SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
______________
FORM
10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2004
Commission
File Number 000-30141
______________
LIVEPERSON,
INC.
(Exact
name of registrant as specified in its charter)
|
DELAWARE |
13-3861628 |
|
(State
of incorporation) |
(I.R.S.
employer identification number) |
| |
|
|
462
SEVENTH AVENUE, 21st FLOOR
NEW
YORK, NEW YORK |
10018 |
|
(Address of principal executive
offices) |
(Zip
Code) |
(212)
609-4200
(Registrant’s
telephone number, including area code)
______________
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001
per share
______________
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes x No o
The
aggregate market value of the voting common stock held by non-affiliates of the
registrant as of June 30, 2004 (the last business day of the registrant’s most
recently completed second fiscal quarter) was approximately $77,016,762
(computed by reference to the last reported sale price on the Nasdaq SmallCap
Market on that date). The registrant does not have any non-voting common stock
outstanding.
On March
1, 2005, 37,429,065 shares of the registrant’s common stock were
outstanding.
Portions
of the registrant’s definitive proxy statement for the 2005 Annual Meeting of
Stockholders, to be filed not later than April 29, 2005, are incorporated by
reference into Items 10, 11, 12, 13 and 14 of Part III of this Form
10-K.
LIVEPERSON,
INC.
2004
ANNUAL REPORT ON FORM 10-K
TABLE
OF CONTENTS
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Page |
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PART
I |
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Item
1. |
Business |
1 |
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Item
2. |
Properties |
10 |
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Item
3. |
Legal
Proceedings |
10 |
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Item
4. |
Submission
of Matters to a Vote of Security Holders |
10 |
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PART
II |
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Item
5. |
Market
for Registrant’s Common Equity, Related Stockholder Matters
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and
Issuer Purchases of Equity Securities |
11 |
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Item
6. |
Selected
Consolidated Financial Data |
13 |
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Item
7. |
Management’s
Discussion and Analysis of Financial Condition and |
|
| |
Results
of Operations |
15 |
|
Item
7A. |
Quantitative
and Qualitative Disclosures About Market Risk |
39 |
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Item
8. |
Consolidated
Financial Statements and Supplementary Data |
40 |
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Item
9. |
Changes
In and Disagreements With Accountants on Accounting and |
|
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Financial
Disclosure |
66 |
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Item
9A. |
Controls
and Procedures |
66 |
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Item
9B. |
Other
Information |
66 |
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PART
III |
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Item
10. |
Directors
and Executive Officers of the Registrant |
67 |
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Item
11. |
Executive
Compensation |
67 |
|
Item
12. |
Security
Ownership of Certain Beneficial Owners and Management and |
|
| |
Related
Stockholder Matters |
67 |
|
Item
13. |
Certain
Relationships and Related Transactions |
67 |
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Item
14. |
Principal
Accountant Fees and Services |
67 |
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PART
IV |
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Item
15. |
Exhibits
and Financial Statement Schedules |
67 |
FORWARD-LOOKING
STATEMENTS
STATEMENTS
IN THIS REPORT ABOUT LIVEPERSON, INC. THAT ARE NOT HISTORICAL FACTS ARE
FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS,
ESTIMATES AND PROJECTIONS ABOUT LIVEPERSON AND OUR INDUSTRY. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL FUTURE EVENTS OR RESULTS TO DIFFER MATERIALLY FROM SUCH STATEMENTS.
ANY SUCH FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. IT IS
ROUTINE FOR OUR INTERNAL PROJECTIONS AND EXPECTATIONS TO CHANGE AS THE YEAR OR
EACH QUARTER IN THE YEAR PROGRESS, AND THEREFORE IT SHOULD BE CLEARLY UNDERSTOOD
THAT THE INTERNAL PROJECTIONS AND BELIEFS UPON WHICH WE BASE OUR EXPECTATIONS
MAY CHANGE PRIOR TO THE END OF EACH QUARTER OR THE YEAR. ALTHOUGH THESE
EXPECTATIONS MAY CHANGE, WE ARE UNDER NO OBLIGATION TO INFORM YOU IF THEY DO.
OUR COMPANY POLICY IS GENERALLY TO PROVIDE OUR EXPECTATIONS ONLY ONCE PER
QUARTER, AND NOT TO UPDATE THAT INFORMATION UNTIL THE NEXT QUARTER. ACTUAL
EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN THE PROJECTIONS
OR FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED IN THE SECTION CAPTIONED “MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—RISK
FACTORS THAT MAY AFFECT FUTURE RESULTS.”
PART
I
ITEM
1. BUSINESS
Overview
LivePerson,
Inc. is a leading provider of solutions for managing online customer
interactions. Our hosted software enables companies to identify and proactively
engage the right customer, using the right communication channel, at the right
time.
LivePerson’s
fully-integrated multi-channel communications platform, Timpani, facilitates
real-time sales, customer service and marketing. Our technology supports and
manages all online interactions—chat, email and self-service/knowledgebase—in a
cost-effective and secure environment. By supplying a single agent desktop and
unified customer history, LivePerson makes it possible for organizations to
deliver a personalized, seamless and satisfying customer
experience.
Bridging
the gap between online interactions and external systems, our solutions deliver
immediate and tangible return on investment by enabling clients to:
| · |
Maximize
revenue opportunities, improve online conversion rates and reduce
abandonment rates |
| · |
Increase
customer satisfaction, retention and
loyalty |
| · |
Strengthen
customer relationships and promote customer-centric
strategies |
| · |
Acquire
and retain multi-channel customers |
| · |
Reduce
operating costs and increase productivity |
More than
3,000 clients, including AT&T, EarthLink, Hewlett-Packard,
Microsoft, Qwest and Verizon have implemented our products and
solutions to increase sales, satisfaction and loyalty; reduce service costs; and
improve agent productivity.
As an
application service provider (ASP), LivePerson provides solutions on a hosted
basis, which offers benefits including low up-front costs; fast implementation;
low total cost of ownership (TCO); scalability; cost predictability and
relatively effortless upgrades. Fully hosted and maintained by LivePerson, our
modular applications eliminate the need for valuable server space and dedicated
IT resources from the client-side.
LivePerson
was incorporated in the State of Delaware in November 1995, and the initial
LivePerson service was introduced in November 1998.
Market
Opportunity
Spurred
by the growing population of online shoppers coupled with innovations and site
improvements, revenues generated by online commerce are expected to more than
double in the next six years—from $144 billion in 2004 to $331 billion in 2010.
Forrester Research announced these calculations in an August 2004 report, which
also projected e-commerce to grow 15% annually in the same timeframe. Currently
accounting for 7% of total retail sales, online retail sales is expected to grow
to 13% in 2010.
The
Internet represents a substantial selling opportunity and also serves as a key
research medium, influencing in-store sales. In November 2004, Forrester
Research reported that 65% of consumers have researched a product online and
then purchased it offline. Rather than fearing competition from the Web,
businesses now recognize that adopting a multi-channel strategy is a critical
step towards meeting consumer needs and achieving profitability.
Seeking
to capitalize on growing broadband adoption rates, organizations have shifted
advertising budgets away from print, radio, television and outdoor, and
re-allocated their money and resources online. However, the industry average for
conversion rates—the percentage of visitors that buy or take a desired action
online—is less than 3%, and shopping cart abandonment rates hover at a dismal
50%, according to a Forrester Research report published in September 2004. By
providing tools that proactively drive sales and actions from website visitors,
LivePerson helps position Internet merchants to capitalize on the opportunity
for growth.
In
addition, as more companies concentrate on improving customer satisfaction and
retention, web-based interaction is among the key forces behind changes that
will characterize the service market in 2005. A Forrester Research trend report,
published in November 2004, cited email and chat interaction as a major driver
changing the service landscape.
Supplying
consistency, continuity and seamless escalation across all online channels,
LivePerson’s online interaction management software enables companies to meet
the increased expectations of multi-channel customers and leverage historic
customer data to promote long-term customer loyalty and
profitability.
The
LivePerson Strategy
Our
objective is to strengthen our current position as a leading provider of online
customer interaction management solutions. Continuing to develop and refine our
technology, which supports real-time sales, customer service and marketing, will
enable us to enhance our status and recognition in the marketplace. The key
elements of our strategy include:
Strengthening
our Position in Target Markets and Growing our Recurring Revenue
Base. We
intend to extend our market position by significantly increasing our installed
client base. We plan to continue to focus primarily on the financial services,
computer software and hardware, retail and telecommunications industries, as
well as small businesses, as our key target markets. We intend to capitalize on
our growing base of existing clients by selling them additional services as
online shoppers are increasingly exposed to the benefits and functionality of
our solutions. Increasing our client base will enable us to continue to expand
our recurring revenue stream. We also believe that greater exposure of Internet
users to our services will create additional demand for real-time sales,
customer service and marketing solutions.
Increasing
the Value of our Service to our Clients. We
strive to continuously add new features and functionality to our live
interaction platform. Because we manage the server infrastructure, we can make
new features available immediately to our clients without client or end-user
installation of software or hardware. We currently offer a suite of reporting,
analysis and administrative tools as part of our overall suite of services. We
will continue to develop more comprehensive tools for appropriate sectors of our
client base, while adding further interactive capabilities. We will also
continue to develop additional services that will provide value to our clients.
For example, we intend to provide more robust advisory services to our clients
that enable improved reporting capabilities, data storage and bridges to
existing client systems. Our clients may use these capabilities to increase
productivity, manage call center staffing, develop one-to-one marketing tactics
and pinpoint sales opportunities. Through these and other initiatives, we intend
to increase the value of our services to clients and their reliance on these
benefits, which we believe will result in additional revenue from both new and
existing clients over time.
Continuing
to Build Strong Brand Recognition. As a
pioneer in online communications and customer interaction management, LivePerson
enjoys strong brand recognition and credibility. LivePerson recently renamed its
product family under the master brand name of Timpani. In the third quarter of
2004, we launched a comprehensive marketing campaign under the newly launched
Timpani brand name, encompassing integrated print and online initiatives. By
strategically targeting decision makers and influencers within key vertical
markets, our goal is to generate increased awareness and demand for our broad
range of online sales and service tools. In addition, we have developed
relationships with the media and analyst community to reinforce our position and
status within the industry. Our brand name is also highly visible to both
business users and consumers. When an online visitor commences a text-based chat
with an organization that offers LivePerson’s real-time technology, our brand
name is generally prominently displayed on the LivePerson dialogue window. In
addition, our clients see our brand name every time they access our server
infrastructure. We believe that this high-visibility placement will create even
greater brand awareness and increased demand for LivePerson’s
solutions.
Maintaining
our Technological Leadership Position. We focus
on the development of tightly integrated software design and network
architecture that is both reliable and scalable. We continue to devote
significant resources to technological innovation. Specifically, we plan to
continue to expand the features and functionality of our existing services,
develop broader applications for our services and create new products and
services that will benefit our expanding client base. We evaluate emerging
technologies and industry standards and continually update our technology in
response to changes in the real-time customer service industry. We believe that
these efforts will allow us to effectively anticipate changing client and
end-user requirements in our rapidly evolving industry.
Evaluating
Strategic Alliances and Acquisitions where Appropriate. We
continue to seek opportunities to form strategic alliances with or to acquire
other companies that can accelerate our growth or broaden our product offerings.
In October 2000, we acquired HumanClick Ltd., an Israeli-based provider of
real-time, on-line customer service applications to small- and mid-sized
businesses. In July 2002, we acquired the customer contracts and associated
rights of NewChannel, Inc., a provider of proactive online sales services. In
December 2003, we acquired certain identifiable assets of Island Data
Corporation, a provider of knowledgebase services to large corporate clients. In
July 2004, we acquired certain identifiable assets of FaceTime Communications,
Inc., a provider of real-time communications solutions.
We have
no commitments with respect to any strategic alliances or acquisitions, and we
are not currently engaged in any material negotiations with respect to these
opportunities.
Expanding
our International Presence. We have
translated the user interface for LivePerson services into eighteen languages,
including Dutch, French, German, Italian, Portuguese, Spanish and Swedish. We
are expanding our international presence to better penetrate these markets
through distributor relationships in the United Kingdom and are evaluating
strategies to implement further international expansion in Germany, France and
the Asia Pacific region.
Products
and Services
LivePerson’s
suite of products support and manage all online customer interactions—chat,
email and self-service/knowledgebase—from a single, unified agent desktop. By
supplying a complete, unified customer history, our solutions enable businesses
to deliver a personalized and seamless customer experience. In addition to
product offerings, LivePerson provides professional services to support the
complete deployment of our enterprise solutions.
Timpani
Sales and Marketing
Timpani
Sales and Marketing combines online site traffic monitoring software with a
sophisticated rules engine to enable LivePerson clients to proactively engage
web site visitors. The product enables clients to maximize online revenue
opportunities, improve conversion rates and reduce shopping cart abandonment by
proactively engaging the right visitor, using the right channel, at the right
time. The intelligent and proactive solution identifies visitors who demonstrate
the highest propensity to buy and reaches out to them, in real time, with
relevant messaging and cross-sell/upsell offers.
Timpani
Contact Center
Timpani
Contact Center provides online customer support capability via a unified,
multi-channel interface comprised of chat, email and self-service knowledgebase.
The product enables clients to improve service quality, increase agent
productivity and facilitate first-contact resolution by streamlining customer
interactions across all online channels, while reducing service costs. By
integrating all interactions, this comprehensive solution supplies a unified
customer history, enabling organizations to deliver service consistency and
continuity to customers. Timpani Contact Center is comprised of Timpani Chat,
Timpani Email and Timpani Self-Service:
| · |
Timpani
Chat.
Timpani Chat enhances customer service with live support, while reducing
interaction costs and churn. A real-time service, it strengthens customer
loyalty and increases satisfaction levels while improving agent
productivity and lowering service costs. The solution’s single agent
desktop promotes multi-tasking and includes productivity tools that speed
time to resolution. |
| · |
Timpani
Email.
Timpani Email efficiently manages inbound email traffic and web form
queries while improving customer satisfaction and increasing agent
productivity. This extensive email management solution funnels all
messages through an automated process that evaluates the business
requirement and triggers a related action—such as generating an
auto-response, routing to an agent queue, deleting spam or escalating to
another channel—for each message. |
| · |
Timpani
Self-Service.
Timpani Self-Service delivers relevant and immediate answers to website
visitors searching for information while optimizing the user experience
and lowering support costs. The sophisticated knowledgebase learns
dynamically and automatically updates based on visitor searches and
behavior. It also allows issues that require further attention to be
escalated to other communication channels, such as live chat, email or
telephone. |
Timpani
SB Chat
Timpani
SB Chat enables small businesses to increase online sales and improve customer
service with live chat. The economical solution supplies both real-time tracking
tools to determine the effectiveness of online marketing campaigns and identify
visitors who are responding; and geo-location, which facilitates
cross-sell/up-sell opportunities and prevents fraud.
Timpani
SB Contact Center
Timpani
SB Contact Center enables small businesses to improve agent productivity, lower
service costs and increase customer satisfaction. Developed for small
businesses, the solution manages all communications—live chat, email,
self-service and telephone logs—from an easy-to-use, all-in-one
platform.
Professional
Services
LivePerson’s
Professional Services team uses a comprehensive, customer-focused methodology to
develop high-quality solutions, which in turn deliver a significant competitive
advantage to our enterprise clients. Dedicated members of the Professional
Services team work hand-in-hand with client teams to analyze online web
processes, develop an optimal deployment strategy, train contact center agents
and implement ongoing performance management systems to deliver the desired
business results.
Clients
Our
client base spans dedicated Internet companies, Fortune 1000 companies and other
online merchants. Our solutions benefit organizations of all sizes conducting
business or communicating with customers online. We plan to continue to focus
primarily on the financial services, computer software and hardware, retail and
telecommunications industries, as well as small businesses, as our key target
markets.
The
following is a representative list of clients among those generating at least
$50,000 in revenue during 2004:
|
American
Airlines Credit Union |
Federated
Department Stores |
Neiman
Marcus |
|
American
Power Conversion |
First
Choice Holidays |
Overstock.com |
|
Ameritrade |
Ford
Motor Company |
Qwest |
|
Bell
Canada |
Hewlett-Packard |
Rackspace |
|
Bell
South |
IndyMac |
Radian
Group |
|
Computer
Associates |
Kaplan
Education |
SunTrust
Bank |
|
EarthLink |
Maersk |
VeriSign |
|
eLuxury |
Microsoft |
Verizon |
Sales
and Marketing
Sales.
We sell
our products and services primarily through a direct sales channel using
solution-based techniques. Throughout the sales process, we concentrate on how
our solutions and domain expertise deliver financial and operational value to
our clients’ strategic initiatives. The value proposition for Timpani Sales and
Marketing is targeted to business executives with profit and loss (P&L) and
lead generation responsibility for the online channel. This audience has a
vested interest in improving conversion rates and increasing average order
size/value. The value proposition for Timpani Contact Center appeals to
professionals who hold top- and bottom-line responsibility for customer service
and technical support functions within their organization. Timpani Contact
Center delivers a compelling solution to those charged with lowering operating
expenses associated with providing customer service and support. Whether we
engage with individuals or teams responsible for sales or service, LivePerson’s
Timpani platform was developed to support any organization with a company-wide
strategic initiative to improve the customer experience.
Our sales
methodology begins with in-depth research and discovery meetings with clients in
order to develop a deep understanding of the value drivers and key performance
metrics of the organization. We then present an analytical review of the ways
our comprehensive solutions and industry expertise can impact these value
drivers and metrics. We then implement a short Proof of Concept (POC) engagement
if necessary, to provide a full production evaluation of our services. The
process concludes with full production and implementation, supported by
evaluation of results relative to pre-established value drivers and key metrics.
Using this methodology provides strong alignment with our clients’ goals and
serves as a competitive advantage for LivePerson.
We are
also exploring arrangements with business partners in the U.S. and
internationally that complement our direct sales force. These arrangements have
begun to deliver incremental results and provide an opportunity to increase our
scale in targeted market segments. Each of these partnerships leverages the
sales methodology employed by our direct sales channel.
Client
Support. Our
Professional Services group provides deployment support to enterprise clients
and maintains involvement throughout the account lifecycle. All LivePerson
clients have access to help desk services, while larger clients are assigned
account managers for ongoing support and process improvement.
Marketing. Our
marketing efforts are organized around the needs, trends and characteristics of
our clients. Our deep relationships with clients foster continuous feedback,
thereby allowing us to develop and refine marketing programs for specific client
segments. We market our products and services to executives with P&L
responsibility for the online sales channel and customer service operations with
a focus on the financial services, computer software and hardware, retail and
telecommunications industries. Our integrated marketing strategy includes lead
generation campaigns to reach potential and existing clients using mediums such
as online initiatives, advertising, direct mail, and industry- and
category-specific tradeshows and events.
Our
marketing strategy also encompasses public relations programs. As a result of
relationships developed with the media and analyst community, we gain press and
editorial coverage. Other initiatives include securing speaking opportunities
and byline articles featuring key executives, which helps raise the company
profile and reinforce our position as an industry leader.
Competition
The
market for sales and customer service technology is intensely competitive and
characterized by aggressive marketing, evolving industry standards, rapid
technology developments and frequent new product introductions. Relatively few
substantial barriers to entry in this market exist, other than the ability to
design and build scalable software and, with respect to outsourced solution
providers, the ability to design, build and manage scalable network
architecture.
LivePerson
competes directly with companies focused on technology that facilitates
real-time sales, email management, searchable knowledgebase applications and
customer service interaction. These markets remain fairly saturated with small
companies that compete on price and features. LivePerson also faces significant
competition from two customer service enterprise software providers, KANA and
RightNow Technologies, which offer hosted solutions. The current competition
within the online conversion market served by Timpani Sales and Marketing is
fragmented. The most significant barriers to entry in this market are knowledge
of:
| · |
Online
consumer purchasing habits |
| · |
How
to correctly engage customers |
| · |
Metrics
proving return on investment |
| · |
Recent
technology innovations |
LivePerson
also faces competition from larger enterprise software companies such as Oracle
and Siebel Systems. In addition, established technology companies may also
leverage their existing relationships and capabilities to offer real-time sales,
customer service and marketing applications.
Finally,
LivePerson competes with clients and potential clients that choose to provide a
real-time sales, customer service and marketing solution in-house as well as, to
a lesser extent, traditional offline customer service solutions, such as
telephone call centers.
LivePerson
believes that competition will increase as our current competitors increase the
sophistication of their offerings and as new participants enter the market. When
compared to LivePerson, some of our larger current and potential competitors
have:
| · |
Longer
operating histories |
| · |
Greater
brand recognition |
| · |
More
diversified lines of products and services |
| · |
Significantly
greater financial, marketing and other
resources |
Some
competitors may enter into strategic or commercial relationships with larger,
more established and better-financed companies, enabling them to:
| · |
Undertake
more extensive marketing campaigns |
| · |
Adopt
more aggressive pricing policies |
| · |
Make
more attractive offers to businesses to induce them to use their products
or services |
Technology
Three key
technological features distinguish the LivePerson services:
| · |
Our
clients are supported by a secure, scalable server infrastructure. We are
able to leverage the costs of this infrastructure as our client base
expands. Our primary servers are hosted in a fully secured third-party
server center in the Eastern United States and are supported by a backup
server facility located in the Southwestern United
States. |
| · |
Our
network, hardware and software are designed to accommodate our clients’
demand for secure, high-quality 24-hours per day/seven-days per week
service. |
| · |
As
a hosted service, we are able to add additional capacity and new features
quickly and efficiently. This has enabled us to immediately provide these
benefits simultaneously to our entire client base. In addition, it allows
us to maintain a relatively short development and implementation
cycle. |
As an
application service provider, we focus on the development of tightly integrated
software design and network architecture. We have dedicated significant
resources to designing our software and network architecture based on the
fundamental principles of security, reliability and scalability.
Software
Design. Our
software design is based on client server architecture. As an application
service provider, our clients install only the LivePerson software client
(Windows or Java-based) on their operators’ workstations. Visitors to our
clients’ Web sites require only a standard Web browser and do not need to
download software from LivePerson in order to interact with our clients’
operators.
Our
software design is also based on open standards. These standard protocols
facilitate integration with our clients’ legacy and third-party systems, and
include:
| · |
XML
(Extensible Mark-up Language) |
| · |
HTML
(Hypertext Mark-up Language) |
| · |
SQL
(Structured Query Language) |
| · |
HTTP
(Hypertext Transfer Protocol) |
Network
Architecture. The
software underlying our services is integrated with scalable and reliable
network architecture. Our network is scalable; we do not need to add new
hardware or network capacity for each new LivePerson client. This network
architecture is hosted in a third-party server center with redundant network
connections, servers and other infrastructure, ensuring high availability and
up-time. We also maintain a backup server infrastructure at a remote location
for effective disaster recovery. For increased security, we use advanced
firewall architecture. We also enable our clients to encrypt their sensitive
data using industry standard encryption algorithms.
Government
Regulation
We are
subject to federal, state and local regulation, and laws of jurisdictions
outside of the United States, including laws and regulations applicable to
computer software and access to or commerce over the Internet. Due to the
increasing popularity and use of the Internet and various other online services,
it is likely that a number of new laws and regulations will be adopted with
respect to the Internet or other online services covering issues such as user
privacy, freedom of expression, pricing, content and quality of products and
services, taxation, advertising, intellectual property rights and information
security. The nature of such legislation and the manner in which it may be
interpreted and enforced cannot be fully determined and, therefore, such
legislation could subject us and/or our clients or Internet users to potential
liability, which in turn could have a material adverse effect on our business,
results of operations and financial condition.
As a
result of collecting data from live online Internet user dialogues, our clients
may be able to analyze the commercial habits of Internet users. Privacy concerns
may cause Internet users to avoid online sites that collect such behavioral
information and even the perception of security and privacy concerns, whether or
not valid, may indirectly inhibit market acceptance of our services. In
addition, we or our clients may be harmed by any laws or regulations that
restrict the ability to collect or use this data. The European Union and many
countries within the E.U. have adopted privacy directives or laws that strictly
regulate the collection and use of personally identifiable information of
Internet users. The United States has adopted legislation which governs the
collection and use of certain personal information. The U.S. Federal Trade
Commission has also taken action against Web site operators who do not comply
with their stated privacy policies. Furthermore, other foreign jurisdictions
have adopted legislation governing the collection and use of personal
information. These and other governmental efforts may limit our clients’ ability
to collect and use information about their Internet users through our services.
As a result, such laws and efforts could create uncertainty in the marketplace
that could reduce demand for our services or increase the cost of doing business
as a result of litigation costs or increased service delivery costs, or could in
some other manner have a material adverse effect on our business, results of
operations and financial condition.
In
addition to privacy legislation, any new legislation or regulation regarding the
Internet, or the application of existing laws and regulations to the Internet,
could harm us. Additionally, as we operate outside the U.S., the international
regulatory environment relating to the Internet could have a material adverse
effect on our business, results of operations and financial
condition.
Intellectual
Property and Proprietary Rights
We rely
on a combination of patent, copyright, trade secret, trademark and other common
law in the United States and other jurisdictions, as well as confidentiality
procedures and contractual provisions, to protect our proprietary technology,
processes and other intellectual property, to the extent that protection is
sought or secured at all. However, we believe that factors such as the
technological and creative skills of our personnel, new service developments,
frequent enhancements and reliable maintenance are more essential to
establishing and maintaining a competitive advantage. Others may develop
technologies that are similar or superior to our technology. We enter into
confidentiality and other written agreements with our employees, consultants and
strategic partners, and through these and other written agreements, we attempt
to control access to and distribution of our software, documentation and other
proprietary information. Despite our efforts to protect our proprietary rights,
third parties may, in an unauthorized manner, attempt to use, copy or otherwise
obtain and market or distribute our intellectual property rights or technology
or otherwise develop a service with the same functionality as our services.
Policing unauthorized use of our services and intellectual property rights is
difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology or intellectual property rights, particularly
in foreign countries where we do business, where our services are sold or used,
where the laws may not protect proprietary rights as fully as do the laws of the
United States or where enforcement of laws protecting proprietary rights is not
common or effective.
Substantial
litigation regarding intellectual property rights exists in the software
industry. In the ordinary course of our business, our services may be
increasingly subject to third-party infringement claims as the number of
competitors in our industry segment grows and the functionality of services in
different industry segments overlaps. Some of our competitors in the market for
real-time sales, customer service and marketing solutions may have filed or may
intend to file patent applications covering aspects of their technology. Any
claims alleging infringement of third-party intellectual property rights could
require us to spend significant amounts in litigation (even if the claim is
invalid), distract management from other tasks of operating our business, pay
substantial damage awards, prevent us from selling our products, delay delivery
of the LivePerson services, develop non-infringing software, technology,
business processes, systems or other intellectual property (none of which might
be successful), or limit our ability to use the intellectual property that is
the subject of any of these claims, unless we enter into license agreements with
the third parties (which may be unavailable on commercially reasonable terms, or
not available at all). Therefore, such claims could have a material adverse
effect on our business, results of operations and financial
condition.
Employees
As of
February 16, 2005, we had 70 full-time employees. None of our employees are
covered by collective bargaining agreements. We believe our relations with our
employees are good.
Web
Site Access to Reports
We make
available, free of charge, on our Web site (www.liveperson.com), our annual
reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practical after we have electronically filed such material with, or
furnished it to, the Securities and Exchange Commission.
ITEM
2. PROPERTIES
We
currently lease approximately 13,000 square feet at our headquarters location in
New York City, through September 2007.
Our
wholly-owned subsidiary, HumanClick Ltd., maintains offices in Raanana, Israel
of approximately 4,000 square feet, under leases expiring in September 2005. We
expect to be able to extend these leases on terms comparable to the existing
arrangements.
ITEM
3. LEGAL
PROCEEDINGS
On or
about December 2, 2002, MCI WorldCom Communications, Inc. filed a complaint
against us in the United States District Court for the Southern District of New
York, containing claims for unpaid invoices related to a contract with MCI for
voice and data services. The complaint sought to recover approximately $761,000
plus interest. The District Court dismissed the action on our motion on May 29,
2003 because the contract contained a binding arbitration provision. The matter
was presented for arbitration with JAMS in New York City in which we denied
liability. In December 2004, the matter was settled for $150,000.
In June
2003, James Ball d/b/a TalktoDealers.com filed a complaint against us and other
unidentified persons in the Superior Court of the State of California for the
County of Orange, containing claims for breach of contract and unjust
enrichment. The complaint sought to recover approximately $1,152,000 per year
from the time of LivePerson’s alleged breach in late 2002 or early 2003, plus
interest, costs, attorneys’ fees, restitution and specific performance. This
matter was settled in November 2004 for $250,000.
We are
not currently a party to any material legal proceedings. From time to time, we
may be subject to various claims and legal actions arising in the ordinary
course of business.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of stockholders through the solicitation of
proxies or otherwise during the fourth quarter of the fiscal year ending
December 31, 2004.
PART
II
ITEM
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES PRICE
RANGE OF COMMON STOCK
Our
common stock is quoted on the Nasdaq SmallCap Market under the symbol LPSN. The
following table sets forth, for each full quarterly period within the two most
recent fiscal years, the range of high and low bid information (in dollars per
share) of our common stock as quoted on the Nasdaq SmallCap Market:
| |
|
High |
|
Low |
|
|
Year
ended December 31, 2003: |
|
|
|
|
|
|
|
|
First
Quarter |
|
$ |
1.26 |
|
$ |
0.65 |
|
|
Second
Quarter |
|
$ |
1.99 |
|
$ |
0.75 |
|
|
Third
Quarter |
|
$ |
4.17 |
|
$ |
1.64 |
|
|
Fourth
Quarter |
|
$ |
7.48 |
|
$ |
3.75 |
|
| |
|
|
|
|
|
|
|
|
Year
ended December 31, 2004: |
|
|
|
|
|
|
|
|
First
Quarter |
|
$ |
6.13 |
|
$ |
3.52 |
|
|
Second
Quarter |
|
$ |
6.23 |
|
$ |
2.98 |
|
|
Third
Quarter |
|
$ |
3.78 |
|
$ |
2.07 |
|
|
Fourth
Quarter |
|
$ |
3.55 |
|
$ |
1.87 |
|
HOLDERS
As of
March 1, 2005, there were approximately 176 holders of record of our common
stock.
DIVIDEND
POLICY
We have
not declared or paid any cash dividends on our capital stock since our
inception. We intend to retain earnings, if any, to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
RECENT
SALES OF UNREGISTERED SECURITIES
All
equity securities of LivePerson that we sold during 2004 that were not
registered under the Securities Act of 1933 have been described in our Quarterly
Reports on Form 10-Q.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The
following table provides certain information regarding the common stock
authorized for issuance under our equity compensation plans, as of December 31,
2004.
|
Plan
Category |
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
(a) |
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and
Rights
(b) |
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (3)
(c) |
|
|
Equity
compensation plans approved by stockholders (1) |
|
|
7,461,275 |
|
$ |
1.85 |
|
|
4,809,964 |
|
|
Equity
compensation plans not approved by stockholders (2) |
|
|
124,500 |
|
$ |
0.69 |
|
|
— |
|
|
Total |
|
|
7,585,775 |
|
$ |
1.83 |
|
|
4,809,964 |
|
| |
(1) |
Our
equity compensation plans which were approved by our stockholders are the
2000 Stock Incentive Plan, as amended and restated, and the Employee Stock
Purchase Plan. |
| |
(2) |
On
December 11, 2002, we issued a warrant to purchase 150,000 shares of
common stock at $0.69 per share to Genesis Select Corp. in exchange for
investor relations services. Because approval was not required at the
time, our stockholders did not approve the issuance of the
warrant. |
| (3) |
Excludes
securities reflected in column (a). The number of shares of common stock
available for issuance under the 2000 Stock Incentive Plan automatically
increases on the first trading day in each calendar year by an amount
equal to three percent (3%) of the total number of shares of our common
stock outstanding on the last trading day of the immediately preceding
calendar year, but in no event shall such annual increase exceed 1,500,000
shares. The number of shares of common stock available for issuance under
our Employee Stock Purchase Plan automatically increases on the first
trading day in each calendar year by an amount equal to one-half of one
percent (0.5%) of the total number of shares of our common stock
outstanding on the last trading day of the immediately preceding calendar
year, but in no event shall such annual increase exceed 150,000 shares.
Effective October 2001, we suspended our Employee Stock Purchase Plan
until further notice. Also see Note 5 to our consolidated financial
statements. |
ISSUER
PURCHASES OF EQUITY SECURITIES
We did
not repurchase any of our securities during any month within the quarter ended
December 31, 2004.
ITEM
6. SELECTED
CONSOLIDATED FINANCIAL DATA
The
selected consolidated financial data with respect to our consolidated balance
sheets as of December 31, 2004 and 2003 and the related consolidated statements
of operations for the years ended December 31, 2004, 2003 and 2002 have been
derived from our audited consolidated financial statements which are included
herein. The selected financial data with respect to our balance sheets as of
December 31, 2002, 2001 and 2000 and the related statements of operations for
the years ended December 31, 2001 and 2000 have been derived from our audited
financial statements which are not included herein. Certain prior year financial
information has been reclassified to conform with fiscal 2004 financial
statement presentation. The following selected consolidated financial data
should be read in conjunction with the consolidated financial statements and the
notes thereto and the information contained in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
| |
|
|
|
|
| |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
2000 |
|
| |
|
|
(in
thousands, except share and per share data) |
|
|
Consolidated
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
17,392 |
|
$ |
12,023 |
|
$ |
8,234 |
|
$ |
7,806 |
|
$ |
6,279 |
|
| |
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue |
|
|
2,888 |
|
|
2,028 |
|
|
1,604 |
|
|
6,547 |
|
|
8,997 |
|
|
Product
development |
|
|
2,000 |
|
|
1,641 |
|
|
1,283 |
|
|
3,328 |
|
|
9,685 |
|
|
Sales
and marketing |
|
|
5,183 |
|
|
3,555 |
|
|
2,177 |
|
|
5,465 |
|
|
19,351 |
|
|
General
and administrative |
|
|
4,456 |
|
|
3,610 |
|
|
3,176 |
|
|
6,369 |
|
|
12,832 |
|
|
Amortization
of goodwill and intangibles |
|
|
792 |
|
|
1,014 |
|
|
357 |
|
|
2,975 |
|
|
619 |
|
|
Non-cash
compensation credit related to restructuring, net |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,720 |
) |
|
— |
|
|
Restructuring
and impairment charges |
|
|
— |
|
|
1,024 |
|
|
1,186 |
|
|
12,740 |
|
|
— |
|
|
Total
operating expenses |
|
|
15,319 |
|
|
12,872 |
|
|
9,783 |
|
|
35,704 |
|
|
51,484 |
|
| |
|
Income
(loss) from operations |
|
|
2,073 |
|
|
(849 |
) |
|
(1,549 |
) |
|
(27,898 |
) |
|
(45,205 |
) |
| |
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense) |
|
|
— |
|
|
(8 |
) |
|
— |
|
|
109 |
|
|
65 |
|
|
Interest
income |
|
|
77 |
|
|
41 |
|
|
126 |
|
|
538 |
|
|
1,839 |
|
|
Interest
expense |
|
|
— |
|
|
— |
|
|
(10 |
) |
|
(10 |
) |
|
(33 |
) |
| |
|
Total
other income, net |
|
|
77 |
|
|
33 |
|
|
116 |
|
|
637 |
|
|
1,871 |
|
| |
|
Income
(loss) before cumulative effect of accounting change |
|
|
2,150 |
|
|
(816 |
) |
|
(1,433 |
) |
|
(27,261 |
) |
|
(43,334 |
) |
|
Cumulative
effect of accounting change (1) |
|
|
— |
|
|
— |
|
|
(5,338 |
) |
|
— |
|
|
— |
|
| |
|
Income
(loss) before provision for income taxes |
|
|
2,150 |
|
|
(816 |
) |
|
(6,771 |
) |
|
(27,261 |
) |
|
(43,334 |
) |
|
Provision
for income taxes |
|
|
58 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| |
|
Net
income (loss) |
|
|
2,092 |
|
|
(816 |
) |
|
(6,771 |
) |
|
(27,261 |
) |
|
(43,334 |
) |
|
Non-cash
preferred stock dividend |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(18,000 |
) |
| |
|
Net
income (loss) attributable to common stockholders |
|
$ |
2,092 |
|
|
(816 |
) |
$ |
(6,771 |
) |
$ |
(27,261 |
) |
$ |
(61,334 |
) |
| |
|
Basic
net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before cumulative effect of accounting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
change |
|
$ |
0.06 |
|
|
(0.02 |
) |
$ |
(0.04 |
) |
$ |
(0.80 |
) |
$ |
(2.50 |
) |
|
Cumulative
effect of accounting change |
|
|
— |
|
|
— |
|
|
(0.16 |
) |
|
— |
|
|
— |
|
| |
|
Net
income (loss) |
|
$ |
0.06 |
|
|
(0.02 |
) |
$ |
(0.20 |
) |
$ |
(0.80 |
) |
$ |
(2.50 |
) |
| |
|
Diluted
net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before cumulative effect of accounting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
change |
|
$ |
0.05 |
|
|
(0.02 |
) |
$ |
(0.04 |
) |
$ |
(0.80 |
) |
$ |
(2.50 |
) |
|
Cumulative
effect of accounting change |
|
|
— |
|
|
— |
|
|
(0.16 |
) |
|
— |
|
|
— |
|
| |
|
Net
income (loss) |
|
$ |
0.05 |
|
|
(0.02 |
) |
$ |
(0.20 |
) |
$ |
(0.80 |
) |
$ |
(2.50 |
) |
| |
|
Weighted
average shares outstanding used in basic net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
(loss) per common share calculation |
|
|
37,263,378 |
|
|
34,854,802 |
|
|
34,028,702 |
|
|
33,987,895 |
|
|
24,535,078 |
|
| |
|
Weighted
average shares outstanding used in diluted net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
(loss) per common share calculation |
|
|
39,680,304 |
|
|
34,854,802 |
|
|
34,028,702 |
|
|
33,987,895 |
|
|
24,535,078 |
|
(1)
Cumulative effect of accounting change relates to the impairment of the carrying
value of goodwill (see note 7 to our consolidated financial
statements).
| |
|
December
31, |
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
|
|
(in
thousands) |
|
|
Consolidated
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
12,425 |
|
$ |
10,898 |
|
$ |
8,004 |
|
$ |
10,136 |
|
$ |
20,449 |
|
|
Working
capital |
|
|
11,283 |
|
|
8,486 |
|
|
6,137 |
|
|
7,878 |
|
|
20,280 |
|
|
Total
assets |
|
|
17,150 |
|
|
13,537 |
|
|
10,837 |
|
|
17,627 |
|
|
47,000 |
|
|
Total
stockholders’ equity |
|
|
13,554 |
|
|
9,336 |
|
|
7,888 |
|
|
14,271 |
|
|
42,775 |
|
ITEM
7. 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
collectibility of accounts receivable, the realization of goodwill, 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 leading provider of solutions for managing online customer interactions.
Our hosted software enables companies to identify and proactively engage the
right customer, using the right communication channel, at the right time.
LivePerson’s fully-integrated multi-channel communications platform, Timpani,
facilitates real-time sales, customer service and marketing. Our technology
supports and manages all online interactions—chat, email and
self-service/knowledgebase—in a cost-effective and secure
environment.
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. We also occasionally charge
professional service fees related to additional training and business consulting
and analysis.
The
initial set-up fee is intended to recover certain costs (principally customer
service, training and other administrative costs) prior to the deployment of our
services. Such fees are recorded as deferred revenue and recognized ratably over
a period of 24 months, representing the estimated term of the client
relationships. Although we believe this estimate is reasonable, this estimate
may change in the future. In instances where we do charge a set-up fee, we
typically do not charge an additional set-up fee if an existing client adds more
services. Unamortized deferred fees, if any, are recognized upon termination of
the agreement with the customer. We recognized set-up fees due to client
attrition of $2,000, $0 and $12,000 in 2004, 2003 and 2002,
respectively.
We also
sell certain of the LivePerson Timpani services directly via Internet download.
These services are marketed as Timpani SB for small- and medium-sized
businesses, and are paid for almost exclusively by credit card. Credit card
payments accelerate cash flow and reduce our collection risk, subject to the
merchant bank’s right to hold back cash pending settlement of the transactions.
Sales executed via Internet download 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. Sales of the
LivePerson services via Internet download typically have no set-up fee, because
we do not provide the customer with training and administrative costs are
minimal.
We record
revenue for traditional direct sales and Internet download sales based upon a
monthly fee charged for the LivePerson services, provided that no significant
Company obligations remain and collection of the resulting receivable is
probable. We recognize monthly service revenue fees as services are provided.
Our service agreements typically have no termination date and are terminable by
either party upon 30 to 90 days’ notice without penalty. We recognize
professional service fees upon completion and customer acceptance of the
professional service engagement.
Accounts
Receivable
Our
customers are primarily concentrated in the United States. We perform ongoing
credit evaluations of our customers’ financial condition (except for customers
who purchase the LivePerson services by credit card via Internet download) and
have established an allowance for doubtful accounts based upon factors
surrounding the credit risk of customers, historical trends and other
information that we believe to be reasonable, although they may change in the
future. If there is a deterioration of a customer’s credit worthiness or actual
write-offs are higher than our historical experience, our estimates of
recoverability for these receivables could be adversely affected. Our
concentration of credit risk is limited due to the large number of customers. No
single customer accounted for or exceeded 10% of our total revenue in 2004, 2003
and 2002. One customer accounted for approximately 10% of accounts receivable at
December 31, 2004. Two customers accounted for approximately 22% of accounts
receivable at December 31, 2003.
Impairment
of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets,” long-lived
assets, such as property, plant and equipment and purchased intangibles subject
to amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying value of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying value of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying value of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying value or the fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance
sheet.
Use
of Estimates
The
preparation of our consolidated financial statements in accordance with
generally accepted accounting principles requires our management to make a
number of estimates and assumptions relating to the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of revenue
and expenses during the period. Significant items subject to such estimates and
assumptions include the carrying amount of property and equipment, intangibles,
valuation allowances for deferred income tax assets, accounts receivable, the
expected term of a client relationship, accruals and other factors. Actual
results could differ from those estimates.
Restructuring
Activities
Restructuring
activities, prior to January 1, 2003, were accounted for in accordance with the
guidance provided in the consensus opinion of the Emerging Issues Task Force
(“EITF”), in connection with EITF Issue No. 94-3, “Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in Restructuring).” EITF Issue No. 94-3
generally requires, with respect to the recognition of severance expenses,
management approval of the restructuring plan, the determination of the
employees to be terminated and communication of benefit arrangement to
employees.
In July
2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities,” which
supersedes EITF Issue No. 94-3. SFAS No. 146 requires that costs associated with
an exit or disposal plan be recognized when incurred rather than at the date of
a commitment to an exit or disposal plan.
Recently
Adopted Accounting Pronouncements
In June
2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement
Obligations.” SFAS No. 143 requires us to record the fair value of an asset
retirement obligation as a liability in the period in which we incur a legal
obligation associated with the retirement of tangible long-lived assets that
results from the acquisition, construction, development, and/or normal use of
the assets. We also would record a corresponding asset that is depreciated over
the life of the asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation would be adjusted at the end of each
period to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. We were required to adopt SFAS No. 143 on
January 1, 2003. The adoption of SFAS No. 143 did not have an impact on our
financial position, cash flows or results of operations.
In
December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123.”
SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements.
Disclosures required by SFAS No. 148 are included in the notes to our
consolidated financial statements included in this Annual Report on Form
10-K.
In May
2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150
established standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 also includes required disclosures for financial instruments within its
scope. SFAS No. 150 was effective for our instruments entered into or modified
after May 31, 2003 and otherwise was effective as of January 1, 2004, except for
mandatorily redeemable financial instruments. For these mandatorily redeemable
financial instruments, SFAS No. 150 will be effective for us on January 1, 2005.
The effective date has been deferred indefinitely for certain other types of
mandatorily redeemable financial instruments. We do not have any financial
instruments that are within the scope of SFAS No. 150; therefore the issuance of
SFAS No. 150 did not have an impact on our financial position, cash flows or
results of operations.
In
December 2003, the staff of the Securities and Exchange Commission issued Staff
Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which supersedes SAB
No. 101, “Revenue Recognition in Financial Statements.” SAB No. 104 primarily
rescinds the accounting guidance contained in SAB No. 101 related to
multiple-element revenue arrangements, which was superseded as a result of the
issuance of EITF Issue No. 00-21, “Accounting for Revenue Arrangements with
Multiple Deliverables.” Additionally, SAB No. 104 rescinds the SEC’s “Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers”
issued with SAB No. 101, which had been codified in SEC Topic 13, “Revenue
Recognition.” SAB No. 104 was effective upon issuance. The issuance of SAB No.
104 did not have a material impact on our financial position, cash flows or
results of operations.
In December 2003, the FASB issued FASB Interpretation
No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,”
which addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. We apply FIN 46R to
variable interest VIEs created after December 31, 2003. For any VIEs that must
be consolidated under FIN 46R that were created before January 1, 2004, the
assets, liabilities and noncontrolling interests of the VIE initially would be
measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value method at the date FIN 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest in the VIE. We have evaluated the impact of applying FIN 46R and it did
not have an impact on our financial position, cash flows or results of
operations.
Recently
Issued Accounting Pronouncements
In
December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
“Share-Based Payment,” which addresses the accounting for transactions in which
an entity exchanges its equity instruments for goods or services, with a primary
focus on transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) is a revision to SFAS No. 123
and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”
and its related implementation guidance. SFAS No. 123(R) requires measurement of
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). Incremental compensation costs arising from subsequent
modifications of awards after the grant date must be recognized. SFAS No. 123(R)
will be effective for us in the first fiscal quarter beginning after June 15,
2005. We are still evaluating the impact that adopting SFAS No. 123(R) will have
on our financial position, cash flows and results of operations. See Note 1(m),
“Stock-based Compensation,” to our consolidated financial statements for
pro forma disclosure assuming a fair value based method of accounting for
stock-based awards.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,”
which eliminates an exception in APB Opinion No. 29, “Accounting for Nonmonetary
Transactions,” for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. SFAS No. 153 will be effective for us for
nonmonetary asset exchanges occurring on or after January 1, 2006. We are still
evaluating the impact that adopting SFAS No. 153 will have on our financial
position, cash flows and results of operations.
Overview
LivePerson
is a leading provider of solutions for managing online customer interactions.
Our hosted software enables companies to identify and proactively engage the
right customer, using the right communication channel, at the right time. We
currently generate revenue from the sale of the LivePerson services under the
brand name Timpani, our fully-integrated multi-channel communications platform
that facilitates real-time sales, customer service and marketing. Our technology
supports and manages all online interactions—chat, email and
self-service/knowledgebase—in a cost-effective and secure
environment.
We were
incorporated in the State of Delaware in November 1995 and the initial
LivePerson service was introduced in November 1998.
In July
2002, we acquired all of the existing customer contracts of NewChannel, Inc. and
associated rights. The purchase price was based, in part, on projected revenue
from each of the former NewChannel clients at the time of their successful
conversion to the LivePerson software platform. Our acquisition cost was
approximately $1.4 million, including the initial purchase price payment of
$600,000 to NewChannel. 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. As of December 31,
2004, we paid approximately $370,000 in cash, and issued 370,894 shares of our
common stock, in connection with the acquisition. The total acquisition costs
were approximately $2.1 million. Of the total purchase price, we have allocated
approximately $65,000 to non-compete agreements which will be amortized over a
period of 24 months, representing the terms of the agreements. The remainder of
the purchase has been allocated to customer contracts and will be amortized over
a period of 36 months, representing our current estimate of the term of the
acquired client relationships. The net acquisition costs of $1.4 million are
included in “Assets - Intangibles, net” on our December 31, 2004 balance
sheet.
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, including the initial purchase price payment of $200,000 to FaceTime.
The total acquisition cost will be amortized ratably over a period of 24 months,
representing our current estimate of the term of the acquired client
relationships. The net acquisition costs of $320,000 are included in “Assets -
Intangibles, net” on our December 31, 2004 balance sheet.
Previously
Disclosed Results of Operations and Financial Condition
On
February 3, 2005, we disclosed our preliminary results of operations and
financial condition for the quarter and year ended December 31, 2004. The
disclosure stated that the 2004 financial audit was not yet complete as of that
date, and that the financial results were subject to change following the
completion of the audit. Since that date, there were two revisions to the
results that impact the previously disclosed results. Management recorded
additional adjusting entries, which resulted in a reduction of net income for
2004 of $76,000. We also corrected an assumption in the methodology for the
calculation of weighted average shares outstanding used in diluted net income
(loss) per common share, which increased the number of weighted average shares
outstanding for the year ended December 31, 2004 by 2,363,125. The impact of
these adjustments was a reduction of basic net income per share for 2004 of
two-tenths of a cent and a reduction of diluted net income per share for 2004 of
one-half of a cent, as compared to the previously disclosed amounts. Due to the
convention of rounding earnings per share to the nearest penny, reported diluted
net income per share for 2004 is $0.05 as compared to $0.06 in the previous
disclosure.
The
correction in methodology also affected the weighted average shares outstanding
used in diluted net income per common share in the third and fourth quarters of
2003 and all quarterly periods in 2004. These corrections had no impact on
reported diluted net income per common share in these periods because of the
convention of rounding earnings per share to the nearest penny.
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. Our set-up fee is
intended to recover certain costs incurred by us (principally customer service,
training and other administrative costs) prior to deployment of our services.
Such fees are recorded as deferred revenue and recognized over a period of 24
months, representing the estimated term of the client relationships. As a result
of recognizing set-up fees in this manner, combined with the fact that a small
proportion of our clients are charged a set-up fee, revenue attributable to our
monthly service fee for the years ended December 31, 2004, 2003 and 2002
accounted for 96%, 98%, and 97%, respectively, of total LivePerson services
revenue. In addition, because we typically do not charge a set-up fee for sales
generated via Internet download, we expect the set-up fee to continue to
represent a small percentage of total revenue. In instances where we do charge a
set-up fee, we typically do not charge an additional set-up fee if an existing
client adds more services. Our service agreements typically have no termination
date and are terminable by either party upon 30 to 90 days’ notice without
penalty. We recognize monthly service revenue 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 generally ranged
from one day to 30 days. There is no lag for sales generated via Internet
download, because our services are immediately available and fully functional
upon download.
We also
sell certain of the LivePerson services directly via Internet download. These
services are marketed as Timpani SB for small- and medium-sized businesses, and
are paid for almost exclusively by credit card. Credit card payments accelerate
cash flow and reduce our collection risk, subject to the merchant bank’s right
to hold back cash pending settlement of the transactions. Sales executed via
Internet download 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. Sales of the LivePerson
services via Internet download typically have no set-up fee, because we do not
provide the customer with training, and administrative costs are minimal. We
recognize monthly service revenue fees from Internet downloads as services are
provided.
We also
have entered into contractual arrangements that complement our direct sales
force and online sales efforts. These are primarily with Web hosting and call
center service companies, pursuant to which LivePerson is paid a commission
based on revenue generated by these service companies from our referrals. To
date, revenue from such commissions has not been material.
Operating
Expenses
Our cost
of revenue has principally been associated with the LivePerson services and has
consisted of:
| · |
compensation
costs relating to employees who provide customer service to our
clients; |
| · |
compensation
costs relating to our network support
staff; |
| · |
allocated
occupancy costs and related overhead; and |
| · |
the
cost of supporting our infrastructure, including expenses related to
server leases and Internet connectivity, as well as depreciation of
certain hardware and software. |
Our
product development expenses consist primarily of compensation and related
expenses for product development personnel, allocated occupancy costs and
related overhead, outsourced labor and expenses for testing new versions of our
software. Product development expenses are charged to operations as
incurred.
Our sales
and marketing expenses consist of compensation and related expenses for sales
personnel and marketing personnel, allocated occupancy costs and related
overhead, advertising, sales commissions, marketing programs, public relations,
promotional materials, travel expenses and trade show exhibit
expenses.
Our
general and administrative expenses consist primarily of compensation and
related expenses for executive, accounting and human resources personnel,
allocated occupancy costs and related overhead, professional fees, provision for
doubtful accounts and other general corporate expenses.
During
2004, we increased our allowance for doubtful accounts by $30,000 to
approximately $94,000, principally due to an increase in accounts receivable as
a result of increased sales, and we wrote off approximately $40,000 of
previously reserved accounts, leaving a net allowance of $54,000 at December 31,
2004. During 2003, we increased our allowance for doubtful accounts by $15,000
to approximately $85,000, principally due to an increase in accounts receivable
as a result of increased sales, and we wrote off approximately $21,000 of
previously reserved accounts, leaving a net allowance of $64,000 at December 31,
2003. We base our allowance for doubtful accounts on specifically identified
credit risks of customers, historical trends and other information that we
believe to be reasonable. We adjust our allowance for doubtful accounts when
accounts previously reserved have been collected.
Non-cash
Compensation Expense
The net
non-cash compensation amounts for the years ended December 31, 2004, 2003 and
2002 consist of:
| |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
(in
thousands) |
|
|
December
2002 warrant granted for investor relations |
|
|
|
|
|
|
|
|
|
|
|
services
(discussed below) |
|
$ |
— |
|
$ |
298 |
|
$ |
— |
|
|
Amortization
of employee stock compensation |
|
|
— |
|
|
— |
|
|
365 |
|
|
Acceleration
of deferred compensation charges related to |
|
|
|
|
|
|
|
|
|
|
|
certain
employee terminations |
|
|
— |
|
|
45 |
|
|
— |
|
|
May
2004 warrant granted for investor relations services |
|
|
|
|
|
|
|
|
|
|
|
(discussed
below) |
|
|
246 |
|
|
— |
|
|
— |
|
|
Total |
|
$ |
246 |
|
$ |
343 |
|
$ |
365 |
|
In
December 2002, we issued a warrant to purchase up to 150,000 shares of common
stock at $0.69 per share to Genesis Select Corp. in exchange for investor
relations services. The warrant vested such that 12,500 shares became
exercisable on each monthly anniversary of the warrant issuance date for the
first 12 months of the warrant’s five-year term. Some or all of the purchase
price may be paid by canceling a portion of the warrant. As of December 31,
2004, the warrant was fully vested and remained outstanding to purchase up to
124,500 shares of common stock. We recorded non-cash compensation expense of
$298,000 related to this warrant during 2003.
In May
2004, we issued a warrant to purchase up to 75,000 shares of common stock at
$3.25 per share to Genesis Select Corp. in exchange for investor relations
services. The warrant vested such that the shares underlying the warrant could
not be sold until after December 31, 2004. Some or all of the purchase price may
be paid by canceling a portion of the warrant. As of December 31, 2004, the
warrant was fully vested and remained outstanding. We recorded non-cash
compensation expense of $246,000 related to this warrant during
2004.
Restructuring
In the
first quarter of 2001, following a review of our business in connection with our
acquisition of the private Israeli company HumanClick Ltd. in October 2000, we
commenced restructuring initiatives to streamline our operations, including the
consolidation of our two San Francisco Bay area offices. The restructuring
resulted in a reduction of our workforce by approximately 90 people as of the
end of the first quarter of 2001. In the first quarter of 2001, we recorded a
charge of approximately $3.4 million for severance and other expenses related to
the restructuring. In the third quarter of 2001, in a continued effort to
streamline our operations, we initiated additional restructuring initiatives and
recorded a charge of approximately $9.3 million. These initiatives resulted in
the elimination of redundant staff positions, and the decision to relocate our
principal executive offices, which included the termination of an office space
lease (and the entering into of a new three-year lease that commenced in
November 2001). The restructuring resulted in a reduction of our workforce by
approximately 20 people, the write-off of impaired computer equipment and
software and the write-off of certain furniture, equipment and building
improvements. For the year ended December 31, 2001, we recorded net charges of
approximately $12.7 million for our various restructuring
initiatives.
In
connection with our third quarter 2001 restructuring initiatives, we
consolidated all of our clients onto a single software application platform and
network. The new platform provided our customers with a more dependable product
and reduced our cost of providing these services. Our network is hosted by a
third-party provider of secure server hosting services located in the United
States. While the cost of providing our services as a result of these
initiatives has decreased, we are dependent on our third-party server hosting
provider for redundant network connections, server maintenance and general
security. We have not experienced any material product instability or
operational consequences since the implementation of these initiatives. We have
also consolidated our product development, help desk and online sales personnel
in our Israel office. As a result, the political, economic or military
conditions affecting Israel could have a material adverse effect on our
operations in Israel or our business.
In the
fourth quarter of 2002, in accordance with EITF 94-3, we incurred an additional
restructuring charge related to our 2001 restructuring initiatives. This $1.2
million charge primarily related to the unfavorable settlement of a previously
disclosed legal proceeding in excess of the provision initially provided for in
connection with our original restructuring plan. The legal proceeding was the
result of the termination of an operating lease for computer equipment that
supported our application platform prior to the consolidation of all clients
onto a single application platform in the third quarter of 2001.
In the
second quarter of 2003, we recorded an additional restructuring charge of
approximately $1.0 million related to our 2001 restructuring initiatives. This
charge reflected the amount of the judgment in a previously disclosed
arbitration proceeding in excess of the $350,000 provision initially provided
for by us in connection with our original restructuring plan in 2001. The
arbitration proceeding was related to a hosted software service contract
terminated during 2001.
Results
of Operations
Due to
our acquisition of certain identifiable assets of FaceTime in July
2004, our acquisition of certain identifiable assets of Island Data in December
2003, our acquisition of the NewChannel customer contracts and associated rights
in July 2002 and our limited operating history, we believe that comparisons
of our 2004, 2003 and 2002 operating results with each other, or with those of
prior periods, are not meaningful and that our historical operating results
should not be relied upon as indicative of future performance.
Comparison
of Fiscal Years Ended December 31, 2004 and 2003
Revenue. Total
revenue increased to $17.4 million for the year ended December 31, 2004, from
$12.0 million for the year ended December 31, 2003. This increase is primarily
attributable to increased revenue from existing clients, the addition of new
clients and, to a lesser extent, to the acquisition of the Island Data customer
contracts and associated rights in December 2003 and the acquisition of the
FaceTime customer contracts in July 2004. Revenue
in 2004 and 2003 included the recognition of set-up fees due to client attrition
of $2,000 and $0, respectively. Unamortized deferred fees, if any, are
recognized upon termination of the agreement with the client.
Cost
of Revenue. Cost of
revenue consists of compensation costs relating to employees who provide
customer service to our clients, compensation costs relating to our network
support staff, the cost of supporting our infrastructure, including expenses
related to server leases and Internet connectivity, as well as depreciation of
certain hardware and software, and allocated occupancy costs and related
overhead. Cost of
revenue increased to $2.9 million in 2004, from $2.0 million in 2003. This
increase is attributable to an increase in the number of account management
personnel to support both increased client activity as well as activity driven
by the acquisition of the Island Data customer contracts and associated rights
in December 2003, increased spending for backup server facilities, increased
usage from existing clients, the addition of new clients and, to a lesser
extent, to the acquisition of the FaceTime customer contracts in July
2004.
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 to $2.0 million in
2004, from $1.6 million in 2003. This increase is attributable to an increase in
the number of LivePerson product development personnel to support both the
launch of a significant new release of the LivePerson services under the Timpani
brand name and, to a lesser extent, an increase in outsourced labor costs
related to the continuing development of our product line 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 to $5.2
million in 2004, from $3.6 million in 2003. This increase is primarily
attributable to an increase in sales and marketing personnel as a result of the
expansion of our sales force, and, to a lesser extent, to an increase in on-line
advertising and marketing expenses related to our increasing efforts to enhance
our brand recognition and to increased sales lead activity.
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 to $4.5 million in
2004, from $3.6 million in 2003. This increase is primarily related to the
settlement of a previously disclosed legal matter and increases in legal
expenses, accounting expenses and recruitment costs related to the expansion of
our sales force, as well as an increase in compensation and related expenses,
partially offset by a decrease in non-cash compensation expense.
Amortization
of Intangibles.
Amortization expense was $792,000 in the year ended December 31, 2004 and
relates to acquisition costs recorded as a result of our acquisitions of certain
identifiable assets of Island Data and FaceTime in December 2003 and July 2004,
respectively.
Amortization expense was $1.0 million in the year ended December 31, 2003 and
relates to acquisition costs recorded as a result of our acquisition of the
NewChannel customer contracts and associated rights in July 2002.
Restructuring
Charge.
Restructuring charge was $0 and $1.0 million in the years ended December 31,
2004, and 2003, respectively. In the second quarter of 2003, we recorded an
additional restructuring charge of approximately $1.0 million related to our
2001 restructuring initiatives. This charge reflected the amount of the judgment
in a previously disclosed arbitration proceeding in excess of the $350,000
provision initially provided for in connection with our original restructuring
plan in 2001.
Other
Income.
Interest income was $77,000 and $41,000 in 2004 and 2003, respectively, and
consists of interest earned on cash and cash equivalents generated by the
receipt of proceeds from our initial public offering in 2000 and preferred stock
issuances in 2000 and 1999, and to a lesser extent, to cash provided by
operating activities. Other expense was $0 and $8,000 in 2004 and 2003,
respectively, and was related to the write-off of our accumulated other
comprehensive loss in connection with the closing of our operations in the
United Kingdom.
Net
Income (Loss). We had
net income of $2.1 million in 2004 compared to a net loss of $816,000 in 2003.
The net loss for 2003 includes the additional restructuring charge of
approximately $1.0 million recorded in the second quarter of 2003 described
above under “Restructuring Charge.”
Comparison
of Fiscal Years Ended December 31, 2003 and 2002
Revenue. Total
revenue increased to $12.0 million for the year ended December 31, 2003, from
$8.2 million for the year ended December 31, 2002. This increase is attributable
to the acquisition of the NewChannel customer contracts and associated rights in
July 2002 and to a combination of revenue from new clients, increased revenue
from existing clients and a greater proportion of new clients purchasing the
higher-priced Sales Edition (a former product) as a result of increased market
acceptance of our services. Revenue in 2003 and 2002 included the recognition of
set-up fees due to client attrition of $0 and $12,000, respectively. Unamortized
deferred fees, if any, are recognized upon termination of the agreement with the
client.
Cost
of Revenue. Cost of
revenue increased to $2.0 million in 2003, from $1.6 million in 2002. This
increase is primarily related to the acquisition of the NewChannel customer
contracts and associated rights in July 2002, as well as increased usage from
existing clients and the addition of new clients.
Product
Development. Product
development costs increased to $1.6 million in 2003, from $1.3 million in 2002.
This increase is attributable to an increase in the number of LivePerson product
development personnel, as well as an increase in outsourced labor costs related
to the continuing development of our product line as we broadened the range of
services we offered to include a fully integrated, multi-channel software
platform.
Sales
and Marketing. Sales
and marketing expenses increased to $3.6 million in 2003, from $2.2 million in
2002. This increase is primarily attributable to an increase in sales and
marketing personnel as a result of both the acquisition of the NewChannel
customer contracts and associated rights in July 2002 and the expansion of our
sales force, and, to a lesser extent, to an increase in on-line advertising and
marketing expenses related to our increased efforts to enhance our brand
recognition and to increased sales lead activity.
General
and Administrative. General
and administrative expenses increased to $3.6 million in 2003, from $3.2 million
in 2002. This increase is primarily attributable to an increase in compensation
and related expenses and to an increase in investor relations expenses as the
result of the hiring of an outside firm and, to a lesser extent, to increases in
recruitment costs and depreciation, partially offset by a decrease in the cost
of our directors and officers insurance.
Amortization
of Intangibles.
Amortization expense was $1.0 million and $357,000 in the years ended December
31, 2003 and 2002, respectively, and relates to acquisition costs recorded as a
result of our acquisition of the NewChannel customer contracts and associated
rights in July 2002.
Restructuring
Charge.
Restructuring charge was $1.0 million and $1.2 million in the years ended
December 31, 2003, and 2002, respectively. In the second quarter of 2003, we
recorded an additional restructuring charge of approximately $1.0 million
related to our 2001 restructuring initiatives. This charge reflected the amount
of the judgment in a previously disclosed arbitration proceeding in excess of
the $350,000 provision initially provided for in connection with our original
restructuring plan in 2001. The arbitration proceeding was related to a hosted
software service contract terminated during 2001. In the fourth quarter of 2002,
we incurred an additional restructuring charge of approximately $1.2 million
related to our 2001 restructuring initiatives. This charge primarily related to
the unfavorable settlement of a previously disclosed legal proceeding in excess
of the provision initially provided for in connection with our original
restructuring plan in 2001. The legal proceeding was the result of the
termination of an operating lease for computer equipment that supported our
application platform prior to the consolidation of all clients onto a single
application platform in the third quarter or 2001.
Other
Income.
Interest income was $41,000 and $126,000 in 2003 and 2002, 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. Interest expense was $0 and $10,000 in 2003 and
2002, respectively. Other expense was $8,000 and $0 in 2003 and 2002,
respectively, and was related to the write-off, in the first quarter of 2003, of
our accumulated other comprehensive loss in connection with the closing of our
operations in the United Kingdom.
Cumulative
Effect of Accounting Change. On
January 1, 2002, we were required to adopt the full provisions of SFAS No. 142,
“Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill and
certain indefinite-lived intangibles no longer be amortized, but instead be
tested for impairment at least annually. This testing requires the
identification of reporting units and comparison of the reporting units’
carrying value to their fair value and, when appropriate, requires the reduction
of the carrying value of impaired assets to their fair value.
The
transitional impairment analysis required upon adoption of SFAS No. 142 was
completed during the first quarter of 2002, and we determined that there was an
impairment of the carrying value of goodwill. As part of this analysis, we
determined that we continued to operate in one operating segment and that we did
not have any separate reporting units under SFAS No. 142; accordingly, the
impairment analysis was performed on an enterprise-wide basis. This process
included obtaining an independent appraisal of our fair value as a whole and of
our individual assets. The allocation of fair values to identifiable tangible
and intangible assets as of January 1, 2002, resulted in an implied valuation of
the goodwill of $0. The implied fair value of goodwill was determined in the
same manner as determining the amount of goodwill that would have been required
to be recognized in a business combination. That is, under SFAS No. 142, an
entity is required to allocate the fair value of a reporting unit to all of the
assets and liabilities of that unit (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination and
the fair value of the reporting unit was the price paid to acquire it. Comparing
this implied value to the carrying value resulted in an impairment of $5.3
million, with no income tax effect. This impairment was recorded as a cumulative
effect of accounting change on our statement of operations as of January 1,
2002.
Net
Loss. Our net
loss decreased to $816,000 in 2003, from $6.8 million in 2002. The net loss for
2003 includes the additional restructuring charge of approximately $1.0 million
recorded in the second quarter of 2003 described above under “Restructuring
Charge.” The net loss for 2002 includes the cumulative effect of an accounting
change of $5.3 million related to the impairment of goodwill described above and
a restructuring charge of approximately $1.2 million.
Unaudited
Quarterly Results of Operations
The
following table sets forth, for the periods indicated, our financial information
for the eight most recent quarters ended December 31, 2004. In our opinion, this
unaudited information has been prepared on a basis consistent with our annual
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
unaudited information for the periods presented. Certain prior year financial
information has been reclassified to conform with fiscal 2004 financial
statement presentation. This information should be read in conjunction with the
consolidated financial statements, including the related notes, included
elsewhere in this annual report. The results of operations for any quarter are
not necessarily indicative of results that we may achieve for any subsequent
periods.
| |
|
Quarter
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept.
30,
|
|
|
June
30,
|
|
|
Mar.
31,
|
|
| |
|
(in
thousands, except share and per share data) |
|
|
Revenue |
|
$ |
4,596 |
|
$ |
4,381 |
|
$ |
4,342 |
|
$ |
4,073 |
|
$ |
3,526 |
|
$ |
3,142 |
|
$ |
2,826 |
|
$ |
2,529 |
|
| |
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
771 |
|
|
730 |
|
|
694 |
|
|
693 |
|
|
520 |
|
|
501 |
|
|
514 |
|
|
493 |
|
|
Product development |
|
|
530 |
|
|
515 |
|
|
516 |
|
|
439 |
|
|
471 |
|
|
419 |
|
|
419 |
|
|
331 |
|
|
Sales and marketing |
|
|
1,462 |
|
|
1,327 |
|
|
1,240 |
|
|
1,154 |
|
|
1,062 |
|
|
910 |
|
|
856 |
|
|
727 |
|
|
General
and administrative |
|
|
1,325 |
|
|
1,222 |
|
|
988 |
|
|
921 |
|
|
954 |
|
|
1,059 |
|
|
786 |
|
|
813 |
|
|
Amortization
of intangibles |
|
|
230 |
|
|
204 |
|
|
179 |
|
|
179 |
|
|
254 |
|
|
253 |
|
|
253 |
|
|
253 |
|
|
Restructuring
and impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charges |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,024 |
|
|
— |
|
|
Total
operating expenses |
|
|
4,318 |
|
|
3,998 |
|
|
3,617 |
|
|
3,386 |
|
|
3,261 |
|
|
3,142 |
|
|
3,852 |
|
|
2,617 |
|
|
Income
(loss) from operations |
|
|
278 |
|
|
383 |
|
|
725 |
|
|
687 |
|
|
265 |
|
|
— |
|
|
(1,026 |
|
|
(88 |
) |
|
Other
income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(8 |
) |
|
Interest
income |
|
|
36 |
|
|
18 |
|
|
11 |
|
|
12 |
|
|
13 |
|
|
9 |
|
|
6 |
|
|
13 |
|
|
Total
other income, net |
|
|
36 |
|
|
18 |
|
|
11 |
|
|
12 |
|
|
13 |
|
|
9 |
|
|
6 |
|
|
5 |
|
|
Income
(loss) before provision for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes |
|
|
314 |
|
|
401 |
|
|
736 |
|
|
699 |
|
|
278 |
|
|
9 |
|
|
(1,020 |
) |
|
(83 |
) |
|
Provision
for income taxes |
|
|
— |
|
|
25 |
|
|
33 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Net
income (loss) |
|
$ |
314 |
|
$ |
376 |
|
$ |
703 |
|
$ |
699 |
|
$ |
278 |
|
$ |
9 |
|
$ |
(1,020 |
) |
$ |
(83 |
) |
|
Basic
net income (loss) per common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share |
|
$ |
0.01 |
|
$ |
0.01 |
|
$ |
0.02 |
|
$ |
0.02 |
|
$ |
0.01 |
|
$ |
0.00 |
|
$ |
(0.03 |
) |
$ |
(0.00 |
) |
|
Diluted
net income (loss) per common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share |
|
$ |
0.01 |
|
$ |
0.01 |
|
$ |
0.02 |
|
$ |
0.02 |
|
$ |
0.01 |
|
$ |
0.00 |
|
$ |
(0.03 |
) |
$ |
(0.00 |
) |
|
Weighted
average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
in basic net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
common share calculation |
|
|
37,370,093 |
|
|
37,336,792 |
|
|
37,318,804 |
|
|
37,010,432 |
|
|
36,133,570 |
|
|
34,887,114 |
|
|
34,229,236 |
|
|
34,155,869 |
|
|
Weighted
average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
in diluted net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per common share calculation |
|
|
39,410,072 |
|
|
39,294,832 |
|
|
39,590,800 |
|
|
39,385,526 |
|
|
38,641,268 |
|
|
37,614,097 |
|
|
34,229,236 |
|
|
34,155,869 |
|
Our
revenue from the LivePerson services increased in each of the last eight
quarters, from $2.5 million to $4.6 million. This increase is primarily
attributable to increased revenue from existing clients, the addition of new
clients and, to a lesser extent, to the acquisition of the Island Data customer
contracts and associated rights in December 2003 and the acquisition of the
FaceTime customer contracts in July 2004.
Our cost
of revenue has generally increased in each of the last eight quarters from
$493,000 to $771,000. This increase is attributable to an increase in the number
of account management personnel to support both increased client activity as
well as activity driven by the acquisition of the Island Data customer contracts
and associated rights in December 2003, increased spending for backup server
facilities, increased usage from existing clients, the addition of new clients
and, to a lesser extent, to the acquisition of the FaceTime customer contracts
in July 2004.
Our
product development costs have generally increased in each of the last eight
quarters from $331,000 to $530,000. This increase is attributable to an increase
in the number of LivePerson product development personnel to support both the
launch of a significant new release of the LivePerson services under the Timpani
brand name and, to a lesser extent, an increase in outsourced labor costs
related to the continuing development of our product line as we broaden the
range of services we offer to include a fully integrated, multi-channel software
platform.
Our sales
and marketing costs have increased in each of the last eight quarters from
$727,000 to $1.5 million. This increase is primarily attributable to an increase
in sales and marketing personnel as a result of the expansion of our sales
force, and, to a lesser extent, to an increase in on-line advertising and
marketing expenses related to our increasing efforts to enhance our brand
recognition and to increased sales lead activity.
Our
general and administrative costs have generally increased in each of the last
eight quarters from $813,000 to $1.3 million. This increase is primarily related
to the settlement of a previously disclosed legal matter and increases in legal
expenses, accounting expenses and recruitment costs related to the expansion of
our sales force, as well as an increase in compensation and related expenses,
partially offset by a decrease in non-cash compensation expense.
Amortization
expense in the year ended December 31, 2004 relates to acquisition costs
recorded as a result of our acquisitions of certain identifiable assets of
Island Data and FaceTime in December 2003 and July 2004,
respectively.
Amortization expense in the year ended December 31, 2003 relates to acquisition
costs recorded as a result of our acquisition of the NewChannel customer
contracts and associated rights in July 2002.
Liquidity
And Capital Resources
As of
December 31, 2004, we had $12.4 million in cash and cash equivalents, an
increase of $1.5 million from December 31, 2003. This increase is primarily
attributable to net cash provided by operating activities offset in part by net
cash used in investing activities. We regularly invest excess funds in
short-term money market funds.
Net cash
provided by operating activities was $2.1 million in the year ended December 31,
2004 and consisted of net income and non-cash expenses related to the
amortization of intangibles, non-cash compensation and depreciation offset by a
decrease in accrued expenses, and increases in accounts receivable and prepaid
expenses. Net cash used in operating activities was $1.1 million in the year
ended December 31, 2003 and consisted primarily of net operating losses offset
by non-cash expenses related to the amortization of intangibles, non-cash
compensation and depreciation and to a lesser extent, to increases in accounts
payable and deferred revenue partially offset by an increase in accounts
receivable.
Net cash
used in investing activities was $662,000 in the year ended December 31, 2004
and was due to the acquisition of the FaceTime customer contracts in July 2004
and the purchase of fixed assets. Net cash
used in investing activities was $142,000 in the year ended December 31, 2003
and was due to the acquisition of certain Island Data assets and the purchase of
fixed assets.
Net cash
provided by financing activities was $122,000 in the year ended December 31,
2004 and was attributable to proceeds from the issuance of common stock in
connection with the exercise of stock options by employees. Net cash provided by
financing activities was $1.9 million in the year ended December 31, 2003 and
was attributable to proceeds from the issuance of common stock in connection
with the exercise of stock options by employees.
We have
incurred significant costs to develop our technology and services, to hire
employees in our customer service, sales, marketing and administration
departments, and for the amortization of goodwill and intangible assets, as well
as non-cash compensation costs. Historically, we incurred significant quarterly
net losses from inception through June 30, 2003, significant negative cash flows
from operations in our quarterly periods from inception through December 31,
2002 and negative cash flows from operations of $124,000 in the three month
period ended March 31, 2004. As of December 31, 2004, we had an accumulated
deficit of approximately $103.9 million. These losses have been funded primarily
through the issuance of common stock in our initial public offering and, prior
to the initial public offering, the issuance of convertible preferred
stock.
We
anticipate that our current cash and cash equivalents will be sufficient to
satisfy our working capital and capital requirements for at least the next
12 months. However, we cannot assure you that we will not require
additional funds prior to such time, and we would then seek to sell additional
equity or debt securities through public financings, or seek alternative sources
of financing. We cannot assure you that additional funding will be available on
favorable terms, when needed, if at all. If we are unable to obtain any
necessary additional financing, we may be required to further reduce the scope
of our planned sales and marketing and product development efforts, which could
materially adversely affect our business, financial condition and operating
results. In addition, we may require additional funds in order to fund more
rapid expansion, to develop new or enhanced services or products or to invest in
complementary businesses, technologies, services or products.
Contractual
Obligations and Commitments
We do not
have any special purposes entities, and other than operating leases, which are
described below, we do not engage in off-balance sheet financing
arrangements.
We lease
facilities and certain equipment under agreements accounted for as operating
leases. These leases generally require us to pay all executory costs such as
maintenance and insurance. Rental expense for operating leases for the years
ended December 31, 2004 and 2003 was approximately $502,000 and $430,000,
respectively.
In
October 2004, we modified the existing lease for our principal executive offices
in New York City. The modification included the extension of the term of our
current lease to October 2007 as well as the addition of new space.
As of
December 31, 2004, our principal commitments were approximately $1.5 million
under various operating leases, of which approximately $609,000 is due in 2005.
We do not currently expect that our principal commitments for the year ended
December 31, 2005 will exceed $700,000 in the aggregate. Our capital
expenditures are not currently expected to exceed $500,000 in 2005. Our
contractual obligations at December 31, 2004 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 |
|
$ |
1,484 |
|
$ |
609 |
|
$ |
875 |
|
$ |
— |
|
$ |
— |
|
|
Total |
|
$ |
1,484 |
|
$ |
609 |
|
$ |
875 |
|
$ |
— |
|
$ |
— |
|
RISK
FACTORS THAT MAY AFFECT FUTURE RESULTS
Risks
Related to Our Business
We
have a history of losses, we had an accumulated deficit of $103.9 million as of
December 31, 2004 and we may incur losses in the future.
Although
we have achieved profitability in each three-month period since and including
the period ended September 30, 2003, we may, in the future, incur losses and
experience negative cash flow, either or both of which may be significant. We
recorded a net loss of $6.8 million for the year ended December 31, 2002 and
$816,000 for the year ended December 31, 2003. We recorded net income of $2.1
million in the year ended December 31, 2004. As of December 31, 2004, our
accumulated deficit was approximately $103.9 million. We cannot assure you that
we can sustain or increase profitability on a quarterly or annual basis in the
future. Failure to maintain profitability may materially and adversely affect
the market price of our common stock.
Our
quarterly revenue and operating results are subject to significant fluctuations,
which may adversely affect the trading price of our common
stock.
Our
quarterly revenue and operating results may fluctuate significantly in the
future due to a variety of factors, including the following factors which are in
part within our control, and in part outside of our control:
| · |
market
acceptance by companies doing business online of real-time sales, customer
service and marketing solutions; |
| · |
our
clients’ business success; |
| · |
our
clients’ demand for our services; |
| · |
our
ability to attract and retain clients; |
| · |
the
amount and timing of capital expenditures and other costs relating to the
expansion of our operations, including those related to
acquisitions; |
| · |
the
introduction of new services by us or our competitors;
and |
| · |
changes
in our pricing policies or the pricing policies of our
competitors. |
Our
revenue and results may also fluctuate significantly in the future due to the
following factors that are entirely outside of our control:
| · |
economic
conditions specific to the Internet, electronic commerce and online media;
and |
| · |
general
economic and political conditions. |
Period-to-period
comparisons of our operating results may not be meaningful because of these
factors. You should not rely upon these comparisons as indicators of our future
performance.
Due to
the foregoing factors, it is possible that our results of operations in one or
more future quarters may fall below the expectations of securities analysts and
investors. If this occurs, the trading price of our common stock could
decline.
We
may be unable to respond to the rapid technological change and changing client
preferences in the online sales, marketing and customer service industry and
this may harm our business.
If we are
unable, for technological, legal, financial or other reasons, to adapt in a
timely manner to changing market conditions in the online sales, marketing and
customer service industry or our clients’ or Internet users’ requirements, our
business, results of operations and financial condition would be materially and
adversely affected. Business on the Internet is characterized by rapid
technological change. In addition, the market for online sales, marketing and
customer service solutions is relatively new. Sudden changes in client and
Internet user requirements and preferences, frequent new product and service
introductions embodying new technologies, such as broadband communications, and
the emergence of new industry standards and practices could render the
LivePerson services and our proprietary technology and systems obsolete. The
rapid evolution of these products and services will require that we continually
improve the performance, features and reliability of our services. Our success
will depend, in part, on our ability to:
| · |
enhance
the features and performance of the LivePerson
services; |
| · |
develop
and offer new services that are valuable to companies doing business
online and Internet users; and |
| · |
respond
to technological advances and emerging industry standards and practices in
a cost-effective and timely manner. |
If any of
our new services, including upgrades to our current services, do not meet our
clients’ or Internet users’ expectations, our business may be harmed. Updating
our technology may require significant additional capital expenditures and could
materially and adversely affect our business, results of operations and
financial condition.
If new
services require us to grow rapidly, this could place a significant strain on
our managerial, operational, technical and financial resources. In order to
manage our growth, we could be required to implement new or upgraded operating
and financial systems, procedures and controls. Our failure to expand our
operations in an efficient manner could cause our expenses to grow, our revenue
to decline or grow more slowly than expected and could otherwise have a material
adverse effect on our business, results of operations and financial
condition.
If
we are not competitive in the market for real-time sales, customer service and
marketing solutions, our business could be harmed.
The
market for sales and customer service technology is intensely competitive and
characterized by aggressive marketing, evolving industry standards, rapid
technology developments and frequent new product introductions. Relatively few
substantial barriers to entry exist in this market, other than the ability to
design and build scalable software and, with respect to outsourced solution
providers, the ability to design, build and manage scalable network
architecture. Established or new entities may enter this market in the near
future, including those that provide real-time interaction online, with or
without the user’s request.
We
compete directly with companies focused on technology that facilitates real-time
sales, email management, searchable knowledgebase applications and customer
service interaction. These markets remain fairly saturated with small companies
that compete on price and features. We also face significant competition from
two customer service enterprise software providers, KANA and RightNow
Technologies, which offer hosted solutions. Furthermore, many of our competitors
offer a broader range of customer relationship management products and services
than we currently offer. We may be disadvantaged and our business may be harmed
if companies doing business online choose real-time sales, customer service and
marketing solutions from such providers.
We also
face potential competition from larger enterprise software companies such as
Oracle and Siebel Systems. In addition, established technology companies,
including Aspect Communications, Avaya, Genesys Telecommunications Laboratories,
IBM and Microsoft, may also leverage their existing relationships and
capabilities to offer real-time sales, customer service and marketing
applications.
Finally,
we face competition from clients and potential clients that choose to provide a
real-time sales, customer service and marketing solution in-house as well as, to
a lesser extent, traditional offline customer service solutions, such as
telephone call centers.
We
believe that competition will increase as our current competitors increase the
sophistication of their offerings and as new participants enter the market. Many
of our larger current and potential competitors have:
| · |
longer
operating histories; |
| · |
greater
brand recognition; |
| · |
more
diversified lines of products and services;
and |
| · |
significantly
greater financial, marketing and other
resources. |
Some
competitors may enter into strategic or commercial relationships with larger,
more established and better-financed companies. These competitors may be able
to:
| · |
undertake
more extensive marketing campaigns; |
| · |
adopt
more aggressive pricing policies; and |
| · |
make
more attractive offers to businesses to induce them to use their products
or services. |
Any delay
in the general market acceptance of the real-time sales, customer service and
marketing solution business model would likely harm our competitive position.
Delays would allow our competitors additional time to improve their service or
product offerings, and would also provide time for new competitors to develop
real-time sales, customer service and marketing applications and solicit
prospective clients within our target markets. Increased competition could
result in pricing pressures, reduced operating margins and loss of market
share.
The
success of our business is dependent on the retention of existing clients and
their purchase of additional LivePerson services.
Our
LivePerson services agreements typically have no termination date and are
terminable upon 30 to 90 days’ notice without penalty. If a significant number
of our clients, or any one client to whom we provide a significant amount of
services, were to terminate these services agreements, or reduce the amount of
services purchased or fail to purchase additional services, our results of
operations may be negatively and materially affected. Dissatisfaction with the
nature or quality of our services could also lead clients to terminate our
service. We depend on monthly fees from the LivePerson services for
substantially all of our revenue. If our retention rate declines, our revenue
could decline unless we are able to obtain additional clients or alternate
revenue sources. Further, because of the historically small amount of services
sold in initial orders, we depend on sales to new clients and sales of
additional services to our existing clients.
We
are dependent on technology systems that are beyond our
control.
The
success of the LivePerson services depends in part on our clients’ online
services as well as the Internet connections of visitors to their Web sites,
both of which are outside of our control. As a result, it may be difficult to
identify the source of problems if they occur. In the past, we have experienced
problems related to connectivity which have resulted in slower than normal
response times to Internet user chat requests and messages and interruptions in
service. The LivePerson services rely both on the Internet and on our
connectivity vendors for data transmission. Therefore, even when connectivity
problems are not caused by the LivePerson services, our clients or Internet
users may attribute the problem to us. This could diminish our brand and harm
our business, divert the attention of our technical personnel from our product
development efforts or cause significant client relations problems.
In
addition, we rely on a third-party Web hosting service provider for Internet
connectivity and network infrastructure hosting, security and maintenance. The
provider has, in the past, experienced problems that have resulted in slower
than normal response times and interruptions in service. If we are unable to
continue utilizing the services of our existing Web hosting provider or if our
Web hosting services experience interruptions or delays, it is possible that our
business could be harmed.
Our
service also depends on third parties for hardware and software, which products
could contain defects. Problems arising from our use of such hardware or
software could require us to incur significant costs or divert the attention of
our technical personnel from our product development efforts. To the extent any
such problems require us to replace such hardware or software, we may not be
able to do so on acceptable terms, if at all.
Technological
defects could disrupt our services, which could harm our business and
reputation.
We face
risks related to the technological capabilities of the LivePerson services. We
expect the number of interactions between our clients’ operators and Internet
users over our system to increase significantly as we expand our client base.
Our network hardware and software may not be able to accommodate this additional
volume. Additionally, we must continually upgrade our software to improve the
features and functionality of the LivePerson services in order to be competitive
in our market. If future versions of our software contain undetected errors, our
business could be harmed. As a result of major software upgrades at LivePerson,
our client sites have, from time to time, experienced slower than normal
response times and interruptions in service. If we experience system failures or
degraded response times, our reputation and brand could be harmed. We may also
experience technical problems in the process of installing and initiating the
LivePerson services on new Web hosting services. These problems, if unremedied,
could harm our business.
The
LivePerson services also depend on complex software which may contain defects,
particularly when we introduce new versions onto our servers. We may not
discover software defects that affect our new or current services or
enhancements until after they are deployed. It is possible that, despite testing
by us, defects may occur in the software. These defects could result
in:
| · |
damage
to our reputation; |
| · |
delays
in or loss of market acceptance of our products;
and |
| · |
unexpected
expenses and diversion of resources to remedy
errors. |
Our
clients may experience adverse business conditions that could adversely affect
our business.
Some of
our clients may experience difficulty in supporting their current operations and
implementing their business plans. These clients may reduce their spending on
our services, or may not be able to discharge their payment and other
obligations to us. These circumstances are influenced by general economic and
industry-specific conditions, and could have a material adverse impact on our
business, financial condition and results of operations. In addition, as a
result of these conditions, our clients, in particular our Internet-related
clients that may experience (or that anticipate experiencing) difficulty raising
capital, may elect to scale back the resources they devote to customer service
technology, including services such as ours. If the current environment for our
clients, including, in particular, our Internet-related clients, does not
improve, our business, results of operations and financial condition could be
materially adversely affected. In addition, the non-payment or late payment of
amounts due to us from a significant number of clients would negatively impact
our financial condition. During 2004, we increased our allowance for doubtful
accounts by $30,000 to approximately $94,000, principally due to an increase in
accounts receivable as a result of increased sales, and we wrote off
approximately $40,000 of previously reserved accounts, leaving a net allowance
of $54,000 at December 31, 2004. During 2003, we increased our allowance for
doubtful accounts by $15,000 to approximately $85,000, principally due to an
increase in accounts receivable as a result of increased sales, and we wrote off
approximately $21,000 of previously reserved accounts, leaving a net allowance
of $64,000 at December 31, 2003.
Our
business is significantly dependent on our ability to retain our current key
personnel, to attract new personnel, and to manage staff
attrition.
Our
future success depends to a significant extent on the continued services of our
senior management team, including Robert P. LoCascio, our founder and Chief
Executive Officer. The loss of the services of any member of our senior
management team, in particular Mr. LoCascio, could have a material and adverse
effect on our business, results of operations and financial condition. We cannot
assure you that we would be able to successfully integrate newly-hired senior
managers who would work together successfully with our existing management
team.
We may be
unable to attract, integrate or retain other highly qualified employees in the
future. If our retention efforts are ineffective, employee turnover could
increase and our ability to provide services to our clients would be materially
and adversely affected.
Any staff
attrition we experience, whether initiated by the departing employees or by us,
could place a significant strain on our managerial, operational, financial and
other resources. To the extent that we do not initiate or seek any staff
attrition that occurs, there can be no assurance that we will be able to
identify and hire adequate replacement staff promptly, if at all, and even that
if such staff is replaced, we will be successful in integrating these employees.
In addition, we may not be able to outsource certain functions. We expect to
evaluate our needs and the performance of our staff on a periodic basis, and may
choose to make adjustments in the future. If the size of our staff is
significantly reduced, either by our choice or otherwise, it may become more
difficult for us to manage existing, or establish new, relationships with
clients and other counter-parties, or to expand and improve our service
offerings. It may also become more difficult for us to implement changes to our
business plan or to respond promptly to opportunities in the marketplace.
Further, it may become more difficult for us to devote personnel resources
necessary to maintain or improve existing systems, including our financial and
managerial controls, billing systems, reporting systems and procedures. Thus,
any significant amount of staff attrition could cause our business and financial
results to suffer.
We
cannot predict our future capital needs to execute our business strategy and we
may not be able to secure additional financing.
We
believe that our current cash and cash equivalents and cash generated from
operations, if any, will be sufficient to fund our working capital and capital
expenditure requirements for at least the next twelve months. To the extent that
we require additional funds to support our operations or the expansion of our
business, or to pay for acquisitions, we may need to sell additional equity,
issue debt or convertible securities or obtain credit facilities through
financial institutions. In the past, we have obtained financing principally
through the sale of preferred stock, common stock and warrants. If additional
funds are raised through the issuance of debt or preferred equity securities,
these securities could have rights, preferences and privileges senior to holders
of common stock, and could have terms that impose restrictions on our
operations. If additional funds are raised through the issuance of additional
equity or convertible securities, our stockholders could suffer dilution. We
cannot assure you that additional funding, if required, will be available to us
in amounts or on terms acceptable to us. If sufficient funds are not available
or are not available on acceptable terms, our ability to fund any potential
expansion, take advantage of acquisition opportunities, develop or enhance our
services or products, or otherwise respond to competitive pressures would be
significantly limited. Those limitations would materially and adversely affect
our business, results of operations and financial condition.
If
we do not successfully integrate potential future acquisitions, our business
could be harmed.
In the
future, we may acquire or invest in complementary companies, products or
technologies. Acquisitions and investments involve numerous risks to us,
including:
| · |
difficulties
in integrating operations, technologies, products and personnel with
LivePerson; |
| · |
diversion
of financial and management resources from efforts related to the
LivePerson services or other then-existing operations; risks of entering
new markets beyond providing real-time sales, customer service and
marketing solutions for companies doing business
online; |
| · |
potential
loss of either our existing key employees or key employees of any
companies we acquire; and |
| · |
our
inability to generate sufficient revenue to offset acquisition or
investment costs. |
These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations.
Furthermore, we may incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders.
We
could face additional regulatory requirements, tax liabilities and other risks
as we expand internationally.
In
October 2000, we acquired HumanClick, an Israeli-based provider of real-time
online customer service applications. In addition, we are testing an outsourced
sales and marketing service provider to sell the LivePerson services in Western
Europe. There are risks related to doing business in international markets, such
as changes in regulatory requirements, tariffs and other trade barriers,
fluctuations in currency exchange rates, more stringent rules relating to the
privacy of Internet users and adverse tax consequences. In addition, there are
likely to be different consumer preferences and requirements in specific
international markets. Furthermore, we may face difficulties in staffing and
managing any foreign operations. One or more of these factors could harm any
future international operations.
Our
reputation depends, in part, on factors which are entirely outside of our
control.
Our
services typically appear as a LivePerson-branded, Timpani-branded or a
custom-created icon on our clients’ Web sites. The customer service operators
who respond to the inquiries of our clients’ Internet users are employees or
agents of our clients; they are not our employees. As a result, we have no way
of controlling the actions of these operators. In addition, an Internet user may
not know that the operator is an employee or agent of our client, rather than a
LivePerson employee. If an Internet user were to have a negative experience in a
LivePerson-powered real-time dialogue, it is possible that this experience could
be attributed to us, which could diminish our brand and harm our business.
Finally, we believe the success of our services depend on the prominent
placement of the icon on the client’s Web site, over which we also have no
control.
Our
business and prospects would suffer if we are unable to protect and enforce our
intellectual property rights.
Our
success and ability to compete depend, in part, upon the protection of our
intellectual property rights relating to the technology underlying the
LivePerson services. It is possible that:
| · |
any
issued patent or patents issued in the future may not be broad enough to
protect our intellectual property rights; |
| · |
any
issued patent or any patents issued in the future could be successfully
challenged by one or more third parties, which could result in our loss of
the right to prevent others from exploiting the inventions claimed in the
patents; |
| · |
current
and future competitors may independently develop similar technologies,
duplicate our services or design around any patents we may have;
and |
| · |
effective
patent protection may not be available in every country in which we do
business, where our services are sold or used, where the laws may not
protect proprietary rights as fully as do the laws of the U.S. or where
enforcement of laws protecting proprietary rights is not common or
effective. |
Further,
to the extent that the invention described in any U.S. patent was made public
prior to the filing of the patent application, we may not be able to obtain
patent protection in certain foreign countries. We also rely upon copyright,
trade secret, trademark and other common law in the U.S. and other
jurisdictions, as well as confidentiality procedures and contractual provisions,
to protect our proprietary technology, processes and other intellectual
property, to the extent that protection is sought or secured at all. Any steps
we might take may not be adequate to protect against infringement and
misappropriation of our intellectual property by third parties. Similarly, third
parties may be able to independently develop similar or superior technology,
processes or other intellectual property. Policing unauthorized use of our
services and intellectual property rights is difficult, and we cannot be certain
that the steps we have taken will prevent misappropriation of our technology or
intellectual property rights, particularly in foreign countries where we do
business, where our services are sold or used, where the laws may not protect
proprietary rights as fully as do the laws of the United States or where
enforcement of laws protecting proprietary rights is not common or effective.
The unauthorized reproduction or other misappropriation of our intellectual
property rights could enable third parties to benefit from our technology
without paying us for it. If this occurs, our business, results of operations
and financial condition could be materially and adversely affected. In addition,
disputes concerning the ownership or rights to use intellectual property could
be costly and time-consuming to litigate, may distract management from operating
our business and may result in our loss of significant rights.
Our
products and services may infringe upon intellectual property rights of third
parties and any infringement could require us to incur substantial costs and may
distract our management.
We are
subject to the risk of claims alleging infringement of third-party proprietary
rights. Substantial litigation regarding intellectual property rights exists in
the software industry. In the ordinary course of our business, our services may
be increasingly subject to third-party infringement claims as the number of
competitors in our industry segment grows and the functionality of services in
different industry segments overlaps. Some of our competitors in the market for
real-time sales, customer service and marketing may have filed or may intend to
file patent applications covering aspects of their technology. Any claims
alleging infringement of third-party intellectual property rights could require
us to spend significant amounts in litigation (even if the claim is invalid),
distract management from other tasks of operating our business, pay substantial
damage awards, prevent us from selling our products, delay delivery of the
LivePerson services, develop non-infringing software, technology, business
processes, systems or other intellectual property (none of which might be
successful), or limit our ability to use the intellectual property that is the
subject of any of these claims, unless we enter into license agreements with the
third parties (which may be unavailable on commercially reasonable terms, or not
available at all). Therefore, such claims could have a material adverse effect
on our business, results of operations and financial condition.
We
may be liable if third parties misappropriate personal information belonging to
our clients’ Internet users.
We
maintain dialogue transcripts of the text-based chats and email interactions
between our clients and Internet users and store on our servers information
supplied voluntarily by these Internet users in surveys. We provide this
information to our clients to allow them to perform Internet user analyses and
monitor the effectiveness of our services. Some of the information we collect
may include personal information, such as contact and demographic information.
If third parties were able to penetrate our network security or otherwise
misappropriate personal information relating to our clients’ Internet users or
the text of customer service inquiries, we could be subject to liability. We
could be subject to negligence claims or claims for misuse of personal
information. These claims could result in litigation, which could have a
material adverse effect on our business, results of operations and financial
condition. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by such breaches.
The need
to physically secure and securely transmit confidential information online has
been a significant barrier to electronic commerce and online communications. Any
well-publicized compromise of security could deter people from using online
services such as the ones we offer, or from using them to conduct transactions,
which involve transmitting confidential information. Because our success depends
on the general acceptance of our services and electronic commerce, we may incur
significant costs to protect against the threat of security breaches or to
alleviate problems caused by these breaches.
Political,
economic and military conditions in Israel could negatively impact our Israeli
operations.
Our
product development staff, help desk and online sales personnel are located in
Israel. As of December 31, 2004, we had 30 full-time employees in Israel and as
of December 31, 2003, we had 33 full-time employees in Israel. Although
substantially all of our sales to date have been made to customers outside
Israel, we are directly influenced by the political, economic and military
conditions affecting Israel. Since the establishment of the State of Israel in
1948, a number of armed conflicts have taken place between Israel and its Arab
neighbors. A state of hostility, varying in degree and intensity, has caused
security and economic problems in Israel. Further, since September 2000, there
has been a significant deterioration in the relationship between Israel and the
Palestinian Authority and serious violence has ensued, the peace process between
the parties has stagnated, and Israel’s relationship with several Arab countries
has been adversely affected. Moreover, hostilities during 2002, 2003 and 2004
escalated significantly, with increased attacks in Israel and an armed conflict
between Israel and the Palestinians in the West Bank and Gaza. Efforts to
resolve the conflict have failed to result in an agreeable solution. Continued
hostilities between the Palestinian community and Israel and any failure to
settle the conflict could adversely affect our operations in Israel and our
business. Further deterioration of the situation into a full-scale armed
conflict might require more widespread military reserve service by some of our
Israeli employees and might result in a significant downturn in the economic or
financial condition of Israel, either of which could have a material adverse
effect on our operations in Israel and our business. In addition, several Arab
countries still restrict business with Israeli companies. Our operations in
Israel could be adversely affected by restrictive laws or policies directed
towards Israel and Israeli businesses.
Risks
Related to Our Industry
We
are dependent on the continued use of the Internet as a medium for
commerce.
We cannot
be sure that a sufficiently broad base of consumers will continue to use the
Internet as a medium for commerce. Convincing our clients to offer real-time
sales, customer service and marketing technology may be difficult.
| · |
The
continuation of the Internet as a viable commercial marketplace is subject
to a number of factors, including: |
| · |
continued
growth in the number of users; |
| · |
concerns
about transaction security; |
| · |
continued
development of the necessary technological
infrastructure; |
| · |
development
of enabling technologies; |
| · |
uncertain
and increasing government regulation; and |
| · |
the
development of complementary services and
products. |
We
depend on the continued viability of the infrastructure of the
Internet.
To the
extent that the Internet continues to experience growth in the number of users
and frequency of use by consumers resulting in increased bandwidth demands, we
cannot assure you that the infrastructure for the Internet will be able to
support the demands placed upon it. The Internet has experienced outages and
delays as a result of damage to portions of its infrastructure. Outages or
delays could adversely affect online sites, email and the level of traffic on
the Internet. We also depend on Internet service providers that provide our
clients and Internet users with access to the LivePerson services. In the past,
users have experienced difficulties due to system failures unrelated to our
service. In addition, the Internet could lose its viability due to delays in the
adoption of new standards and protocols required to handle increased levels of
Internet activity. Insufficient availability of telecommunications services to
support the Internet also could result in slower response times and negatively
impact use of the Internet generally, and our clients’ sites (including the
LivePerson dialogue windows) in particular. If the use of the Internet fails to
grow or grows more slowly than expected, if the infrastructure for the Internet
does not effectively support growth that may occur or if the Internet does not
become a viable commercial marketplace, we may not maintain profitability and
our business, results of operations and financial condition will
suffer.
We
may become subject to burdensome government regulation and legal
uncertainties.
We are
subject to federal, state and local regulation, and laws of jurisdictions
outside of the United States, including laws and regulations applicable to
computer software and access to or commerce over the Internet. Due to the
increasing popularity and use of the Internet and various other online services,
it is likely that a number of new laws and regulations will be adopted with
respect to the Internet or other online services covering issues such as user
privacy, freedom of expression, pricing, content and quality of products and
services, taxation, advertising, intellectual property rights and information
security. The nature of such legislation and the manner in which it may be
interpreted and enforced cannot be fully determined and, therefore, such
legislation could subject us and/or our clients or Internet users to potential
liability, which in turn could have a material adverse effect on our business,
results of operations and financial condition.
As a
result of collecting data from live online Internet user dialogues, our clients
may be able to analyze the commercial habits of Internet users. Privacy concerns
may cause Internet users to avoid online sites that collect such behavioral
information and even the perception of security and privacy concerns, whether or
not valid, may indirectly inhibit market acceptance of our services. In
addition, we or our clients may be harmed by any laws or regulations that
restrict the ability to collect or use this data. The European Union and many
countries within the E.U. have adopted privacy directives or laws that strictly
regulate the collection and use of personally identifiable information of
Internet users. The United States has adopted legislation which governs the
collection and use of certain personal information. The U.S. Federal Trade
Commission has also taken action against Web site operators who do not comply
with their stated privacy policies. Furthermore, other foreign jurisdictions
have adopted legislation governing the collection and use of personal
information. These and other governmental efforts may limit our clients’ ability
to collect and use information about their Internet users through our services.
As a result, such laws and efforts could create uncertainty in the marketplace
that could reduce demand for our services or increase the cost of doing business
as a result of litigation costs or increased service delivery costs, or could in
some other manner have a material adverse effect on our business, results of
operations and financial condition.
For
example, the LivePerson services allow our clients to capture and save
information about Internet users, possibly without their knowledge.
Additionally, our service uses a tool, commonly referred to as a “cookie,” to
uniquely identify each of our clients’ Internet users. To the extent that
additional legislation regarding Internet user privacy is enacted, such as
legislation governing the collection and use of information regarding Internet
users through the use of cookies, the effectiveness of the LivePerson services
could be impaired by restricting us from collecting information which may be
valuable to our clients. The foregoing could have a material adverse effect our
business, results of operations and financial condition.
In
addition to privacy legislation, any new legislation or regulation regarding the
Internet, or the application of existing laws and regulations to the Internet,
could harm us. Additionally, as we operate outside the U.S., the international
regulatory environment relating to the Internet could have a material adverse
effect on our business, results of operations and financial
condition.
Security
concerns could hinder commerce on the Internet.
User
concerns about the security of confidential information online has been a
significant barrier to commerce on the Internet and online communications. Any
well-publicized compromise of security could deter people from using the
Internet or other online services or from using them to conduct transactions
that involve the transmission of confidential information. If Internet commerce
is inhibited as a result of such security concerns, our business would be
harmed.
Other
Risks
Our
stockholders who each own greater than five percent of the outstanding common
stock, and our executive officers and directors, will be able to influence
matters requiring a stockholder vote.
Our
stockholders who each own greater than five percent of the outstanding common
stock and their affiliates, and our executive officers and directors, in the
aggregate, beneficially own approximately 50.6% of our outstanding common stock.
As a result, these stockholders, if acting together, will be able to
significantly influence all matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership could also have the effect of
delaying or preventing a change in control.
The
future sale of shares of our common stock may negatively affect our stock
price.
If our
stockholders sell substantial amounts of our common stock, including shares
issuable upon the exercise of outstanding options and warrants in the public
market, or if our stockholders are perceived by the market as intending to sell
substantial amounts of our common stock, the market price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
securities in the future at a time and price that we deem appropriate. The
number of shares of common stock subject to the registration statement we filed
in January 2004, registering our issuance and sale from time to time of up to
4,000,000 shares of common stock, is much greater than the average weekly
trading volume for our shares. No prediction can be made as to the effect, if
any, that market sales of these or other shares of our common stock will have on
the market price of our common stock.
Our
stock price has been highly volatile and may experience extreme price and volume
fluctuations in the future, which could reduce the value of your investment and
subject us to litigation.
Fluctuations
in market price and volume are particularly common among securities of Internet
and other technology companies. The market price of our common stock has
fluctuated significantly in the past and may continue to be highly volatile,
with extreme price and volume fluctuations, in response to the following
factors, some of which are beyond our control:
| · |
variations
in our quarterly operating results; |
| · |
changes
in market valuations of publicly-traded companies in general and Internet
and other technology companies in
particular; |
| · |
our
announcements of significant client contracts, acquisitions and our
ability to integrate these acquisitions, strategic partnerships, joint
ventures or capital commitments; |
| · |
our
failure to complete significant sales; |
| · |
additions
or departures of key personnel; |
| · |
future
sales of our common stock; |
| · |
changes
in financial estimates by securities analysts;
and |
| · |
terrorist
attacks against the United States or in Israel, the engagement in
hostilities or an escalation of hostilities by or against the United
States or Israel, or the declaration of war or national emergency by the
United States or Israel. |
In the
past, companies that have experienced volatility in the market price of their
stock have been the subject of securities class action litigation. We may in the
future be the target of similar litigation, which could result in substantial
costs and distract management from other important aspects of operating our
business.
Anti-takeover
provisions in our charter documents and Delaware law may make it difficult for a
third party to acquire us.
Provisions
of our amended and restated certificate of incorporation, such as our staggered
Board of Directors, the manner in which director vacancies may be filled and
provisions regarding the calling of stockholder meetings, could make it more
difficult for a third party to acquire us, even if doing so might be beneficial
to our stockholders. In addition, provisions of our amended and restated bylaws,
such as advance notice requirements for stockholder proposals, and applicable
provisions of Delaware law, such as the application of business combination
limitations, could impose similar difficulties. Further, provisions of our
amended and restated certificate of incorporation relating to directors,
stockholder meetings, limitation of director liability, indemnification and
amendment of the certificate of incorporation and bylaws may not be amended
without the affirmative vote of not less than 66.67% of the outstanding shares
of our capital stock entitled to vote generally in the election of directors
(considered for this purpose as a single class) cast at a meeting of our
stockholders called for that purpose. Our amended and restated bylaws may not be
amended without the affirmative vote of at least 66.67% of our Board of
Directors or without the affirmative vote of not less than 66.67% of the
outstanding shares of our capital stock entitled to vote generally in the
election of directors (considered for this purpose as a single class) cast at a
meeting of our stockholders called for that purpose.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency
Rate Fluctuations
Through
December 31, 2004, our results of operations, financial condition and cash flows
have not been materially affected by changes in the relative values of non-U.S.
currencies to the U.S. dollar. The functional currency of our wholly-owned
Israeli subsidiary, HumanClick Ltd., is the U.S. dollar. We do not use
derivative financial instruments to limit our foreign currency risk
exposure.
Collection
Risk
Our
accounts receivable are subject, in the normal course of business, to collection
risks. We regularly assess these risks and have established policies and
business practices to protect against the adverse effects of collection risks.
During 2004, we increased our allowance for doubtful accounts by $30,000 to
approximately $94,000, principally due to an increase in accounts receivable as
a result of increased sales, and we wrote off approximately $40,000 of
previously reserved accounts, leaving a net allowance of $54,000 at December 31,
2004. During 2003, we increased our allowance for doubtful accounts by $15,000
to approximately $85,000, principally due to an increase in accounts receivable
as a result of increased sales, and we wrote off approximately $21,000 of
previously reserved accounts, leaving a net allowance of $64,000 at December 31,
2003.
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
8. CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Report
of KPMG LLP, Independent Registered Public Accounting Firm |
41 |
| |
|
Consolidated
Balance Sheets as of December 31, 2004 and 2003 |
42 |
| |
|
Consolidated
Statements of Operations for the years ended December 31, 2004, 2003 and
2002 |
43 |
| |
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2004,
2003 and 2002 |
44 |
| |
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2004, 2003 and
2002 |
45 |
| |
|
Notes
to Consolidated Financial Statements |
46 |
The
unaudited supplementary data regarding quarterly results of operations are
incorporated by reference to the information set forth in Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” in
the section captioned, “Unaudited Quarterly Results of
Operations.”
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
LivePerson,
Inc.:
We have
audited the accompanying consolidated balance sheets of LivePerson, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of LivePerson, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
New York,
New York
March 16,
2005
LIVEPERSON,
INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share data)
| |
|
December
31 |
|
| |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
12,425 |
|
$ |
10,898 |
|
|
Accounts
receivable, less allowance for doubtful accounts |
|
|
|
|
|
|
|
|
of
$54 and $64, in 2004 and 2003, respectively |
|
|
1,641 |
|
|
1,239 |
|
|
Prepaid
expenses and other current assets |
|
|
475 |
|
|
318 |
|
|
Total
current assets |
|
|
14,541 |
|
|
12,455 |
|
|
Property
and equipment, net |
|
|
384 |
|
|
341 |
|
|
Intangibles,
net |
|
|
1,721 |
|
|
361 |
|
|
Security
deposits |
|
|
166 |
|
|
129 |
|
|
Other
assets |
|
|
338 |
|
|
251 |
|
|
Total
assets |
|
$ |
17,150 |
|
$ |
13,537 |
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
262 |
|
$ |
116 |
|
|
Accrued
expenses |
|
|
1,666 |
|
|
2,577 |
|
|
Deferred
revenue |
|
|
1,330 |
|
|
1,276 |
|
|
Total
current liabilities |
|
|
3,258 |
|
|
3,969 |
|
|
Other
liabilities |
|
|
338 |
|
|
232 |
|
| |
|
|
|
|
|
|
|
|
Commitments
and contingencies |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Stockholders’
equity: |
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value per share; 5,000,000 |
|
|
|
|
|
|
|
|
shares
authorized, 0 issued and outstanding at |
|
|
|
|
|
|
|
|
December
31, 2004 and 2003 |
|
|
-- |
|
|
-- |
|
|
Common
stock, $.001 par value per share; 100,000,000 |
|
|
|
|
|
|
|
|
shares
authorized, 37,380,732 shares issued and |
|
|
|
|
|
|
|
|
outstanding
at December 31, 2004; 36,816,415 shares |
|
|
|
|
|
|
|
|
issued
and outstanding at December 31, 2003 |
|
|
37 |
|
|
36 |
|
|
Additional
paid-in capital |
|
|
117,440 |
|
|
115,315 |
|
|
Accumulated
deficit |
|
|
(103,923 |
) |
|
(106,015 |
) |
|
Total
stockholders’ equity |
|
|
13,554 |
|
|
9,336 |
|
|
Total
liabilities and stockholders’ equity |
|
$ |
17,150 |
|
$ |
13,537 |
|
See
accompanying notes to consolidated financial statements.
LIVEPERSON,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except share and per share data)
| |
|
Year
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Revenue |
|
$ |
17,392 |
|
$ |
12,023 |
|
$ |
8,234 |
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue |
|
|
2,888 |
|
|
2,028 |
|
|
1,604 |
|
|
Product
development. |
|
|
2,000 |
|
|
1,641 |
|
|
1,283 |
|
|
Sales
and marketing |
|
|
5,183 |
|
|
3,555 |
|
|
2,177 |
|
|
General
and administrative |
|
|
4,456 |
|
|
3,610
|
|
|
3,176 |
|
|
Amortization
of intangibles |
|
|
792 |
|
|
1,014 |
|
|
357 |
|
|
Restructuring
and impairment charges |
|
|
-- |
|
|
1,024 |
|
|
1,186 |
|
|
Total
operating expenses |
|
|
15,319 |
|
|
12,872 |
|
|
9,783 |
|
|
Income
(loss) from operations |
|
|
2,073 |
|
|
(849 |
) |
|
(1,549 |
) |
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income |
|
|
-- |
|
|
(8 |
) |
|
-- |
|
|
Interest
income |
|
|
77 |
|
|
41 |
|
|
126 |
|
|
Interest
expense |
|
|
-- |
|
|
-- |
|
|
(10 |
) |
|
Total
other income, net |
|
|
77 |
|
|
33 |
|
|
116 |
|
|
Income
(loss) before cumulative effect of accounting |
|
|
|
|
|
|
|
|
|
|
|
change |
|
|
2,150 |
|
|
(816 |
) |
|
(1,433 |
) |
|
Cumulative
effect of accounting change |
|
|
-- |
|
|
-- |
|
|
(5,338 |
) |
|
Income
(loss) before provision for income taxes |
|
|
2,150 |
|
|
(816 |
) |
|
(6,771 |
) |
|
Provision
for income taxes |
|
|
58 |
|
|
-- |
|
|
-- |
|
|
Net
income (loss) |
|
|
2,092 |
|
|
(816 |
) |
|
(6,771 |
) |
|
Basic
net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before cumulative effect of accounting |
|
|
|
|
|
|
|
|
|
|
|
change |
|
$ |
0.06 |
|
$ |
(0.02 |
) |
$ |
(0.04 |
) |
|
Cumulative
effect of accounting change |
|
|
-- |
|
|
-- |
|
|
(0.16 |
) |
|
Net
income (loss) |
|
$ |
0.06 |
|
$ |
(0.02 |
) |
$ |
(0.20 |
) |
|
Diluted
net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before cumulative effect of accounting |
|
|
|
|
|
|
|
|
|
|
|
change |
|
$ |
0.05 |
|
$ |
(0.02 |
) |
$ |
(0.04 |
) |
|
Cumulative
effect of accounting change |
|
|
-- |
|
|
-- |
|
|
(0.16 |
) |
|
Net
income (loss) |
|
$ |
0.05 |
|
$ |
(0.02 |
) |
$ |
(0.20 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding used in basic |
|
|
|
|
|
|
|
|
|
|
|
net
income (loss) per common share calculation |
|
|
37,263,378 |
|
|
34,854,802 |
|
|
34,028,702 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding used in diluted |
|
|
|
|
|
|
|
|
|
|
|
net
income (loss) per common share calculation |
|
|
39,680,304 |
|
|
34,854,802 |
|
|
34,028,702 |
|
See
accompanying notes to consolidated financial statements.
LIVEPERSON,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
thousands, except share and per share data)
| |
|
|
|
Additional
Paid-in Capital |
|
Deferred
Compensation |
|
|
|
Accumulated
Other
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Common
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2001 |
|
|
33,983,381 |
|
$ |
34 |
|
$ |
113,071 |
|
$ |
(399 |
) |
$ |
(98,428 |
) |
$ |
(7 |
) |
$ |
14,271 |
|
|
Issuance
of common stock upon exercise of stock options |
|
|
77,500 |
|
|
-- |
|
|
24 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
24 |
|
|
Deferred
stock based compensation, net of forfeitures |
|
|
-- |
|
|
-- |
|
|
(34 |
) |
|
34 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Amortization
of deferred compensation, net of forfeitures |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
365 |
|
|
-- |
|
|
-- |
|
|
365 |
|
|
Net
loss |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(6,771 |
) |
|
-- |
|
|
(6,771 |
) |
|
Foreign
currency translation |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(1 |
) |
|
(1 |
) |
|
Comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,772 |
) |
|
Balance
at December 31, 2002 |
|
|
34,060,881 |
|
|
34 |
|
|
113,061 |
|
|
-- |
|
|
(105,199 |
) |
|
(8 |
) |
|
7,888 |
|
|
Issuance
of common stock upon exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
warrants |
|
|
2,755,534 |
|
|
2 |
|
|
1,911 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
1,913 |
|
|
Deferred
stock based compensation |
|
|
-- |
|
|
-- |
|
|
298 |
|
|
(298 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
|
Acceleration
of employee stock options |
|
|
-- |
|
|
-- |
|
|
45 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
45 |
|
|
Amortization
of deferred compensation |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
298 |
|
|
-- |
|
|
-- |
|
|
298 |
|
|
Net
loss |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(816 |
) |
|
-- |
|
|
(816 |
) |
|
Other
comprehensive loss |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
8 |
|
|
8 |
|
|
Comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(808 |
) |
|
Balance
at December 31, 2003 |
|
|
36,816,415 |
|
|
36 |
|
|
115,315 |
|
|
-- |
|
|
(106,015 |
) |
|
-- |
|
|
9,336 |
|
|
Issuance
of common stock upon exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
warrants |
|
|
193,423 |
|
|
-- |
|
|
122 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
122 |
|
|
Issuance
of common stock related to asset acquisition |
|
|
370,894 |
|
|
1 |
|
|
1,749 |
|
|
-- |
|
|
--
|
|
|
-- |
|
|
1,750 |
|
|
Deferred
stock based compensation |
|
|
-- |
|
|
-- |
|
|
246 |
|
|
(246 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
|
Amortization
of deferred compensation |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
246 |
|
|
-- |
|
|
-- |
|
|
246
|
|
|
Tax
benefit from exercise of employee stock options |
|
|
-- |
|
|
-- |
|
|
8 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
8
|
|
|
Net
income |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
2,092 |
|
|
-- |
|
|
2,092
|
|
|
Balance
at December 31, 2004 |
|
|
37,380,732 |
|
$ |
37 |
|
$ |
117,440 |
|
$ |
-- |
|
$ |
(103,923 |
) |
$ |
-- |
|
$ |
13,554 |
|
See
accompanying notes to consolidated financial statements.
LIVEPERSON,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands, except share and per share data)
| |
|
Year
Ended December 31, |
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
Net
income (loss) |
|
$ |
2,092 |
|
$ |
(816 |
) |
$ |
(6,771 |
) |
|
Adjustments
to reconcile net income (loss) to net cash |
|
|
|
|
|
|
|
|
|
|
|
Provided
by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of accounting change |
|
|
-- |
|
|
-- |
|
|
5,338 |
|
|
Non-cash
compensation expense, net |
|
|
246 |
|
|
343 |
|
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
217 |
|
|
321 |
|
|
366 |
|
|
Amortization
of intangibles |
|
|
792 |
|
|
1,014 |
|
|
357 |
|
|
Provision
for doubtful accounts, net |
|
|
30 |
|
|
15 |
|
|
-- |
|
|
Deferred
income taxes |
|
|
8 |
|
|
-- |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(432 |
) |
|
(648 |
) |
|
13 |
|
|
Prepaid
expenses and other current assets |
|
|
(157 |
) |
|
(19 |
) |
|
90 |
|
|
Security
deposits |
|
|
(37 |
) |
|
(5 |
) |
|
(2 |
) |
|
Other
assets and liabilities |
|
|
19 |
|
|
-- |
|
|
-- |
|
|
Accounts
payable |
|
|
146 |
|
|
(21 |
) |
|
(456 |
) |
|
Accrued
expenses |
|
|
(911 |
) |
|
454 |
|
|
(278 |
) |
|
Deferred
revenue |
|
|
54 |
|
|
476 |
|
|
240 |
|
|
Net
cash provided by (used in) operating activities |
|
|
2,067
|
|
|
1,114 |
|
|
(738 |
) |
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment, including capitalized |
|
|
|
|
|
|
|
|
|
|
|
software |
|
|
(260 |
) |
|
(67 |
) |
|
(59 |
) |
|
Proceeds
from sale of property and equipment |
|
|
-- |
|
|
-- |
|
|
13 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Island Data customer contracts |
|
|
(8 |
) |
|
(75 |
) |
|
-- |
|
|
Acquisition
of NewChannel customer contracts |
|
|
-- |
|
|
-- |
|
|
(1,371 |
) |
|
Acquisition
of FaceTime customer contracts |
|
|
(394 |
) |
|
-- |
|
|
-- |
|
|
Net
cash used in investing activities |
|
|
(662 |
) |
|
(142 |
) |
|
(1,417 |
) |
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock in connection with |
|
|
|
|
|
|
|
|
|
|
|
the
exercise of options and warrants |
|
|
122 |
|
|
1,914 |
|
|
24 |
|
|
Net
cash provided by financing activities |
|
|
122 |
|
|
1,914 |
|
|
24 |
|
|
Effect
of foreign exchange rate changes on cash |
|
|
|
|
|
|
|
|
|
|
|
and
cash equivalents |
|
|
- |
|
|
8 |
|
|
(1 |
) |
|
Net
increase (decrease) in cash and cash equivalents |
|
|
1,527 |
|
|
2,894 |
|
|
(2,132 |
) |
|
Cash
and cash equivalents at the beginning of the year |
|
|
10,898 |
|
|
8,004 |
|
|
10,136 |
|
|
Cash
and cash equivalents at the end of the year |
|
$ |
12,425 |
|
$ |
10,898 |
|
$ |
8,004 |
|
|
Supplemental
disclosures: |
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
-- |
|
$ |
-- |
|
$ |
10 |
|
|
Income
taxes |
|
|
88 |
|
|
-- |
|
|
-- |
|
Supplemental
disclosure of non-cash investing and financing activities:
During
the years ended December 31, 2004 and 2003, 22,198 and 276,910 shares of common
stock, respectively, were issued in connection with the cashless exercise of
warrants.
During
the year ended December 31, 2004, the Company issued 370,894 shares of common
stock in connection with the acquisition of certain identifiable assets of
Island Data Corporation.
See
accompanying notes to consolidated financial statements.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2004 and 2003
(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 leading
provider of solutions for managing online customer interactions. The Company’s
hosted software enables companies to identify and engage customers, using
communication channels. LivePerson’s fully-integrated multi-channel
communications platform, Timpani, facilitates real-time sales, customer service
and marketing. The Company’s technology supports and manages all online
interactions—chat, email and self-service/knowledgebase.
The
Company’s primary revenue source is from the sale of the LivePerson services
under the brand name Timpani, which is conducted within one operating segment.
The Company’s product development staff, help desk and online sales support are
located in Israel.
(b)
Principles of Consolidation
The
consolidated financial statements reflect the operations of LivePerson and its
wholly-owned subsidiary. All significant intercompany balances and transactions
have been eliminated in consolidation.
(c)
Use of Estimates
The
preparation of the consolidated financial statements in accordance with
generally accepted accounting principles requires the Company’s management to
make a number of estimates and assumptions relating to the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
revenue and expenses during the period. Significant items subject to such
estimates and assumptions include the carrying amount of property and equipment,
intangibles, valuation allowances for deferred income tax assets, accounts
receivable, the expected term of a client relationship, accruals and other
factors. Actual results could differ from those estimates.
(d)
Reclassifications
Certain
prior year financial information has been reclassified to conform with fiscal
2004 financial statement presentation.
(e)
Cash and Cash Equivalents
The
Company considers all highly liquid securities with original maturities of three
months or less when acquired to be cash equivalents.
(f)
Property and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over the
estimated useful lives of the related assets, generally three to five years for
equipment and software. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
life of the asset. Total depreciation for the years ended December 31, 2004,
2003 and 2002 was $217, $321, and $366, respectively, and was recorded in Cost
of revenue and General and administrative expense for each year.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share
data)
(g)
Impairment of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets,” long-lived
assets, such as property, plant and equipment and purchased intangibles subject
to amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying value of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying value of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying value of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying value or the fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sales would be presented
separately in the appropriate asset and liability sections of the balance
sheet.
(h)
Accounts Receivable
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts receivable. The
Company determines the allowance based on historical write-off experience. The
Company reviews its allowance for doubtful accounts monthly. Past due balances
over 90 days and over a specified amount are reviewed individually for
collectibitity. All other balances are reviewed on a pooled basis. Account
balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. The
Company does not have any off-balance sheet credit exposure related to its
customers.
(i)
Revenue Recognition
The
Company’s hosted software enables companies to identify and engage customers,
using communication channels. LivePerson’s fully-integrated multi-channel
communications platform, Timpani, facilitates real-time sales, customer service
and marketing. The Company’s technology supports and manages all online
interactions—chat, email and self-service/knowledgebase.
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. The Company
also occasionally charges professional service fees related to additional
training and business consulting and analysis.
The
initial set-up fee is intended to recover certain costs (principally customer
service, training and other administrative costs) prior to the deployment of the
LivePerson services. Such fees are recorded as deferred revenue and recognized
ratably over a period of 24 months, representing the estimated term of the
client relationships. Although the Company believes this estimate is reasonable,
this estimate may change in the future. In instances where the Company does
charge a set-up fee, the Company typically does not charge an additional set-up
fee if an existing client adds more services. Unamortized deferred fees, if any,
are recognized upon termination of the agreement with the customer. The Company
recognized set-up fees due to client attrition of $2, $0, and $12 in 2004, 2003
and 2002, respectively.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
The
Company also sells certain of the LivePerson Timpani services directly via
Internet download. These services are marketed as Timpani SB for small- and
medium-sized businesses, and are paid for almost exclusively by credit card.
Credit card payments accelerate cash flow and reduce the Company’s collection
risk, subject to the merchant bank’s right to hold back cash pending settlement
of the transactions. Sales executed via Internet download 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. Sales of the LivePerson services via Internet download typically
have no set-up fee, because the Company does not provide the customer with
training and administrative costs are minimal.
The
Company records revenue for its traditional direct sales and Internet download
sales based upon a monthly fee charged for the LivePerson services, provided
that no significant Company obligations remain and collection of the resulting
receivable is probable. The Company recognizes monthly service revenue fees as
services are provided. The Company’s service agreements typically have no
termination date and are terminable by either party upon 30 to 90 days’ notice
without penalty. The Company recognizes professional service fees upon
completion and customer acceptance of the professional service
engagement.
(j)
Income Taxes
Income
taxes are accounted for under the asset and liability method. Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in results of operations in the period that
the tax change occurs. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
(k)
Advertising Costs
The
Company expenses the cost of advertising and promoting its services as incurred.
Such costs totaled approximately $902, $208, and $71 for the years ended
December 31, 2004, 2003 and 2002, respectively.
(l)
Financial Instruments and Concentration of Credit
Risk
The
Company’s business is characterized by rapid technological change, new product
development and evolving industry standards. Inherent in the Company’s business
are various risks and uncertainties, including its limited operating history,
unproven business model and the limited history of commerce on the Internet. The
Company’s success may depend, in part, upon the emergence of the Internet as a
commerce medium, prospective product development efforts and the acceptance of
the Company’s solutions by the marketplace.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash and cash equivalents and accounts
receivable which approximate fair value at December 31, 2004 because of the
short-term nature of these instruments. The Company invests its cash and cash
equivalents with financial institutions that it believes are of high quality,
and performs periodic evaluations of these instruments and the relative credit
standings of the institutions with which it invests. At certain times, the
Company’s cash balances with any one financial institution may exceed Federal
Deposit Insurance Corporation insurance limits. The Company believes it
mitigates its risk by depositing its cash balances with high credit, quality
financial institutions.
The
Company’s customers are primarily concentrated in the United States. The Company
performs ongoing credit evaluations of its customers’ financial condition
(except for customers who purchase the LivePerson services by credit card via
Internet download) and has established an allowance for doubtful accounts based
upon factors surrounding the credit risk of customers, historical trends and
other information. Concentration of credit risk is limited due to the Company’s
large number of customers. No single customer accounted for or exceeded 10% of
revenue in 2004, 2003 or 2002. One customer accounted for approximately 10% of
accounts receivable at December 31, 2004. Two customers accounted for
approximately 22% of accounts receivable at December 31, 2003.
(m)
Stock-based Compensation
The
Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees,” and related interpretations including Financial Accounting
Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain
Transactions Involving Stock Compensation: An Interpretation of APB Opinion No.
25” (issued in March 2000), to account for its fixed plan stock options. Under
this method, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. SFAS
No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148,
“Accounting for Stock-Based Compensation - Transition and Disclosure” (an
amendment to SFAS No. 123), established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As permitted by existing accounting standards, the Company
has elected to continue to apply the intrinsic value-based method of accounting
described above, and has adopted the disclosure requirements of SFAS No. 123, as
amended by SFAS No. 148. The Company amortizes deferred compensation on a graded
vesting methodology in accordance with FASB Interpretation No. 28, “Accounting
for Stock Appreciation Rights and Other Variable Stock Award
Plans.”
The
Company applies APB Opinion No. 25 and related interpretations in accounting for
its stock option grants to employees. Accordingly, except as mentioned below, no
compensation expense has been recognized relating to these stock option grants
in the consolidated financial statements. Had compensation cost for the
Company’s stock option grants been determined based on the fair value at the
grant date for awards consistent with the method of SFAS No. 123, the Company’s
net income attributable to common stockholders for 2004 would have decreased and
the net loss attributable to common stockholders for 2003 and 2002 would have
increased to the pro forma amounts presented below. The Company did not have any
employee stock options outstanding prior to January 1, 1998.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
The
Company determined after the end of the second quarter of 2004 that it had
misapplied certain provisions of SFAS No. 123 when calculating the disclosure
requirements for its stock-based employee compensation plan using a fair-value
based method of accounting. The misapplication primarily related to the
amortization period used when computing the pro forma compensation expense
impact of issued stock options on net income (loss) and basic and diluted net
income (loss) per common share. The restated pro forma amounts do not
affect our reported results of operations for any period. The table below
includes the restated pro forma amounts for 2003 and 2002.
| |
|
Year
Ended |
|
|
|
|
December
31, |
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) as reported |
|
$ |
2,092 |
|
$ |
(816 |
) |
$ |
(6,771 |
) |
|
Add:
Stock-based compensation expense included in net |
|
|
|
|
|
|
|
|
|
|
|
income
(loss) as reported |
|
|
-- |
|
|
45 |
|
|
365 |
|
|
Deduct:
Pro forma stock-based compensation cost |
|
|
(1,308 |
) |
|
(945 |
) |
|
(746 |
) |
|
Pro
forma net income (loss) |
|
$ |
784 |
|
$ |
(1,716 |
) |
$ |
(7,152 |
) |
|
Basic
net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
$ |
0.06 |
|
$ |
(0.02 |
) |
$ |
(0.20 |
) |
|
Pro
forma |
|
$ |
0.02 |
|
$ |
(0.05 |
) |
$ |
(0.21 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
$ |
0.05 |
|
$ |
(0.02 |
) |
$ |
(0.20 |
) |
|
Pro
forma |
|
$ |
0.02 |
|
$ |
(0.05 |
) |
$ |
(0.21 |
) |
The per
share weighted average fair value of stock options granted during 2004, 2003 and
2002, was $2.04, $1.68 and $0.70, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants in 2004,
2003 and 2002: dividend yield of zero percent for all years; risk-free interest
rates of 4.6%, 4.1% and 4.6%, respectively; and expected life of five years for
all years. During 2004, 2003 and 2002, the Company used a volatility factor of
89%, 146% and 135%, respectively.
The
following table provides the restated pro forma amounts of originally reported
December 31, 2003 pro forma disclosures. The Company has disclosed, and intends
to continue to disclose in future filings, the restated amounts for such pro
forma disclosures.
|
Year
Ended December 31, 2003 |
|
Previously
Disclosed
in
Original Report |
|
Restated |
|
|
Pro
forma stock-based compensation cost |
|
$ |
(403 |
) |
$ |
(945 |
) |
|
Pro
forma net loss |
|
$ |
(1,174 |
) |
$ |
(1,716 |
) |
|
Pro
forma basic net loss per common share |
|
$ |
(0.03 |
) |
$ |
(0.05 |
) |
|
Pro
forma diluted net loss per common share |
|
$ |
(0.03 |
) |
$ |
(0.05 |
) |
The
following table provides the restated pro forma amounts of originally reported
December 31, 2002 pro forma disclosures. The Company has disclosed, and intends
to continue to disclose in future filings, the restated amounts for such pro
forma disclosures.
|
Year
Ended December 31, 2002 |
|
Previously
Disclosed
in
Original Report |
|
Restated |
|
|
Pro
forma stock-based compensation cost |
|
$ |
(499 |
) |
$ |
(746 |
) |
|
Pro
forma net loss |
|
$ |
(6,905 |
) |
$ |
(7,152 |
) |
|
Pro
forma basic net loss per common share |
|
$ |
(0.20 |
) |
$ |
(0.21 |
) |
|
Pro
forma diluted net loss per common share |
|
$ |
(0.20 |
) |
$ |
(0.21 |
) |
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share
data)
(n)
Basic and Diluted Net Income (Loss) Per Share
The
Company calculates earnings per share in accordance with the provisions of SFAS
No. 128, “Earnings Per Share (“EPS”),” and the guidance of the Securities and
Exchange Commission (“SEC”). Under SFAS No. 128, basic EPS excludes dilution for
common stock equivalents and is computed by dividing net income or loss
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. All options, warrants or other potentially
dilutive instruments issued for nominal consideration are required to be
included in the calculation of basic and diluted net income (loss) attributable
to common stockholders. The Company has included 17,339 shares of common stock
in the calculation of basic and diluted net income (loss) attributable to common
stockholders from October 2000 which relate to certain options that were
originally issued by HumanClick Ltd. for nominal consideration and subsequently
assumed by the Company in connection with its acquisition of HumanClick in
October 2000. Diluted EPS 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 (loss) per share presented is equal to basic net income (loss) per share
since all common stock equivalents are anti-dilutive for the years ended
December 31, 2003 and 2002.
Diluted
net income per common share for the year ended December 31, 2004 includes the
effect of options to purchase 6,491,025 shares of common stock with a weighted
average exercise price of $1.30 and warrants to purchase 202,802 shares of
common stock with a weighted average exercise price of $1.65. Diluted net loss
per common share for the years ended December 31, 2003 and 2002 does not include
the effects of options to purchase 4,816,500 and 7,828,334 shares of common
stock, respectively and warrants to purchase 150,000 and 607,030 shares of
common stock, respectively, as the effect of their inclusion is anti-dilutive
during each period.
(o)
Segment Reporting
The
Company accounts for its segment information in accordance with the provisions
of SFAS No. 131, “Disclosures About Segments of an Enterprise and Related
Information.” SFAS No. 131 establishes annual and interim reporting standards
for operating segments of a company. SFAS No. 131 requires disclosures of
selected segment-related financial information about products, major customers,
and geographic areas. The Company is organized in a single operating segment for
purposes of making operating decisions and assessing performance. The chief
operating decision-maker evaluates performance, makes operating decisions, and
allocates resources based on financial data consistent with the presentation in
the accompanying consolidated financial statements. The Company’s revenue has
been earned primarily from customers in the United States.
(p)
Comprehensive Income (loss)
SFAS No.
130, “Reporting Comprehensive Income,” requires the Company to report in its
consolidated financial statements, in addition to its net income (loss),
comprehensive income (loss), which includes all changes in equity during a
period from non-owner sources including, as applicable, foreign currency items,
minimum pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. There were no material differences
between the Company’s comprehensive income (loss) and its net income (loss) for
all periods presented.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
(q)
Computer Software
In April
1998, the American Institute of Certified Public Accountants issued Statement of
Position 98-1, “Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.” SOP 98-1 provides guidance for determining whether
computer software is internal-use software and on accounting for the proceeds of
computer software originally developed or obtained for internal use and then
subsequently sold to the public. It also provides guidance on capitalization of
the costs incurred for computer software developed or obtained for internal use.
The Company adopted SOP 98-1 in 1999 and capitalized $929 as of December 31,
2004 and $682 as of December 31, 2003.
(r)
Intangible Assets
The
Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible
Assets,” on January 1, 2002. Pursuant to SFAS No. 142, goodwill and intangible
assets acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but instead tested for impairment at
least annually. SFAS No. 142 also requires that intangible assets with
estimatable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, “Accounting for Impairment or Disposal of
Long-Lived Assets.”
Intangible
assets are stated net of accumulated amortization of $792 and $0 as of December
31, 2004 and 2003, respectively. Intangible assets relate to the acquisition of
certain identifiable assets of FaceTime in July 2004, the acquisition of the
Island Data customer contracts in 2003 and the acquisition of the NewChannel
customer contracts and associated rights in 2002, and are being amortized on a
straight-line basis over the expected period of benefit of 24 months, 36 months
and 18 months, respectively (see Note 2).
(s)
Deferred Rent
The
Company records rent expense on a straight-line basis over the term of the
related lease. The difference between the rent expense recognized for financial
reporting purposes and the actual payments made in accordance with the lease
agreement is recognized as deferred rent liability.
(t)
Product Development Costs
The
Company accounts for product development costs in accordance with SFAS No. 86,
“Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed,” under which certain software development costs incurred subsequent to
the establishment of technological feasibility are capitalized and amortized
over the estimated lives of the related products. Technological feasibility is
established upon completion of a working model. To date, completion of a working
model of the Company’s products and general release have substantially
coincided. As a result, the Company has not capitalized any software development
costs and such costs have not been significant. Through December 31, 2004, all
development costs have been charged to product development expense in the
accompanying consolidated statements of operations.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share
data)
(u)
Foreign Currency Translation
Assets
and liabilities in foreign functional currencies are translated at the exchange
rate as of the balance sheet date. Translation adjustments are recorded as a
separate component of stockholders’ equity. Revenue, costs and expenses
denominated in foreign functional currencies are translated at the weighted
average exchange rate for the period. The Company had no translation adjustment
for the years ended December 31, 2004 and 2003.
(v)
Restructuring Activities
Restructuring
activities, prior to January 1, 2003, were accounted for in accordance with the
guidance provided in the consensus opinion of the Emerging Issues Task Force
(“EITF”), in connection with EITF Issue No. 94-3, “Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in Restructuring).” EITF Issue No. 94-3
generally requires, with respect to the recognition of severance expenses,
management approval of the restructuring plan, the determination of the
employees to be terminated and communication of benefit arrangement to
employees.
In July
2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit
or Disposal Activities,” which supersedes EITF Issue No. 94-3. SFAS No. 146
requires that costs associated with an exit or disposal plan be recognized when
incurred rather than at the date of a commitment to an exit or disposal plan.
The adoption of SFAS No. 146, effective January 1, 2003, did not have any impact
on the Company’s financial condition or results of operations.
(w)
Recently Adopted Accounting Pronouncements
In June
2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement
Obligations.” SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that results from the acquisition, construction, development, and/or normal use
of the assets. The Company also would record a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation would be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company was required to adopt SFAS No.
143 on January 1, 2003. The adoption of SFAS No. 143 did not have an impact on
the Company’s financial position, cash flows or results of
operations.
In
December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123.”
SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements.
Disclosures required by SFAS No. 148 are included in these notes to the
Company’s consolidated financial statements.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
In May
2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150
established standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 also includes required disclosures for financial instruments within its
scope. For the Company, SFAS No. 150 was effective for instruments entered into
or modified after May 31, 2003 and otherwise was effective as of January 1,
2004, except for mandatorily redeemable financial instruments. For these
mandatorily redeemable financial instruments, SFAS No. 150 will be effective for
the Company on January 1, 2005. The effective date has been deferred
indefinitely for certain other types of mandatorily redeemable financial
instruments. The Company does not have any financial instruments that are within
the scope of SFAS No. 150; therefore the issuance of SFAS No. 150 did not have
an impact on the Company’s financial position, cash flows or results of
operations.
In
December 2003, the staff of the SEC issued Staff Accounting Bulleting (“SAB”)
No. 104, “Revenue Recognition,” which supersedes SAB No. 101, “Revenue
Recognition in Financial Statements.” SAB No. 104 primarily rescinds the
accounting guidance contained in SAB No. 101 related to multiple-element revenue
arrangements, which was superseded as a result of the issuance of EITF Issue No.
00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.”
Additionally, SAB No. 104 rescinds the SEC’s “Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers” issued with SAB No. 101,
which had been codified in SEC Topic 13, “Revenue Recognition.” SAB No. 104 was
effective upon issuance. The issuance of SAB No. 104 did not have a material
impact on the Company’s financial position, cash flows or results of
operations.
In
December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), “Consolidation of Variable Interest Entities,” which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. The Company applies FIN 46R to variable interest
VIEs created after December 31, 2003. For any VIEs that must be consolidated
under FIN 46R that were created before January 1, 2004, the assets, liabilities
and noncontrolling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the balance
sheet and any previously recognized interest being recognized as the cumulative
effect of an accounting change. If determining the carrying amounts is not
practicable, fair value method at the date FIN 46R first applies may be used to
measure the assets, liabilities and noncontrolling interest in the VIE. The
Company has evaluated the impact of applying FIN 46R and it did not have an
impact on the Company’s financial position, cash flows or results of
operations.
(x)
Recently Issued Accounting Pronouncements
In
December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
“Share-Based Payment,” which addresses the accounting for transactions in which
an entity exchanges its equity instruments for goods or services, with a primary
focus on transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) is a revision to SFAS No. 123
and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”
and its related implementation guidance. SFAS No. 123(R) requires measurement of
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). Incremental compensation costs arising from subsequent
modifications of awards after the grant date must be recognized. SFAS No. 123(R)
will be effective for the Company in the first fiscal quarter beginning after
June 15, 2005. The Company is still evaluating the impact that adopting SFAS No.
123(R) will have on its financial position, cash flows and results of
operations. See Note 1(m) for pro forma disclosure assuming a fair value based
method of accounting for stock-based awards.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,”
which eliminates an exception in APB Opinion No. 29, “Accounting for Nonmonetary
Transactions,” for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. SFAS No. 153 will be effective for the Company
for nonmonetary asset exchanges occurring on or after January 1,
2006.
(y)
Fair Value of Financial Instruments
The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. Cash and cash
equivalents, accounts receivable, prepaid expenses, security deposits, other
assets, accounts payable, accrued expenses and deferred revenue carrying amounts
approximate fair value because of the short maturity of these
instruments.
(z)
Intangible Assets
Amortization
of intangible assets is summarized as follows:
Acquired
Intangible Assets
| |
|
As
of December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Average |
|
|
|
|
|
Carrying |
|
Amortization |
|
Accumulated |
|
|
|
|
Amount |
|
Period |
|
Amortization |
|
|
Amortizing
intangible assets: |
|
|
|
|
|
|
|
|
Certain
identifiable assets of Island Data |
|
$ |
2,119 |
|
|
3.0
years |
|
$ |
717 |
|
|
Certain
identifiable assets of FaceTime |
|
|
394 |
|
|
2.0
years |
|
|
75 |
|
|
Total |
|
$ |
2,513 |
|
|
|
|
$ |
792 |
|
Aggregate
amortization expense for intangible assets was $792 and $1,014 for the years
ended December 31, 2004 and 2003, respectively. Estimated amortization expense
for the next five years is: $928 in 2005, $793 in 2006, $0 in 2007, $0 in 2008,
and $0 in 2009.
(2)
Asset Acquisitions
NewChannel
In July
2002, the Company 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 Company’s
acquisition cost was approximately $1,371, including the initial purchase price
payment of $600 to NewChannel. 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.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
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. As of
December 31, 2004, 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 $2,100. Of the total purchase price,
the Company has allocated approximately $65 to non-compete agreements which will
be amortized over a period of 24 months, representing the terms of the
agreements. The remainder of the purchase has been allocated to customer
contracts and will be amortized over a period of 36 months, representing the
current estimate of the term of the acquired client relationships. The net
acquisition costs of $1,401 are included in “Assets - Intangibles, net” on our
December 31, 2004 balance sheet.
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, including the initial purchase price
payment of $200 to FaceTime. The total acquisition cost will be amortized
ratably over a period of 24 months, representing the current estimate of the
term of the acquired client relationships. The net acquisition costs of $320 are
included in “Assets - Intangibles, net” on our December 31, 2004 balance
sheet.
(3)
Balance Sheet Components
Property
and Equipment
Property
and equipment is summarized as follows:
| |
|
December
31, |
|
|
|
|
2004 |
|
2003 |
|
|
Computer
equipment and software |
|
$ |
1,712 |
|
$ |
1,460 |
|
|
Furniture,
equipment and building improvements |
|
|
44 |
|
|
36 |
|
| |
|
|
1,756 |
|
|
1,496 |
|
| |
|
|
|
|
|
|
|
|
Less
accumulated depreciation |
|
|
1,372 |
|
|
1,155 |
|
|
Total |
|
$ |
384 |
|
$ |
341 |
|
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
Accrued
Expenses
Accrued
expenses consist of the following:
| |
|
December
31, |
|
|
|
|
2004 |
|
2003 |
|
| Payroll
and related costs |
|
$ |
1,102 |
|
$ |
1,820 |
|
|
Professional
services and consulting fees |
|
|
448 |
|
|
382 |
|
|
Sales
commissions |
|
|
90 |
|
|
31 |
|
|
Island
Data customer contracts acquisition costs |
|
|
-- |
|
|
286 |
|
|
Other |
|
|
26 |
|
|
58 |
|
|
Total |
|
$ |
1,666 |
|
$ |
2,577 |
|
(4)
Capitalization
In
December 2002, the Company issued a warrant to purchase up to 150,000 shares of
common stock at $0.69 per share to Genesis Select Corp. in exchange for investor
relations services. The warrant vested such that 12,500 shares became
exercisable on each monthly anniversary of the warrant issuance date for the
first 12 months of the warrant’s five-year term. Some or all of the purchase
price may be paid by canceling a portion of the warrant. The Company recorded
non-cash compensation expense of $298 related to this warrant during 2003. The
Company accounted for this warrant in accordance with EITF Abstract No. 96-18,
“Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.” Pursuant to EITF
No. 96-18, the Company values the warrant at each balance sheet date using a
Black-Scholes pricing model as of each balance sheet date. Had the warrant been
accounted for with the method established by SFAS No. 123, the Company’s pro
forma net loss would not have been materially different. As of December 31,
2004, the warrant was fully vested and remained outstanding to purchase up to
124,500 shares of common stock. During the year ended December 31, 2004, the
Company issued an aggregate of 22,198 shares of common stock upon the partial
exercise of the warrant, in consideration of the termination of the right to
purchase an additional 3,302 shares of common stock in the aggregate, pursuant
to the warrant’s net exercise provisions.
During
the year ended December 31, 2003, the Company issued an aggregate of 276,910
shares of common stock upon the exercise of warrants issued in 1999, in
consideration of the termination of the right to purchase an additional 180,910
shares of common stock in the aggregate, pursuant to the warrants’ net exercise
provisions.
In
January 2004, the Company filed a registration statement with the SEC to
register the resale of up to 500,000 shares of its common stock by Island Data.
The registration of the resale of the shares was required by the Company’s
agreement with Island Data. The shares registered for resale on the registration
statement, but not actually issued to Island Data pursuant to the agreement,
will be deregistered. The Company did not receive any proceeds from the sale of
the shares of common stock covered by the Island Data registration
statement.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
In
January 2004, the Company filed a shelf registration statement with the SEC
relating to 4,000,000 shares of its common stock that the Company may issue from
time to time. The Company has no immediate plans to offer or sell any shares
under this shelf registration. The Company presently intends to use the net
proceeds from any sale of the registered shares for general corporate purposes,
working capital and potential strategic acquisitions. The Company would announce
the terms of any issuance in a filing with the SEC at the time the Company
offers or sells the shares.
In May
2004, the Company issued a warrant to purchase up to 75,000 shares of common
stock at $3.25 per share to Genesis Select Corp. in exchange for investor
relations services. The warrant vested such that the shares underlying the
warrant could not be sold until after December 31, 2004. The warrant expires in
May 2009. Some or all of the purchase price may be paid by canceling a portion
of the warrant. As of December 31, 2004, the warrant was fully vested and
remained outstanding. The Company recorded non-cash compensation expense of $246
related to this warrant during 2004. The Company accounted for this warrant in
accordance with EITF Abstract No. 96-18. Had the warrant been accounted for with
the method established by SFAS No. 123, the Company’s pro forma net income would
not have been materially different.
(5)
Stock Options
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
December 31, 2004, approximately 11,251,000 shares of common stock were reserved
for issuance under the 2000 Plan (taking into account all option exercises
through December 31, 2004). On the first trading day in January 2005,
approximately 1,121,000 additional shares of common stock were reserved for
issuance under the 2000 Plan pursuant to its automatic increase
provisions.
In March
2000, the Company adopted the 2000 Employee Stock Purchase Plan with 450,000
shares of common stock initially reserved for issuance. Pursuant to the Employee
Stock Purchase Plan, 0 and 4,000 shares were issued in 2002 and 2001,
respectively. Pursuant to the provisions of the Employee Stock Purchase Plan,
the number of shares of common stock available for issuance thereunder
automatically increases on the first trading day in each calendar year by an
amount equal to one-half of one percent (0.5%) of the total number of shares of
the Company’s common stock outstanding on the last trading day of the
immediately preceding calendar year, but in no event shall such annual increase
exceed 150,000 shares. As of December 31, 2004, approximately 1,020,000 shares
of common stock were reserved for issuance under the Employee Stock Purchase
Plan (taking into account all share purchases through December 31, 2004). On the
first trading day in January 2005, 150,000 additional shares of common stock
were reserved for issuance under the Employee Stock Purchase Plan pursuant to
its automatic increase provisions. Effective October 2001, the Company suspended
the Employee Stock Purchase Plan until further notice.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
A summary
of the Company’s stock option activity and weighted average exercise prices is
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
Exercise
Price |
|
|
Options
outstanding at December 31, 2001 |
|
|
6,467,242 |
|
$ |
1.46 |
|
|
Options
granted |
|
|
2,265,000 |
|
$ |
0.70 |
|
|
Options
exercised |
|
|
(77,500 |
) |
$ |
0.31 |
|
|
Options
cancelled |
|
|
(826,408 |
) |
$ |
1.68 |
|
|
Options
outstanding at December 31, 2002 |
|
|
7,828,334 |
|
$ |
1.23 |
|
|
Options
granted |
|
|
590,000 |
|
$ |
1.85 |
|
|
Options
exercised |
|
|
(2,478,624 |
) |
$ |
0.77 |
|
|
Options
cancelled |
|
|
(216,710 |
) |
$ |
2.05 |
|
|
Options
outstanding at December 31, 2003 |
|
|
5,723,000 |
|
$ |
1.46 |
|
|
Options
granted |
|
|
2,090,000 |
|
$ |
2.80 |
|
|
Options
exercised |
|
|
(171,225 |
) |
$ |
0.71 |
|
|
Options
cancelled |
|
|
(255,500 |
) |
$ |
2.25 |
|
|
Options
outstanding at December 31, 2004 |
|
|
7,386,275 |
|
$ |
1.83 |
|
| |
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2002 |
|
|
3,635,542 |
|
$ |
1.82 |
|
| |
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2003 |
|
|
2,672,447 |
|
$ |
2.21 |
|
| |
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2004 |
|
|
3,710,795 |
|
$ |
1.79 |
|
The net
non-cash compensation amounts for the years ended December 31, 2004, 2003 and
2002 consist of:
| |
|
2004 |
|
2003 |
|
2002 |
|
|
December
2002 warrant granted for investor relations |
|
|
|
|
|
|
|
|
services
|
|
$ |
-- |
|
$ |
298 |
|
$ |
-- |
|
|
Amortization
of employee stock compensation |
|
|
-- |
|
|
-- |
|
|
365 |
|
|
Acceleration
of deferred compensation charges related to |
|
|
|
|
|
|
|
|
|
|
|
certain
employee terminations |
|
|
-- |
|
|
45 |
|
|
-- |
|
|
May
2004 warrant granted for investor relations services |
|
|
246 |
|
|
-- |
|
|
-- |
|
|
Total |
|
$ |
246 |
|
$ |
343 |
|
$ |
365 |
|
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2004:
|
Options
Outstanding |
|
Options
Exercisable |
|
| |
|
|
|
Weighted |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
| |
|
Number |
|
Remaining |
|
Average |
|
Number |
|
Average |
|
|
Exercise
Price |
|
Outstanding |
|
Contractual
Life |
|
Exercise
Price |
|
Outstanding |
|
Exercise
Price |
|
|
$0.00-$
1.00 |
|
|
3,708,836 |
|
|
7.04 |
|
$ |
0.57 |
|
|
2,188,356 |
|
$ |
0.53 |
|
|
$1.01-$
2.00 |
|
|
1,556,689 |
|
|
7.72 |
|
|
1.93 |
|
|
706,689 |
|
|
1.92 |
|
|
$2.01-$
5.00 |
|
|
1,558,625 |
|
|
8.15 |
|
|
3.06 |
|
|
457,375 |
|
|
3.49 |
|
|
$5.01-$11.00 |
|
|
562,125 |
|
|
6.46 |
|
|
6.46 |
|
|
358,375 |
|
|
7.05 |
|
|
|
|
7,386,275 |
|
|
|
|
$ |
1.83 |
|
|
3,710,795 |
|
$ |
1.79 |
|
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2003:
|
Options
Outstanding |
|
Options
Exercisable |
|
| |
|
|
|
Weighted |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
| |
|
Number |
|
Remaining |
|
Average |
|
Number |
|
Average |
|
|
Exercise
Price |
|
Outstanding |
|
Contractual
Life |
|
Exercise
Price |
|
Outstanding |
|
Exercise
Price |
|
|
$0.00-$
1.00 |
|
|
4,008,311 |
|
|
7.88 |
|
$ |
0.58 |
|
|
1,248,851 |
|
$ |
0.55 |
|
|
$1.01-$
2.00 |
|
|
700,189 |
|
|
5.00 |
|
|
1.88 |
|
|
660,002 |
|
|
1.93 |
|
|
$2.01-$
5.00 |
|
|
637,375 |
|
|
7.08 |
|
|
3.29 |
|
|
415,875 |
|
|
3.58 |
|
|
$5.01-$11.00 |
|
|
377,125 |
|
|
6.36 |
|
|
6.96 |
|
|
347,719 |
|
|
7.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,672,447 |
|
$ |
2.21 |
|
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2002:
|
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 |
|
|
5,854,850 |
|
|
8.42 |
|
$ |
0.55 |
|
|
1,992,143 |
|
$ |
0.56 |
|
|
$1.01-$
2.00 |
|
|
1,166,109 |
|
|
6.95 |
|
|
1.82 |
|
|
957,040 |
|
|
1.81 |
|
|
$2.01-$
5.00 |
|
|
417,375 |
|
|
6.74 |
|
|
3.58 |
|
|
321,375 |
|
|
3.58 |
|
|
$5.01-$11.00 |
|
|
390,000 |
|
|
6.53 |
|
|
7.18 |
|
|
364,984 |
|
|
7.18 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
3,635,542 |
|
|
1.82 |
|
(6)
Restructuring and Impairment Charges
In the
first quarter of 2001, following a review of the Company’s business in
connection with its acquisition of HumanClick, the Company commenced
restructuring initiatives to streamline its operations, including the
consolidation of its two San Francisco Bay area offices. The restructuring
resulted in a reduction of the Company’s workforce by approximately 90 people as
of the end of the first quarter of 2001. In the first quarter of 2001, the
Company recorded a charge of $3,391 for severance and other expenses related to
the restructuring.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
In the
third quarter of 2001, in a continued effort to streamline its operations, the
Company initiated additional restructuring initiatives. These initiatives
resulted in the elimination of redundant staff positions, the consolidation of
all clients onto a single application platform and the decision to relocate its
principal executive offices, which included the termination of an office space
lease. These initiatives resulted in a reduction of the Company’s workforce by
approximately 20 people, the write-off of impaired computer equipment and
software and the write-off of certain furniture, equipment and building
improvements. In the third quarter of 2001, the Company recorded a charge of
$9,232 for severance and other expenses related to the additional
restructuring.
As a
result of the various restructuring initiatives, for the year ended December 31,
2001, the Company recorded restructuring and impairment charges of approximately
$12,740, in the aggregate. In addition, for the year ended December 31, 2001,
the Company also recognized a net non-cash compensation credit in the amount of
approximately $1,720 associated with LivePerson employees who were terminated as
part of the Company’s restructuring initiatives in the first quarter of 2001.
The net non-cash compensation credit of $1,720 for the year ended December 31,
2001 represents the reversal of $3,228 of previously recognized amortization of
deferred compensation related to options of employees which did not vest due to
their termination of employment in connection with the Company’s restructuring
initiatives, offset by the acceleration of vesting of certain other employee
options of $1,508 also in connection with the restructuring initiatives.
Approximately $446 of the $1,508 represents additional compensation related to
the intrinsic value of options at the date of modification recorded during the
first quarter of 2001.
The
balance of the accrued restructuring charges as of December 31, 2003 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of |
|
the
year ended |
|
the
year ended |
|
Balance
as of |
|
|
|
|
January
1, 2003 |
|
December
31, 2003 |
|
December
31, 2003 |
|
December
31, 2003 |
|
|
Contract
terminations (a) |
|
$ |
615 |
|
$ |
1,024 |
|
$ |
(1,639 |
) |
$ |
-- |
|
|
Total |
|
$ |
615 |
|
$ |
1,024 |
|
$ |
(1,639 |
) |
$ |
-- |
|
(a) In
the second quarter of 2003, the Company recorded an additional restructuring
charge of approximately $1,024 related to its 2001 restructuring initiatives.
This charge reflected the amount of the judgment in a previously disclosed
arbitration proceeding in excess of the $350 provision initially provided for in
connection with the Company’s original restructuring plan in
2001.
The
allocation of the restructuring and impairment charges as of December 31, 2002
is as follows:
|
|
|
|
|
|
Net
(utilization) |
|
|
|
|
|
|
|
|
Provision
(reversals) |
|
reversals
during |
|
|
|
|
|
|
Balance
as of |
|
for
the year ended |
|
the
year ended |
|
Balance
as of |
|
|
|
|
January
1, 2002 |
|
December
31, 2002 |
|
December
31, 2002 |
|
December
31, 2002 |
|
|
Severance |
|
$ |
55 |
|
$ |
(55 |
) |
$ |
-- |
|
$ |
-- |
|
|
Contract
terminations (b) |
|
|
985
|
|
|
1,241
|
|
|
(1,611 |
) |
|
615 |
|
|
Total |
|
$ |
1,040 |
|
$ |
1,186 |
|
$ |
(1,611 |
) |
$ |
615 |
|
(b) In
the fourth quarter of 2002, in accordance with EITF 94-3, the Company incurred
an additional restructuring charge of approximately $1,241 related to its 2001
restructuring initiatives. This charge primarily related to the unfavorable
settlement of a previously disclosed legal proceeding in excess of the provision
initially provided for in connection with the Company’s original restructuring
plan. The legal proceeding was the result of the termination of an operating
lease for computer equipment that supported the Company’s application platform
prior to the consolidation of all clients onto a single application platform in
the third quarter of 2001.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share
data)
(7)
Cumulative Effect of Accounting Change
On
January 1, 2002, the Company was required to adopt the full provisions of SFAS
No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that
goodwill and certain indefinite-lived intangibles no longer be amortized, but
instead be tested for impairment at least annually. This testing requires the
identification of reporting units and comparison of the reporting units’
carrying value to their fair value and, when appropriate, requires the reduction
of the carrying value of impaired assets to their fair value.
The
transitional impairment analysis required upon adoption of SFAS No. 142 was
completed during the first quarter of 2002, and the Company determined that
there was an impairment of the carrying value of goodwill. As part of this
analysis, management determined that the Company continued to operate in one
operating segment and that it did not have any separate reporting units under
SFAS No. 142; accordingly, the impairment analysis was performed on an
enterprise-wide basis. This process included obtaining an independent appraisal
of the fair value of the Company as a whole and of its individual assets. Fair
value was determined from the same cash flow forecasts used in December 2001 for
the evaluation of Company’s carrying value under SFAS No. 121, “Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of,” which was the accounting rule for impairment of goodwill that preceded SFAS
No. 142 and was effective through December 31, 2001. The valuation methodology
required by SFAS No. 142 is different than that required by SFAS No. 121. An
impairment is more likely to result under SFAS No. 142 because it requires,
among other items, the discounting of forecasted cash flows as compared to the
undiscounted cash flow valuation method under SFAS No. 121.
The
allocation of fair values to identifiable tangible and intangible assets as of
January 1, 2002, resulted in an implied valuation of the goodwill of $0. The
implied fair value of goodwill was determined in the same manner as determining
the amount of goodwill that would have been required to be recognized in a
business combination. That is, under SFAS No. 142, an entity is required to
allocate the fair value of a reporting unit to all of the assets and liabilities
of that unit (including any unrecognized intangible assets) as if the reporting
unit had been acquired in a business combination and the fair value of the
reporting unit was the price paid to acquire it. Comparing this implied value to
the carrying value resulted in an impairment of $5,338, with no income tax
effect. This impairment was recorded as a cumulative effect of accounting change
on the Company’s statement of operations as of January 1, 2002.
(8)
Valuation and Qualifying Accounts
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
Balance
at |
|
Charged
to |
|
|
|
Balance
at |
|
|
|
|
Beginning
of |
|
Costs
and |
|
Deductions/ |
|
End
of |
|
|
|
|
Period
|
|
Expenses
|
|
Write-offs
|
|
Period |
|
|
For
the year ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts |
|
$ |
64 |
|
$ |
30 |
|
$ |
(40 |
) |
$ |
54 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts |
|
$ |
70 |
|
$ |
15 |
|
$ |
(21 |
) |
$ |
64 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts |
|
$ |
160 |
|
$ |
-- |
|
$ |
(90 |
) |
$ |
70 |
|
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share
data)
(9)
Income Taxes
Income
taxes are accounted for under the asset and liability method. Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences are expected to become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment.
Under
Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s use
of its federal net operating loss (“NOL”) carryforwards may be limited if the
Company has experienced an ownership change, as defined in Section 382. The
Company completed its previously disclosed Section 382 analysis during 2004 and
determined that an ownership change had occurred. As a result, there is a
material limitation on the Company’s use of its NOL carryforwards, which results
in a corresponding reduction in the Company's deferred tax assets. Accordingly,
the December 31, 2003 deferred tax assets disclosed below have been adjusted to
reflect the Section 382 limitation. As of December 31, 2004 and 2003, the
Company had approximately $9,341 and $11,554, respectively, of 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 $23,000
prior to the expiration of the NOL carryforwards in 2023. If the entire deferred
tax asset is realized, approximately $4,640 will be allocated to Additional
paid-in capital with the remainder reducing income tax expense. Taxable income
(loss) for the years ended December 31, 2004, 2003 and 2002 was $2,213, $(7,443)
and $(2,162), respectively. Based upon the level of historical taxable losses
and after considering projections for future taxable income over the periods in
which the deferred tax assets are expected to be deductible, management believes
it is more likely than not that the Company will not realize the benefits of
these deductible differences at December 31, 2004. Accordingly, the Company has
recorded a full valuation allowance against its deferred tax assets. Management
will continue to assess the valuation allowance. To the extent it is determined
that a valuation allowance is no longer required with respect to certain
deferred tax assets, the tax benefit, if any, of such deferred tax assets will
be recognized in the future.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
The
effects of temporary differences and tax loss carryforwards that give rise to
significant portions of federal deferred tax assets and deferred tax liabilities
at December 31, 2004 and 2003 are presented below:
|
|
|
2004 |
|
2003 |
|
| |
|
|
Deferred
tax assets: |
|
|
|
|
|
|
Net
operating loss carry forwards |
|
$ |
4,017 |
|
$ |
4,853 |
|
|
Accounts
payable and accrued expenses |
|
|
13 |
|
|
84 |
|
|
Deferred
revenue |
|
|
396 |
|
|
324 |
|
|
Non-cash
compensation |
|
|
2,012 |
|
|
1,966 |
|
|
Goodwill
and intangibles amortization |
|
|
3,585 |
|
|
3,395 |
|
|
Allowance
for doubtful accounts |
|
|
23 |
|
|
27 |
|
|
Other |
|
|
58 |
|
|
3 |
|
| |
|
Gross
deferred tax assets |
|
|
10,104 |
|
|
10,652 |
|
|
Less:
valuation allowance |
|
|
(10,030 |
) |
|
(10,594 |
) |
| |
|
Net
deferred tax assets |
|
|
74 |
|
|
58 |
|
|
Deferred
tax liabilities: |
|
|
|
|
|
|
|
|
Plant
and equipment, principally due to differences in |
|
|
|
|
|
|
|
|
depreciation |
|
|
(74 |
) |
|
(58 |
) |
| |
|
Gross
deferred tax liabilities |
|
|
(74 |
) |
|
(58 |
) |
| |
|
Net
deferred taxes |
|
$ |
— |
|
$ |
— |
|
The
difference between the statutory federal income tax rate and the Company’s
effective tax rate is principally due to the utilization of federal and state
net operating losses and the Company incurring net operating losses for which no
tax benefit was recorded for the years ending December 31, 2004 and December 31,
2003, respectively.
(10)
Commitments and Contingencies
The
Company leases facilities and certain equipment under agreements accounted for
as operating leases. These leases generally require the Company to pay all
executory costs such as maintenance and insurance. Rental expense for operating
leases for the years ending December 31, 2004, 2003 and 2002 was approximately
$502, $430 and $378, respectively.
In
October 2004, the Company modified the existing lease for its principal
executive offices in New York City. The modification included the extension of
the term of the current lease to October 2007 as well as the addition of new
space.
LIVEPERSON,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2004 and 2003
(In
thousands, except share and per share data)
Future
minimum lease payments under non-cancelable operating leases (with an initial or
remaining lease terms in excess of one year) are as follows:
|
Year
ending December 31, |
|
Operating
Leases |
|
|
2005 |
|
$ |
609 |
|
|
2006 |
|
|
511 |
|
|
2007 |
|
|
364 |
|
|
Thereafter |
|
|
— |
|
|
Total
minimum lease payments |
|
$ |
1,484 |
|
(11)
Legal Proceedings
On or
about December 2, 2002, MCI WorldCom Communications, Inc. filed a complaint
against the Company in the United States District Court for the Southern
District of New York, containing claims for unpaid invoices related to a
contract with MCI for voice and data services. The complaint sought to recover
approximately $761 plus interest. The District Court dismissed the action on the
Company’s motion on May 29, 2003 because the contract contained a binding
arbitration provision. The matter was presented for arbitration with JAMS in New
York City in which the Company denied liability. In December 2004, the matter
was settled for $150.
In June
2003, James Ball d/b/a TalktoDealers.com filed a complaint against the Company
and other unidentified persons in the Superior Court of the State of California
for the County of Orange, containing claims for breach of contract and unjust
enrichment. The complaint sought to recover approximately $1,152 per year from
the time of the Company’s alleged breach in late 2002 or early 2003, plus
interest, costs, attorneys’ fees, restitution and specific performance. This
matter was settled in November 2004 for $250.
The
Company is not currently a party to any material legal proceedings. From time to
time, the Company may be subject to various claims and legal actions arising in
the ordinary course of business.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of LivePerson’s “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 December
31, 2004. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of December 31, 2004 to ensure that information required to be
disclosed by LivePerson 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 LivePerson’s
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure.
Management’s
Annual Report on Internal Control over Financial Reporting and Attestation
Report of our Independent Registered Public Accounting Firm
Our
Management’s Report on Internal Control over Financial Reporting and the
Attestation Report of our Independent Registered Public Accounting Firm thereon
will be filed by amendment to this Annual Report on Form 10-K not later than 45
days after March 16, 2005, as permitted by SEC Release No. 34-50754 (November
30, 2004), “Order Under Section 36 of the Securities Exchange Act of 1934
Granting an Exemption From Specified Provisions of Exchange Act Rules 13a-1 and
15d-1.”
Changes
in Internal Control over Financial Reporting
During
the quarter ended December 31, 2004, we added an additional accounting staff
manager and dispersed certain control processes among both existing personnel
and the new employee. We made these changes to strengthen our existing controls
over certain risk areas related to our internal control over financial
reporting. These changes were part of our continuous efforts to ensure that our
internal control over financial reporting is effective.
There
were no other changes in LivePerson’s internal control over financial reporting
during the quarter ended December 31, 2004 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.
ITEM
9B. OTHER
INFORMATION
None.