<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number: 0-30141
LivePerson, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3861628
- ---------------------------------------- ------------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
462 Seventh Avenue, 10th Floor
New York, New York 10018-7606
- ------------------------------------------ ------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 277-8950
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
-------------- ------------
As of April 12, 2000, there were 29,358,869 shares of the issuer's
common stock outstanding.
<PAGE>
LIVEPERSON, INC.
MARCH 31, 2000
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION................................................................... 1
ITEM 1. CONDENSED FINANCIAL STATEMENTS.......................................................... 1
Condensed Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999......... 1
Unaudited Condensed Statements of Operations for the three months ended
March 31, 2000 and 1999............................................................... 2
Unaudited Condensed Statements of Cash Flows for the three months ended
March 31, 2000 and 1999............................................................... 3
Notes to Unaudited Interim Condensed Financial Statements............................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 34
PART II. OTHER INFORMATION...................................................................... 34
ITEM 1. LEGAL PROCEEDINGS....................................................................... 34
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................... 34
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................... 35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 35
ITEM 5. OTHER INFORMATION....................................................................... 36
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K......................................................... 36
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
LIVEPERSON, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 8,901 $14,944
Marketable securities .................................. 15,058 --
Accounts receivable, net................................ 637 465
Prepaid expenses and other current assets............... 1,021 597
-------- -------
Total current assets................................ 25,617 16,006
Property and equipment, net................................. 7,506 2,457
Security deposits........................................... 254 487
Deferred offering costs..................................... 1,590 140
Deferred costs, net......................................... 885 480
-------- -------
Total assets........................................ $ 35,852 $19,570
======== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable........................................ $ 4,112 $ 1,776
Accrued expenses........................................ 2,336 689
Deferred revenue........................................ 398 161
-------- -------
Total current liabilities........................... 6,846 2,626
-------- -------
Commitments and contingencies
Series C redeemable convertible preferred stock, $.001 par
value; 5,132,433 shares authorized, issued and
outstanding at March 31, 2000 and December 31, 1999;
with an aggregate liquidation preference of $18,990....... 18,990 18,990
Series D redeemable convertible preferred stock, $.001 par
value; 3,157,895 shares authorized, issued and outstanding
at March 31, 2000; with an aggregate liquidation
preference of $18,000; no shares authorized, issued and
outstanding at December 31, 1999.......................... 18,000 --
Stockholders' deficit:
Series A convertible preferred stock, $.001 par value;
2,541,667 shares authorized, issued and outstanding at
March 31, 2000 and December 31, 1999; with an aggregate
liquidation preference of $3,000....................... 3 3
Series B convertible preferred stock $.001 par value;
1,142,857 shares authorized, issued and outstanding
at March 31, 2000 and December 31, 1999; with an
aggregate liquidation preference of $1,600............. 1 1
Common stock, $.001 par value; 100,000,000 shares
authorized, 7,377,596 shares issued and outstanding
at March 31, 2000; 30,000,000 shares authorized,
7,092,000 shares issued and outstanding at
December 31, 1999...................................... 7 7
Additional paid-in capital.............................. 31,866 12,420
Deferred compensation................................... (17,454) (4,644)
Accumulated deficit..................................... (22,407) (9,833)
-------- -------
Total stockholders' deficit......................... (7,984) (2,046)
-------- -------
Total liabilities and stockholders' deficit......... $ 35,852 $19,570
======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS.
1
<PAGE>
LIVEPERSON, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
---------- -----------
<S> <C> <C>
Revenue:
Service revenue......................................... $ 774 $ 15
Programming revenue..................................... -- 9
---------- -----------
Total revenue....................................... 774 24
---------- -----------
Operating expenses:
Cost of revenue......................................... 1,190 24
Product development..................................... 1,767 139
Sales and marketing, exclusive of $756 and $0 reported
below as non-cash expenses............................ 3,425 51
General and administrative, exclusive of $5,200 and $50
reported below as non-cash expenses................... 1,300 158
Non-cash expenses....................................... 5,956 50
---------- -----------
Total operating expenses............................ 13,638 422
---------- -----------
Loss from operations........................................ (12,864) (398)
---------- -----------
Other income (expense):
Interest income......................................... 291 20
Interest expense........................................ -- (1)
---------- -----------
Total other income (expense), net................... 291 19
---------- -----------
Net loss.................................................... (12,573) (379)
Non-cash preferred stock dividend........................... 18,000 --
---------- -----------
Net loss attributable to common stockholders................ $ (30,573) $ (379)
========== ===========
Basic and diluted net loss per common share................. $ (4.15) $ (0.05)
========== ===========
Weighted average shares outstanding used in basic and
diluted net loss per common share calculation............. 7,362,000 7,092,000
========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS.
2
<PAGE>
LIVEPERSON, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(12,573) $ (379)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash expenses................................... 5,968 50
Depreciation........................................ 240 --
Provision for doubtful accounts..................... 20 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (192) (18)
Prepaid expenses and other current assets............... (424) --
Security deposits....................................... 233 --
Accounts payable........................................ 2,336 95
Accrued expenses........................................ 1,647 28
Deferred revenue........................................ 237 4
-------- -------
Net cash used in operating activities............... (2,508) (220)
-------- -------
Cash flows from investing activities:
Purchases of property and equipment..................... (5,289) --
Purchase of investment securities available for sale.... (15,058) --
-------- -------
Net cash used in investing activities............... (20,347) --
-------- -------
Cash flows from financing activities:
Net proceeds from issuance of Series A, B, C and D
preferred stock and warrants to acquire common
stock.................................................. 17,918 3,002
Proceeds from issuance of note payable.................. -- (100)
Net proceeds from issuance of common stock in connection
with the exercise of warrants and options.............. 344 --
Deferred offering costs................................. (1,450) --
-------- -------
Net cash provided by financing activities........... 16,812 2,902
-------- -------
Net (decrease) increase in cash and cash
equivalents......................................... (6,043) 2,682
Cash and cash equivalents at the beginning of the
period................................................. 14,944 107
-------- -------
Cash and cash equivalents at the end of the period...... $ 8,901 $ 2,789
======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
LIVEPERSON, INC.
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(A) SUMMARY OF OPERATIONS
LivePerson, Inc. (the "Company" or "LivePerson"), was incorporated in the
State of Delaware in 1995 under the name of Sybarite Interactive Inc. The
Company, which commenced operations in 1996, changed its name to Live Person,
Inc. in January 1999 and to LivePerson, Inc. in March 2000. The Company
offers the LivePerson service, which facilitates real-time sales and customer
service for companies doing business on the Internet.
The Company generates revenues from the sale of the LivePerson service.
Prior to November 1998, when the LivePerson service was introduced, the
Company provided services primarily related to Web-based community
programming and media design.
(B) UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying interim condensed financial statements as of March 31,
2000 and for the three months ended March 31, 2000 and 1999 are unaudited. In
the opinion of management, the unaudited interim condensed 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 financial position of
LivePerson, Inc. as of March 31, 2000 and the results of operations and cash
flows for the interim periods ended March 31, 2000 and 1999. The financial
data and other information disclosed in these notes to the condensed
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 balance sheet at December 31, 1999 has been derived from
audited financial statements at that date.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. These unaudited interim condensed financial
statements be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended December 31, 1999, included in
the Company's Registration Statement on Form S-1 declared effective by the
Securities and Exchange Commission on April 6, 2000.
(C) INITIAL PUBLIC OFFERING
On April 12, 2000, the Company consummated its initial public offering
(the "IPO"), which resulted in the issuance of 4,000,000 shares of its common
stock at $8.00 per share and realized net proceeds to the Company before
expenses of $29,760.
(D) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(E) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities, with original maturities
of three months or less when acquired, to be cash equivalents.
4
<PAGE>
LIVEPERSON, INC.
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) LETTERS OF CREDIT
The Company is contingently liable under standby letters of credit totaling
approximately $2,300 at March 31, 2000. Management does not expect any
material losses to result from these off-balance-sheet instruments because
performance is not expected to be required, and therefore, is of the opinion
that the fair value of these instruments is zero.
(G) REVENUE RECOGNITION
Prior to November 1998, when the LivePerson service was introduced, the
Company generated revenue from services primarily related to Web-based community
programming and media design. Revenues from such services are recognized upon
completion of the project provided that no significant Company obligations
remain and collection of the resulting receivable is probable.
During 1998, the Company began offering the LivePerson service. The
LivePerson service facilitates real-time sales and customer service for
companies doing business on the Internet. The Company charges an initial
non-refundable set-up fee as well as a monthly fee for each operator access
account ("seat") using the LivePerson service.
The initial set-up fee principally represents customer service, training and
other administrative costs related to the deployment of the LivePerson service.
Such fees are recorded as deferred revenue and recognized over a period of
24 months, representing the Company's current estimate of the expected term of a
client relationship. This estimate may change in the future.
The Company also records revenue based upon a monthly fee charged for each
seat using the LivePerson service provided that no significant Company
obligations remain and collection of the resulting receivable is probable. The
Company recognizes monthly service revenue fees as services are provided. The
Company's service agreements typically have no termination date and are
terminable by either party upon 30 to 90 days' notice without penalty. The
Company does not charge an additional set-up fee if an existing client adds more
seats.
5
<PAGE>
LIVEPERSON, INC.
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash and cash equivalents, accounts
receivable, accounts payable and note payable. At December 31, 1999 and
March 31, 2000, the fair value of these instruments approximated their
financial statement carrying amount because of the short-term maturity of
these instruments. The Company has not experienced any significant credit
loss to date. No single customer accounted for or exceeded 10% of
either revenue or accounts receivable in 1999 or in the quarter ended
March 31, 2000.
(I) BASIC AND DILUTED NET LOSS PER SHARE
The Company calculates earnings per share in accordance with the provisions
of SFAS No. 128, "Earnings Per Share", and the Securities and Exchange
Commission Staff Accounting Bulletin No. 98. Under SFAS No. 128, basic EPS
excludes dilution for common stock equivalents and is computed by dividing
income or loss available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock and resulted in the issuance of
common stock. Diluted net loss per share is equal to basic loss per share since
all common stock equivalents are anti-dilutive for each of the periods
presented.
Diluted net loss per common share for the period ending March 31, 1999
and March 31, 2000 does not include the effects of options to purchase
786,060 and 5,574,405 shares of common stock, respectively, 468,749 and
542,968 common stock warrants, respectively, and 3,812,499 shares of Series A
and an aggregate of 17,962,273 shares of Series A, Series B, Series C and
Series D convertible preferred stock on an "as if" converted basis,
respectively, as the effect of their inclusion is anti-dilutive during each
period. There were no dilutive securities outstanding in 1997.
6
<PAGE>
LIVEPERSON, INC.
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) STOCK SPLIT
Effective March 8, 2000, the Company authorized and implemented a 3-for-2
split of shares of the Company's common stock in the form of a common stock
dividend. Accordingly, all common share and per common share information,
warrants and options, in the accompanying financial statements has been
retroactively restated to reflect the effect of the stock split.
(K) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities," which provides guidance on the financial reporting of
start-up costs. SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. SOP 98-5 was adopted by the Company on
January 1, 1999. As the Company had not capitalized such costs, the adoption of
SOP 98-5 did not have an impact on the consolidated financial statements of the
Company.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance for
determining whether computer software is internal-use software and on accounting
for the proceeds of computer software originally developed or obtained for
internal use and then subsequently sold to the public. It also provides guidance
on capitalization of the costs incurred for computer software developed or
obtained for internal use. The Company adopted SOP 98-1 in the first quarter of
1999, the effect of which did not have a material effect on the financial
statements.
7
<PAGE>
LIVEPERSON, INC.
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. Subsequently, the FASB
issued SFAS No. 137 which deferred the effective date of SFAS No. 133. SFAS
No. 137 is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company has not yet analyzed the impact of this pronouncement
on its financial statements.
FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation" ("FIN No.44") provides guidance for applying
APB Opinion No. 25, "Accounting for Stock Issued to Employees." With certain
exceptions, FIN No. 44 applies prospectively to new awards, exchanges of
awards in a business combination, modifications to outstanding awards and
changes in grantee status on or after July 1, 2000. The Company does not
believe that the implementation of FIN No. 44 will have a significant effect
on its results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB No. 101") which
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company will be required to adopt the accounting provisions of SAB No. 101,
no later than the second quarter of 2000. The Company does not believe that
the implementation of SAB No. 101 will have a significant effect on its
results of operations.
(2) BALANCE SHEET COMPONENTS
Property and equipment is stated at cost and is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
Computer equipment and software.................... $7,305 $2,367
Furniture and equipment............................ 539 188
------ ------
7,844 2,555
Less accumulated depreciation...................... 338 98
------ ------
Total.......................................... $7,506 $2,457
====== ======
</TABLE>
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- -------------
<S> <C> <C>
Professional services and consulting fees.......... $1,792 $554
Sales commissions.................................. 181 68
Other.............................................. 363 67
------ ----
Total.......................................... $2,336 $689
====== ====
</TABLE>
Prepaid expenses and other current assets at March 31, 2000 and at
December 31, 1999 principally included prepayments for various advertising and
promotional activities.
8
<PAGE>
LIVEPERSON, INC.
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(3) CAPITALIZATION
The Company had 30,000,000 shares of common stock authorized and 9,000,000
shares of preferred stock authorized as of December 31, 1999. On January 27,
2000, the Company increased the number of its authorized shares of common stock
to 35,000,000 and the number of its authorized shares of preferred stock to
12,274,852. On March 8, 2000, the Company increased the number of its authorized
shares of common stock to 100,000,000.
In January 2000, LivePerson issued an aggregate of 3,157,895 shares of
Series D Redeemable Convertible preferred stock ("Series D") at $5.70 per
share. Total proceeds, net of offering costs of $100, amounted to $17,900.
The difference between the price of the Series D on an as if converted basis
of $3.80 and $11.70 (the fair value on the date of issuance), or $7.90,
multiplied by the number of shares of Series D on an as if converted basis
represents the intrinsic value of the beneficial conversion feature, which
totaled $37,421. However, as the intrinsic value of the beneficial conversion
feature is greater than the $18,000 in gross proceeds received from the
Series D preferred stock issuance, the amount of the discount attributed to
the beneficial conversion feature is limited to the $18,000 of gross proceeds
received. The $18,000 beneficial conversion feature was recorded in the
quarter ended March 31, 2000 as a non-cash preferred stock dividend because
the Series D convertible preferred stock was, at the time it was issued,
immediately convertible at the option of the preferred stockholders. The
$18,000 non-cash dividend increased the Company's net loss attributable to
common stockholders for the quarter ended March 31, 2000 by the same amount.
During the period from January 1, 2000 through March 31, 2000, 175,781
warrants to purchase common stock at an exercise price of $1.60 per share
were exercised.
Upon the closing of the IPO on April 12, 2000, 2,541,667, 1,142,857,
5,132,433 and 3,157,895 shares of Series A, Series B, Series C and Series D
convertible preferred stock, respectively, representing all of the outstanding
shares of the convertible preferred stock on that date, automatically converted
at a ratio of two shares of preferred stock for three shares of common stock,
into an aggregate of 17,962,273 shares of common stock.
9
<PAGE>
LIVEPERSON, INC.
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) STOCK OPTIONS
During 1998, the Company established the Stock Option and Restricted Stock
Purchase Plan (the "1998 Plan"). Under the 1998 Plan, the Board of Directors may
issue incentive stock options or nonqualified stock options to purchase up to
5,850,000 shares of common stock.
A summary of the Company's stock option activity and weighted average
exercise prices is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options outstanding at December 31, 1997.................... -- --
Options granted............................................. 197,100 $0.67
Options cancelled........................................... -- --
--------- -----
Options outstanding at December 31, 1998.................... 197,100 $0.67
Options granted............................................. 3,496,245 $1.37
Options cancelled........................................... (81,000) $0.94
--------- -----
Options outstanding at December 31, 1999.................... 3,612,345 $1.33
Options granted............................................. 2,288,625 $4.33
Options exercised........................................... (109,815) $0.67
Options cancelled........................................... (216,750) $1.01
--------- -----
Options outstanding at March 31, 2000....................... 5,574,405 $2.61
========= =====
Options exercisable at December 31, 1998.................... -- --
Options exercisable at December 31, 1999.................... 479,960 $1.09
========= =====
Options exercisable at March 31, 2000....................... 1,508,788 $2.06
========= =====
</TABLE>
10
<PAGE>
LIVEPERSON, INC.
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) STOCK OPTIONS (CONTINUED)
During May 1999, the Company issued an option to purchase 94,500 shares
of common stock at an exercise price of $1.60 per share to a client in
connection with an agreement by the Company to provide services to the client
for a two-year period. The Company is receiving subscription revenue from the
client over the two-year period based on the number of seats the client is
using. There is no minimum guarantee. This option originally provided that it
would vest in or before May 2001 if the client met certain defined revenue
targets and was exercisable for a period of 3 years from the date of grant.
The Company accounted for this option in accordance with Emerging Issues Task
Force Abstract No. 96-18, "Accounting for Equity Instruments That are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services." Pursuant to EITF 96-18, the Company valued the option at each
balance sheet date using a Black-Scholes pricing model using a volatility
factor of 50%, a $1.60 per share exercise price and the then fair value of
the Company's common stock as of each balance sheet date. The $566 value
ascribed to the option reflects the market value at December 31, 1999 and has
been recorded as deferred cost on the Company's December 31, 1999 balance
sheet. The value ascribed to this option was adjusted at each balance sheet
date to bring the total deferred cost recognized up to the then current fair
value. This cost is being ratably amortized over the two-year service
agreement, as the Company believed that the achievement of the revenue
targets was probable. As a result, the Company has amortized $86 of the
deferred costs as of December 31, 1999, of which $24 has been offset against
the $27 of revenue recognized from the client, and the remaining $62 of sales
and marketing expense is reflected as a non-cash expense in the Company's
1999 statement of operations. In February 2000, the Company amended the
option agreement with the client whereby the option became fully vested and
immediately exercisable. However, the client is precluded from selling the
underlying common stock until the earlier of five years or, if certain
revenue targets are met, May 19, 2001. The value ascribed to the option at
the time the option agreement was amended, using a Black-Scholes pricing
model, was $1,014, which is being ratably amortized over the remaining
service period of approximately 15 months because the vesting of the options
does not affect the Company's obligation under the service agreement. In
addition, the ratable amortization of the remaining deferred cost of $1,014
will be recorded as a reduction of the revenue recognized from the client,
with any excess amortization recorded as sales and marketing expense which
will be reflected as a non-cash expense in the Company's statement of
operations. The Company amortized $129 of the deferred costs during the
three months ended March 31, 2000, of which $12 was offset against the
$12 of revenue recognized from the client, and the remaining $117 of
sales and marketing expense is reflected as a non-cash expense in the
Company's March 31, 2000 Statement of Operations.
11
<PAGE>
LIVEPERSON, INC.
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) STOCK OPTIONS (CONTINUED)
During 1999 and the quarter ended March 31, 2000, the Company granted
stock options to purchase 5,690,370 shares of common stock at a weighted
average exercise price of $2.55, certain of which were granted at less than
the deemed fair value of the common stock at the date of grant. For the year
ended December 31, 1999 and the quarter ended March 31, 2000, the Company
recorded deferred compensation of approximately $6,233 and $18,010,
respectively, in connection with these options. These amounts are presented
as deferred compensation within the financial statements and will be
amortized over the vesting period, typically three to four years, of the
applicable options. The Company amortized $1,589 of deferred compensation for
the year ended December 1999 and $5,200 for the quarter ended March 31, 2000.
The Company expects to amortize the following amounts of deferred
compensation relating to options granted in 1999 and 2000 as follows:
2000-$14,475, including the $5,200 that was recorded in the first quarter;
2001-$4,907; 2002-$2,475; and 2003-$797.
The Company recorded an additional $639 of non-cash expense during the first
quarter of 2000 in connection with the vesting of options pursuant to an
employee severance agreement.
(5) COMMITMENTS AND CONTINGENCIES
In the first quarter of 2000, the Company entered into three additional
leases for office space. The lease for the Company's San Francisco office
space, entered into in February 2000, provides for annual aggregate payments
of $275. The security deposit for this lease is approximately $24. The
Company also entered into two subleases for approximately 8,000 and 4,000
square feet, respectively, in New York City expiring in September 2000,
providing for annual aggregate payments of $238 and $182, respectively. In
March 2000, the Company entered into a lease for an aggregate of
approximately 83,500 square feet on two floors at a location in New York
City. The lease with respect to one floor, consisting of approximately 40,500
square feet, commenced in April 2000, at a rent of approximately $1,400 per
year in the first three years, $1,500 per year in years four through seven
and $1,600 per year in years eight through ten. The related security deposit
is $2,000 for the first three years, $1,300 for years four through seven and
$670 for years eight through ten. The other floor consists of approximately
43,000 square feet, and the lease term relating to that floor commences in
March 2001, at a rent of approximately $1,500 per year in the first three
years, $1,600 per year in years four through seven and $1,700 per year in
years eight through ten. The related security deposit is $2,200 for the first
three years, $1,500 for years four through seven and $747 for years eight
through ten. At our option, we provided the security deposit by a letter of
credit.
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LIVEPERSON, INC.
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SUBSEQUENT EVENTS
Upon the consummation of the Company's initial public offering on April 12,
2000, the Company authorized the issuance of 5,000,000 shares of preferred
stock.
The Company established a successor to the 1998 Plan, the 2000 Stock
Incentive Plan (the "2000 Plan"). Under the 2000 Plan, the options which had
been outstanding under the 1998 Plan were incorporated into the 2000 Plan and
the Company increased the number of shares available for issuance under the
plan by approximately 4,150,000, thereby reserving for issuance 10,000,000
shares of Common Stock in the aggregate. Options to acquire common stock
granted thereunder will have 10 year terms.
The Company adopted the 2000 Employee Stock Purchase Plan with 450,000
shares of common stock initially reserved for issuance.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ TOGETHER WITH OUR CONSOLIDATED FINANCIAL STATEMENTS
AND THE RELATED NOTES, WHICH APPEAR ELSEWHERE IN THIS QUARTERLY REPORT. THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT OUR
CURRENT PLANS, ESTIMATES AND BELIEFS AND INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE
THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS QUARTERLY REPORT, PARTICULARLY IN
THE SECTION ENTITLED "--RISK FACTORS THAT MAY AFFECT FUTURE RESULTS."
OVERVIEW
LivePerson is a provider of technology that facilitates real-time sales and
customer service for companies doing business on the Internet. We are an
application service provider, and we offer our proprietary real-time interaction
technology as an outsourced service. We currently generate revenue from the sale
of our LivePerson service, which enables our clients to communicate directly
with Internet users via text-based chat. Our clients can respond to Internet
user inquiries in real time, and can thereby enhance their Internet users'
online shopping experience.
Our business was incorporated in the State of Delaware in November 1995
under the name Sybarite Interactive Inc.; however, we did not commence
operations until January 1996. We had no significant revenue until 1997, when we
began to generate revenue from services primarily related to Web-based community
programming and media design.
In 1998, we shifted our core business focus to the development of the
LivePerson service and phased out our prior programming efforts, which last
generated revenue in December 1999. We introduced the LivePerson service in
November 1998.
In January 2000, we completed a private placement of 3,157,895 shares of
our series D redeemable convertible preferred stock with an affiliate of, and
other entities associated with, Dell Computer Corporation and with NBC
Interactive Media, Inc. (a division of NBC) at a purchase price of $5.70 per
share. We received net proceeds of approximately $17.9 million from this
private placement. Our series D redeemable convertible preferred stock
converted, at a two-for-three ratio, into 4,736,842 shares of common stock
upon the closing of our initial public offering on April 12, 2000, together
with our other outstanding convertible preferred stock. In connection with
the issuance of our series D redeemable convertible preferred stock, we
recorded a non-cash preferred stock dividend of $18.0 million, which relates
to the beneficial conversion feature associated with such preferred stock.
The amount of this dividend is limited to the gross proceeds received by us
in connection with the sale of our series D convertible preferred stock and
was recorded in the first quarter of 2000 because the series D convertible
preferred stock was, at the time it was issued, immediately convertible at
the option of the holder.
REVENUE
With respect to the LivePerson service, our clients pay us an initial
non-refundable set-up fee, as well as a monthly fee for each seat. Our set-up
fee is intended to recover certain costs incurred by us (principally customer
service, training and other administrative costs) prior to deployment of our
service. Such fees are recorded as deferred revenue and recognized over a period
of 24 months, representing the estimated expected term of a client relationship.
As a result of recognizing set-up fees in this manner, combined with the fact
that we have more seats on an aggregate basis than clients, in 1999 and the
quarter ended March 31, 2000, revenue attributable to our monthly service fee
accounted for 95% and 94%, respectively, of total
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LivePerson service revenue. In addition, because we expect the aggregate number
of seats to continue to grow, we expect the set-up fee to represent a decreasing
percentage of total revenue over time. We do not charge an additional set-up fee
if an existing client adds more seats. We recognize monthly service revenue fees
as services are provided. Given the time required to schedule training for our
clients' operators and our clients' resource constraints, we have historically
experienced a lag between signing a client contract and generating revenue from
that client. This lag has generally ranged from one day to 30 days.
We also have begun to enter into contractual arrangements that complement
our direct sales force. These are primarily with Web hosting and call center
service companies, and are in the form of value-added reseller or referral
agreements pursuant to which the parties are paid a commission based on
generated revenue. Such commissions are paid and accounted for monthly, as
revenue is realized. Commissions generated under such agreements to date have
not, as a percentage of total LivePerson service revenue, been material,
although we expect such commissions to increase in both absolute terms and as a
percentage of total LivePerson service revenue over time.
Prior to November 1998, when the LivePerson service was introduced, we
generated revenue from services primarily related to Web-based community
programming and media design. Revenue from such services was $9,000 for the
quarter ended March 31, 1999. As of January 2000, we no longer generated any
revenue from these services. Revenue generated from Web-based community
programming and media design services is recognized upon completion of the
project, provided that no significant obligations remain outstanding and
collection of the resulting receivable is probable.
OPERATING EXPENSES
Our cost of revenue associated with programming activity consisted
primarily of the personnel expenses associated with outsourced programming
and design. We no longer incurred these costs as of December 1998. We began
developing the LivePerson service in the third quarter of 1998. We did not
allocate development costs of the LivePerson service separately. Accordingly,
since November 1998, our cost of revenue has principally been associated with
the LivePerson service and has consisted of:
- compensation costs relating to employees who provide customer service to
our clients, consisting of 17 people at December 31, 1999 and 31 people
at March 31, 2000;
- compensation costs relating to our network support staff, consisting of
five people at December 31, 1999 and 8 people at March 31,
2000;
- allocated occupancy costs and related overhead; and
- the cost of supporting our infrastructure, including expenses related to
leasing space and connectivity for our services, as well as depreciation
of certain hardware and software.
Our product development expenses consist primarily of compensation and
related expenses for product development personnel, consisting of 15 and 31
people at December 31, 1999 and March 31, 2000, respectively, allocated
occupancy costs and related overhead, and expenses for testing new versions of
our software. Product development expenses are charged to operations as
incurred.
Our sales and marketing expenses consist of compensation and related
expenses for sales personnel and marketing personnel, consisting of 21 and 33
people at December 31, 1999 and March 31, 2000, respectively, allocated
occupancy costs and related overhead, advertising, sales
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commissions, marketing programs, public relations, promotional materials, travel
expenses and trade show exhibit expenses.
Our general and administrative expenses consist primarily of compensation
and related expenses for executive, accounting and human resources personnel,
consisting of 15 and 33 people at December 31, 1999 and March 31, 2000,
respectively, allocated occupancy costs and related overhead, professional fees,
provision for doubtful accounts and other general corporate expenses.
In the first quarter 2000, we increased our allowance for doubtful
accounts to $105,000 from $85,000, principally due to an increase in accounts
receivable. We base our allowance for doubtful accounts on specifically
identified known doubtful accounts plus a general reserve for potential
future doubtful accounts. We adjust our allowance for doubtful accounts when
accounts previously reserved have been collected.
NON-CASH EXPENSES
During May 1999, we issued an option to purchase 94,500 shares of common
stock at an exercise price of $1.60 per share to ShopNow.com Inc., a client,
in connection with an agreement to provide the LivePerson service to ShopNow
for two years. As discussed below, the option was amended in February 2000.
The original terms of the option provided that it would vest in or before May
2001, if revenue generated by ShopNow met certain targets. We granted these
options as an incentive for entering into a two-year service agreement with
us that had no minimum revenue guarantees, at a point in time when the
LivePerson service was very new and its viability was not yet known. At
December 31, 1999, the total value ascribed to this option, using a
Black-Scholes pricing model, was $566,000, which was recorded as a deferred
cost in our December 31, 1999 balance sheet. In 1999, we amortized $86,000 of
this deferred cost, of which $24,000 has been offset against the $27,000 of
revenue recognized from ShopNow. The remaining $62,000 constitutes sales and
marketing expense and is reflected as a non-cash expense in our 1999
statement of operations.
In February 2000, we amended the option agreement. Under the amendment,
the option became fully vested and immediately exercisable. ShopNow has
agreed, however, that it will not sell the underlying common stock until the
earlier of February 2005 and, if it has met certain amended revenue targets,
May 19, 2001. The value ascribed to the option at the time the
option agreement was amended, using a Black-Scholes pricing model, was
$1,014,000, which is being ratably amortized over the remaining service
period of approximately 15 months because the vesting of the option does not
affect our obligation under the service agreement. In addition, the ratable
amortization of the remaining deferred cost of $1,014,000 will be recorded as
a reduction of the revenue recognized from ShopNow, with any excess
amortization recorded as sales and marketing expense, which will be reflected
as a non-cash expense in our statement of operations. The Company amortized
$129 of the deferred costs during the three months ended March 31, 2000, of
which $12 was offset against the $12 of revenue recognized from the
client, and the remaining $117 of sales and marketing expense is reflected
as a non-cash expense in the Company's March 31, 2000 Statement of Operations.
Through March 31, 2000, we granted stock options to purchase 5,429,460
shares of common stock to employees, of which options to purchase 5,131,710
shares of common stock at a weighted average exercise price of $2.72 remained
outstanding at March 31, 2000. Certain of these options were granted at less
than the deemed fair value at the date of grant. The deemed fair value of
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our common stock ranged from $0.67 to $13.00 for the period during which
these options were granted. In connection with the granting of these options,
we recorded deferred compensation of $6.2 million in 1999 and recorded
additional deferred compensation of $18.2 million in the quarter ended
March 31, 2000, representing the difference between the deemed fair value of the
common stock at the date of grant for accounting purposes and the exercise price
of the related options. This amount will be recorded as deferred compensation in
our financial statements and will be amortized over the vesting period,
typically three to four years, of the applicable options. In 1999 and the first
quarter 2000, we amortized $1.6 million and $5.2 million, respectively, of
deferred compensation. We expect to amortize the remaining deferred compensation
annually as follows:
- 2000--$14.5 million, including the $5.2 million that was recorded in
the first quarter;
- 2001--$4.9 million;
- 2002--$2.5 million; and
- 2003--$797,000.
We recorded an additional $639,000 of non-cash expense during the first
quarter of 2000 in connection with the vesting of options pursuant to an
employee severance agreement.
In January 1999, we issued 41,667 shares of series A convertible preferred
stock in the amount of $50,000 in exchange for consulting services provided by
Silicon Alley Venture Partners, LLC.
RESULTS OF OPERATIONS
Due to the phasing out of our programming services and our limited operating
history, we believe that comparisons of our first quarter 2000 and 1999
operating results with those of prior periods are not meaningful and that our
historical operating results should not be relied upon as indicative of future
performance.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUE. Total revenue increased to $774,000 in the three months ended
March 31, 2000, from $24,000 in the comparable period in 1999. Revenue
associated with the LivePerson service increased to $774,000 in the three months
ended March 31, 2000, from $15,000 in the comparable period in 1999. This
increase was due primarily to increased marketing efforts on behalf of the
LivePerson service, increased market acceptance of LivePerson's service and
increased sales generated by LivePerson's expanded sales force. The growth of
our sales force has allowed us to solicit more prospective clients and to
respond more quickly and effectively to their inquiries. We cannot assure you
that we will achieve similar growth in future periods.
Revenue associated with Web-based community programming and media design
services decreased to $0 in the three months ended March 31, 2000, from $9,000
in the comparable period in 1999. We no longer provided these services as of
January 2000; accordingly, we believe period-to-period comparisons are not
meaningful.
COST OF REVENUE. Cost of revenue consists of compensation costs relating to
employees who provide customer service to our clients; compensation costs
relating to our network support staff; the cost of supporting our
infrastructure, including expenses related to leasing space and connectivity for
our services, as well as depreciation of certain hardware and software; and
allocated occupancy costs and related overhead. Cost of revenue increased to
$1.2 million in the three months ended March 31, 2000, from $24,000 in the
comparable period in 1999. This increase was primarily attributable to costs
associated with an increase in the number of LivePerson network operations
personnel and client services personnel to serve an expanding client base. Our
network operations organization grew to 8 people at March 31, 2000 from
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0 people at March 31, 1999 and our client services organization grew to 31
people at March 31, 2000 from one person at March 31, 1999. We expect the cost
of our client services department to continue to increase as we continue to hire
additional personnel. We also expect to continue to expend significant amounts
to expand our technological infrastructure and to incur increased depreciation
expenses related to such spending. As a result, we expect cost of revenue as a
percentage of revenue to increase in the short term.
PRODUCT DEVELOPMENT. Our product development expenses consist primarily of
compensation and related expenses for product development personnel. Product
development costs increased to $1.8 million in the three months ended March 31,
2000, from $140,000 in the comparable period in 1999. This increase was
primarily attributable to an increase in the number of LivePerson product
development personnel, which grew to 31 people at March 31, 2000 from 4 at March
31, 1999, as well as allocated occupancy costs and related overhead. As a
percentage of revenue, product development costs declined generally over the
last five quarters.
SALES AND MARKETING. Our sales and marketing expenses consist of
compensation and related expenses for sales and marketing personnel, as well as
advertising, public relations and trade show exhibit expenses. Sales and
marketing expenses increased to $3.4 million in the three months ended March 31,
2000, from $51,000 in the comparable period in 1999. This increase was primarily
attributable to increased expenses for advertising and marketing as well as
increased headcount and related personnel expenses. Our sales and marketing
headcount grew to 33 people at March 31, 2000 from 2 people at March 31, 1999.
The increase in sales staff headcount is attributable to the expansion of our
sales efforts. The increase in our marketing headcount and related expenses is
due to our increasing efforts to enhance our brand recognition. We expect sales
and marketing expense to continue to increase as we expand our business.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
consist primarily of compensation and related expenses for executive,
accounting and human resources personnel. General and administrative expenses
increased to $1.3 million in the three months ended March 31, 2000, from
$158,000 in the comparable period in 1999. This increase was due primarily to
an increase in headcount, which grew to 33 people at March 31, 2000 from 2 at
March 31, 1999, and, to a lesser extent, to professional fees. We expect general
and administrative costs to continue to increase in connection with the growth
of our business as well as our reporting obligations as a public company.
NON-CASH EXPENSES. Non-cash expenses consist primarily of amortization
of deferred stock-based compensation, as well as compensation expense incurred
in connection with options and preferred stock issued to non-employees in lieu
of payment for services rendered. Deferred stock-based compensation represents
the difference between the exercise price and the deemed fair value of certain
stock options granted to employees. Deferred compensation is being amortized
over the vesting period of the individual options. Non-cash expenses increased
to $6.0 million in the quarter ended March 31, 2000 from $50,000 in the quarter
ended March 31, 1999.
OTHER INCOME. Interest income for the quarter ended March 31, 2000 was
$291,000 and consists of interest earned on cash and cash equivalents generated
by the receipt of proceeds from our preferred stock issuances. Other income for
the three months ended March 31, 1999 was $19,000. The increase, particularly
since the third quarter of 1999, is due primarily to interest earned on the net
proceeds from the private placements of our series C and series D redeemable
convertible preferred stock. We expect interest income to increase with the
investment of the proceeds from the issuance of our common stock in our initial
public offering, which was consummated on April 12, 2000, in short-term,
interest-bearing, investment-grade securities, pending our use of such proceeds.
See "Part II. Other Information--Item 2. Changes in Securities and Use of
Proceeds--(d) Use of Proceeds."
NET LOSS. Our net loss increased to $12.6 million for the three months
ended March 31, 2000, from $379,000 for the three months ended March 31, 1999.
We have experienced substantial increases in our expenses since our
introduction of the LivePerson service and we anticipate that our expenses will
continue to grow in the future. Although our revenue from the LivePerson service
has grown in each of the quarters since its introduction, we cannot assure you
that we can sustain this growth or that we will generate sufficient revenue to
achieve profitability. Consequently, we believe that period-to-period
comparisons of our operating results may not be meaningful, and as a result, you
should not rely on them as an indication of future performance.
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LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations principally through
cash generated by private placements of our convertible preferred stock and
the initial public offering of our common stock. Through March 31, 2000, we
have raised a total of $41.4 million in aggregate net proceeds in four
private placements. As of March 31, 2000, we had $24.0 million in cash and
cash equivalents and marketable securities, an increase of $9.0 million from
December 31, 1999. We regularly invest excess funds in short-term money
market funds, commercial paper, government securities, and short-term notes.
In April 2000, we issued 4,000,000 shares of common stock at an offering
price of $8.00 per share, raising total net proceeds of approximately $29.8
million, before expenses. In March 2000, we entered into two letters of
credit, which serve as the security deposits for our new leases of office
space, in an aggregate amount of $2.3 million for 2000. We expect to enter
into an additional letter of credit for $2.2 million in 2001.
Net cash used in operating activities was $220,000 for the quarter ended
March 31, 1999 and $2.5 million for the quarter ended March 31, 2000. Net
cash used in operating activities for the quarter ended March 31, 1999
consisted primarily of net operating losses, offset by non-cash compensation
and changes in accounts receivable, accounts payable and accrued expenses and
deferred revenue. Net cash used in operating activities for the quarter ended
March 31, 2000 consisted primarily of net operating losses, partially offset
by an increase in non-cash expenses, accounts payable and accrued expenses.
Net cash used in investing activities was $0 in the quarter ended
March 31, 1999 and $20.3 million for the quarter ended March 31, 2000. Net cash
used in investing activities for the three months ended March 31, 2000 was due
to the purchase of fixed assets and the purchase of short-term
available-for-sale investments.
Net cash provided by financing activities was $2.9 million for the
quarter ended March 31, 1999 and $16.8 million for the quarter ended March
31, 2000. Net cash provided by financing activities for the quarters ended
March 31, 1999 and 2000 and for the year ended December 31, 1999 was
primarily attributable to proceeds from the sale of our convertible preferred
stock.
As of March 31, 2000, our principal commitments consisted of $234,000 due
per month under operating leases. During the year ending December 31, 2000,
we anticipate an increase in capital expenditures and lease commitments
consistent with our anticipated growth in operations, infrastructure and
personnel. We do not currently expect that our principal commitments for the
year ended December 31, 2000 will exceed $5.0 million.
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In the first quarter of 2000, we entered into three additional leases for
office space, one in San Francisco and two in New York City. The lease for
our San Francisco office space, entered into in February 2000, provides for
annual aggregate payments of $275,000. We also entered into two subleases for
approximately 8,000 and 4,000 square feet, respectively, in New York City
expiring in September 2000, providing for annual aggregate payments of
$238,000 and $182,000, respectively. In March 2000, we entered into a lease
for an aggregate of approximately 83,500 square feet on two floors at a
location in New York City. The lease provisions with respect to one floor,
consisting of approximately 40,500 square feet, commenced in April 2000, with
rent of approximately $1.4 million per year in the first three years, $1.5
million per year in years four through seven and $1.6 million per year in
years eight through ten. The related security deposit is $2.0 million for the
first three years, $1.3 million for years four through seven and $670,000 for
years eight through ten. The other floor consists of approximately 43,000
square feet, and the lease provisions relating to that floor commence in
March 2001, with rent of approximately $1.5 million per year in the first
three years, $1.6 million per year in years four through seven and $1.7
million per year in years eight through ten. The related security deposit is
$2.2 million for the first three years, $1.5 million for years four through
seven and $747,000 for years eight through ten. At our option, we have
provided the security deposit by a letter of credit.
We have incurred significant net losses and negative cash flows from
operations since inception, and as of March 31, 2000, had an accumulated
deficit of $22.4 million. These losses have been funded primarily through the
issuance of our convertible preferred stock. We intend to continue to invest
heavily in sales, marketing, promotion, technology and infrastructure
development as we grow. As a result, we expect to continue to incur operating
losses and negative cash flows for the foreseeable future.
We expect to devote substantial capital resources to expand the sales,
marketing, product development and customer service organizations, to expand our
marketing effort, to build the infrastructure necessary to support the growth in
our customer base and other general corporate activities.
We anticipate that the net proceeds from our initial public offering and
the sale of our series D redeemable convertible preferred stock, together
with our current cash and cash equivalents and cash generated from
operations, if any, will be sufficient to satisfy our liquidity requirements
for at least the next 12 months. However, we cannot assure you that we will
not require additional funds prior to such time, and we would then seek to
sell additional equity or debt securities or seek alternative sources of
financing. If we are unable to obtain this additional financing, we may be
required to reduce the scope of our planned sales and marketing and product
development efforts, which could harm our business, financial condition and
operating results. In addition, we may require additional funds in order to
fund more rapid expansion, to develop new or enhanced services or products or
to invest in complementary businesses, technologies, services or products.
Additional funding may not be available on favorable terms, if at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP No. 98-5, "Reporting on the Costs of Start-Up Activities,"
which provides guidance on the financial reporting of start-up costs. SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. We adopted SOP 98-5 on January 1, 1999. As we had not capitalized such
costs, the adoption of SOP 98-5 did not have an impact on our consolidated
financial statements.
In April 1998, AICPA issued Statement of position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use
("SOP 98-1")." SOP 98-1 provides guidance for determining whether computer
software is internal-use software and on accounting for the proceeds of computer
software originally developed or obtained for internal use and then
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subsequently sold to the public. It also provides guidance on capitalization of
the costs incurred for computer software developed or obtained for internal use.
We adopted SOP 98-1 in the first quarter of 1999, which did not have a material
effect on our financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. Subsequently, the FASB
issued SFAS No. 137 which deferred the effective date of SFAS No. 133. SFAS
No. 137 is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. We have not yet analyzed the impact of this pronouncement on our
financial statements.
FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation" ("FIN No.44") provides guidance for applying
APB Opinion No. 25, "Accounting for Stock Issued to Employees." With certain
exceptions, FIN No. 44 applies prospectively to new awards, exchanges of
awards in a business combination, modifications to outstanding awards and
changes in grantee status on or after July 1, 2000. The Company does not
believe that the implementation of FIN No. 44 will have a significant effect
on its results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB No. 101") which
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company will be required to adopt the accounting provisions of SAB No. 101,
no later than the second quarter of 2000. The Company does not believe that
the implementation of SAB No. 101 will have a significant effect on its
results of operations.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY PROVIDING THE LIVEPERSON SERVICE AND EXPECT
TO ENCOUNTER DIFFICULTIES FACED BY EARLY STAGE COMPANIES IN NEW AND RAPIDLY
EVOLVING MARKETS.
We have only a limited operating history providing the LivePerson service
upon which to base an evaluation of our current business and future prospects.
We began offering the LivePerson service in November 1998; accordingly, the
revenue and income potential of our business and the related market are
unproven. As a result of our limited operating history as a provider of
real-time sales and customer service technology for companies doing business on
the Internet, we have only 17 months of historical financial data relating to
the LivePerson service upon which to forecast revenue and results of operations.
In addition, because this market is relatively new and rapidly evolving, we
have limited insight into trends that may emerge and affect our business. Before
investing in us, you should evaluate the risks, expenses and problems frequently
encountered by companies such as ours that are in the early stages of
development and that are entering new and rapidly changing markets. These risks
include our ability to:
- attract more clients and retain existing clients;
- sell additional seats, which generate monthly fees, and other services to
our existing clients;
- effectively market and maintain our brand name;
- respond effectively to competitive pressures;
- continue to develop and upgrade our technology; and
- attract, integrate, retain and motivate qualified personnel.
If we are unsuccessful in addressing some or all of these risks, our
business, financial condition and results of operations would be materially and
adversely affected.
OUR ANNUAL REVENUE THROUGH DECEMBER 31, 1999 HAS NEVER EXCEEDED $620,000,
OUR QUARTERLY REVENUE HAS NEVER EXCEEDED $800,000, WE HAD AN ACCUMULATED
DEFICIT OF $22.4 MILLION AS OF MARCH 31, 2000 AND WE EXPECT TO INCUR
SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE.
We have not achieved profitability and, as we expect to continue to incur
significant operating expenses and to make significant capital expenditures, we
expect to continue to experience significant losses and negative cash flow for
the foreseeable future. We recorded a net
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loss of $20,000 for the year ended December 31, 1998 (the year in which we
commenced offering the LivePerson service), a net loss of approximately $9.8
million for the year ended December 31, 1999 and a net loss of $12.6 million
for the quarter ended March 31, 2000. In addition, for the quarter ended
March 31, 2000, we recorded a non-cash dividend of $18.0 million. The total
non-cash charge we expect to record in connection with our 1999 and 2000
option grants for the year ended December 31, 2000 is approximately $15.2
million, of which $5.2 million was recorded in the quarter ended March 31,
2000. The Company recorded an additional $639 of non-cash expense during the
first quarter of 2000 in connection with the vesting of options pursuant to
an employee severance agreement. As of March 31, 2000, our accumulated
deficit was approximately $22.4 million. Even if we do achieve profitability,
we cannot assure you that we can sustain or increase profitability on a
quarterly or annual basis in the future. Failure to achieve or maintain
profitability may materially and adversely affect the market price of our
common stock.
WE HAVE AN UNPROVEN BUSINESS MODEL AND MAY NOT GENERATE SUFFICIENT REVENUE FOR
OUR BUSINESS TO SURVIVE.
Our business model is based on the delivery of real-time sales and customer
service technology to companies doing business on the Internet, a largely
untested business. Sales and customer service historically have been provided
primarily in person or by telephone. Our business model assumes that companies
doing business on the Internet will choose to provide sales and customer service
via the Internet. Our business model also assumes that many companies will
recognize the benefits of an outsourced application, that Internet users will
choose to engage a customer service representative in a live text-based
interaction, that this interaction will maximize sales opportunities and enhance
the online shopping experience and that companies will seek to have their online
sales and customer service technology provided by us. If any of these
assumptions is incorrect, our business may be harmed.
WE EXPECT THAT ALL OF OUR REVENUE WILL COME FROM THE LIVEPERSON SERVICE FOR THE
FORESEEABLE FUTURE AND IF WE ARE NOT SUCCESSFUL IN SELLING THE SERVICE, OUR
REVENUE WILL NOT INCREASE AND MAY DECLINE.
The success of our business currently depends, and for the foreseeable
future will continue to substantially depend, on the sale of only one service.
Revenue related to the LivePerson service, which will account for all of our
revenue for the forseeable future, is comprised of initial non-refundable set-up
fees and ongoing monthly fees. Ongoing monthly fees, in turn, result from the
sale of seats to new clients and the sale of additional seats to existing
clients. Since 1999, revenue from monthly fees accounted for more than 90% of
LivePerson service revenue. We introduced our LivePerson service in November
1998, and at March 31, 2000, we had 570 revenue-generating clients, of which 450
were actively using the LivePerson service. We cannot be certain that there will
be client demand for our service or that we will be successful in penetrating
the market for real-time sales and customer service technology. A decline in the
price of, or fluctuation in the demand for, the LivePerson service, is likely to
cause our revenue to decline. In addition, if our clients were to reduce the
number of seats used or fail to purchase additional seats, our revenue might not
increase.
THE SUCCESS OF OUR BUSINESS REQUIRES THAT CLIENTS CONTINUE TO USE THE LIVEPERSON
SERVICE AND PURCHASE ADDITIONAL SEATS.
Our LivePerson service agreements typically have no termination date and are
terminable upon 30 to 90 days' notice without penalty. If a significant number
of our clients, or any one client with a significant number of seats, were to
terminate these service agreements, reduce the number of seats purchased or fail
to purchase additional seats, our results of operations may be negatively and
materially affected. We cannot assure you that we will experience high client
retention rates. Our client retention rates may decline as a result of a number
of factors, including competition, consolidation in the Internet industry or
termination of operations by a
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significant number of our clients. Dissatisfaction with the nature or quality of
our services could also lead clients to terminate our service. We depend on
monthly fees from the LivePerson service for substantially all our revenue. If
our retention rate declines, our revenue could decline unless we are able to
obtain additional clients or alternate revenue sources. Further, because of the
historically small number of seats sold in initial orders, we depend on sales to
new clients and sales of additional seats to our existing clients.
OUR QUARTERLY REVENUE AND OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT
FLUCTUATIONS WHICH MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON
STOCK.
We expect our quarterly revenue and operating results to fluctuate
significantly in the future due to a variety of factors, including the following
factors which are in part within our control, and in part outside of our
control:
- market acceptance by companies doing business on the Internet of
real-time sales and customer service technology;
- our clients' business success;
- our clients' demand for seats;
- our ability to attract and retain clients;
- the amount and timing of capital expenditures and other costs relating to
the expansion of our operations, including those related to acquisitions;
- the introduction of new services by us or our competitors; and
- changes in our pricing policies or the pricing policies of our
competitors.
Our revenue and results may also fluctuate significantly in the future due to
the following factors that are entirely outside of our control:
- seasonal factors affecting our clients' businesses;
- economic conditions specific to the Internet, electronic commerce and
online media; and
- general economic conditions.
Many of our clients' businesses are seasonal. Our clients' demand for
real-time sales and customer service technology in general and their demand for
seats, in particular, may be seasonal as well. As a result, our future revenue
and profits may vary from quarter to quarter.
We do not believe that period-to-period comparisons of our operating results
are meaningful. You should not rely upon these comparisons as indicators of our
future performance.
Due to the foregoing factors, it is possible that our results of operations
in one or more future quarters may fall below the expectations of securities
analysts and investors. If this occurs, the trading price of our common stock
would decline.
COMPETITION FOR PERSONNEL QUALIFIED TO DEVELOP AND SUPPORT THE LIVEPERSON
SERVICE IS INTENSE.
We may be unable to retain our key employees or attract, integrate or retain
other highly qualified employees in the future. We have experienced, and expect
to continue to experience, difficulty in hiring highly-skilled employees with
appropriate qualifications, such as employees combining customer service
backgrounds with technical aptitude, and employees with experience developing
scalable computer networks. As we continue to increase our client base and
expand our operations, we expect that we will hire additional technical
personnel, client services
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personnel and sales and marketing personnel. There is significant competition
for qualified employees in our industry, particularly employees with such
backgrounds. If we do not succeed in attracting new personnel or retaining and
motivating our current personnel, or if we are unable to outsourced certain
functions, our business, results of operations and financial condition will be
materially and adversely affected.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR EXPANDING OPERATIONS.
Since the launch of the LivePerson service in November 1998, we have grown
rapidly. This growth has placed a significant strain on our managerial,
operational, technical and financial resources. In 2000, we intend to replace
our existing accounting and other back-office systems at a cost of approximately
$1.0 million. The new systems will have to be integrated with our operations,
controls and procedures. If we are not able to successfully integrate these new
systems with our existing systems, or if we incur significant costs in order to
achieve such integration, our business could be harmed. In order to manage our
growth, we must also continue to implement new or upgraded operating and
financial systems, procedures and controls. Our failure to expand our operations
in an efficient manner could cause our expenses to grow, our revenue to decline
or grow more slowly than expected and could otherwise have a material adverse
effect on our business, results of operations and financial condition.
Further, as a result of our growth, the number of our employees grew from
six at December 31, 1998 to 136 at March 31, 2000. In the area of technology, we
grew from one employee at December 31, 1998, to 19 employees at December 31,
1999 and to 48 employees at March 31, 2000. We expect to nearly double our
existing technology personnel in the remainder of the year; however we cannot
assure you that we will grow by this amount. We also cannot assure you that we
will be successful in integrating these new employees or that such integration
will not distract valuable management resources.
In addition, in January 2000, we hired our Chief Operating Officer, Dean
Margolis, and our Chief Technology Officer, James L. Reagan, who do not have
significant experience working with us or with each other. The process of
integrating new members of our senior management team can be time-consuming and
may distract other members of management from the operation of our business. If
members of our senior management are unable to work together successfully or
manage our growth, our business will be harmed.
OUR REPUTATION DEPENDS, IN PART, ON FACTORS WHICH ARE ENTIRELY OUTSIDE OF OUR
CONTROL.
Our service appears as a LivePerson-branded or custom-created icon on our
clients' Web sites. When an Internet user clicks on the icon, a pop-up dialogue
window appears, which, in nearly all cases, displays the slogan "Powered by
LivePerson." The customer service operators who respond to the inquiries of our
clients' Internet users are employees or agents of our clients; they are not
employees of LivePerson. As a result, we have no way of controlling the actions
of these operators. In addition, an Internet user may not know that the operator
is an employee or agent of our client, rather than a LivePerson employee. If an
Internet user were to have a negative experience in a LivePerson-powered
real-time dialogue, it is possible that this experience could be attributed to
us, which could diminish our brand and harm our business. Finally, we believe
the success of our service depends on the prominent placement of the icon on the
client's Web site, over which we also have no control.
WE MAY BE UNABLE TO CONTINUE TO BUILD AWARENESS OF THE LIVEPERSON BRAND NAME.
Building recognition of our brand is critical to establishing the advantage
of being among the first application service providers to provide real-time
sales and customer service and to
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attracting new clients. If we fail to successfully promote and maintain our
brand or incur significant expenses in promoting our brand without an associated
increase in our revenue, our business, results of operations and financial
condition may be materially and adversely affected.
WE ARE DEPENDENT ON TECHNOLOGY SYSTEMS THAT ARE BEYOND OUR CONTROL.
The success of the LivePerson service depends in part on our clients' online
services as well as the Internet connections of visitors to their Web sites,
both of which are outside of our control. As a result, it may be difficult to
identify the source of problems if they occur. In the past, we have experienced
problems related to connectivity which have resulted in slower than normal
response times to Internet user chat requests and messages and interruptions in
service. The LivePerson service relies both on the Internet and on our
connectivity vendors for data transmission. Therefore, even when connectivity
problems are not caused by the LivePerson service, our clients or Internet users
may attribute the problem to us. This could diminish our brand and harm our
business, divert the attention of our technical personnel from our product
development efforts or cause significant client relations problems.
In addition, we rely on two Web hosting services for Internet connectivity
to deliver our service, power, security and technical assistance. They have, in
the past, experienced problems that have resulted in slower than normal response
times and interruptions in service. If we are unable to continue utilizing the
services of our existing Web hosting providers or if our Web hosting services
experience interruptions or delays, it is possible that our business could be
harmed.
Our service also depends on many third parties for hardware and software,
which products could contain defects. Problems arising from our use of such
hardware or software could require us to incur significant costs or divert the
attention of our technical personnel from our product development efforts. To
the extent any such problems require us to replace such hardware or software, we
may not be able to do so on acceptable terms, if at all.
TECHNOLOGICAL DEFECTS COULD DISRUPT OUR SERVICE, WHICH COULD HARM OUR BUSINESS
AND REPUTATION.
We face risks related to the technological capabilities of the LivePerson
service. We expect the number of simultaneous chats between our clients'
operators and Internet users over our system to increase significantly as we
expand our client base. Our network hardware and software may not be able to
accommodate this additional volume. Additionally, we must continually upgrade
our software to improve the features and functionality of the LivePerson service
in order to be competitive in our market. If future versions of our software
contain undetected errors, our business could be harmed. As a result of major
software upgrades at LivePerson, our client sites have, from time to time,
experienced slower than normal response times and interruptions in service. If
we experience system failures or degraded response times, our reputation and
brand could be harmed. We may also experience technical problems in the process
of installing and initiating the LivePerson service on new Web hosting services.
These problems, if unremedied, could harm our business.
The LivePerson service also depends on complex software which may contain
defects, particularly when we introduce new versions onto our servers. We may
not discover software defects that affect our new or current services or
enhancements until after they are deployed. It is possible that, despite testing
by us, defects may occur in the software. These defects could result in:
- damage to our reputation;
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- lost sales;
- delays in or loss of market acceptance of our products; and
- unexpected expenses and diversion of resources to remedy errors.
WE MAY BE UNABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE AND CHANGING
CLIENT PREFERENCES IN THE ONLINE SALES AND CUSTOMER SERVICE INDUSTRY AND
THIS MAY HARM OUR BUSINESS.
If we are unable, for technological, legal, financial or other reasons, to
adapt in a timely manner to changing market conditions in the online sales and
customer service industry or our clients' or Internet users' requirements, our
business, results of operations and financial condition would be materially and
adversely affected. Business on the Internet is characterized by rapid
technological change. In addition, the market for online sales and customer
service technology is relatively new. Sudden changes in client and Internet user
requirements and preferences, frequent new product and service introductions
embodying new technologies, such as broadband communications, and the emergence
of new industry standards and practices could render the LivePerson service and
our proprietary technology and systems obsolete. The rapid evolution of these
products and services will require that we continually improve the performance,
features and reliability of the LivePerson service. Our success will depend, in
part, on our ability to:
- enhance the features and performance of the LivePerson service;
- develop and offer new services that are valuable to companies doing
business on the Internet and Internet users; and
- respond to technological advances and emerging industry standards and
practices in a cost-effective and timely manner.
If any of our new services, including upgrades to the LivePerson service, do not
meet our clients' or Internet users' expectations, our business may be harmed.
Updating our technology may require significant additional capital expenditures
and could materially and adversely affect our business, results of operations
and financial condition.
IF WE ARE NOT COMPETITIVE IN THE MARKET FOR REAL-TIME SALES AND CUSTOMER SERVICE
TECHNOLOGY, OUR BUSINESS COULD BE HARMED.
There are no substantial barriers to entry in the real-time sales and
customer service technology market, other than the ability to design and build
scalable software and, with respect to outsourced solution providers, the
ability to design and build scalable network architecture. Established or new
entities may enter this market in the near future, including those that provide
real-time interaction online, with or without the user's request.
We compete directly with companies focused on technology that facilitates
real-time sales and customer service interaction. Our competitors include
customer service enterprise software providers such as eGain Communications
Corp., eShare Technologies, Inc., Kana Communications, Inc. and WebLine
Communications (a part of Cisco Systems' applications technology group), some of
which are beginning to offer hosted solutions. Furthermore, many of our
competitors offer a broader range of customer relationship management products
and services than we currently offer. We may be disadvantaged and our business
may be harmed if companies doing business on the Internet choose sales and
customer service technology from such providers.
We also face potential competition from larger enterprise software companies
such as Oracle Corporation and Siebel Systems. In addition, established
technology companies, including IBM,
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Hewlett-Packard and Microsoft, may also leverage their existing relationships
and capabilities to offer real-time sales and customer service applications.
Finally, we face competition from clients and potential clients that choose
to provide a real-time sales and customer service solution in-house as well as,
to a lesser extent, traditional offline customer service solutions, such as
telephone call centers.
We believe that competition will increase as our current competitors
increase the sophistication of their offerings and as new participants enter the
market. Many of our current and potential competitors have:
- longer operating histories;
- larger client bases;
- greater brand recognition;
- more diversified lines of products and services; and
- significantly greater financial, marketing and other resources.
These competitors may enter into strategic or commercial relationships with
larger, more established and better-financed companies. These competitors may be
able to:
- undertake more extensive marketing campaigns;
- adopt more aggressive pricing policies; and
- make more attractive offers to businesses to induce them to use their
products or services.
Any delay in the general market acceptance of the real-time sales and
customer service solution business model would likely harm our competitive
position. Delays would allow our competitors additional time to improve their
service or product offerings, and would also provide time for new competitors to
develop real-time sales and customer service applications and solicit
prospective clients within our target markets. Increased competition could
result in pricing pressures, reduced operating margins and loss of market share.
IF WE DO NOT SUCCESSFULLY INTEGRATE POTENTIAL FUTURE ACQUISITIONS, OUR BUSINESS
COULD BE HARMED.
In the future, we may acquire or invest in complementary companies, products
or technologies. Acquisitions and investments involve numerous risks to us,
including:
- difficulties in integrating operations, technologies, products and
personnel with LivePerson;
- diversion of financial and management resources from efforts related to
the LivePerson service or other then-existing operations;
- risks of entering new markets beyond providing real-time sales and
customer service technology for companies doing business on the Internet;
- potential loss of either our existing key employees or key employees of
any companies we acquire; and
- our inability to generate sufficient revenue to offset acquisition or
investment costs.
These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our results
of operations. Furthermore, we may incur debt or issue equity securities to pay
for any future acquisitions. The issuance of equity securities could be dilutive
to our existing stockholders.
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WE COULD FACE ADDITIONAL REGULATORY REQUIREMENTS, TAX LIABILITIES AND OTHER
RISKS AS WE EXPAND INTERNATIONALLY.
We intend to expand internationally. There are risks related to doing
business in international markets, such as changes in regulatory requirements,
tariffs and other trade barriers, fluctuations in currency exchange rates and
adverse tax consequences. In addition, there are likely to be different consumer
preferences and requirements in specific international markets. Furthermore, we
may face difficulties in staffing and managing any foreign operations. One or
more of these factors could harm any future international operations.
OUR BUSINESS AND PROSPECTS WOULD SUFFER IF WE ARE UNABLE TO PROTECT AND ENFORCE
OUR INTELLECTUAL PROPERTY RIGHTS.
Our success and ability to compete depend, in part, upon the protection of
our intellectual property rights relating to the technology underlying the
LivePerson service. We currently have a U.S. patent application pending relating
to such technology and have not filed applications outside the U.S. It is
possible that:
- our pending patent application may not result in the issuance of a
patent;
- any patent issued may not be broad enough to protect our intellectual
property rights;
- any patent issued could be successfully challenged by one or more third
parties, which could result in our loss of the right to prevent others
from exploiting the invention claimed in the patent;
- current and future competitors may independently develop similar
technology, duplicate our service or design around any patent we may
have; and
- effective patent protection may not be available in every country in
which we do business.
We also rely upon copyright, trade secret and trademark law, written
agreements and common law to protect our proprietary technology, processes and
other intellectual property, to the extent that protection is sought or secured
at all. We currently have one patent application pending. To the extent that the
invention described in our U.S. patent application was made public prior to the
filing of the application, we may not be able to obtain patent protection in
certain foreign countries. We currently have a common law trademark,
"LivePerson", and three pending U.S. trademark applications. The trademark
examiner assigned to our applications has issued non-final office actions with
respect to our applications, requesting additional information and making
initial refusals. However, no final determinations as to the registrability of
the marks have been made. We are in the process of responding to these office
actions prior to their respective deadlines, but ultimately we may not be able
to secure registration of our trademarks. In addition, we do not have any
trademarks registered outside the U.S., nor do we have any trademark
applications pending outside the U.S. We cannot assure you that any steps we
might take will be adequate to protect against infringement and misappropriation
of our intellectual property by third parties. Similarly, we cannot assure you
that third parties will not be able to independently develop similar or superior
technology, processes or other intellectual property. The unauthorized
reproduction or other misappropriation of our intellectual property rights could
enable third parties to benefit from our technology without paying us for it. If
this occurs, our business, results of operations and financial condition would
be materially and adversely affected. In addition, disputes concerning the
ownership or rights to use intellectual property could be costly and
time-consuming to litigate, may distract management from operating our business
and may result in our loss of significant rights.
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OUR PRODUCTS AND SERVICES MAY INFRINGE UPON INTELLECTUAL PROPERTY RIGHTS OF
THIRD PARTIES AND ANY INFRINGEMENT COULD REQUIRE US TO INCUR SUBSTANTIAL
COSTS AND MAY DISTRACT OUR MANAGEMENT.
Although we attempt to avoid infringing known proprietary rights of third
parties, we are subject to the risk of claims alleging infringement of
third-party proprietary rights. If we infringe upon the rights of third parties,
we may not be able to obtain licenses to use those rights on commercially
reasonable terms. In that event, we would need to undertake substantial
reengineering to continue offering our service. Any effort to undertake such
reengineering might not be successful. In addition, any claim of infringement
could cause us to incur substantial costs defending against the claim, even if
the claim is invalid, and could distract our management from our business.
Furthermore, a party making such a claim could secure a judgment that requires
us to pay substantial damages. A judgment could also include an injunction or
other court order that could prevent us from selling our products. If any of
these events occurred, our business, results of operations and financial
condition would be materially and adversely affected.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS TO EXECUTE OUR BUSINESS STRATEGY AND
WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING.
We believe that the net proceeds from our initial public offering and
from the sale of our series D redeemable convertible preferred stock,
together with our current cash and cash equivalents and cash generated from
operations, if any, will be sufficient to fund our working capital and
capital expenditure requirements for at least the next 12 months. To the
extent that we require additional funds to support our operations or the
expansion of our business, or to pay for acquisitions, we may need to sell
additional equity, issue debt or convertible securities or obtain credit
facilities through financial institutions. In the past, we have obtained
financing principally through the sale of preferred stock, common stock and
warrants. If additional funds are raised through the issuance of debt or
preferred equity securities, these securities could have rights, preferences
and privileges senior to holders of common stock. The terms of any debt
securities could impose restrictions on our operations. If additional funds
are raised through the issuance of additional equity or convertible
securities, our stockholders could suffer dilution. We cannot assure you that
additional funding, if required, will be available to us in amounts or on
terms acceptable to us. If sufficient funds are not available or are not
available on acceptable terms, our ability to fund our expansion, take
advantage of acquisition opportunities, develop or enhance our services or
products, or otherwise respond to competitive pressures would be
significantly limited. Those limitations would materially and adversely
affect our business, results of operations and financial condition.
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OUR BUSINESS IS DEPENDENT ON A FEW KEY EMPLOYEES, INCLUDING OUR CHIEF EXECUTIVE
OFFICER, ROBERT P. LOCASCIO.
Our future success depends to a significant extent on the continued services
of our senior management team, including Robert P. LoCascio, our founder and
Chief Executive Officer. The loss of the services of any member of our senior
management team, in particular Mr. LoCascio, could have a material and adverse
effect on our business, results of operations and financial condition.
WE MAY BE LIABLE IF THIRD PARTIES MISAPPROPRIATE PERSONAL INFORMATION BELONGING
TO OUR CLIENTS' INTERNET USERS.
We maintain dialogue transcripts of the text-based chats between our clients
and Internet users and store on our servers information supplied voluntarily by
these Internet users in exit surveys which follow the chats. We provide this
information to our clients to allow them to perform Internet user analyses and
monitor the effectiveness of our service. Some of the information we collect in
text-based chats and exit surveys may include personal information, such as
contact and demographic information. If third parties were able to penetrate our
network security or otherwise misappropriate personal information relating to
our clients' Internet users or the text of customer service inquiries, we could
be subject to liability. We could be subject to negligence claims or claims for
misuse of personal information. These claims could result in litigation which
could have a material adverse effect on our business, results of operations and
financial condition. We may incur significant costs to protect against the
threat of security breaches or to alleviate problems caused by such breaches.
RISKS RELATED TO OUR INDUSTRY
WE ARE DEPENDENT ON CONTINUED GROWTH IN THE USE OF THE INTERNET AS A MEDIUM FOR
COMMERCE.
We cannot be sure that a sufficiently broad base of consumers will adopt,
and continue to use, the Internet as a medium for commerce. Our long-term
viability depends substantially upon the widespread acceptance and development
of the Internet as an effective medium for consumer commerce. Use of the
Internet to effect retail transactions is at an early stage of development.
Convincing our clients to offer real-time sales and customer service technology
may be difficult.
Demand for recently introduced services and products over the Internet is
subject to a high level of uncertainty. Few proven services and products exist.
The development of the Internet into a viable commercial marketplace is subject
to a number of factors, including:
- continued growth in the number of users;
- concerns about transaction security;
- continued development of the necessary technological infrastructure;
- development of enabling technologies;
- uncertain and increasing government regulation; and
- the development of complementary services and products.
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WE DEPEND ON THE CONTINUED VIABILITY OF THE INFRASTRUCTURE OF THE INTERNET.
To the extent that the Internet continues to experience growth in the number
of users and frequency of use by consumers resulting in increased bandwidth
demands, we cannot assure you that the infrastructure for the Internet will be
able to support the demands placed upon it. The Internet has experienced outages
and delays as a result of damage to portions of its infrastructure. Outages or
delays could adversely affect online sites, email and the level of traffic on
the Internet. We also depend on Internet service providers that provide our
clients and Internet users with access to the LivePerson service. In the past,
users have experienced difficulties due to system failures unrelated to our
service. In addition, the Internet could lose its viability due to delays in the
adoption of new standards and protocols required to handle increased levels of
Internet activity. Insufficient availability of telecommunications services to
support the Internet also could result in slower response times and negatively
impact use of the Internet generally, and our clients' sites (including the
LivePerson pop-up dialogue window) in particular. If the use of the Internet
fails to grow or grows more slowly than expected, if the infrastructure for the
Internet does not effectively support growth that may occur or if the Internet
does not become a viable commercial marketplace, we may not achieve
profitability and our business, results of operations and financial condition
will suffer.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES.
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. Recently, the United
States Congress enacted Internet legislation relating to issues such as
children's privacy, copyright and taxation. The children's privacy legislation
imposes restrictions on the collection, use and distribution of personal
identification information obtained online from children under the age of 13.
The copyright legislation establishes rules governing the liability of Internet
service providers and Web site publishers for the copyright infringement of
Internet users. The tax legislation places a moratorium on certain forms of
Internet taxes for three years; however, this moratorium does not apply to sales
and use taxes. Additionally, the European Union recently adopted a directive
addressing data privacy which imposes restrictions on the collection, use and
processing of personal data. Existing legislation and any new legislation could
hinder the growth in use of the Internet generally and decrease the acceptance
of the Internet as a medium for communication, commerce and advertising. The
laws governing the Internet remain largely unsettled, even in areas where
legislation has been enacted. It may take several years to determine whether and
how existing laws such as those governing intellectual property, taxation and
personal privacy apply to the Internet and Internet services. In addition, the
growth and development of the market for Internet commerce may prompt calls for
more stringent consumer protection laws, both in the U.S. and abroad, which may
impose additional burdens on companies conducting business online. Our business,
results of operations and financial condition could be materially and adversely
affected if we do not comply with recent legislation or laws or regulations
relating to the Internet that are adopted or modified in the future.
For example, the LivePerson service allows our clients to capture and save
information about Internet users, possibly without their knowledge.
Additionally, our service uses a tool, commonly referred to as a "cookie," to
uniquely identify each of our clients' Internet users. To the extent that
additional legislation regarding Internet user privacy is enacted, such as
legislation governing the collection and use of information regarding Internet
users through the use of cookies, the effectiveness of the LivePerson service
could be impaired by restricting us from collecting information which may be
valuable to our clients. The foregoing could harm our business, results of
operations and financial condition.
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SECURITY CONCERNS COULD HINDER COMMERCE ON THE INTERNET.
User concerns about the security of confidential information online has been
a significant barrier to commerce on the Internet and online communications. Any
well-publicized compromise of security could deter people from using the
Internet or other online services or from using them to conduct transactions
that involve the transmission of confidential information. If Internet commerce
is inhibited as a result of such security concerns, our business would be
harmed.
OTHER RISKS
OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% OR GREATER STOCKHOLDERS WILL EXERCISE
CONTROL OVER ALL MATTERS REQUIRING A STOCKHOLDER VOTE.
Our executive officers, directors and stockholders who each own greater than
5% of the outstanding common stock and their affiliates, in the aggregate,
beneficially own more than 50% of our outstanding common stock. As a result,
these stockholders will be able to exercise control over all matters requiring
approval by our stockholders, including the election of directors and approval
of significant corporate transactions. This concentration of ownership could
also have the effect of delaying or preventing a change in control.
OF OUR TOTAL OUTSTANDING SHARES, 25,339,869 ARE RESTRICTED FROM IMMEDIATE RESALE
PURSUANT TO CONTRACTUAL AGREEMENTS AND PROVISIONS OF LAWS, BUT MAY BE SOLD
INTO THE MARKET IN THE NEAR FUTURE. THE SALE OF THESE SHARES COULD CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS
IS DOING WELL.
After the initial public offering of our common stock, which commenced
trading on April 7, 2000, we had outstanding 29,339,869 shares of common stock.
Of these shares, the 4,000,000 shares sold in our initial public offering are
freely tradable, except for any shares purchased by our "affiliates," as that
term is used in Rule 144 of the Securities Act, who are generally those persons
who directly or indirectly control LivePerson, such as our directors, executive
officers, and significant stockholders. Affiliates may only sell their shares
pursuant to the requirements of Rule 144 or in a registered public offering.
Unless sold earlier pursuant to a registered public offering, the remaining
25,339,869 shares will become available for resale in the public market at
various times in the future, including 20,603,027 shares that are eligible for
resale following the expiration of the 180-day lock-up agreements entered into
among the underwriters and such stockholders. Chase Securities Inc. may waive
the restrictions imposed in such agreements at any time. The following table
illustrates the shares eligible for sale in the public market:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ---------------- ----
<C> <S>
4,000,000 After April 6, 2000, freely tradable shares sold in our
initial public offering and shares saleable under Rule
144(k) that are not subject to the 180-day lock-up
0 After July 5, 2000, shares saleable under Rule 144 or Rule
701 that are not subject to the 180-day lock-up
20,603,027 After October 3, 2000, the 180-day lock-up is released and
these shares are saleable under Rule 144 (subject, in some
cases, to volume limitations), Rule 144(k) or Rule 701
4,736,842 After October 3, 2000, restricted securities that are held
for less than one year are not yet saleable under Rule 144
</TABLE>
In addition, up to 151,065 shares which are issuable pursuant to options
to purchase common stock are not subject to the 180-day lock-up and will be
freely tradable upon exercise of the options. As of May 10, 2000, options to
purchase 19,000 of these shares of common stock had been exercised.
32
<PAGE>
As restrictions on resale end, the market price of our stock could drop
significantly if the holders of restricted shares sell them or are perceived by
the market as intending to sell them.
OUR STOCK PRICE MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS.
Fluctuations in market price and volume are particularly common among
securities of Internet and other technology companies. The market price of our
common stock may fluctuate significantly, in response to the following factors,
some of which are beyond our control:
- variations in our quarterly operating results;
- changes in market valuations of Internet and other technology companies;
- our announcements of significant client contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments;
- our failure to complete significant sales;
- additions or departures of key personnel;
- future sales of our common stock; and
- changes in financial estimates by securities analysts.
In the past, companies that have experienced volatility in the market price
of their common stock have been the object of securities class action
litigation. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and distract management from other
aspects of operating our business.
WE MAY SPEND A SUBSTANTIAL PORTION OF THE NET PROCEEDS OF OUR INITIAL PUBLIC
OFFERING IN WAYS WITH WHICH YOU MAY NOT AGREE.
Our management has broad discretion to spend the net proceeds from our
initial public offering in ways with which you may not agree. Any currently
anticipated uses of the net proceeds of our initial public offering are subject
to change. The failure of our management to apply these funds effectively could
result in unfavorable returns. This could have a material and adverse effect on
our business, results of operations and financial condition, and could cause the
price of our common stock to decline.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of our amended and restated certificate of incorporation, such as
our staggered board of directors, the manner in which director vacancies may be
filled and provisions regarding the calling of stockholder meetings, could make
it more difficult for a third party to acquire us, even if doing so might be
beneficial to our stockholders. In addition, provisions of our amended and
restated bylaws, such as advance notice requirements for stockholder proposals,
and applicable provisions of Delaware law, such as the application of business
combination limitations, could impose similar difficulties. Further, our amended
and restated certificate of incorporation and our amended and restated bylaws
may not be amended without the affirmative vote of at least 66.67% of our board
of directors or without the affirmative vote of not less than 66.67% of the
outstanding shares of our capital stock entitled to vote generally in the
election of directors (considered for this purpose as a single class) cast at a
meeting of our stockholders called for that purpose.
33
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. Our accounts receivable are subject, in the normal course of
business, to collection risks. We regularly assess these risks and have
established policies and business practices to protect against the adverse
effects of collection risks. As a result, we do not anticipate any material
losses in this area.
INTEREST RATE RISK. Our investments are classified as cash and cash
equivalents and marketable securities. Therefore, changes in the market's
interest rates do not affect the value of the investments as recorded by us.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None
(b) None.
(c) Recent Sales of Unregistered Securities:
All information in this section relating to options reflects a three-for-two
stock split of shares of our common stock effected on March 8, 2000 in the form
of a stock dividend. All information in this section relating to shares of
convertible preferred stock reflects the actual shares issued, which converted
into common stock at a ratio of two preferred shares for three common shares
upon the closing of our initial public offering on April 12, 2000.
In the quarter ended March 31, 2000, we issued the following securities that
were not registered under the Securities Act of 1933, as amended (the "Act"):
COMMON STOCK. On January 28, 2000, we issued 62,500 shares of common stock,
par value $0.001 per share ("Common Stock") to Silicon Alley Venture Partners,
LLC pursuant to the exercise of an option to purchase shares of Common Stock, at
an aggregate price of $62,500. On February 29, 2000, we issued 117,187 shares of
Common Stock to Dawntreader Fund I LP pursuant to the exercise of a warrant to
purchase shares of Common Stock, at an aggregate price
34
<PAGE>
of $281,250. On March 8, 2000, in order to effect a three-for-two stock split in
the form of a stock dividend, we issued an aggregate of 2,453,844 shares of
Common Stock to Robert P. LoCascio, Robert Olender, Henry R. Kravis, Mark
Lipschultz, Esther Dyson, Dawntreader Fund I LP and Silicon Alley Venture
Partners, LLC. On March 22, 2000, we issued 16,065 shares of Common Stock to
Ronald Palmeri pursuant to the exercise of an option to purchase shares of
Common Stock at an aggregate price of $10,710. All such issuances were made
under the exemption from registration provided by Section 4(2) of the Act.
CONVERTIBLE PREFERRED STOCK. We issued 3,157,895 shares of Series D
redeemable convertible preferred stock, par value $0.001 per share, on
January 28, 2000 at a purchase price per share of $5.70 for gross proceeds of
$18,000,000 to Dell USA L.P., Austin I, LLC, Van Eyck Partners, LLC, Striped
Marlin Investments, LLC, MSD EC I, LLC, and NBC Interactive Media, Inc. All such
issuances were made under the exemption from registration provided under Section
4(2) of the Act.
OPTIONS. Of the options granted by us pursuant to our 2000 Stock Incentive
Plan and Employee Stock Purchase Plan, the successors to our 1998 Stock Option
and Restricted Stock Purchase Plan, options to purchase 297,750 shares of Common
Stock were cancelled through March 31, 2000 and options to purchase a total of
5,574,405 shares of Common Stock at a weighted average exercise price of $2.61
per share remained outstanding at March 31, 2000. All such grants were made
under the exemptions from registration provided under Rule 701 and Section 4(2)
of the Act.
(d) Use of Proceeds
On April 12, 2000, we consummated our initial public offering of
4,000,000 shares of Common Stock, for which trading on the Nasdaq National
Market commenced on April 7, 2000, pursuant to the Registration Statement on
Form S-1, file number 333-95689, which was declared effective by the
Securities and Exchange Commission on April 6, 2000. The aggregate price of
the offering shares was $32.0 million and our net proceeds after
underwriters' commissions and expenses were approximately $28.3 million. The
managing underwriters of the offering were Chase Securities Inc., Thomas
Weisel Partners LLC and PaineWebber Incorporated. We have invested the
proceeds in cash and cash equivalents.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 28, 2000, in a Written Consent in Lieu of a Special Meeting
of the Stockholders of the Company, the holders of 4,755,899 shares of Common
Stock (out of 4,907,687 shares outstanding) and the holders of 11,184,784
shares of preferred stock, voting on an as converted basis (out of 11,974,852
shares outstanding on an as converted basis), approved an amendment to the
Company's certificate of incorporation, changing the name of the Company from
'Live Person, Inc.' to 'LivePerson, Inc.' and increasing the authorized
Common Stock to 100,000,000 shares. On March 23, 2000, in a Written Consent
in Lieu of a Special Meeting of the Stockholders of the Company, the holders
of 7,377,596 shares of Common Stock, representing all of the then outstanding
shares of Common Stock of the Company and the holders of 17,962,273 shares of
our preferred stock, voting on an as converted basis, representing all of
then outstanding shares of preferred stock, approved our Fourth Amended and
Restated Certificate of Incorporation, our Second Amended and Restated
By-laws, our 2000 Stock Incentive Plan and our Employee Stock Purchase Plan.
35
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three months
ended March 31, 2000.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIVEPERSON, INC.
(Registrant)
Date: May 15, 2000 By: /s/ ROBERT P. LOCASCIO
Name: Robert P. LoCascio
Title: President and Chief Executive
Officer (duly authorized officer)
Date: May 15, 2000 By: /s/ TIMOTHY E. BIXBY
Name: Timothy E. Bixby
Title: Executive Vice President, Chief
Financial Officer and Secretary
(principal financial and accounting
officer)
37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,901
<SECURITIES> 15,058
<RECEIVABLES> 742
<ALLOWANCES> (105)
<INVENTORY> 0
<CURRENT-ASSETS> 25,617
<PP&E> 7,844
<DEPRECIATION> (338)
<TOTAL-ASSETS> 35,852
<CURRENT-LIABILITIES> 6,846
<BONDS> 0
36,990
4
<COMMON> 7
<OTHER-SE> (7,995)
<TOTAL-LIABILITY-AND-EQUITY> 35,852
<SALES> 774
<TOTAL-REVENUES> 774
<CGS> 1,190
<TOTAL-COSTS> 13,638
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,573)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,573)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,573)
<EPS-BASIC> (4.15)
<EPS-DILUTED> (4.15)
</TABLE>
