direct sales.
These sales typically have no set-up fee, because we typically do not provide
the customer with onsite training, and administrative costs are minimal. We
recognize monthly service fees from the sale of LivePerson Pro and LivePerson
Contact Center during the month in which services are provided.
We
also
have entered into contractual arrangements that complement our direct sales
force and online sales efforts. These are primarily with Web hosting and call
center service companies, pursuant to which LivePerson is paid a commission
based on revenue generated by these service companies from our referrals. To
date, revenue from such commissions has not been material.
OPERATING
EXPENSES
Our
cost
of revenue has principally been associated with the LivePerson services and
has
consisted of:
| |
·
|
compensation
costs relating to employees who provide customer support and
implementation services to our
clients;
|
| |
·
|
compensation
costs relating to our network support
staff;
|
| |
·
|
allocated
occupancy costs and related overhead;
and
|
| |
·
|
the
cost of supporting our infrastructure, including expenses related
to
server leases, infrastructure support costs and Internet connectivity,
as
well as depreciation of certain hardware and
software.
|
Our
product development expenses consist primarily of compensation and related
expenses for product development personnel, allocated occupancy costs and
related overhead, outsourced labor and expenses for testing new versions of
our
software. Product development expenses are charged to operations as
incurred.
Our
sales
and marketing expenses consist of compensation and related expenses for sales
personnel and marketing personnel, allocated occupancy costs and related
overhead, advertising, sales commissions, marketing programs, public relations,
promotional materials, travel expenses and trade show exhibit
expenses.
Our
general and administrative expenses consist primarily of compensation and
related expenses for executive, accounting and human resources personnel,
allocated occupancy costs and related overhead, professional fees, provision
for
doubtful accounts and other general corporate expenses.
RESULTS
OF OPERATIONS
Due
to
our acquisition of certain identifiable assets of FaceTime in July 2004, our
acquisition of certain identifiable assets of Island Data in December 2003,
our
acquisition of the NewChannel customer contracts and associated rights in July
2002 and our limited operating history, we believe that comparisons of our
operating results for the three months ended March 31, 2006 and 2005 with each
other, or with those of prior periods, are not meaningful and that our
historical operating results should not be relied upon as indicative of future
performance.
COMPARISON
OF THREE MONTHS ENDED MARCH 31, 2006 AND 2005
Revenue.
Total
revenue increased by 39% to $6.9 million in the three months ended March 31,
2006, from $5.0 million in the comparable period in 2005. This increase is
primarily attributable to revenue from new clients of approximately $1.4 million
and, to a lesser extent, to increased revenue from existing clients in the
amount of approximately $413,000.
Cost
of Revenue.
Cost of
revenue consists of compensation costs relating to employees who provide
customer service to our clients, compensation costs relating to our network
support staff, the cost of supporting our infrastructure, including expenses
related to server leases and Internet connectivity, as well as depreciation
of
certain hardware and software, and allocated occupancy costs and related
overhead. Cost of revenue increased by 69% to $1.5 million in the three months
ended March 31, 2006, from $863,000 in the comparable period in 2005. This
increase is primarily attributable to costs related to additional account
management personnel to support increased client activity from existing clients
and the addition of new clients in the amount of approximately $267,000 and
to
increased spending for primary and backup server facilities of approximately
$166,000. The increase is also attributable to stock-based compensation
associated with the adoption of SFAS No. 123(R) in the amount of $44,000. As
a
result, our gross margin in the three months ended March 31, 2006 decreased
to
79% as compared to the three months ended March 31, 2005 of 83%. The proportion
of our new clients that are large corporations is increasing. These companies
typically have more significant implementation requirements and more stringent
data security standards. As a result, we have invested additional resources
to
support this change in the customer base and in anticipation of a continuation
of this trend, which has increased our cost of revenue and decreased our gross
margin.
Product
Development.
Our
product development expenses consist primarily of compensation and related
expenses for product development personnel as well as allocated occupancy costs
and related overhead. Product development costs increased by 30% to $880,000
in
the three months ended March 31, 2006, from $675,000 in the comparable period
in
2005. This increase is primarily attributable to stock-based compensation
associated with the adoption of SFAS No. 123(R) in the amount of $127,000 and,
to a lesser extent, to an increase in the number of LivePerson product
development personnel, at a cost of approximately $46,000, to support the
continuing development of our product line as we broaden the range of services
we offer to include a fully integrated, multi-channel software
platform.
Sales
and Marketing.
Our
sales and marketing expenses consist of compensation and related expenses for
sales and marketing personnel, as well as advertising, public relations and
trade show exhibit expenses. Sales and marketing expenses increased by 78%
to
$2.6 million in the three months ended March 31, 2006, from $1.5 million in
the
comparable period in 2005. This increase is primarily attributable to an
increase in costs related to additional sales and marketing personnel of
approximately $764,000, and to a lesser extent, an increase in advertising
expenses of approximately $82,000 related to our efforts to enhance our brand
recognition and increase sales lead activity. A significant portion of this
increase is driven by our recent move to increase our internal marketing
resources and external market presence, through an increased focus on public
relations and press activity, trade show participation and promotional and
advertising efforts designed to increase the inbound sales lead flow to our
direct sales force. The increase is also attributable to stock-based
compensation associated with the adoption of SFAS No. 123(R) in the amount
of
$183,000.
General
and Administrative.
Our
general and administrative expenses consist primarily of compensation and
related expenses for executive, accounting, human resources and administrative
personnel. General and administrative expenses increased by 18% to $1.5 million
in the three months ended March 31, 2006, from $1.3 million in the comparable
period in 2005. This increase is primarily attributable to stock-based
compensation associated with the adoption of SFAS No. 123(R) in the amount
of
$229,000 and, to a lesser extent, to increases in recruiting costs and legal
fees in the amount of approximately $178,000 offset by a decrease in accounting
expenses related to the audit of our internal control over financial reporting
as required by the Sarbanes-Oxley Act in the amount of approximately
$209,000.
Amortization
of Intangibles.
Amortization expense was $232,000 and $235,000 in the three months ended
March 31, 2006 and 2005, respectively, and relates to acquisition costs
recorded as a result of our acquisition of certain identifiable assets of Island
Data and FaceTime in December 2003 and July 2004, respectively.
Other
Income.
Interest
income was $143,000 and $43,000 in the three months ended March 31, 2006 and
2005, respectively, and consists of interest earned on cash and cash equivalents
generated by the receipt of proceeds from our initial public offering in 2000
and preferred stock issuances in 2000 and 1999 and, to a lesser extent, cash
provided by operating activities. This increase is primarily attributable to
increases in short-term interest rates and larger balances in interest bearing
accounts as a result of generating positive cash flows from
operations.
Provision
for Income Taxes.
Income
tax expense was $0 and $164,000 in the three months ended March 31, 2006 and
2005, respectively. In the three months ended March 31, 2006, we reduced our
valuation allowance against deferred tax assets resulting in an effective tax
rate of zero. At March 31, 2005, we had recorded a full valuation allowance
against deferred tax assets. The income tax expense for the three months ended
March 31, 2005 was attributable to the fact that our federal net operating
loss carryforward available for 2005 is related to the exercise of employee
stock options. Accordingly, the resulting tax benefit was recorded as an
increase in Additional paid-in capital and not as a reduction in income tax
expense.
Net
Income.
We had
net income of $299,000 in the three months ended March 31, 2006 compared to
$304,000 for the comparable period in 2005. Though net income was essentially
flat in the comparable periods, revenue was up $1.9 million and operating
expenses were up $2.2 million, including stock-based compensation expense of
$0.6 million related to the adoption of SFAS No. 123(R) in the three months
ended March 31, 2006. This decrease in income from operations was offset by
an
increase in interest income and a decrease in income tax expense.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
March 31, 2006, we had approximately $19.1 million in cash and cash equivalents,
an increase of $2.0 million from December 31, 2005. This increase is primarily
attributable to net cash provided by operating activities and, to a lesser
extent, to proceeds from the issuance of common stock in connection with the
exercise of stock options by employees offset in part by net cash used in
investing activities. We regularly invest excess funds in short-term money
market funds.
Net
cash
provided by operating activities was $1.4 million for the three months ended
March 31, 2006 and consisted primarily of net income and non-cash expenses
related to the adoption of SFAS No. 123(R) and to the amortization of
intangibles and an increase in deferred revenue, partially offset by an increase
in accounts receivable and a decrease in accrued expenses. Net
cash
provided by operating activities was $264,000 for the three months ended March
31, 2005 and consisted primarily of net income and non-cash expenses related
to
the amortization of intangibles, partially offset by an increase in accounts
receivable and a decrease in accrued expenses.
Net
cash
used in investing activities was $55,000 and $41,000 in the three months ended
March 31, 2006 and 2005, respectively, and was due primarily to the purchase
of
fixed assets.
Net
cash
provided by financing activities was $686,000 and $31,000 for the three months
ended March 31, 2006 and 2005, respectively, and consisted of proceeds from
the
issuance of common stock in connection with the exercise of stock options by
employees.
We
have
incurred significant costs to develop our technology and services, to hire
employees in our customer service, sales, marketing and administration
departments, and for the amortization of goodwill and intangible assets, as
well
as non-cash compensation costs. Historically, we incurred significant quarterly
net losses from inception through June 30, 2003, significant negative cash
flows
from operations in our quarterly periods from inception through December 31,
2002 and negative cash flows from operations of $124,000 in the three month
period ended March 31, 2004. As of March 31, 2006, we had an accumulated deficit
of approximately $101.1 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
months ended March 31, 2006 and 2005 was approximately $172,000 and $157,000,
respectively.
As
of
March 31, 2006, our principal commitments were approximately $1.0 million under
various operating leases, of which approximately $488,000 is due in 2006. We
do
not currently expect that our principal commitments for the year ending December
31, 2006 will exceed $800,000 in the aggregate. Our capital expenditures are
not
currently expected to exceed $500,000 in 2006. Our contractual obligations
at
March 31, 2006 are summarized as follows:
| |
|
Payments
due by period
|
|
| |
|
(in
thousands)
|
|
|
Contractual
Obligations
|
|
Total
|
|
Less
than 1 year
|
|
1-3
years
|
|
3-5
years
|
|
More
than 5 years
|
|
|
Operating
leases
|
|
$
|
1,034
|
|
$
|
488
|
|
$
|
546
|
|
$
|
—
|
|
$
|
—
|
|
|
Total
|
|
$
|
1,034
|
|
$
|
488
|
|
$
|
546
|
|
$
|
—
|
|
$
|
—
|
|
In
April
2006, we modified the existing lease for our principal executive offices in
New
York City. The modification is effective July 1, 2006 and includes the extension
of the term of the current lease through July 2011 as well as the addition
of
new space. As a result, our principal commitments under various operating leases
increased to approximately $3.3 million, of which approximately $522,000 is
due
in 2006.
Currency
Rate Fluctuations
Through
March 31, 2006, our results of operations, financial condition and cash flows
have not been materially affected by changes in the relative values of non-U.S.
currencies to the U.S. dollar. The functional currency of our wholly-owned
Israeli subsidiary, HumanClick Ltd., is the U.S. dollar and the functional
currency of our operations in the United Kingdom is the U.K. pound (sterling).
We do not use derivative financial instruments to limit our foreign currency
risk exposure.
Collection
Risk
Our
accounts receivable are subject, in the normal course of business, to collection
risks. We regularly assess these risks and have established policies and
business practices to protect against the adverse effects of collection risks.
We did not increase our allowance for doubtful accounts in the three months
ended March 31, 2006. During the year ended 2005, we increased our allowance
for
doubtful accounts by $30,000 to approximately $84,000, principally due to an
increase in accounts receivable as a result of increased sales, and we wrote
off
approximately $17,000 of previously reserved accounts, leaving a net allowance
of $67,000 at December 31, 2005.
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.
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 March 31, 2006. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of March 31,
2006
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.
There
were no changes in our internal control over financial reporting during the
quarter ended March 31, 2006 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.
In
September 2005, we received written notification from a former employee alleging
claims related to improper termination of employment. We believe the claims
are
without merit, and, in the event this matter proceeds further, we intend to
vigorously defend against any such claims. We have not accrued for this
contingency as of December 31, 2005, or March 31, 2006, because the amount
of
loss, if any, cannot be reasonably estimated at this time.
We
are
not currently party to any legal proceedings. From time to time, we may be
subject to various claims and legal actions arising in the ordinary course
of
business.
Risks
that could have a material and adverse impact on our business, results of
operations and financial condition include the following: our history of losses;
potential fluctuations in our quarterly and annual results; responding to rapid
technological change and changing client preferences; competition in the
real-time sales, marketing and customer service solutions market; continued
use
by our clients of the LivePerson services and their purchase of additional
services; technology systems beyond our control and technology-related defects
that could disrupt the LivePerson services; risks related to adverse business
conditions experienced by our clients; our dependence on key employees;
competition for qualified personnel; the impact of new accounting rules,
including the requirement to expense stock options; the possible unavailability
of financing as and if needed; risks related to the operational integration
of
acquisitions; risks related to our international operations, particularly our
operations in Israel, and the current civil and political unrest in that region;
risks related to protecting our intellectual property rights or potential
infringement of the intellectual property rights of third parties; our
dependence on the continued use of the Internet as a medium for commerce and
the
viability of the infrastructure of the Internet; and risks related to the
regulation or possible misappropriation of personal information. 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 15, 2006.
There
are
no material changes to the risk factors described in the Form 10-K.
The
following exhibits are filed as part of this Quarterly Report on Form
10-Q:
|
|
|
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
|
| |
|
|
|
|
|
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
|
| |
|
|
|
|
|
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
|
| |
|
|
|
|
|
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:
May
10, 2006 |
By: |
/s/
ROBERT P. LOCASCIO |
| |
|
| |
Name:
Robert P. LoCascio
Title:
Chief Executive Officer (duly authorized
officer)
|
| |
|
|
| Date:
May
10, 2006 |
By: |
/s/ TIMOTHY
E. BIXBY |
| |
|
| |
Name:
Timothy E. Bixby
Title: President,
Chief Financial Officer and Secretary
(principal financial and accounting
officer)
|
EXHIBIT
INDEX
EXHIBIT
|
|
|
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
|
| |
|
|
|
|
|
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
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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
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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
|