Company Quick10K Filing
Quick10K
Liveperson
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$28.33 65 $1,840
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-06 Shareholder Vote
8-K 2019-05-02 Earnings, Exhibits
8-K 2019-03-11 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2019-02-21 Officers
8-K 2019-02-21 Earnings, Exhibits
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-06-05 Shareholder Vote
8-K 2018-05-03 Earnings, Officers, Exhibits
8-K 2018-02-16 Earnings, Officers, Exhibits
8-K 2017-12-27 Officers
DIS Walt Disney 240,140
WD Walker & Dunlop 1,680
MDGL Madrigal Pharmaceuticals 1,600
CYRN Cyren 106
ATOM Atomera 61
TPCA Tropicana Entertainment 0
REN Resolute Energy 0
BTHT Best Hometown Bancorp 0
PGEC Prestige Capital 0
FUTU Future Healthcare of America 0
LPSN 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.3 a2019q1livepersonex103rsu.htm
EX-10.4 a2019q1livepersonex104rsu.htm
EX-31.1 a2019q1livepersonex311.htm
EX-31.2 a2019q1livepersonex312.htm
EX-32.1 a2019q1livepersonex321.htm
EX-32.2 a2019q1livepersonex322.htm

Liveperson Earnings 2019-03-31

LPSN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a2019q1liveperson10-q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number: 000-30141
LIVEPERSON, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
13-3861628
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer Identification No.)
 
 
 
475 Tenth Avenue, 5th Floor
New York, New York
 
10018
(Address of Principal Executive Offices)
 
(Zip Code)
(212) 609-4200
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
LPSN
The Nasdaq Stock Market LLC
Common Stock, par value $0.001 per share
LPSN
The Tel Aviv Stock Exchange
On April 25, 2019, 64,845,886 shares of the registrant’s common stock were outstanding.

1



LIVEPERSON, INC.
March 31, 2019
FORM 10-Q
INDEX

 
 
PAGE
Part I.
Financial Information

 
 
 
Item 1.
Financial Statements (Unaudited):

 
 
 
 
Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

 
 
 
 
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018

 
 
 
 
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018

 
 
 

 
Condensed Consolidated Statements of Shareholder's Equity for the Three Months Ended March 31, 2019 and 2018
7

 
 
 

 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

 
 
 
 
Notes to Condensed Consolidated Financial Statements

 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk

 
 
 
Item 4.
Controls and Procedures

 
 
 
Part II.
Other Information

 
 
 
Item 1.
Legal Proceedings

 
 
 
Item 1A.
Risk Factors

 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

 
 
 

Item 3.
Defaults Upon Senior Securities

 
 
 

Item 4.
Mine Safety Disclosures

 
 
 

Item 5.
Other Information

 
 
 

Item 6.
Exhibits

 
 
 
Signatures
 


2



FORWARD-LOOKING STATEMENTS
 
STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q ABOUT LIVEPERSON, INC. (“LIVEPERSON”) 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 PROGRESSES, 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 POLICY IS GENERALLY TO PROVIDE OUR EXPECTATIONS ONLY ONCE PER QUARTER, AND NOT TO UPDATE THAT INFORMATION UNTIL THE NEXT QUARTER. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN THE PROJECTIONS OR FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN PART II, ITEM 1A, “RISK FACTORS.”

3



Part I. Financial Information
Item 1. Financial Statements
LIVEPERSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
 
March 31,
2019
 
December 31,
2018
 
 
 
(Note 1)
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and cash equivalents
$
237,787

 
$
66,449

Accounts receivable, net of allowance for doubtful accounts of $2,728 and $2,276 as of March 31, 2019 and December 31, 2018, respectively
51,285

 
46,023

Prepaid expenses and other current assets
29,290

 
22,613

Total current assets
318,362

 
135,085

Operating lease right of use asset
14,817

 

Property and equipment, net
48,432

 
43,735

Intangibles, net
13,077

 
13,832

Goodwill
94,987

 
95,031

Deferred tax assets
714

 
713

Other assets
1,822

 
1,707

Total assets
$
492,211

 
$
290,103

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable
$
7,331

 
$
8,174

Accrued expenses and other current liabilities
35,897

 
50,662

Deferred revenue
66,210

 
55,015

Operating lease liability
6,227

 

Total current liabilities
115,665

 
113,851

Deferred revenue
177

 
222

Convertible senior notes, net
171,294

 

Other liabilities
320

 
4,205

Operating lease liability
12,566

 

Deferred tax liability
1,150

 
1,096

Total liabilities
301,172

 
119,374

 
 
 
 
Commitments and contingencies


 


STOCKHOLDERS’ EQUITY:
 

 
 

Common stock
65

 
64

Additional paid-in capital
401,996

 
362,590

Treasury stock
(3
)
 
(3
)
Accumulated deficit
(206,381
)
 
(187,491
)
Accumulated other comprehensive loss
(4,638
)
 
(4,431
)
Total stockholders’ equity
191,039

 
170,729

Total liabilities and stockholders’ equity
$
492,211

 
$
290,103

 
See Notes to Condensed Consolidated Financial Statements (unaudited).

4



LIVEPERSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Revenue
 
$
66,402

 
$
58,241

Costs and expenses (1) (2)
 
 

 
 

Cost of revenue (3)
 
18,649

 
13,954

Sales and marketing
 
33,036

 
24,131

General and administrative
 
14,167

 
10,123

Product development
 
18,173

 
13,252

Restructuring costs
 
279

 
178

Amortization of purchased intangibles
 
461

 
424

Total costs and expenses
 
84,765

 
62,062

Loss from operations
 
(18,363
)
 
(3,821
)
Other income , net
 
66

 
129

Loss before provision for (benefit from) income taxes
 
(18,297
)
 
(3,692
)
Provision for (benefit from) income taxes
 
593

 
(489
)
Net loss
 
$
(18,890
)
 
$
(3,203
)
 
 
 
 
 
Net loss per share of common stock:
 
 
 
 
Basic
 
$
(0.31
)
 
$
(0.06
)
Diluted
 
$
(0.31
)
 
$
(0.06
)
 
 
 
 
 
Weighted-average shares used to compute net loss per share:
 
 
 
Basic
 
61,422,227

 
57,309,707

Diluted
 
61,422,227

 
57,309,707

 
 
 
 
 
 
 
 
 
 
(1) Amounts include stock-based compensation expense, as follows:
 
 
 
Cost of revenue
 
$
620

 
$
154

Sales and marketing
 
1,599

 
886

General and administrative
 
2,566

 
840

Product development
 
2,381

 
558

 
 
 
 
 
(2) Amounts include depreciation expense, as follows:
 
 
 
Cost of revenue
 
2,027

 
1,916

Sales and marketing
 
357

 
356

General and administrative
 
231

 
246

Product development
 
1,266

 
840

(3) Amounts include amortization of purchased intangibles, as follows:
 
 
 
Cost of revenue
 
285

 
$
287

 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements (unaudited).


5



LIVEPERSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
 
Three Months Ended
 
March 31,
 
2019
 
2018
Net loss
$
(18,890
)
 
$
(3,203
)
Foreign currency translation adjustment
207

 
(559
)
Comprehensive loss
$
(18,683
)
 
$
(3,762
)
 
See Notes to Condensed Consolidated Financial Statements (unaudited).


6



LIVEPERSON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

Three Months Ended March 31, 2019
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance at December 31, 2018
63,676,229

 
64

 
(2,681,285
)
 
(3
)
 
362,590

 
(187,491
)
 
(4,431
)
 
170,729

Common stock issued upon exercise of stock options
626,478

 
1

 

 

 
6,476

 

 

 
6,477

Common stock issued upon vesting of restricted stock units
414,742

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 
5,188

 

 

 
5,188

Common stock issued under Employee Stock Purchase Plan
30,349

 

 

 

 
721

 

 

 
721

Common stock repurchase

 

 
(23,421
)
 

 
(709
)
 

 

 
(709
)
Equity component of convertible senior notes

 

 

 

 
52,900

 

 

 
52,900

Equity component of convertible senior notes issuance costs

 

 

 

 
(1,986
)
 

 

 
(1,986
)
Purchase of capped call option

 

 

 

 
(23,184
)
 

 

 
(23,184
)
Net loss

 

 

 

 

 
(18,890
)
 

 
(18,890
)
Other comprehensive income

 

 

 

 

 

 
(207
)
 
(207
)
Balance at March 31, 2019
64,747,798

 
$
65

 
(2,704,706
)
 
$
(3
)
 
$
401,996

 
$
(206,381
)
 
$
(4,638
)
 
$
191,039

Three Months Ended March 31, 2018
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance at December 31, 2017
59,663,969

 
60

 
(2,587,535
)
 
(3
)
 
305,676

 
(163,135
)
 
(2,535
)
 
140,063

Common stock issued upon exercise of stock options
644,830

 

 

 

 
5,440

 

 

 
5,440

Common stock issued upon vesting of restricted stock units
103,339

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 
2,437

 

 

 
2,437

Common stock issued under Employee Stock Purchase Plan
39,888

 

 

 

 
490

 

 

 
490

Common stock repurchase

 

 
(93,750
)
 

 
(1,345
)
 

 

 
(1,345
)
ASC 606 prior period adjustment (see note 1)

 

 

 

 

 
676

 

 
676

Issuance of common stock in connection with acquisitions (see note 9)
85,681

 

 

 

 
1,000

 

 


1,000

Net loss

 

 

 

 

 
(3,203
)
 

 
(3,203
)
Other comprehensive income

 

 

 

 

 

 
559

 
559

Balance at March 31, 2018
60,537,707

 
$
60

 
(2,681,285
)
 
$
(3
)
 
$
313,698

 
$
(165,662
)
 
$
(1,976
)
 
$
146,117



See Notes to Condensed Consolidated Financial Statements (unaudited).

7



LIVEPERSON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 
Three Months Ended
 
March 31,
 
2019
 
2018
OPERATING ACTIVITIES:
 

 
 

Net loss
$
(18,890
)
 
$
(3,203
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Stock-based compensation expense
7,166

 
2,438

Depreciation
3,881

 
3,358

Amortization of purchased intangibles
746

 
711

Amortization of debt issuance costs
116

 

Accretion of debt discount on convertible senior notes
727

 

Amortization of tenant allowance
(129
)
 
(42
)
Deferred income taxes
52

 
16

Provision for doubtful accounts
502

 
496

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(5,763
)
 
(8,467
)
Prepaid expenses and other current assets
(6,677
)
 
(5,841
)
Other assets
(115
)
 
(21
)
Accounts payable
(744
)
 
(172
)
Accrued expenses and other current liabilities
(17,932
)
 
(9,782
)
Deferred revenue
11,150

 
19,921

Other liabilities
219

 
(89
)
Net cash used in operating activities
(25,691
)
 
(677
)
 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment, including capitalized software
(8,335
)
 
(4,595
)
Cash held as collateral for foreign exchange forward contracts

 
1,235

Payments for acquisitions and intangible assets, net of cash acquired
(2
)
 
(263
)
Net cash used in investing activities
(8,337
)
 
(3,623
)
 
 
 
 
FINANCING ACTIVITIES:
 

 
 

Proceeds from issuance of convertible senior notes
230,000

 

Payment of issuance costs in connection with convertible senior notes
(7,329
)
 

Purchase of capped call option
(23,184
)
 

Payments related to contingent consideration
(487
)
 

Proceeds from issuance of common stock in connection with the exercise of options
7,198

 
5,949

Repurchase of common stock
(709
)
 
(1,345
)
Net cash provided by financing activities
205,489

 
4,604

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(123
)
 
1,061

CHANGE IN CASH AND CASH EQUIVALENTS
171,338

 
1,365

CASH AND CASH EQUIVALENTS - Beginning of the period
66,449

 
56,115

CASH AND CASH EQUIVALENTS - End of the period
$
237,787

 
$
57,480

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION: 
 
 
 
Cash paid for income taxes
$
338

 
$
553

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchase of property and equipment recorded in accounts payable
$
198

 
$
292

Issuance of 85,861 shares of common stock in connection with the BotCentral transaction on January 22, 2018
$

 
$
1,000

Debt offering costs, accrued but not paid
$
1,306

 
$


8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



1.
Description of Business and Basis of Presentation
LivePerson, Inc. (the “Company” or “LivePerson”) was incorporated in the State of Delaware in November 1995 and the LivePerson service was introduced in November 1998. In April 2000, the Company completed an initial public offering and is currently traded on the NASDAQ Global Select Market and the Tel Aviv Stock Exchange. LivePerson is headquartered in New York City with U.S. offices in Alpharetta (Georgia), Austin (Texas), Mountain View (California) and Seattle (Washington), and international offices in Amsterdam (Netherlands), Berlin (Germany), London (United Kingdom), Mannheim (Germany), Melbourne (Australia), Milan (Italy), Paris (France), Ra'anana (Israel), Reading (United Kingdom), Sydney (Australia), Tel Aviv (Israel), and Tokyo (Japan).
LivePerson makes life easier by transforming how people communicate with brands. During the past decade, the consumer has made the mobile device the center of their digital lives, and they have made mobile messaging the center of communication with friends, family and peers. The Company’s technology enables consumers to connect with businesses through these same preferred conversational interfaces, including Facebook Messenger, WhatsApp, Apple Business Chat, Google Rich Business Messenger and Alexa. These messaging conversations harness human agents, bots and Artificial Intelligence (AI) to power convenient, personalized and content-rich journeys across the entire consumer lifecycle, from discovery and research, to sales, service and support, and even marketing and brick and mortar engagements. For example, consumers can look up product info like ratings, images and pricing, search for stores, see products in the store, schedule appointments, apply for credit, approve repairs, make purchases or payments - all without ever leaving the messaging channel. LivePerson calls these AI and human-assisted conversational experiences over messaging Conversational Commerce.
LiveEngage, the Company’s enterprise-class, cloud-based platform, was designed for Conversational Commerce, enabling businesses to securely deploy messaging, coupled with bots and AI, at scale for brands with tens of millions of customers and many thousands of customer care agents. LiveEngage powers conversations across each of a brand’s primary digital channels, including mobile apps, mobile and desktop web browsers, short message service (SMS), social media and third-party consumer messaging platforms. Brands can also use LiveEngage to message consumers when they dial a 1-800 number instead of having them navigate interactive voice response systems (IVRs) and wait on hold.
The robust, cloud-based suite of rich mobile messaging and real-time chat offerings features intelligent routing and capacity mapping, queue prioritization, customer sentiment, real-time analytics and reporting, content delivery, Payment Card Industry (PCI) compliance, cobrowsing and a sophisticated proactive targeting engine. With LiveEngage, agents can manage all conversations with consumers through a single console interface, regardless of which disparate messaging endpoints the consumers originate from: i.e., WhatsApp, Line, Apple Business Chat, IVR, or Google Home. An extensible application programming interface (API) stack facilitates a lower cost of ownership by facilitating robust integration into back-end systems, as well as enabling developers to build their own programs and services on top of the platform. More than three dozen APIs are available on LiveEngage.
LiveEngage also features Maven, a robust AI engine that was custom designed for Conversational Commerce. Maven, announced in December 2018, puts the power of bot development, training and management into the hands of the contact center and its agents, the teams most familiar with how to structure sales and service conversations to drive successful outcomes. The platform enables what the Company calls “the tango” of humans, AI and bots, whereby human agents act as bot managers, overseeing AI-powered conversations and seamlessly stepping into the flow when a personal touch is needed. Through Maven Assist, agents become ultra-efficient, leveraging the AI engine to serve up relevant content, define next-best actions and take over repetitive transactional work, so that the agent can focus on relationship building. By seamlessly integrating LiveEngage with Maven, as well as third-party bots, the platform provides businesses with a comprehensive view of all AI-based and human-based conversations from a single console.
Complementing LiveEngage are teams of technical, solutions and consulting professionals that have developed deep domain expertise in Conversational Commerce across industries and messaging endpoints. The Company is positioned as an authority in Conversational Commerce, publishing a proprietary Conversational Quotient™ Index that measures each customer across multiple key indicators to ascertain their level of conversational maturity. Each business is then benchmarked against industry peers to determine their relative progression. The Company has developed a Transformation Model that is introduced to existing and prospective customers to help guide them on their journeys from legacy and oftentimes inefficient legacy voice, email and chat solutions to modern conversational ones powered by messaging and AI. LivePerson’s products, coupled with our domain knowledge, industry expertise and professional services, have been proven to maximize the effectiveness of Conversational Commerce and deliver measurable return on investment.
As a “cloud computing” or software-as-a-service (SaaS) provider, LivePerson provides solutions on a hosted basis. This model offers significant benefits over premise-based software, including lower up-front costs, faster implementation, lower total cost of ownership, scalability, cost predictability, and simplified upgrades. Organizations that adopt a fully-hosted, multi-tenant

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


architecture that is maintained by LivePerson eliminate the majority of the time, server infrastructure costs, and IT resources required to implement, maintain, and support traditional on-premise software.
The Company's consumer services offering is an online marketplace that connects independent service providers (Experts) who provide information and knowledge for a fee via mobile and online messaging with individual consumers (Users). Users seek assistance and advice in various categories including personal counseling and coaching, computers and programming, education and tutoring, spirituality and religion, and other topics.
Basis of Presentation
The accompanying condensed consolidated financial statements as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the consolidated financial position of LivePerson as of March 31, 2019, and the consolidated results of operations, comprehensive loss and cash flows for the interim periods ended March 31, 2019 and 2018. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to these periods are unaudited. The results of operations for any interim period are not necessarily indicative of the results of operations for any other future interim period or for a full fiscal year. The condensed consolidated balance sheet at December 31, 2018 has been derived from audited consolidated financial statements at that date.
Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 25, 2019.
Principles of Consolidation
The condensed consolidated financial statements include the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from management’s estimates.
Recently Issued Accounting Standards    
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2018-15 "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements" (“ASU 2018-15”). This standard aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under Accounting Standards Codification ("ASC") 350-40, in order to determine which costs to capitalize and recognize as an asset. ASU 2018-15 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company is currently in the process of evaluating the impact of the adoption of ASU 2018-230 on its consolidated financial statements.
In January 2017, FASB issued ASU No. 2017-04, "Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" (“ASU 2017-04”). This update addresses concerns over the cost and complexity of the two-step goodwill impairment test. The amendments in this update remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 is effective for financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods. The Company does not expect the adoption of ASU 2017-04 will have a material effect on its financial position, results of operations or cash flows.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) may apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.

The Company adopted ASU No. 2016-02-Leases (Topic 842), as of January 1, 2019 using the modified transition approach. The modified transition approach provides a method for recording existing leases at adoption. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (i.e. January 1, 2019). For its long-term operating lease, the Company recognized a right-of-use asset and a lease liability on its balance sheet. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that the Company would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent. The lease term at the commencement date is determined by considering whether renewal options and termination options are reasonably assured of exercise. Rent expense for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses on the statements of operations. Variable lease payments include lease operating expenses. Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $14.8 million and $18.8 million, respectively, as of March 31, 2019. The standard did not materially impact the Company's consolidated net earnings and had no impact on cash flows.

In June 2018, the FASB issued ASU No. 2018-07 "Compensation -Stock Compensation (Topic 718) -Improvements to Nonemployee Share-Based Payment Accounting" ("ASU 2018-07"). This new standard expands the scope of Topic 718, Compensation-Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. ASU 2018-07 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The standard did not materially impact the Company's consolidated net earnings and had no impact on cash flows.
2.
Revenue Recognition 
The majority of the Company’s revenue is generated from monthly service revenues and related professional services from the sale of the LivePerson services. Revenues are recognized when control of these services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

The Company determines revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the Company satisfies a performance obligation.
    
Total revenue of $66.4 million and $58.2 million recognized during the three months ended March 31, 2019 and 2018, respectively, under Topic 606, was not materially different from what would have been recognized under Topic 605.


11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Hosted Services- Business Revenue

Hosted Services Business revenue is reported at the amount that reflects the ultimate consideration expected to be received and primarily consist of fees that provide customers access to LiveEngage, the Company’s enterprise-class, cloud-based platform. The Company has determined such access represents a stand-ready service provided continually throughout the contract term. As such, control and satisfaction of this stand-ready performance obligation is deemed to occur over time. The Company recognizes this revenue over time on a ratable basis over the contract term, beginning on the date that access to the LiveEngage platform is made available to the customer. The passage of time is deemed to be the most faithful depiction of the transfer of control of the services as the customer simultaneously receives and consumes the benefit provided by the Company’s performance. Subscription contracts are generally one year or longer in length, billed, monthly, quarterly or annually in advance. There is no significant variable consideration related to these arrangements. Additionally, for certain of the Company's larger customers, the Company may provide call center labor through an arrangement with one or more of several qualified vendors. For most of these customers, the Company passes the fee it incurs with the labor provider and its fee for the hosted services through to its customers in the form of a fixed fee for each order placed via the Company's online engagement solutions. For these Gainshare (formerly Pay for Performance) arrangements in accordance with ASC-606, "Principal Agent Considerations", the Company acts as a principal in a transaction if it controls the specified goods or services before they are transferred to the customer.

Professional Services Revenues

Professional services revenue primarily consists of fees for deployment and optimization services, as well as training delivered on an on-demand basis which is deemed to represent a distinct stand-ready performance obligation. Professional Services Revenues are reported at the amount that reflects the ultimate consideration the Company expects to receive in exchange for such services. Control for the majority of the Company's Professional Services contracts passes over time to the customer and is recognized ratably over the contracted period, as the passage of time is deemed to be the most faithful depiction of the transfer of control. For certain deployment services, which are not deemed to represent a distinct performance obligation, revenue will be recognized in the same manner as the fee for access to the LiveEngage platform, and as such will be recognized on a straight-line basis over the contract term. For services billed on a fixed price basis, revenue is recognized over time based on the proportion performed using inputs as the measure of progress toward complete satisfaction of the performance obligation. Professional service contracts are generally one year or longer in length, billed, monthly, quarterly or annually in advance. There is no significant variable consideration related to these arrangements.

Contracts with Multiple Performance Obligations

Some of the Company's contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors, including the value of its contracts, the cloud applications sold, and the number and types of users within its contracts.

Hosted Services- Consumer Revenue

For revenue from the Company's Consumer segment generated from online transactions between Experts and Users, revenue is recognized at an amount net of Expert fees in accordance with ASC 606, “Principal Agent Considerations,” due primarily to the fact that the Expert is the primary obligor. Additionally, the Company performs as an agent without any risk of loss for collection, and is not involved in selecting the Expert or establishing the Expert’s fee.  The Company collects a fee from the consumer and retains a portion of the fee, and then remits the balance to the Expert. Revenue from these transactions is recognized at the point in time when the transaction is complete and no significant performance obligations remain.

Deferred Revenues

The Company records deferred revenues when cash payments are received or due in advance of its performance. The increase in the deferred revenue balance for the three months ended March 31, 2019 is primarily driven by cash payments received or due in advance of satisfying its performance obligations, partially offset by $16.9 million of revenues recognized that were included in the deferred revenue balance as of December 31, 2018.

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following table presents deferred revenue by revenue source (amounts in thousands):
 
 
Deferred Revenue
 
 
As of March 31, 2019
 
December 31, 2018
Hosted services – Business
 
$
61,463

 
$
52,232

Professional services – Business
 
4,747

 
2,783

Total deferred revenue - short term
 
$
66,210

 
$
55,015

 
 
 
 
 
Hosted services – Business
 
$
4

 
$
19

Professional services – Business
 
173

 
203

Total deferred revenue - long term
 
$
177

 
$
222

Disaggregated Revenue

The following table presents the Company's revenues disaggregated by revenue source (amounts in thousands):
 
Three Months Ended
 
March 31,
 
2019
 
2018
(1)
Revenue:
 
 
 
 
Hosted services – Business
$
51,537

 
$
47,427

 
Hosted services – Consumer
5,407

 
4,680

 
Professional services
9,458

 
6,134

 
Total revenue
$
66,402

 
$
58,241

 
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.
Revenue by Geographic Location

The following table presents the Company’s revenues attributable to domestic and foreign operations for the periods presented (amounts in thousands):
 
Three Months Ended
 
March 31,
 
2019
 
2018
United States
$
38,589

 
$
34,071

Other Americas (1)
2,769

 
1,259

Total Americas
41,358

 
35,330

EMEA (2) (4)
18,113

 
16,919

APAC (3)
6,931

 
5,992

Total revenue
$
66,402

 
$
58,241

(1) Canada, Latin America and South America
(2) Europe, the Middle East and Africa (“EMEA”)
(3) Asia-Pacific (“APAC”)
(4) Includes revenues from the United Kingdom of $11.7 million for the three months ended March 31, 2019 and 2018, respectively, and from the Netherlands of $2.5 million and $1.9 million for the three months ended March 31, 2019 and 2018, respectively.

Information about Contract Balances

Amounts collected in advance of services being provided are accounted for as deferred revenue. Nearly all of the Company's deferred revenue balance is related to Hosted Services- Business Revenue.

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


In some arrangements, the Company allows customers to pay for access to LiveEngage over the term of the software license. The Company refers to these as subscription transactions. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables, anticipated to be invoiced in the next twelve months, are included in accounts receivable on the consolidated balance sheet. The opening and closing balances of the Company's accounts receivable, unbilled receivables, and deferred revenues are as follows (amounts in thousands):
 
Accounts Receivable
 
Unbilled Receivable
 
Prepaid Commissions
 
Deferred Revenue (current)
 
Deferred Revenue (long term)
Opening Balance as of December 31, 2018
$
34,211

 
$
11,812

 
$
13,361

 
$
55,015

 
$
222

Increase (decrease), net
6,607

 
(1,345
)
 
2,825

 
11,195

 
(45
)
Ending Balance as of March 31, 2019
$
40,818

 
$
10,467

 
$
16,186

 
$
66,210

 
$
177


As of March 31, 2019, the Company expects to recognize the long term performance obligations in 2020.


3. Net Loss Per Share

The Company calculates earnings per share (“EPS”) in accordance with the provisions of ASC 260-10 and the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 98. Under ASC 260-10, basic EPS excludes dilution for common stock equivalents and is computed by dividing net income or loss attributable to common shareholders by the weighted average number of common shares outstanding for the period. All options, warrants or other potentially dilutive instruments issued for nominal consideration are required to be included in the calculation of basic and diluted net income attributable to common stockholders. Diluted EPS is calculated using the treasury stock method and reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock.
Diluted net loss per common share for the three months ended March 31, 2019 does not include the effect of 8,330,741 outstanding common stock awards, as the effect of their inclusion is anti-dilutive. Diluted net loss per common share for the three months ended March 31, 2018 does not include the effect of 10,074,809 outstanding common stock awards, as the effect of their inclusion is anti-dilutive.
A reconciliation of shares used in calculating basic and diluted net loss per share follows:
 
Three Months Ended
 
March 31,
 
2019
 
2018
Basic
61,422,227

 
57,309,707

Effect of assumed exercised options

 

Diluted
61,422,227

 
57,309,707

The Company expects to settle the principal amount of its outstanding Notes (as defined below) in cash and any excess in shares of the Company’s common stock. The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the initial conversion price of $38.58 per share for the Notes. See Note 8 of the Notes to Condensed Consolidated Financial Statements for a full description of the Notes.

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


4.
Segment Information
The Company accounts for its segment information in accordance with the provisions of ASC 280-10, “Segment Reporting.” ASC 280-10 establishes annual and interim reporting standards for operating segments of a company. ASC 280-10 requires disclosures of selected segment-related financial information about products, major customers, and geographic areas based on the Company’s internal accounting methods. The Company is organized into two operating segments for purposes of making operating decisions and assessing performance. The Business segment enables brands to leverage LiveEngage’s sophisticated intelligence engine to connect with consumers through an integrated suite of mobile and online business messaging technologies. The Consumer segment facilitates online transactions between independent service providers (“Experts”) and individual consumers (“Users”) seeking information and knowledge for a fee via mobile and online messaging. Both segments currently generate their revenue primarily in the United States. The chief operating decision maker, who is the chief executive officer, evaluates performance, makes operating decisions, and allocates resources based on the operating income of each segment. The reporting segments follow the same accounting polices used in the preparation of the Company’s condensed consolidated financial statements which are described in the summary of significant accounting policies. The Company allocates cost of revenue, sales and marketing and amortization of purchased intangibles to the segments, but it does not allocate product development expenses, general and administrative expenses, restructuring costs and income tax expense because management does not use this information to measure performance of the operating segments. There are currently no inter-segment sales.
Summarized financial information by segment for the three months ended March 31, 2019, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision maker, follows (amounts in thousands):
 
Business
 
Consumer
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Hosted services – Business
$
51,537

 
$

 
$

 
$
51,537

Hosted services – Consumer

 
5,407

 

 
5,407

Professional services
9,458

 

 

 
9,458

Total revenue
60,995

 
5,407

 

 
66,402

Cost of revenue
17,662

 
987

 

 
18,649

Sales and marketing
30,092

 
2,944

 

 
33,036

Amortization of purchased intangibles
461

 

 

 
461

Unallocated corporate expenses

 

 
32,619

 
32,619

Operating income (loss)
$
12,780

 
$
1,476

 
$
(32,619
)
 
$
(18,363
)
Summarized financial information by segment for the three months ended March 31, 2018, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision maker, follows (amounts in thousands):
 
Business
 
Consumer
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Hosted services – Business
$
47,427

 
$

 
$

 
$
47,427

Hosted services – Consumer

 
4,680

 

 
4,680

Professional services
6,134

 

 

 
6,134

Total revenue
53,561

 
4,680

 

 
58,241

Cost of revenue
12,918

 
1,036

 

 
13,954

Sales and marketing
21,723

 
2,408

 

 
24,131

Amortization of purchased intangibles
424

 

 

 
424

Unallocated corporate expenses

 

 
23,553

 
23,553

Operating income (loss)
$
18,496

 
$
1,236

 
$
(23,553
)
 
$
(3,821
)

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Geographic Information
The Company is domiciled in the United States and has international operations in Israel, the United Kingdom, Asia-Pacific and Australia, Latin America and Western Europe, particularly France, Germany and the Netherlands. The following table presents the Company’s long-lived assets by geographic region as of the dates presented (amounts in thousands):
 
March 31,
 
December 31,
 
2019
 
2018
United States
$
135,894

 
$
121,894

Israel
16,657

 
13,598

Australia
9,293

 
8,970

Netherlands
7,344

 
7,426

Other (1)
4,661

 
3,130

Total long-lived assets
$
173,849

 
$
155,018

(1) United Kingdom, Germany, Japan, France and Italy
No individual customer accounted for 10% or more of consolidated revenue for any of the periods presented. No individual customer accounted for 10% or more of accounts receivable as of March 31, 2019. One customer exceeded 10% of our total accounts receivable in 2018. 
5.
Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the three months ended March 31, 2019 are as follows (amounts in thousands):
 
Business
 
Consumer
 
Consolidated
Balance as of December 31, 2018
$
87,007

 
$
8,024

 
$
95,031

Adjustments to goodwill:
 
 
 
 
 
Foreign exchange adjustment
(44
)
 

 
(44
)
Balance as of March 31, 2019
$
86,963

 
$
8,024

 
$
94,987

Intangible Assets
Intangible assets are summarized as follows (amounts in thousands):
 
As of March 31, 2019
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Weighted
Average
Amortization
Period
Amortizing intangible assets:
 
 
 
 
 
 
 
Technology
$
30,414

 
$
(24,006
)
 
$
6,408

 
5.3 years
Customer relationships
16,964

 
(12,073
)
 
4,891

 
8.4 years
Trade names
1,284

 
(1,284
)
 

 
2.1 years
Non-compete agreements
1,435

 
(1,435
)
 

 
2.3 years
Patents
2,343

 
(592
)
 
1,751

 
12.6 years
Other
262

 
(235
)
 
27

 
2.7 years
Total
$
52,702

 
$
(39,625
)
 
$
13,077

 
 


16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
As of December 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Weighted
Average
Amortization
Period
Amortizing intangible assets:
 
 
 
 
 
 
 
Technology
$
30,447

 
$
(23,615
)
 
$
6,832

 
5.3 years
Customer relationships
17,219

 
(11,786
)
 
5,433

 
8.4 years
Trade names
1,286

 
(1,286
)
 

 
2.1 years
Non-compete agreements
1,436

 
(1,436
)
 

 
2.3 years
Patents
2,074

 
(534
)
 
1,540

 
12.4 years
Other
262

 
(235
)
 
27

 
2.7 years
Total
$
52,724

 
$
(38,892
)
 
$
13,832

 
 
 
Amortization expense is calculated over the estimated useful life of the asset. Aggregate amortization expense for intangible assets was $0.7 million for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2019 and 2018, respectively, a portion of this amortization is included in cost of revenue. Estimated amortization expense for the next five years is as follows (amounts in thousands):  
 
Estimated Amortization Expense
Remaining 2019
$
2,167

2020
2,702

2021
2,490

2022
2,128

2023
884

Thereafter
2,706

Total
$
13,077


6.
Property and Equipment
The following table presents the detail of property and equipment for the periods presented (amounts in thousands):
 
March 31,
2019
 
December 31,
2018
Computer equipment and software
$
77,881

 
$
79,161

Internal-use software development costs
28,835

 
19,240

Furniture, equipment and building improvements
14,492

 
14,132

 
121,208

 
112,533

Less: accumulated depreciation
(72,776
)
 
(68,798
)
Total
$
48,432

 
$
43,735



17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


7.
Accrued Expenses and Other Current Liabilities
The following table presents the detail of accrued expenses and other current liabilities for the periods presented (amounts in thousands):
 
March 31,
2019
 
December 31,
2018
Payroll and other employee related costs
$
11,106

 
$
19,014

Professional services and consulting and other vendor fees
16,176

 
17,461

Unrecognized tax benefits
1,930

 
1,913

Sales commissions
3,689

 
6,239

Contingent earn-out (see Note 9)
1,885

 
2,372

Restructuring (see Note 13)
72

 
977

Other
1,039

 
2,686

Total
$
35,897

 
$
50,662


8.
Convertible Senior Notes and Capped Call Transactions
In March 2019, the Company issued $230.0 million aggregate principal amount of 0.750% Convertible Senior Notes due 2024 in a private placement, which amount includes $30.0 million aggregate principal amount of such Notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (collectively, the “Notes”). The interest on the Notes is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2019.
 The Notes will mature on March 1, 2024, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds from the debt offering, after deducting debt issuance costs, paid or payable by us, were approximately $221.0 million.
 Each $1,000 principal amount of the Notes is initially convertible into 25.9182 shares of the Company’s common stock par value $0.001, which is equivalent to an initial conversion price of approximately $38.58 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event. The Notes are not redeemable prior to the maturity date of the Notes and no sinking fund is provided for the Notes. If we undergo a fundamental change (as defined in the indenture governing the Notes) prior to the maturity date, holders may require us to repurchase for cash all or any portion of their Notes in principal amounts of $1,000 or a multiple thereof at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Holders of the Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding November 1, 2023, in multiples of $1,000 principal amount, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2019 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the Notes on each applicable trading day as determined by the Company; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the indenture governing the Notes) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate for the Notes on each such trading day; or (3) upon the occurrence of specified corporate events. On or after November 1, 2023, holders may convert all or any portion of their Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election.
   It is the Company’s current intent to settle the principal amount of its outstanding Notes in cash and any excess in shares of the Company’s common stock.
During the three months ended March 31, 2019, the conditions allowing holders of the notes to convert were not met.

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 The Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment with the Company’s existing and future liabilities that are not so subordinated; effectively subordinated to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries of the Company.
 In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components.  The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $52.9 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an effective interest rate over the contractual terms of the Notes.
In accounting for the transaction costs related to the Notes, the Company allocated the total amount incurred of approximately $8.6 million to the liability and equity components of the Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were approximately $6.6 million, were recorded as an additional debt discount and are amortized to interest expense using the effective interest method over the contractual terms of the Notes. Issuance costs attributable to the equity component were approximately $2.0 million and recorded as a reduction of additional paid in capital in stockholders’ equity.
The net carrying amount of the liability component of the Notes was as follows (in thousands):
 
As of March 31, 2019
Principal
$
230,000

Unamortized discount
(52,173
)
Unamortized issuance costs
(6,533
)
Net carrying amount
$
171,294

The net carrying amount of the equity component of the Notes was as follows (in thousands):
 
As of March 31, 2019
Proceeds allocated to the conversion options (debt discount)
$
52,900

Issuance costs
(1,986
)
Net carrying amount
$
50,914

The following table sets forth the interest expense recognized related to the Notes (in thousands):
 
Three Months Ended March 31, 2019
Contractual interest expense
$
144

Amortization of issuance costs
116

Amortization of debt discount
727

Total interest expense
$
987


The remaining term over which the debt discount and debt issuance costs will be amortized is 4.9 years. The effective interest rate on the debt was 6.97% for the period ended March 31, 2019.
In connection with the offering of the Notes, the Company entered into privately-negotiated capped call option transactions with certain counterparties (the “capped calls”). The capped calls each have an initial strike price of approximately $38.58 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The capped calls have initial cap prices of $57.16 per share, subject to certain adjustment events. The capped calls cover, subject to anti-dilution adjustments, approximately 5.96 million shares of Common Stock. The capped calls are generally intended to reduce or offset the potential dilution to the Common Stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The capped calls expire on March 1, 2024, subject to earlier exercise. The capped calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the capped calls are subject to certain specified additional disruption events that may give rise to a termination of the capped calls, including changes in law, failure to deliver, and hedging disruptions. The capped calls are recorded in stockholders’ equity and are not accounted for as

19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


derivatives. The net cost of $23.2 million incurred to purchase the capped calls was recorded as a reduction to additional paid-in capital in the accompanying condensed consolidated balance sheet.
9.
Acquisitions
AdvantageTec Inc.
In October 2018, the Company entered into a stock purchase agreement to acquire the outstanding equity interest of AdvantageTec Inc. (“AdvantageTec”), a leading provider of texting solutions for service departments of automotive dealerships that helps enable Conversational Commerce across the entire dealership, including both front end/variable operations (new and used vehicle sales) and back end/fixed operations (parts and services). The purchase agreement was for total consideration of approximately $11.2 million, which includes approximately $6.0 million in cash, approximately $4.3 million in shares of common stock, and approximately $0.9 million of potential earn-out consideration in cash and shares of common stock. The earn-out is contingent upon achieving certain targeted financial, strategic and integration objectives and milestones and is included as part of the purchase price. During the three months ended March 31, 2019, the Company made $0.5 million of payments in earn-out consideration, with potential future earn-out payments of $0.4 million at March 31, 2019.
The purchase price allocation resulted in approximately $9.1 million of goodwill and approximately $2.2 million of intangible assets. The goodwill will not be deductible for tax purposes. The intangible assets are being amortized over their expected period of benefit. A deferred tax liability for the identified intangibles has been recorded.
    AdvantageTec Inc. enhances the Company’s messaging platform available for the automotive industry and is included in the Company's business segment.
Conversable, Inc.
In September 2018, the Company acquired the employees and technology assets of Conversable, Inc. a SaaS based Artificial Intelligence powered conversational platform, headquartered in Austin, Texas, for an aggregate estimated purchase price of $5.7 million. The estimated purchase price consisted of $1.3 million in cash, approximately $2.9 million in shares of common stock of the Company, and a potential earn-out consideration of $1.5 million in cash, which is based on achieving certain targeted financial, strategic, and integration objectives. This transaction was accounted for under the purchase method of accounting and was based upon the estimated fair value of Conversable, Inc.'s net tangible and identifiable intangible assets as of the date of acquisition.
The purchase price allocation resulted in approximately $5.5 million of goodwill and approximately $0.5 million of intangible assets. The goodwill will be deductible for tax purposes. The intangible assets are being amortized over their expected period of benefit. The allocation of the purchase price to net book value of acquired assets and liabilities resulted in a net liability of $0.3 million, which includes accounts receivable, property and equipment, accrued expenses, and deferred revenue. Transaction costs of $0.3 million were expensed during the three month ended March 31, 2019.
Conversable Inc.’s capabilities will accelerate the ongoing expansion of the Company's Conversational Commerce solutions and enhance the Company’s ability to deliver proactive and personalized content and services when and where the customer needs it, helping consumers find immediate service through messaging. Conversable, Inc is included in the Company's business segment.
BotCentral, Inc.
In January 2018, the Company acquired the employees and technology assets of BotCentral, Inc., a Silicon Valley based startup, for an approximate purchase price of $1.0 million in common stock of the Company. The Company incurred an additional $0.2 million related to acquisition costs. This transaction was accounted for as an asset purchase. The aggregate amount of approximately $1.2 million is included in intangibles on the Company's consolidated balance sheet. With the team's expertise and knowledge of the LiveEngage platform, the team is bringing valuable insight for the Company's customers and partners, and enabling the company to more rapidly optimize its bot deployment capabilities, and grow the ecosystem. BotCentral Inc is included in the Company's business segment.


20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



10.
Fair Value Measurements
The Company measures its cash equivalents at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs reflect: quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
Financial Assets and Liabilities
The carrying amount of cash, accounts receivable, and accounts payable approximate their fair value due to their short-term nature. The Companys assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of March 31, 2019 and December 31, 2018, are summarized as follows (amounts in thousands).
 
March 31, 2019
 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
2,853

 
$

 
$

 
$
2,853

 
$
2,828

 
$

 
$

 
$
2,828

Total assets
$
2,853

 
$

 
$

 
$
2,853

 
$
2,828

 
$

 
$

 
$
2,828

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent earn-out
$

 
$

 
$
1,885

 
$
1,885

 
$

 
$

 
$
2,372

 
$
2,372

Total liabilities
$

 
$

 
$
1,885

 
$
1,885

 
$

 
$

 
$
2,372

 
$
2,372

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions based on the best information available.
The Company's money market funds are measured at fair value on a recurring basis based on quoted market prices in active markets and are classified as level 1 within the fair value hierarchy. The Company's contingent earn-out liability is measured at fair value on a recurring basis and is classified as level 3 within the fair value hierarchy. On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived tangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. The Company uses an income approach and inputs that constitute level 3. During the third quarter of each year, the Company evaluates goodwill for impairment at the reporting unit level. The Company uses qualitative factors in accordance with ASU No. 2011-08 to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  This measurement is classified based on level 3 input.
As of March 31, 2019, the fair value of the Notes, net of debt issuance costs and the amortization of debt discount, as further described in Note 8 above, was approximately $171.3 million. The fair value was determined by an independent valuation specialist using the antithetic variable technique and is considered a Level 2 fair value measurement.

21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The Company recorded a contingent earn-out of $2.4 million in December 2018 in connection with the acquisition of Conversable, Inc. The contingent earn-out is based on achieving certain targeted financial, strategic, and integration objectives. The unobservable inputs considered are probability factors and the time value of money. During the three months ended March 31, 2019, there were payments of $0.5 million. As a result, the contingent earn-out balance was $1.9 million as of March 31, 2019. See Note 9 of the Notes to Condensed Consolidated Financial Statements for a full description of the acquisition.
The changes in fair value of the Level 3 liabilities are as follows (amounts in thousands):
 
Contingent Earn-Out
 
March 31, 2019
 
December 31, 2018
Balance, Beginning of period
$
2,372

 
$

Conversable, Inc. addition (see Note 9)

 
1,496

AdvantageTec Inc. addition (see Note 9)

 
876

Cash payment
(487
)
 

Balance, End of period
$
1,885

 
$
2,372


Derivative Financial Instruments
The Company is exposed to foreign exchange risks that in part are managed by using derivative financial instruments. The Company entered into foreign currency forward contracts related to risks associated with foreign operations. The Company does not use derivatives for trading purposes. Derivatives are recorded at their estimated fair values based upon Level 2 inputs. Derivatives designated and effective as cash flow hedges are reported as a component of other comprehensive income and reclassified to earnings in the same periods in which the hedged transactions impact earnings. Gains and losses related to derivatives not meeting the requirements of hedge accounting and the portion of derivatives related to hedge ineffectiveness are recognized in current earnings. As of March 31, 2019, the Company is not party to any foreign currency forward contracts and does not have any restricted cash balance.
The following summarizes certain information regarding the Company’s derivatives that are not designated or are not effective as hedges (in thousands):
 
 
Gain (losses) on Derivative Instruments Recognized in Statements of Operations
 
 
 
Three Months Ended March 31,
 
 
Location
2019
 
2018
Foreign currency derivatives contracts
 
Other income, net
$

 
$
(50
)

11.
Commitments and Contingencies
Contractual Obligations
The Company leases facilities and certain car leases under agreements accounted for as operating leases. Our leases have initial lease terms ranging from 2 years to 13 years. Payments due under the lease contracts include primarily fixed payments. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Currently, there are no operating leases where we believe it is reasonable certain that we will exercise any option to extend the initial term.
The Company has evaluated its facility leases and determined which leases met the definition of the new standard in accordance with Topic 842. The Company also performed an evaluation of their other contracts with suppliers in accordance with Topic 842 and have determined that, except for the facilities and car leases described above, none of our supply contracts contain a lease. Further, the Company has made an accounting policy election to keep leases with an initial term of twelve months or less off the balance sheet. This policy applies to all classes of the underlying assets. The Company will recognize those lease payments and associated interest expense in the consolidated statement of operations evenly over the lease term.
In connection with the leases, the Company recognized an operating lease right-of-use assets of $14.8 million and an aggregate lease liability of $18.8 million in its condensed consolidated balance sheet as of March 31, 2019.

22

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The determination of the incremental borrowing rate used to calculate the present value of the right-of-use assets and lease liabilities depends on whether an interest rate is specified in the lease or not. If the lease specifies a rate, that rate is used when calculating the present value of lease payments. If the rate is not readily determinable, which is generally the case for the Company, the Company’s incremental borrowing rate (“IBR”) as of the date of inception is used (for initial measurement, the IBR was determined as of the adoption date of the standard). The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment. The Company used a ratings benchmark report against its peers in the technology sector.
 
 
As of March 31, 2019
Operating Leases
 
(in thousands, except lease term and discount rate)
Right-of-use asset
 
$
14,817

 
 
 
Current operating lease liability
 
6,227

Long term operating lease liability
 
12,566

Total operating lease liability
 
$
18,793

 
 
 
Weighted Average Remaining Lease Term
 
 
Operating leases
 
3.3 years

 
 
 
Weighted Average Discount Rate
 
 
Operating leases
 
7
%
During the three months ended March 31, 2019, there were $1.5 million of cash payments for operating leases. The undiscounted future lease payments under the lease liability as of March 31, 2019 were as follows (amounts in thousands):
Year ending December 31:
 
As of March 31, 2019
2019 (remaining nine months)
 
$
5,390

2020
 
6,078

2021
 
4,612

2022
 
3,233

2023
 
1,313

2024 and thereafter
 
640

Total undiscounted lease payments
 
21,266

Less: present value adjustment
 
(2,473
)
Total operating lease liability
 
$
18,793

Rental expense for operating leases and other service agreements for the three months ended March 31, 2019 and 2018 was approximately $2.9 million and $2.6 million, respectively.
Employee Benefit Plans
The Company has a 401(k) defined contribution plan covering all eligible employees. In 2018, the Company provided for employer matching contributions equal to 50% of employee contributions, up to the lesser of 5% of eligible compensation or $6,000. Matching contributions are deposited into the employee’s 401(k) account and are subject to 5 year graded vesting. Beginning in 2019, the Company's 401(k) policy was changed, whereby the Company matches 100% of the first 3% of eligible compensation and 50% of the next 2% of eligible compensation. Furthermore, the match is immediately vested. Salaries and related expenses include $1.0 million and $0.5 million of employer matching contributions for the three months ended March 31, 2019 and 2018.
Letters of Credit
As of March 31, 2019, the Company has a $1.3 million letter of credit outstanding substantially in favor of a certain landlord for office space. In addition, the Company has a letter of credit totaling $0.1 million as a security deposit for the due performance by the Company of the terms and conditions of a supply contract. There were no draws against these letters of credit during the three months ended March 31, 2019

23

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


12.
Stockholders Equity
Common Stock
As of March 31, 2019, there were 100,000,000 shares of common stock authorized, and 64,747,798 shares issued and outstanding. As of December 31, 2018, there were 100,000,000 shares of common stock authorized, and 63,676,229 shares issued and outstanding. The par value for common shares is $0.001 per share.
Preferred Stock
As of March 31, 2019 and December 31, 2018, there were 5,000,000 shares of preferred stock authorized, and zero shares issued and outstanding. The par value for preferred shares is $0.001 per share.
Stock Repurchase Program
From 2012 through 2018, the Company had a stock repurchase program in place pursuant to which the Company was authorized to repurchase shares of its common stock, in the open market or privately negotiated transactions, at times and prices considered appropriate by the Board of Directors depending upon prevailing market conditions and other corporate considerations. The timing and actual number of shares repurchased depend on a variety of factors including the timing of open trading windows, price, corporate and regulatory requirements and other market conditions. The program was discontinued at the end of 2018. The Company may or may not enter into a new stock repurchase program in the future.

Stock-Based Compensation
The Company follows FASB ASC 718-10, “Stock Compensation,” 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. ASC 718-10 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. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.
The per share weighted average fair value of stock options granted was $9.84 and $5.74 during the three months ended March 31, 2019 and 2018, 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:
 
Three Months Ended
 
March 31,
 
2019
 
2018
Dividend yield
0.0%
 
0.0%
Risk-free interest rate
2.49% - 2.57%
 
2.5% - 2.7%
Expected life (in years)
5
 
5
Historical volatility
43.62% - 43.85%
 
47.9% - 48.2%
A description of the methods used in the significant assumptions used to estimate the fair value of stock-based compensation awards follows:
Dividend yield – The Company uses 0% as it has never issued dividends and does not anticipate issuing dividends in the near term.
Risk-free interest rate – The Company uses the market yield on U.S. Treasury securities at five years with constant maturity, representing the current expected life of stock options in years.
Expected life – The Company uses historical data to estimate the expected life of a stock option.
Historical volatility – The Company uses a trailing five year from grant date to determine volatility.
Stock Option Plans
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 or other equity-based awards in respect of up to 5,850,000 shares of common stock. The 2000 Stock Incentive Plan (the “2000 Plan”) succeeded the 1998 Plan. Under the 2000 Plan, the options which had been outstanding under the 1998 Plan were incorporated in the 2000 Plan increasing the number of shares available for issuance under the 2000 Plan by approximately 4,150,000, thereby reserving for issuance 10,000,000 shares of common stock in the aggregate.

24

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The Company established the 2009 Stock Incentive Plan (as amended and restated, the “2009 Plan”) as a successor to the 2000 Plan. Under the 2009 Plan, the options which had been outstanding under the 2000 Plan were incorporated into the 2009 Plan and the Company increased the number of shares available for issuance under the plan by 6,000,000. The Company amended the 2009 Plan (the “Amended 2009 Plan”) effective June 7, 2012. The Amended 2009 Plan increased the number of shares authorized for issuance under the plan by an additional 4,250,000.
On June 2, 2017, the Company's Board of Directors amended and restated the Amended 2009 Plan effective April 30, 2017. The amended and restated plan increased the number of shares authorized for issuance under the plan by an additional 4,000,000, thereby reserving for issuance 27,817,744 shares of common stock in the aggregate. Options to acquire common stock granted thereunder have 10-year terms. As of March 31, 2019, approximately 2.6 million shares of common stock remained available for issuance under the Amended 2009 Plan (taking into account all option exercises and other equity award settlements through March 31, 2019).
On April 11, 2019, the Company's Board of Directors adopted the 2019 Stock Incentive Plan, subject to stockholder approval, to replace the Amended and Restated 2009 Plan, which will expire under its terms on June 9, 2019.
Employee Stock Purchase Plan
In June 2010, the Company’s stockholders approved the 2010 Employee Stock Purchase Plan with 1,000,000 shares of common stock initially reserved for issuance. Subject to stockholder approval, which was obtained on June 2, 2017, the Company's Board of Directors amended and restated the 2010 Employee Stock Purchase Plan effective April 30, 2017. The amended and restated plan increased the number of shares authorized for issuance under the plan by an additional 1,000,000, thereby reserving for issuance 2,000,000 shares of common stock in the aggregate. As of March 31, 2019, approximately 0.8 million shares of common stock remained available for issuance under the Employee Stock Purchase Plan (taking into account all share purchases through March 31, 2019).
On April 11, 2019, the Company's Board of Directors adopted the 2019 Employee Stock Purchase Plan subject to stockholder approval, to replace the Amended and Restated 2010 Employee Stock Purchase Plan which will expire under its terms in June 2020.
Inducement Plan
During January 2018, the Company established the Inducement Plan (the “2018 Plan”). Under the 2018 Plan, the Board of Directors can issue incentive stock options or nonqualified stock options or other equity-based awards in respect of up to 1,500,000 shares of common stock. On April 25, 2018, the Company's Board of Directors amended and restated the 2018 Plan (the "Amended 2018 Plan"). The Amended 2018 Plan increased the number of shares authorized for issuance under the plan by an additional 500,000 shares, and subsequently the Board of Directors has approved and ratified, effective as of July 31, 2018, October 29, 2018 and February 13, 2019, increases of the number of shares authorized for issuance under the Amended 2018 Plan by 500,000, 250,000 and 618,048 shares, respectively, constituting 3,368,048 shares of common stock in the aggregate being reserved for issuance pursuant to grants under the Amended 2018 Plan. As of March 31, 2019, approximately 0.2 million shares of common stock remained available for issuance under the Amended 2018 Plan (taking into account all option exercises and other equity award settlements through March 31, 2019).
Stock Option Activity
A summary of the Company’s stock option activity and weighted average exercise prices follows:
 
Stock Option Activity
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in thousands)
 
Options (in thousands)
 
Weighted
Average
Exercise Price
 
 
Balance outstanding at December 31, 2018
6,266

 
$
12.13

 
 
 
 
Granted
241

 
23.75

 
 
 
 
Exercised
(626
)
 
10.36

 
 
 
 
Cancelled or expired
(124
)
 
11.96

 
 
 
 
Balance outstanding at March31, 2019
5,757

 
$
12.81

 
6.73
 
$
93,297

Options vested and expected to vest
5,157

 
$
12.50

 
6.48
 
$
85,169

Options exercisable at March 31, 2019
3,093

 
$
11.38

 
4.97
 
$
54,556

The total fair value of stock options exercised during the three months ended March 31, 2019 was approximately $3.0 million. As of March 31, 2019, there was approximately $14.5 million of total unrecognized compensation cost related to nonvested

25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of approximately 2.6 years.
The following table summarizes information about outstanding and vested stock options as of March 31, 2019:
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
 
Number of Shares Outstanding (in thousands)
 
Weighted-Average Remaining Contractual Life (Years)
 
Weighted-Average Exercise Price
 
Number of Shares (in thousands)
 
Weighted-Average Exercise Price
$3.35 - $7.60
 
903

 
6.47
 
$
7.30

 
475

 
$
7.15

$7.95 - $10.01
 
655

 
6.35
 
9.33

 
535

 
9.35

$10.05 - $10.60
 
664

 
5.72
 
10.26

 
658

 
10.26

$11.33 - $12.32
 
360

 
7.06
 
11.81

 
176

 
11.77

$12.45 - $12.45
 
855

 
2.85
 
12.45

 
158

 
12.45

$12.46 - $13.59
 
643

 
9.38
 
13.30

 
643

 
13.30

$14.30 - $16.05
 
580

 
3.76
 
14.84

 
149

 
15.08

$16.35 - $21.05
 
621

 
8.72
 
17.76

 
299

 
17.46

$21.10 - $25.36
 
360

 
6.92
 
22.67

 

 

$25.95 - $25.95
 
116

 
9.82
 
25.95

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
5,757

 
6.91
 
$
12.81

 
3,093

 
$
11.38

Restricted Stock Unit Activity
A summary of the Company’s restricted stock units (“RSUs”) activity and weighted average exercise prices follows:
 
Restricted Stock Unit Activity
 
 
 
Number of Shares (in thousands)
 
Weighted Average
Grant Date Fair Value (Per Share)
 
Aggregate Fair Value (in thousands)
Balance outstanding at December 31, 2018
2,690

 
$
15.81

 
$

Awarded
386

 
25.07

 

Released
(415
)
 
12.18

 

Forfeited
(87
)
 
15.87

 

Non-vested and outstanding at March 31 2019
2,574

 
$
17.61

 
$
74,719

Expected to vest
1,816

 
$
16.80

 
$
52,686

RSUs granted to employees generally vest over a three to four-year period or upon achievement of certain performance conditions. In accordance with ASU 2017-09, as of March 31, 2019, total unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested RSUs was approximately $42.2 million and the weighted-average remaining vesting period was 2.8 years.
As of March 31, 2019, the Company accrued approximately $1.9 million in cash awards to be settled in shares of the Company's stock and recorded a corresponding expense, which is included as a component of stock-based compensation expense in the accompanying condensed consolidated financial statements for the three months ended March 31, 2019.
Stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations and cash flows was $7.2 million and $2.4 million for the three months ended March 31, 2019 and 2018, respectively.



26



13.
Restructuring
The Company’s restructuring costs relate to the wind-down of its legacy platform and severance costs associated with re-prioritizing and reallocating resources to focus on areas showing high growth potential within the Company's Business Segment. The expense associated with this restructuring was approximately $0.3 million and $0.2 million during the three months ended March 31, 2019 and 2018, respectively. The Company expects to incur additional restructuring costs through December 31, 2019. The restructuring liability was approximately $0.1 million as of March 31, 2019 and $1.0 million as of December 31, 2018. It is classified as accrued expenses and other current liabilities on the condensed consolidated balance sheets.
The following table presents the detail of the liability for the Company's restructuring charges for the periods presented (amounts in thousands):
 
March 31, 2019
 
December 31, 2018
Balance, Beginning of the year
$
977

 
$
2,338

Severance and other associated costs
279

 
4,468

Cash payments
(1,184
)
 
(5,829
)
Balance, End of period
$
72

 
$
977


The following table presents the detail of expenses for the Company's restructuring charges for the three months ended March 31, 2019 (amounts in thousands):
 
March 31, 2019
 
March 31, 2018
Severance and other associated costs
$
279

 
$
178

Total restructuring costs
$
279

 
$
178


14. Legal Matters
The Company previously filed an intellectual property suit against [24]7 Customer, Inc. in the Southern District of New York on March 6, 2014 seeking damages on the grounds that [24]7 reverse engineered and misappropriated the Company's technology to develop competing products and misused the Company's business information. On June 22, 2015, [24]7 Customer, Inc. filed suit against the Company in the Northern District of California alleging patent infringement. On December 7, 2015, [24]7 Customer Inc. filed a second patent infringement suit against the Company, also in the Northern District of California. On March 16, 2017, the New York case was voluntarily transferred and consolidated with the two California cases in the Northern District of California for all pre-trial purposes. Rulings by both the Court and the United States Patent Office in the Company's favor have invalidated the majority of [24]7 patents that were asserted in the patent cases. Trial for the Company's intellectual property and other claims asserted against [24]7 in the original litigation is currently set for September 3, 2019. The Company believes the claims filed by [24]7 are entirely without merit and intends to defend them vigorously.
The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where the Company assesses the likelihood of loss as probable.
From time to time, the Company is involved in or subject to legal, administrative and regulatory proceedings, claims, demands and investigations arising in the ordinary course of business, including direct claims brought by or against the Company with respect to intellectual property, contracts, employment and other matters, as well as claims brought against the Company’s customers for whom the Company has a contractual indemnification obligation. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matter as appropriate and in compliance with ASC 450. The accruals or estimates, if any, resulting from the foregoing analysis, are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, as applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.

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From time to time, third parties assert claims against the Company regarding intellectual property rights, privacy issues and other matters arising in the ordinary course of business. Although the Company cannot be certain of the outcome of any litigation or the disposition of any claims, nor the amount of damages and exposure, if any, that the Company could incur, the Company currently believes that the final disposition of all existing matters will not have a material adverse effect on our business, results of operations, financial condition or cash flows. In addition, in the ordinary course of business, the Company is also subject to periodic threats of lawsuits, investigations and claims. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
General

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that management believes are reasonable based upon the information available. We base these estimates on our historical experience, future expectations and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments that may not be readily apparent from other sources. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. These estimates and assumptions relate to estimates of the carrying amount of goodwill, intangibles, depreciation, stock based-compensation, valuation allowances for deferred income taxes, accounts receivable, the expected term of a customer 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.

Overview
  LivePerson, Inc. ("LivePerson," the "Company," "we" or "our") makes life easier by transforming how people communicate with brands. During the past decade, the consumer has made the mobile device the center of their digital lives, and they have made mobile messaging the center of communication with friends, family and peers. Our technology enables consumers to connect with businesses through these same preferred conversational interfaces, including Facebook Messenger, WhatsApp, Apple Business Chat, Google Rich Business Messenger and Alexa. These messaging conversations harness human agents, bots and Artificial Intelligence (AI) to power convenient, personalized and content-rich journeys across the entire consumer lifecycle, from discovery and research, to sales, service and support, and even marketing and brick and mortar engagements. For example, consumers can look up product info like ratings, images and pricing, search for stores, see products in the store, schedule appointments, apply for credit, approve repairs, make purchases or payments - all without ever leaving the messaging channel. We call these AI and human-assisted conversational experiences over messaging Conversational Commerce.
LiveEngage, our enterprise-class, cloud-based platform, was designed for Conversational Commerce, enabling businesses to securely deploy messaging, coupled with bots and AI, at scale for brands with tens of millions of customers and many thousands of customer care agents. LiveEngage powers conversations across each of a brand’s primary digital channels, including mobile apps, mobile and desktop web browsers, short message service (SMS), social media and third-party consumer messaging platforms. Brands can also use LiveEngage to message consumers when they dial a 1-800 number instead of having them navigate interactive voice response systems (IVRs) and wait on hold.
Our robust, cloud-based suite of rich mobile messaging and real-time chat offerings features intelligent routing and capacity mapping, queue prioritization, customer sentiment, real-time analytics and reporting, content delivery, Payment Card Industry (PCI) compliance, cobrowsing and a sophisticated proactive targeting engine. With LiveEngage, agents can manage all conversations with consumers through a single console interface, regardless of which disparate messaging endpoints the consumers originate from: i.e., WhatsApp, Line, Apple Business Chat, IVR, or Google Home. An extensible application programming interface (API) stack facilitates a lower cost of ownership by facilitating robust integration into back-end systems, as well as enabling developers to build their own programs and services on top of the platform. More than three dozen APIs are available on LiveEngage.
LiveEngage also features Maven, a robust AI engine that was custom designed for Conversational Commerce. Maven, announced in December 2018, puts the power of bot development, training and management into the hands of the contact center and its agents, the teams most familiar with how to structure sales and service conversations to drive successful outcomes. The platform enables what the we call “the tango” of humans, AI and bots, whereby human agents act as bot managers, overseeing AI-powered conversations and seamlessly stepping into the flow when a personal touch is needed. Through Maven Assist, agents become ultra-efficient, leveraging the AI engine to serve up relevant content, define next-best actions and take over repetitive transactional work, so that the agent can focus on relationship building. By seamlessly integrating LiveEngage with Maven, as well as third-party bots, the platform provides businesses with a comprehensive view of all AI-based and human-based conversations from a single console.
Complementing LiveEngage are teams of technical, solutions and consulting professionals that have developed deep domain expertise in Conversational Commerce across industries and messaging endpoints. We are positioned as an authority in Conversational Commerce, publishing a proprietary Conversational Quotient™ Index that measures each customer across multiple key indicators to ascertain their level of conversational maturity. Each business is then benchmarked against industry peers to determine their relative progression. We  have developed a Transformation Model that is introduced to existing and

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prospective customers to help guide them on their journeys from legacy voice, email and chat solutions to modern conversational ones powered by messaging and AI. Our products, coupled with our domain knowledge, industry expertise and professional services, have been proven to maximize the effectiveness of Conversational Commerce and deliver measurable return on investment.
As a “cloud computing” or software-as-a-service (SaaS) provider, LivePerson provides solutions on a hosted basis. This model offers significant benefits over premise-based software, including lower up-front costs, faster implementation, lower total cost of ownership, scalability, cost predictability, and simplified upgrades. Organizations that adopt a fully-hosted, multi-tenant architecture that is maintained by LivePerson eliminate the majority of the time, server infrastructure costs, and IT resources required to implement, maintain, and support traditional on-premise software.
More than 18,000 businesses, including HSBC, Orange, and The Home Depot use our Conversational Commerce solutions to orchestrate humans and AI, at scale, and create a convenient, deeply personal relationship.
Our solutions benefit organizations of all sizes conducting business or communicating with consumers through mobile and online messaging and chat. We plan to continue to focus on key target markets: consumer/retail, telecommunications, financial services, travel/hospitality, technology and automotive, within the United States and Canada, Latin America, Europe and the Asia-Pacific region.
We are organized into two operating segments: Business and Consumer. The Business segment enables brands to leverage LiveEngage’s sophisticated intelligence engine to connect with consumers through an integrated suite of mobile and online business messaging technologies. The Consumer segment facilitates online transactions between independent service providers (“Experts”) and individual consumers (“Users”) seeking information and knowledge for a fee via mobile and online messaging.
In order to sustain growth in these segments, our strategy is to expand our position as the leading provider of online and mobile messaging solutions that transform how people communicate with brands. To accomplish this, we are focused on the following current initiatives:
The key elements of LivePerson’s business solutions strategy include:
Build awareness and drive adoption of Conversational Commerce. LivePerson brought our first customer live on messaging in June 2016. Since that time, we have been focused on building awareness for Conversational Commerce and driving adoption. We have educated businesses on the financial and operational transformation that occurs when a contact center shifts to an asynchronous messaging environment, where the consumer controls the pace of the conversation, which can last minutes, hours or days, from a synchronous call or chat center, where conversations occur in real-time and have a distinct start and end.
A key component of our industry awareness marketing strategy has been to hold multiple global customer summits each year that target executives from enterprise customers and prospects, and feature a key theme within Conversational Commerce, such as Apple Business Chat, Google Rich Business Messenger, IVR deflection or AI. LivePerson customers are the centerpoint of these summits, presenting why they chose LivePerson for Conversational Commerce, how they achieved success, and what type of ROI they have realized. Each attendee then receives a blueprint for how they can achieve similar outcomes. We have found this strategy to drive strong results for LivePerson, as we have seen a greater than 40% conversion rate on opportunities that were created or advanced as part of the customer summits. By year end 2018, we had brought more than 200 customers live on messaging and increased adoption within our enterprise customers to more than 40%. In addition, more than 50% of messaging conversations had automation attached. We will continue to focus on building awareness for Conversational Commerce and driving adoption of messaging and AI across our customer base.
Increase volumes on LiveEngage by deploying a broad messaging ecosystem and expanding customer use cases. Our strategy is to drive higher volumes on LiveEngage by going both wide across messaging endpoints and deep across consumer use cases. LivePerson offers a platform usage pricing model, where customers are offered access to our entire suite of messaging technologies across their entire agent pool for a pre-negotiated cost per interaction. We believe that over time this model will drive higher revenue for LivePerson by reducing barriers to adoption of new messaging endpoints and use cases.
In order to go wide across messaging endpoints, it is imperative that LiveEngage integrates to all of the messaging apps that consumers prefer to use for communication. For example, if a consumer is an avid WhatsApp user, and a brand only offers SMS as a messaging option, that consumer may be reluctant to try messaging the brand. Therefore, a key strategy of our has been to build one of the industry’s broadest ecosystems of messaging endpoints. In June 2016, we launched with In-App messaging. In 2017, we introduced Facebook Messenger, SMS, Web messaging and IVR deflection integrations. In 2018, we added Apple Business Chat, Google Rich Business Messenger, Line, WhatsApp, Alexa, Google Home, Google Ad Lingo and Twitter.
Each channel added opens the door to hundreds of millions of new consumers, providing brands a greater opportunity to shift share away from their legacy contact center channels into messaging. LivePerson makes the management of all these disparate channels seamless to the brand. The LiveEngage intelligent routing, queuing and prioritization software orchestrates

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these conversations at scale, regardless of which messaging endpoint they originated from, so that human and bot agents can engage with all customers through just one console.
In order to go deep across customer use cases, we are focused on extending LiveEngage beyond just taking share of the 270 billion calls made to customer service 1-800 numbers each year, into sales, marketing and brick and mortar conversations. For example, in 2018, a home improvement retailer launched a bot that autonomously sells millions of dollars of grills; a leading global concessions manager launched a service that lets patrons in a sports arena order beverages to their seats through Apple Business Chat; and a telecommunications company used LiveEngage to drive pre-sales for an iPhone series launch.
We believe that this strategy has influenced LivePerson’s enterprise and mid-market revenue retention rate, (the trailing-twelve-month change in total revenue from existing customers after upsells, downsells and attrition) which was greater than 110% in 2018. The benefit can also be seen in LivePerson’s average revenue per user (ARPU) for our enterprise and mid-market customers, which increased more than 25% in 2018 to approximately $285,000 from approximately $220,000 in 2017. For this same customer set, when examining only the subset that have adopted messaging, the ARPU in 2018 increased to approximately $500,000. When examining customers that have adopted at least three endpoints, the APRU in 2018 increased into the low seven figures. We believe these ARPU trends are a clear indication of how LivePerson’s strategy to drive messaging adoption has successfully influenced our revenue growth by taking share from legacy communication channels. We will continue to focus on adding new messaging endpoints and driving higher adoption of each of these channels within our customer base.
Globalize R&D to attract the industry’s best AI, machine learning and conversational talent. We believe that AI and machine learning are critical to successfully scaling Conversational Commerce, and that in order to develop the industry’s leading technology, we need to open offices where the best talent is located. To spearhead that globalization effort, in 2018, LivePerson recruited Alex Spinelli, key architect of the Alexa Operating System at Amazon.com, as our Global CTO. Under Mr. Spinelli’s leadership, we opened an Advanced Technology Center in Seattle, Washington, in 2018, expanded our Mannheim, Germany development center, and added key development talent through the acquisitions of BotCentral in Mountain View, California and Conversable in Austin, Texas. We added more than 70 machine learning, AI and Conversational Commerce developers in 2018, recruiting top talent from firms such as Nike, Amazon.com, Microsoft and Target. We expect to continue adding industry leading development talent across our global offices in 2019.
Bring to market best-in-class AI and machine learning technologies designed for Conversational Commerce. We believe that over the past few years many first generation AI and bots have created frustrating experiences for consumers and businesses alike, which in turn has eroded trust in automation. Many of these solutions have proven difficult to build and scale, and have been limited by stand alone implementations that lacked the measurement, reporting and human oversight of Conversational Commerce platforms such as LiveEngage. In December 2018, LivePerson announced Maven, a patent pending AI engine that is designed to overcome these shortcomings and help brands rapidly bring to market conversational AI that can scale to millions of interactions, while increasing customer satisfaction and conversion rates.
Unlike alternative solutions designed solely for IT departments, Maven was built to be used by developers and contact center agents. By putting the power of conversational design and bot management in the hands of contact center agents, Maven gives brands the ability to leverage the employees closest to the customer, those who are most versed in the voice of the brand, and with the most expertise in how to craft successful outcomes for customer service and sales journeys.
Some of the key innovations behind Maven include:
bot building software that is based on dialogue instead of workflow or code, so non-technical employees like contact center agents can design automations
the ability to bootstrap conversations with existing transcripts, reducing design effort and speeding time to market
the establishing of contact center agents as bot managers, ensuring that every conversation is safeguarded by a human and that agents are continuously training the AI to be smarter and drive more successful outcomes
powerful Assist technology that multiplies the efficiency of agents by analyzing intents in real time and then suggesting next best actions, predefined content, and bots that can take over transactional work
pre-built templates for target verticals that provide out of the box support for the top intents and back-end integrations
third-party AI NLU integration, so customers aren't boxed into one vendor
AI analytics and reporting tailored to Conversational Commerce

Our strategy is to continue to enhance the Maven AI engine and related products, leveraging our global R&D footprint and substantial library of mobile and online conversational data, with the aim of increasing agent efficiency, decreasing customer care costs, improving the customer experience and increasing customer lifetime value.