UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-Q
  x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE
ACT OF 1934
  For
the quarterly period ended SEPTEMBER 30, 2009
  or
   ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE
ACT OF 1934
  For
the transition period from ____________________ to
____________________
  Commission
file number: 0-30141
  LIVEPERSON,
      INC.(Exact
      Name of Registrant as Specified in Its
Charter)
 
 DELAWARE
                          
                          13-3861628(State
      or Other Jurisdiction of
                            Incorporation
      or Organization)
                          
                          (IRS
      Employer Identification No.)462
      SEVENTH AVENUE
                            NEW
      YORK, NEW YORK
                          
                          10018(Address
      of Principal Executive Offices)
                          
                          (Zip
      Code)
 
 (212)
      609-4200(Registrant’s
      Telephone Number, Including Area
Code)
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No  ̈
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes x No  ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one).
  Large
      accelerated filer  ̈
                Accelerated
      filer xNon-accelerated
      filer  ̈
                Smaller
      reporting company   ̈(Do
      not check if a smaller reporting company)
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈ No x
  As of
November 5, 2009, there were 48,511,550 shares of the issuer’s common stock
outstanding.
  
  LIVEPERSON,
INC.
 SEPTEMBER
30, 2009
 FORM
10-Q
 INDEX
  PAGEPART
      I.
                        FINANCIAL
      INFORMATION
                        4ITEM
      1.
                        FINANCIAL
      STATEMENTS
                        4CONDENSED
      CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2009 (UNAUDITED) AND
      DECEMBER 31, 2008
                        4UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS
      ENDED SEPTEMBER 30, 2009 AND 2008
                        5UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
      SEPTEMBER 30, 2009 AND 2008
                        6NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                        7ITEM
      2.
                        MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                        19ITEM
      3.
                        QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                        30ITEM
      4.
                        CONTROLS
      AND PROCEDURES
                        31PART
      II.
                        OTHER
      INFORMATION
                        32ITEM
      1.
                        LEGAL
      PROCEEDINGS
                        32ITEM 1A.
                        RISK
      FACTORS
                        32ITEM
      2.
                        UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                        33ITEM
      5.
                        OTHER
      INFORMATION
                        33ITEM
      6.
                        EXHIBITS
                        34
  2
  FORWARD-LOOKING
STATEMENTS
  STATEMENTS
IN THIS REPORT ABOUT LIVEPERSON, INC. THAT ARE NOT HISTORICAL FACTS ARE
FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS,
ESTIMATES AND PROJECTIONS ABOUT LIVEPERSON AND OUR INDUSTRY. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL FUTURE EVENTS OR RESULTS TO DIFFER MATERIALLY FROM SUCH STATEMENTS.
ANY SUCH FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. IT IS
ROUTINE FOR OUR INTERNAL PROJECTIONS AND EXPECTATIONS TO CHANGE AS THE YEAR OR
EACH QUARTER IN THE YEAR PROGRESS, AND THEREFORE IT SHOULD BE CLEARLY UNDERSTOOD
THAT THE INTERNAL PROJECTIONS AND BELIEFS UPON WHICH WE BASE OUR EXPECTATIONS
MAY CHANGE PRIOR TO THE END OF EACH QUARTER OR THE YEAR. ALTHOUGH THESE
EXPECTATIONS MAY CHANGE, WE ARE UNDER NO OBLIGATION TO INFORM YOU IF THEY DO.
OUR COMPANY POLICY IS GENERALLY TO PROVIDE OUR EXPECTATIONS ONLY ONCE PER
QUARTER, AND NOT TO UPDATE THAT INFORMATION UNTIL THE NEXT QUARTER. ACTUAL
EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN THE PROJECTIONS
OR FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED IN PART II, ITEM 1A, “RISK
FACTORS.”
  3
  PART
I. FINANCIAL INFORMATION
  ITEM
1. FINANCIAL STATEMENTS
  LIVEPERSON,
INC.
  CONDENSED
CONSOLIDATED BALANCE SHEETS
 (IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
  September 30, 2009
                
                
                December 31, 2008(Unaudited)
                
                
                (Note
      1(B))ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                36,486
                
                
                $
                25,500Accounts
      receivable, net of allowance for doubtful accounts of $370 and
      $340  as of September 30, 2009 and December 31, 2008,
      respectively
                
                
                10,442
                
                
                
                7,574Prepaid
      expenses and other current assets
                
                
                2,545
                
                
                
                1,706Deferred
      tax assets, net
                
                
                812
                
                
                
                1,772Total
      current assets
                
                
                50,285
                
                
                
                36,552Property
      and equipment, net
                
                
                8,986
                
                
                
                7,473Intangibles,
      net
                
                
                3,211
                
                
                
                4,319Goodwill
                
                
                23,906
                
                
                
                24,388Deferred
      tax assets, net
                
                
                7,654
                
                
                
                7,330Deferred
      implementation costs
                
                
                134
                
                
                
                147Security
      deposits
                
                
                321
                
                
                
                349Other
      assets
                
                
                1,617
                
                
                
                1,390Total
      assets
                
                $
                96,114
                
                
                $
                81,948LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                4,739
                
                
                $
                3,555Accrued
      expenses
                
                
                10,103
                
                
                
                9,088Deferred
      revenue
                
                
                4,670
                
                
                
                3,985Total
      current liabilities
                
                
                19,512
                
                
                
                16,628Deferred
      revenue, net of current
                
                
                449
                
                
                
                347Other
      liabilities
                
                
                1,617
                
                
                
                1,390Total
      liabilities
                
                
                21,578
                
                
                
                18,365Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $.001 par value per share; 5,000,000 shares authorized, 0 shares
      issued and outstanding at September 30, 2009 and December 31,
      2008
                
                
                —
                
                
                
                —Common
      stock, $.001 par value per share; 100,000,000 shares authorized,
      48,380,800 shares issued and outstanding at September 30, 2009 and
      47,357,017 shares issued and outstanding at December 31,
    2008
                
                
                48
                
                
                
                47Additional
      paid-in capital
                
                
                187,181
                
                
                
                180,869Accumulated
      deficit
                
                
                (112,523
                )
                
                
                (117,195
                )Accumulated
      other comprehensive loss
                
                
                (170
                )
                
                
                (138
                )Total
      stockholders’ equity
                
                
                74,536
                
                
                
                63,583Total
      liabilities and stockholders’ equity
                
                $
                96,114
                
                
                $
                81,948
  SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED
 CONSOLIDATED
FINANCIAL STATEMENTS.
  4
  LIVEPERSON,
INC.
  CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
 (IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 UNAUDITED
 
 Three Months Ended
                    September 30,
                
                
                Nine Months Ended
                    September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenue
                
                $
                22,262
                
                
                $
                19,375
                
                
                $
                62,722
                
                
                $
                55,048Operating
      expenses:Cost
      of revenue
                
                
                5,495
                
                
                
                5,226
                
                
                
                15,007
                
                
                
                15,346Product
      development
                
                
                3,109
                
                
                
                3,299
                
                
                
                8,949
                
                
                
                9,876Sales
      and marketing
                
                
                6,535
                
                
                
                6,624
                
                
                
                19,947
                
                
                
                18,864General
      and administrative
                
                
                3,312
                
                
                
                3,399
                
                
                
                9,991
                
                
                
                10,034Amortization
      of intangibles
                
                
                118
                
                
                
                352
                
                
                
                662
                
                
                
                1,134Total
      operating expenses
                
                
                18,569
                
                
                
                18,900
                
                
                
                54,556
                
                
                
                55,254Income
      (loss) from operations
                
                
                3,693
                
                
                
                475
                
                
                
                8,166
                
                
                
                (206
                )Other
      income (expense):Financial
      income (expense)
                
                
                75
                
                
                
                (123
                )
                
                
                (21
                )
                
                
                (125
                )Interest
      income
                
                
                15
                
                
                
                79
                
                
                
                71
                
                
                
                270Total
      other income (expense), net
                
                
                90
                
                
                
                (44
                )
                
                
                50
                
                
                
                145Income
      (loss) before provision for (benefit from) income taxes
                
                
                3,783
                
                
                
                431
                
                
                
                8,216
                
                
                
                (61
                )Provision
      for (benefit from) income taxes
                
                
                1,516
                
                
                
                21
                
                
                
                3,544
                
                
                
                (68
                )Net
      income
                
                $
                2,267
                
                
                $
                410
                
                
                $
                4,672
                
                
                $
                7Basic
      net income per common share
                
                $
                .05
                
                
                $
                0.01
                
                
                $
                0.10
                
                
                $
                0.00Diluted
      net income per common share
                
                $
                .05
                
                
                $
                0.01
                
                
                $
                0.10
                
                
                $
                0.00Weighted
      average shares outstanding used in basic net income per common share
      calculation
                
                
                47,968,777
                
                
                
                47,229,252
                
                
                
                47,684,047
                
                
                
                47,433,924Weighted
      average shares outstanding used in diluted net income per common share
      calculation
                
                
                49,683,730
                
                
                
                48,678,016
                
                
                
                48,553,525
                
                
                
                49,064,151
  Income
from operations for the three and nine months ended September 30, 2009 includes
stock-based compensation expense related to ASC 718-10 in the amount of $1,211
and $3,491, respectively. Income (loss) from operations for the three and nine
months ended September 30, 2008 includes stock-based compensation expense
related to ASC 718-10 in the amount of $1,014 and $3,178, respectively. See Note
1(E).
  SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED
 CONSOLIDATED
FINANCIAL STATEMENTS.
  5
  LIVEPERSON,
INC.
  CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN
THOUSANDS)
 UNAUDITED
  Nine Months Ended
                    September 30,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                4,672
                
                
                $
                7Adjustments
      to reconcile net income to net cash provided by operating
      activities:Stock-based
      compensation expense
                
                
                3,491
                
                
                
                3,178Depreciation
                
                
                2,448
                
                
                
                1,324Amortization
      of intangibles
                
                
                1,583
                
                
                
                2,055Deferred
      income taxes
                
                
                636
                
                
                
                (39
                )Provision
      for doubtful accounts
                
                
                30
                
                
                
                68CHANGES
      IN OPERATING ASSETS AND LIABILITIES:Accounts
      receivable
                
                
                (2,899
                )
                
                
                (952
                )Prepaid
      expenses and other current assets
                
                
                (833
                )
                
                
                (523
                )Deferred
      implementation costs
                
                
                13
                
                
                
                55Security
      deposits
                
                
                28
                
                
                
                114Accounts
      payable
                
                
                1,309
                
                
                
                1,054Accrued
      expenses
                
                
                1,581
                
                
                
                (494
                )Deferred
      revenue
                
                
                787
                
                
                
                408Net
      cash provided by operating activities
                
                
                12,846
                
                
                
                6,255CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment, including capitalized software
                
                
                (4,091
                )
                
                
                (5,393
                )Acquisition
      of patents
                
                
                (475
                )
                
                
                -Acquisition
      of Kasamba
                
                
                —
                
                
                
                (112
                )Acquisition
      of Proficient
                
                
                (84
                )
                
                
                (132
                )Net
      cash used in investing activities
                
                
                (4,650
                )
                
                
                (5,637
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repurchase
      of common stock
                
                
                (28
                )
                
                
                (3,680
                )Excess
      tax benefit from the exercise of employee stock options
                
                
                1,248
                
                
                
                -Proceeds
      from issuance of common stock in connection with the exercise of
      options
                
                
                1,603
                
                
                
                655Net
      cash provided by (used in) financing activities
                
                
                2,823
                
                
                
                (3,025
                )Effect
      of foreign exchange rate changes on cash and cash
    equivalents
                
                
                (33
                )
                
                
                (42
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                10,986
                
                
                
                (2,449
                )Cash
      and cash equivalents at the beginning of the period
                
                
                25,500
                
                
                
                26,222Cash
      and cash equivalents at the end of the period
                
                $
                36,486
                
                
                $
                23,773
  Supplemental
disclosure of non-cash investing activities:
  During
the nine months ended September 30, 2009, the Company settled a pre-acquisition
contingency resulting in a decrease in accrued expenses in the amount of
$566.
  Cash
flows from investing for the nine months ended September 30, 2009 does not
include the purchases of approximately $147 of capitalized equipment related to
the Company’s colocation facility as the corresponding invoices are included in
accounts payable at September 30, 2009, and therefore did not have an impact on
cash flows for the period.
  Cash
flows from investing for the nine months ended September 30, 2008 does not
include the purchases of approximately $936 of capitalized equipment related to
the Company’s colocation facility as the corresponding invoices are included in
accounts payable at September 30, 2008, and therefore did not have an impact on
cash flows for the period.
  SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED
 CONSOLIDATED
FINANCIAL STATEMENTS.
  6
  LIVEPERSON,
INC.
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
  (1)   SUMMARY
OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
  (A)  SUMMARY
OF OPERATIONS
  LivePerson,
Inc. (the “Company” or “LivePerson”) was incorporated in the State of Delaware
in 1995. The Company commenced operations in 1996. LivePerson provides online
engagement solutions that facilitate real-time assistance and expert
advice.
  The
Company’s primary revenue source is the sale of the LivePerson services to
businesses of all sizes. The Company also facilitates online transactions
between independent service providers (“Experts”) who provide expert online
advice to individual consumers (“Users”). Headquartered in New York City, the
Company’s product development staff, help desk and online sales support are
located in Israel. The Company also maintains sales and professional services
offices in Atlanta and the United Kingdom.
  (B)  UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
  The
accompanying condensed consolidated financial statements as of September 30,
2009 and for the three and nine months ended September 30, 2009 and 2008 are
unaudited. In the opinion of management, the unaudited condensed consolidated
financial statements have been prepared on the same basis as the annual
financial statements and reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the consolidated financial
position of LivePerson as of September 30, 2009, and the consolidated results of
operations and cash flows for the interim periods ended September 30, 2009 and
2008. The financial data and other information disclosed in these notes to the
condensed consolidated financial statements related to these periods are
unaudited. The results of operations for any interim period are not necessarily
indicative of the results of operations for any other future interim period or
for a full fiscal year. The condensed consolidated balance sheet at December 31,
2008 has been derived from audited consolidated financial statements at that
date.
  Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”). These unaudited interim condensed consolidated
financial statements should be read in conjunction with the Company’s audited
consolidated financial statements and notes thereto for the year ended December
31, 2008, included in the Company’s Annual Report on Form 10-K filed with the
SEC on March 13, 2009.
  The
Company has evaluated subsequent events through November 5, 2009, which is the
date the financial statements were available to be issued.
  (C)  RECLASSIFICATIONS
  Certain
prior year financial information has been reclassified to conform with fiscal
2009 financial statement presentation.
  (D)  REVENUE
RECOGNITION
  The
majority of the Company’s revenue is generated from monthly service revenues and
related professional services from the sale of the LivePerson services. Because
the Company provides its application as a service, the Company follows the
provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 605-10-S99, “Revenue Recognition” and ASC 605-25, “Revenue
Recognition with Multiple-Element Arrangements”. The Company charges a monthly
fee, which varies by service and client usage. The majority of the Company’s
larger clients also pay a professional services fee related to implementation.
The Company defers these implementation fees and associated direct costs and
recognizes them ratably over the expected term of the client relationship upon
commencement of the hosting services. The Company may also charge professional
service fees related to additional training, business consulting and analysis in
support of the LivePerson services.
  7
  The
Company also sells certain of the LivePerson services directly via Internet
download. These services are marketed as LivePerson Pro and LivePerson Contact
Center for small and mid-sized businesses (“SMBs”), and are paid for almost
exclusively by credit card. Credit card payments accelerate cash flow and reduce
the Company’s collection risk, subject to the merchant bank’s right to hold back
cash pending settlement of the transactions. Sales of LivePerson Pro and
LivePerson Contact Center may occur with or without the assistance of an online
sales representative, rather than through face-to-face or telephone contact that
is typically required for traditional direct sales.
  The
Company recognizes monthly service revenue based upon the fee charged for the
LivePerson services, provided that there is persuasive evidence of an
arrangement, no significant Company obligations remain, collection of the
resulting receivable is probable and the amount of fees to be paid is fixed or
determinable. The Company’s service agreements typically have twelve month terms
and, in some cases, are terminable or may terminate upon 30 to 90 days’ notice
without penalty. When professional service fees provide added value to the
customer on a standalone basis, the Company recognizes professional service fees
upon completion and customer acceptance because they have established objective
and reliable evidence of the fair value of the undelivered hosting services. If
a professional services arrangement does not qualify for separate accounting,
the Company recognizes the fees, and the related labor costs, ratably over a
period of 48 months, representing the Company’s current estimate of the term of
the client relationship.
  For
revenue generated from online transactions between Experts and Users, the
Company recognizes revenue net of the expert fees in accordance with ASC 605-45,
“Principal Agent Considerations”, due to the fact that the Company performs as
an agent without any risk of loss for collection. The Company collects a fee
from the consumer and retains a portion of the fee, and then remits the balance
to the Expert. Revenue from these transactions is recognized when there is
persuasive evidence of an arrangement, no significant Company obligations
remain, collection of the resulting receivable is probable and the amount of
fees to be paid is fixed or determinable.
  (E)  STOCK-BASED
COMPENSATION
  The
Company follows FASB ASC 718-10, “Stock Compensation”, which addresses the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services, with a primary focus on transactions in which an entity
obtains employee services in share-based payment transactions. ASC 718-10 is a
revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” and
supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees,” and its related implementation guidance. ASC 718-10
requires measurement of the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). Incremental compensation costs arising from
subsequent modifications of awards after the grant date must be
recognized.
  The
Company adopted ASC 718-10 using the modified prospective transition method,
which requires the application of the accounting standard as of January 1, 2006.
The Company’s Consolidated Financial Statements as of and for the three and nine
months ended September 30, 2009 and 2008 reflect the impact of ASC 718-10. ASC
718-10 requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company’s Consolidated
Statements of Operations. Stock-based compensation recognized in the Company’s
Consolidated Statements of Income for the three and nine months ended September
30, 2009 and 2008 includes compensation expense for share-based awards granted
prior to, but not fully vested as of January 1, 2006 based on the grant date
fair value estimated in accordance with ASC 718-10 as well as compensation
expense for share-based awards granted subsequent to January 1, 2006 in
accordance with ASC 718-10. The Company currently uses the Black-Scholes option
pricing model to determine grant date fair value.
  8
  The
following table summarizes stock-based compensation expense related to employee
stock options under ASC 718-10 included in Company’s Statements of Income for
the three and nine months ended September 30, 2009 and 2008:
  Three Months Ended
                      September 30,
                  
                  
                  Nine Months Ended
                      September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Cost
      of revenue
                  
                  $
                  213
                  
                  
                  $
                  145
                  
                  
                  $
                  579
                  
                  
                  $
                  420Product
      development expense
                  
                  
                  356
                  
                  
                  
                  302
                  
                  
                  
                  1,030
                  
                  
                  
                  1,015Sales
      and marketing expense
                  
                  
                  361
                  
                  
                  
                  292
                  
                  
                  
                  961
                  
                  
                  
                  881General
      and administrative expense
                  
                  
                  281
                  
                  
                  
                  275
                  
                  
                  
                  921
                  
                  
                  
                  862Total
      stock based compensation included in operating expenses
                  
                  $
                  1,211
                  
                  
                  $
                  1,014
                  
                  
                  $
                  3,491
                  
                  
                  $
                  3,178
  The per
share weighted average fair value of stock options granted and assumed during
the three and nine months ended September 30, 2009 was $2.33 and $1.24,
respectively. The per share weighted average fair value of stock options granted
and assumed during the three and nine months ended September 30, 2008 was $1.65
and $1.93, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
  Three Months Ended
                          September 30,
                      
                      
                      Nine Months Ended
                          September 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Dividend
      yield
                      
                      
                      0.0
                      
                      
                      
                      0.0
                      
                      
                      
                      0.0
                      
                      
                      
                      0.0Risk-free
      interest rate
                      
                      
                      3.4%-3.8
                      
                      
                      
                      3.9%-4.0
                      
                      
                      
                      2.8%-3.9
                      
                      
                      
                      1.9%-4.0Expected
      life (in years)
                      
                      
                      5.0
                      
                      
                      
                      4.9
                      
                      
                      
                      5.0
                      
                      
                      
                      4.2-4.9Historical
      volatility
                      
                      
                      64.6%-65.7
                      
                      
                      
                      68.5
                      
                      
                      
                      64.6%-68.2
                      
                      
                      
                      68.5%-71.5
  During
1998, the Company established the Stock Option and Restricted Stock Purchase
Plan (the “1998 Plan”). Under the 1998 Plan, the Board of Directors could issue
incentive stock options or nonqualified stock options to purchase up to
5,850,000 shares of common stock. The 2000 Stock Incentive Plan (the “2000
Plan”) succeeded the 1998 Plan. Under the 2000 Plan, the options which had been
outstanding under the 1998 Plan were incorporated in the 2000 Plan increasing
the number of shares available for issuance under the plan by approximately
4,150,000, thereby reserving for issuance 10,000,000 shares of common stock in
the aggregate. Pursuant to the provisions of the 2000 Plan, the number of shares
of common stock available for issuance thereunder automatically increases on the
first trading day in each calendar year by an amount equal to three percent (3%)
of the total number of shares of the Company’s common stock outstanding on the
last trading day of the immediately preceding calendar year, but in no event
shall such annual increase exceed 1,500,000 shares.  As of December
31, 2008, approximately 12,385,000 shares of common stock were reserved for
issuance under the 2000 Plan (taking into account all option exercises through
December 31, 2008).
  The
Company established the 2009 Stock Incentive Plan (the “2009 Plan”) as a
successor to the 2000 Plan. Under the 2009 Plan, the options which had been
outstanding under the 2000 Plan were incorporated into the 2009 Plan and the
Company increased the number of shares available for issuance under the plan by
6,000,000, thereby reserving for issuance 19,567,744 shares of common stock in
the aggregate. Options to acquire common stock granted thereunder have ten-year
terms. As of September 30, 2009, approximately 18,880,000 shares of common stock
were reserved for issuance under the 2009 Plan (taking into account all option
exercises through September 30, 2009). As of September 30, 2009, there was
$7,779 of total unrecognized compensation cost related to nonvested share-based
compensation arrangements. That cost, as of September 30, 2009, is expected to
be recognized over a weighted average period of approximately 1.9
years.
  9
  A summary
of the Company’s stock option activity and weighted average exercise prices is
as follows:
  Options
                
                
                Weighted
                    Average
                    Exercise PriceOptions outstanding at
      December 31, 2008
                
                
                9,939,045
                
                
                $
                3.67Options
      granted
                
                
                1,630,000
                
                
                
                2.13Options
      exercised
                
                
                (1,030,006
                )
                
                
                1.60Options
      cancelled
                
                
                (939,859
                )
                
                
                3.64Options
      outstanding at September 30, 2009
                
                
                9,599,180
                
                
                
                3.61Options
      exercisable at September 30, 2009
                
                
                5,380,862
                
                
                $
                3.69
  The total
intrinsic value of stock options exercised during the period ended September 30,
2009 was approximately $2,130. The total intrinsic value of options exercisable
at September 30, 2009 was approximately $8,751. The total intrinsic value of
options expected to vest is approximately $7,485.
  A summary
of the status of the Company’s nonvested options as of December 31, 2008, and
changes during the nine months ended September 30, 2009 is as
follows:
  Options
                
                
                Weighted
                    Average Grant-
                    Date Fair ValueNonvested
      Options at December 31, 2008
                
                
                4,471,251
                
                
                $
                2.59Granted
                
                
                1,630,000
                
                
                
                1.24Vested
                
                
                (1,344,048
                )
                
                
                2.67Cancelled
                
                
                (538,885
                )
                
                
                2.19Nonvested
      Options at September 30, 2009
                
                
                4,218,318
                
                
                $
                2.09
  (F)  BASIC
AND DILUTED NET INCOME PER SHARE
  The
Company calculates earnings per share in accordance with the provisions of ASC
260-10 and the guidance of  SEC Staff Accounting Bulletin (“SAB”) No.
98. Under ASC 260-10, basic EPS excludes dilution for common stock equivalents
and is computed by dividing net income or loss attributable to common
shareholders by the weighted average number of common shares outstanding for the
period. All options, warrants or other potentially dilutive instruments issued
for nominal consideration are required to be included in the calculation of
basic and diluted net income attributable to common stockholders. Diluted EPS is
calculated using the treasury stock method and reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock and resulted in the issuance of common
stock.
  Diluted
net income per common share for the three and nine months ended September 30,
2009 includes the effect of options to purchase 4,745,087 and 3,671,729 shares,
respectively, of common stock with a weighted average exercise price of $2.16
and $1.85, respectively. Diluted net income per common share for the three and
nine months ended September 30, 2008 includes the effect of options to purchase
2,704,344 and 3,576,467 shares, respectively, of common stock with a weighted
average exercise price of $1.37 and $1.75, respectively.
  A
reconciliation of shares used in calculating basic and diluted earnings per
share follows:
  Three Months Ended
                    September 30,
                
                
                Nine Months Ended
                    September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Basic
                
                
                47,968,777
                
                
                
                47,229,252
                
                
                
                47,684,047
                
                
                
                47,433,924Effect
      of assumed exercised options
                
                
                1,714,953
                
                
                
                1,448,764
                
                
                
                869,478
                
                
                
                1,630,227Diluted
                
                
                49,683,730
                
                
                
                48,678,016
                
                
                
                48,553,525
                
                
                
                49,064,151
  10
  (G)  SEGMENT
REPORTING
  The
Company accounts for its segment information in accordance with the provisions
of ASC 280-10, “Segment Reporting”. ASC 280-10 establishes annual and interim
reporting standards for operating segments of a company. ASC 280-10 requires
disclosures of selected segment-related financial information about products,
major customers, and geographic areas based on the Company’s internal accounting
methods. Due to the acquisition of Kasamba Inc. in October 2007, the Company is
organized into two operating segments for purposes of making operating decisions
and assessing performance. The Company may reorganize its operations in the
future when the integration of its products and services are complete. The
Business segment supports and manages real-time online interactions - chat,
voice/click-to-call, email and self-service/knowledgebase and sells its products
and services to global corporations of all sizes. The Consumer segment
facilitates online transactions between Experts and Users and sells its services
to consumers. Both segments currently generate their revenue primarily in the
U.S. The chief operating decision-makers evaluate performance, make operating
decisions, and allocate resources based on the operating income of each segment.
The reporting segments follow the same accounting polices used in the
preparation of the Company’s consolidated financial statements and are described
in the summary of significant accounting policies. The Company allocates cost of
revenue, sales and marketing and amortization of purchased intangibles to the
segments, but it does not allocate product development, general and
administrative, non cash-compensation expenses and income taxes because
management does not use this information to measure performance of the operating
segments. There are currently no inter-segment sales.
  Summarized
financial information by segment for the three months ended September 30, 2009,
based on the Company’s internal financial reporting system utilized by the
Company’s chief operating decision makers, follows:
  Consolidated
                
                
                Corporate
                
                
                Business
                
                
                ConsumerRevenue:Hosted
      services - Business
                
                $
                18,417
                
                
                $
                —
                
                
                $
                18,417
                
                
                $
                —Hosted
      services - Consumer
                
                
                3,123
                
                
                
                —
                
                
                
                —
                
                
                
                3,123Professional
      services
                
                
                722
                
                
                
                —
                
                
                
                722
                
                
                
                —Total
      revenue
                
                
                22,262
                
                
                
                —
                
                
                
                19,139
                
                
                
                3,123Cost
      of revenue
                
                
                5,495
                
                
                
                —
                
                
                
                4,603
                
                
                
                892Sales
      and marketing
                
                
                6,535
                
                
                
                —
                
                
                
                4,808
                
                
                
                1,727Amortization
      of intangibles
                
                
                118
                
                
                
                —
                
                
                
                46
                
                
                
                72Unallocated
      corporate expenses
                
                
                6,421
                
                
                
                6,421
                
                
                
                —
                
                
                
                —Operating
      income (loss)
                
                $
                3,693
                
                
                $
                (6,421
                )
                
                $
                9,682
                
                
                $
                432
  Summarized
financial information by segment for the three months ended September 30, 2008,
based on the Company’s internal financial reporting system utilized by the
Company’s chief operating decision makers, follows:
  Consolidated
                
                
                Corporate
                
                
                Business
                
                
                ConsumerRevenue:Hosted
      services - Business
                
                $
                15,769
                
                
                $
                —
                
                
                $
                15,769
                
                
                $
                —Hosted
      services - Consumer
                
                
                2,647
                
                
                
                —
                
                
                
                —
                
                
                
                2,647Professional
      services
                
                
                959
                
                
                
                —
                
                
                
                959
                
                
                
                —Total
      revenue
                
                
                19,375
                
                
                
                —
                
                
                
                16,728
                
                
                
                2,647Cost
      of revenue
                
                
                5,226
                
                
                
                —
                
                
                
                4,268
                
                
                
                958Sales
      and marketing
                
                
                6,624
                
                
                
                —
                
                
                
                4,572
                
                
                
                2,052Amortization
      of intangibles
                
                
                352
                
                
                
                —
                
                
                
                202
                
                
                
                150Unallocated
      corporate expenses
                
                
                6,698
                
                
                
                6,698
                
                
                
                —
                
                
                
                —Operating
      income (loss)
                
                $
                475
                
                
                $
                (6,698
                )
                
                $
                7,686
                
                
                $
                (513
                )
  11
  Revenues
attributable to domestic and foreign operations for the three months ended
September 30, 2009 and 2008, follows:
  September 30,2009
                
                
                2008United
      States
                
                $
                16,874
                
                
                $
                14,888United
      Kingdom
                
                
                2,439
                
                
                
                2,250Other
      Countries
                
                
                2,949
                
                
                
                2,237Total
      revenue
                
                $
                22,262
                
                
                $
                19,375
  Summarized
financial information by segment for the nine months ended September 30, 2009,
based on the Company’s internal financial reporting system utilized by the
Company’s chief operating decision makers, follows:
  Consolidated
                
                
                Corporate
                
                
                Business
                
                
                ConsumerRevenue:Hosted
      services - Business
                
                $
                52,075
                
                
                $
                —
                
                
                $
                52,075
                
                
                $
                —Hosted
      services - Consumer
                
                
                8,530
                
                
                
                —
                
                
                
                —
                
                
                
                8,530Professional
      services
                
                
                2,117
                
                
                
                —
                
                
                
                2,117
                
                
                
                —Total
      revenue
                
                
                62,722
                
                
                
                —
                
                
                
                54,192
                
                
                
                8,530Cost
      of revenue
                
                
                15,007
                
                
                
                —
                
                
                
                12,369
                
                
                
                2,638Sales
      and marketing
                
                
                19,947
                
                
                
                —
                
                
                
                14,716
                
                
                
                5,231Amortization
      of intangibles
                
                
                662
                
                
                
                —
                
                
                
                446
                
                
                
                216Unallocated
      corporate expenses
                
                
                18,940
                
                
                
                18,940
                
                
                
                —
                
                
                
                —Operating
      income (loss)
                
                $
                8,166
                
                
                $
                (18,940
                )
                
                $
                26,661
                
                
                $
                445
  Summarized
financial information by segment for the nine months ended September 30, 2008,
based on the Company’s internal financial reporting system utilized by the
Company’s chief operating decision makers, follows:
  Consolidated
                
                
                Corporate
                
                
                Business
                
                
                ConsumerRevenue:Hosted
      services - Business
                
                $
                44,257
                
                
                $
                —
                
                
                $
                44,257
                
                
                $
                —Hosted
      services - Consumer
                
                
                8,132
                
                
                
                —
                
                
                
                —
                
                
                
                8,132Professional
      services
                
                
                2,659
                
                
                
                —
                
                
                
                2,659
                
                
                
                —Total
      revenue
                
                
                55,048
                
                
                
                —
                
                
                
                46,916
                
                
                
                8,132Cost
      of revenue
                
                
                15,346
                
                
                
                —
                
                
                
                12,520
                
                
                
                2,826Sales
      and marketing
                
                
                18,864
                
                
                
                —
                
                
                
                13,356
                
                
                
                5,508Amortization
      of intangibles
                
                
                1,134
                
                
                
                —
                
                
                
                686
                
                
                
                448Unallocated
      corporate expenses
                
                
                19,910
                
                
                
                19,910
                
                
                
                —
                
                
                
                —Operating
      income (loss)
                
                $
                (206
                )
                
                $
                (19,910
                )
                
                $
                20,354
                
                
                $
                (650
                )
  Revenues
attributable to domestic and foreign operations for the nine months ended
September 30, 2009 and 2008, follows:
  September 30,2009
                
                
                2008United
      States
                
                $
                46,927
                
                
                $
                42,599United
      Kingdom
                
                
                6,617
                
                
                
                6,135Other
      Countries
                
                
                9,178
                
                
                
                6,314Total
      revenue
                
                $
                62,722
                
                
                $
                55,048
  12
  Long-lived
assets by geographic region follows:
  September 30, 2009
                
                
                December 31, 2008United
      States
                
                $
                31,699
                
                
                $
                29,664Israel
                
                
                14,130
                
                
                
                15,732Total
      long-lived assets
                
                $
                45,829
                
                
                $
                45,396
  (H)  GOODWILL
AND INTANGIBLE ASSETS
  The
changes in the carrying amount of goodwill for the nine months ended September
30, 2009 are as follows:
  Total
                
                
                Business
                
                
                ConsumerBalance
      as of December 31, 2008
                
                $
                24,388
                
                
                $
                15,798
                
                
                $
                8,590Adjustments
      to goodwill:Contingent
      earnout payments
                
                
                84
                
                
                
                84
                
                
                
                —Settlement
      of pre-acquisition contingency
                
                
                (566
                )
                
                
                —
                
                
                
                (566
                )Balance
      as of September 30, 2009
                
                $
                23,906
                
                
                $
                15,882
                
                
                $
                8,024
  The
changes in the carrying amount of goodwill for the year ended December 31, 2008
are as follows:
  Total
                
                
                Business
                
                
                ConsumerBalance
      as of December 31, 2007
                
                $
                51,684
                
                
                $
                18,744
                
                
                $
                32,940Adjustments
      to goodwill:Impairment
                
                
                (23,501
                )
                
                
                —
                
                
                
                (23,501
                )Release
      of valuation reserve on deferred tax asset
                
                
                (3,867
                )
                
                
                (3,025
                )
                
                
                (842
                )Other
                
                
                72
                
                
                
                79
                
                
                
                (7
                )Balance
      as of December 31, 2008
                
                $
                24,388
                
                
                $
                15,798
                
                
                $
                8,590
  Intangible
assets are summarized as follows (see Note 3):
  Acquired
Intangible Assets
  As of September 30, 2009Gross
                      Carrying
                      Amount
                  
                  Weighted
                      Average
                      Amortization
                      Period
                  
                  Accumulated
                      AmortizationAmortizing
      intangible assets:Technology
                  
                  $
                  5,410
                  
                  3.8
      years
                  
                  $
                  2,955Customer
      contracts/customer lists
                  
                  
                  2,400
                  
                  3.0
      years
                  
                  
                  2,400Trade
      names
                  
                  
                  630
                  
                  3.0
      years
                  
                  
                  420Non-compete
      agreements
                  
                  
                  410
                  
                  1.2
      years
                  
                  
                  410Patents
                  
                  
                  475
                  
                  11.0
      years
                  
                  
                  7Other
                  
                  
                  235
                  
                  3.0
      years
                  
                  
                  157Total
                  
                  $
                  9,560
                  
                  
                  
                  $
                  6,349
  13
  As of December 31, 2008Gross
                        Carrying
                        Amount
                    
                    Weighted
                        Average
                        Amortization
                        Period
                    
                    Accumulated
                        AmortizationAmortizing
      intangible assets:Technology
                    
                    $
                    5,410
                    
                    3.8
      years
                    
                    $
                    2,034Customer
      contracts/customer lists
                    
                    
                    2,400
                    
                    3.0
      years
                    
                    
                    1,961Trade
      names
                    
                    
                    630
                    
                    3.0
      years
                    
                    
                    263Non-compete
      agreements
                    
                    
                    410
                    
                    1.2
      years
                    
                    
                    410Other
                    
                    
                    235
                    
                    3.0
      years
                    
                    
                    98Total
                    
                    $
                    9,085
                    
                    
                    
                    $
                    4,766
  Amortization
expense is calculated on a straight-line basis over the estimated useful life of
the asset. Aggregate amortization expense for intangible assets was $425 and
$1,583 for the three and nine months ended September 30, 2009, respectively, and
$659 and $2,055 for the three and nine months ended September 30, 2008,
respectively. Estimated amortization expense for the next five years is: $390 in
2009, $1,487 in 2010, $964 in 2011, $43 in 2012, $43 in 2013 and $284
thereafter.
  (I)  RECENTLY
ISSUED FASB ACCOUNTING STANDARDS UPDATES
  In
October 2009, FASB Accounting Standards Update 2009-13 addressed the accounting
for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than as a combined unit.
Specifically, this update amends the criteria in Subtopic 605-25, Revenue
Recognition-Multiple-Element Arrangements, for separating consideration in
multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method. In
addition, this guidance significantly expands required disclosures related to a
vendor’s multiple-deliverable revenue arrangements. FASB Accounting Standards
Update 2009-13 is effective prospectively for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010.
Early adoption is permitted. The Company is currently assessing the impact of
this update on the its consolidated financial statements.
  In
September 2009, the FASB published FASB Accounting Standards Update No. 2009-12,
Fair Value Measurements and Disclosures (Topic 820)—Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its Equivalent). This
update amends Subtopic 820-10, Fair Value Measurements and Disclosures—Overall,
to permit a reporting entity to measure the fair value of certain investments on
the basis of the net asset value per share of the investment (or its
equivalent). This update also requires new disclosures, by major category of
investments about the attributes of investments within the scope of this
amendment to the Codification. The guidance in this update is effective for
interim and annual periods ending after December 15, 2009. Early application is
permitted. The adoption of this update will not have a material impact on the
Company’s consolidated financial statements.
  In August
2009, FASB Accounting Standards Update 2009-05 included amendments to Subtopic
820-10, Fair Value Measurements and Disclosures—Overall, for the fair value
measurement of liabilities and provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the techniques provided for in this update. This update also clarifies
that when estimating the fair value of a liability, a reporting entity is not
required to include a separate input or adjustment to other inputs relating to
the existence of a restriction that prevents the transfer of a liability and
that both a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when traded as
an asset in an active market when no adjustments to the quoted price of the
asset are required are Level 1 fair value measurements. The adoption of
this update did not have a material impact on the Company’s consolidated
financial statements.
  14
  In July
2009, the FASB issued ASC 105-10, “Generally Accepted Accounting Principles”.
ASC 105-10 established the FASB Accounting Standards Codification as the single
source of authoritative U.S. generally accepted accounting principles (“U.S.
GAAP”) recognized by the FASB to be applied by nongovernmental entities. ASC
105-10 will supersede all existing non-SEC accounting and reporting standards.
All other nongrandfathered non-SEC accounting literature not included in ASC
105-10 will become nonauthoritative. Following ASC 105-10, the FASB will not
issue new standards in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards
Updates, which will serve only to: (a) update the Codification; (b) provide
background information about the guidance; and (c) provide the bases for
conclusions on the change(s) in the Codification. ASC 105-10 and the
Codification are effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of ASC 105-10 did
not have a material impact on the Company’s consolidated financial
statements.
  In May
2009, the FASB issued ASC 855-10, “Subsequent Events”. ASC 855-10 established
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. Specifically, ASC 855-10 provides; (a) the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements; (b) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements; and (c) the disclosures that an entity should
make about events or transactions that occurred after the balance sheet date.
ASC 855-10 is effective for interim or annual financial periods ending after
June 15, 2009, and shall be applied prospectively. The adoption of this ASC did
not have a material impact on the Company’s consolidated financial
statements.
  In April
2009, the FASB issued ASC 825-10-65, Interim Disclosures about Fair Value of
Financial Instruments. ASC 825-10-65 amends ASC 825-10-50, Disclosures About
Fair Value of Financial Instrument, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. ASC 825-10-65 also amends ASC 270-10,
Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. ASC 825-10-65 is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. ASC 825-10-65 does not require disclosures
for earlier periods presented for comparative purposes at initial adoption. In
periods after initial adoption, ASC 825-10-65 requires comparative disclosures
only for periods ending after initial adoption. The adoption of this ASC did not
have a material impact on the Company’s consolidated financial
statements.
  In April
2009, the FASB issued ASC 805-10, “Accounting for Assets Acquired and
Liabilities assumed in a Business Combination That Arise from Contingencies —an
amendment of FASB Statement No. 141 (Revised December 2007), Business
Combinations”. ASC 805-10 addresses application issues raised by preparers,
auditors, and members of the legal profession on initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination. ASC
805-10 is effective for assets or liabilities arising from contingencies in
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. ASC 805-10 will have an impact on the Company’s accounting for any
future acquisitions and its consolidated financial statements.
  In April
2008, the FASB issued ASC 350-10, “Determination of the Useful Life of
Intangible Assets”. ASC 350-10 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under ASC 350-10, “Goodwill and Other Intangible
Assets.” ASC No. 350-10 is effective for fiscal years beginning after December
15, 2008. The adoption of this ASC did not have a material impact on the
Company’s consolidated financial statements.
  15
  In
March 2008, the FASB issued ASC 815-10, “Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133”. ASC 815-10 requires enhanced disclosures regarding derivatives
and hedging activities, including: (a) the manner in which an entity uses
derivative instruments; (b) the manner in which derivative instruments and
related hedged items are accounted for under Accounting Standards
Codification 815-10, “Accounting for Derivative Instruments and Hedging
Activities”; and (c) the effect of derivative instruments and related hedged
items on an entity’s financial position, financial performance, and cash flows.
ASC 815-10 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. As ASC 815-10 relates
specifically to disclosures, it currently has no impact on the Company’s
consolidated financial statements.
  In
December 2007, the FASB issued ASC 805-10, “Business
Combinations”.  ASC 805-10 established principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree, and the goodwill acquired. ASC 805-10 also
established disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. ASC 805-10 is effective for
fiscal years beginning after December 15, 2008. ASC 805-10 will have an
impact on its accounting for any future acquisitions and its consolidated
financial statements.
  In
September 2006, the FASB issued ASC 820-10, “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. ASC 820-10 applies to other
accounting pronouncements that require or permit fair value measurements, but
does not require any new fair value measurements. ASC 820-10 is effective
for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years, with the exception of all
non-financial assets and liabilities, which will be effective for years
beginning after November 15, 2008. The Company adopted the required provisions
of ASC 820-10 that became effective in its first quarter of 2008. The
adoption of these provisions did not have a material impact on the Company’s
consolidated financial statements. In February 2008, the FASB issued ASC
820-10-15, “Effective Date of FASB ASC 820-10”. ASC 820-10-15 delays the
effective date of ASC 820-10 for nonfinancial assets and nonfinancial
liabilities, except for certain items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). In
October 2008, the FASB issued ASC 820-10-35, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active”. ASC 820-10-35
applies to financial assets within the scope of accounting pronouncements that
require or permit fair value measurements in accordance with ASC 820-10.
This ASC clarifies the application of ASC 820-10 in determining the fair
values of assets or liabilities in a market that is not active. In April 2009,
the FASB issued ASC 820-10-65, “Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly”. ASC 820-10-65 does not change
the definition of fair value as detailed in ASC 820-10, but provides
additional guidance for estimating fair value in accordance with ASC 820-10
when the volume and level of activity for the asset or liability have
significantly decreased. The provisions of ASC 820-10-65 are effective for
interim and annual reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. If early adoption is
elected for either ASC 320-10 or ASC 825-10 and ASC 270-10, ASC 820-10-65 must
also be adopted early.
  (2)  BALANCE
SHEET COMPONENTS
  Property
and equipment is summarized as follows:
  September 30, 2009
                
                
                December 31, 2008Computer
      equipment and software
                
                $
                15,590
                
                
                $
                11,690Furniture,
      equipment and building improvements
                
                
                799
                
                
                
                74116,389
                
                
                
                12,431Less
      accumulated depreciation
                
                
                7,403
                
                
                
                4,958Total
                
                $
                8,986
                
                
                $
                7,473
  Accrued
expenses consist of the following:
  September 30, 2009
                
                
                December 31, 2008Payroll
      and other employee related costs
                
                $
                6,378
                
                
                $
                5,536Professional
      services and consulting and other vendor fees
                
                
                2,759
                
                
                
                2,879Sales
      commissions
                
                
                472
                
                
                
                256Other
                
                
                494
                
                
                
                417Total
                
                $
                10,103
                
                
                $
                9,088
  16
  (3)  ASSET
ACQUISITIONS
  Proficient
Systems
  On July
18, 2006, the Company acquired Proficient Systems, Inc. (“Proficient”), a
provider of hosted proactive chat solutions that help companies generate revenue
on their web sites. This transaction was accounted for under the purchase method
of accounting and, accordingly, the operating results of Proficient were
included in the Company’s consolidated results of operations from the date of
acquisition. The acquisition added several U.K. based financial services clients
and provided an innovative product marketing team. The Company incurred
additional costs related to litigation resulting from an earn-out dispute in the
amount of $79, net and reduced the valuation reserve on acquired net operating
losses in the amount of $3,025, resulting in a net decrease in goodwill in the
amount of $2,946 in the twelve months ended December 31, 2008. The Company
incurred additional costs related to the earn-out litigation in the amount of
$84, resulting in an increase in goodwill in the nine months ended September 30,
2009.
  Based on
the achievement of certain revenue targets as of March 31, 2007, LivePerson was
contingently required to issue up to an additional 2,050,000 shares of common
stock. Based on these targets, the Company issued 1,127,985 shares of common
stock valued at $8,894, based on the quoted market price of the Company’s common
stock on the date the contingency was resolved, and made a cash payment of $20
related to this contingency. At March 31, 2007, the value of these shares has
been allocated to goodwill with a corresponding increase in equity. All
1,127,985 shares are included in the weighted average shares outstanding used in
basic and diluted net income per common share as of March 31, 2007. In
accordance with the purchase agreement, the earn-out consideration is subject to
review by Proficient’s Shareholders’ Representative. On July 31, 2007, the
Company was served with a complaint filed in the United States District Court
for the Southern District of New York by the Shareholders’ Representative of
Proficient. The complaint filed by the Shareholders’ Representative sought
certain documentation relating to calculation of the earn-out consideration, and
demands payment of damages on the grounds that substantially all of the
remaining contingently issuable earn-out shares should have been paid. The
Company believes the claims are without merit, intends to vigorously defend
against this lawsuit, and does not currently expect that the calculation of the
total shares issued will differ significantly from the amount issued to
date.
  The
components of the intangible assets are as follows:
  Weighted
                    Average Useful
                    Life (months)
                
                
                AmountCustomer
      relationships
                
                
                36
                
                
                $
                2,400Technology
                
                
                18
                
                
                
                500Non-compete
      agreements
                
                
                24
                
                
                
                100$
                3,000
  The net
intangible assets were fully amortized as of September 30, 2009. The net
intangible assets of $439 are included in “Assets - Intangibles, net” on the
Company’s December 31, 2008 balance sheet.
 
 Kasamba
Inc.
  On
October 3, 2007, the Company acquired Kasamba Inc. (“Kasamba”), an online
provider of live expert advice delivered to consumers via real-time chat. This
transaction was accounted for under the purchase method of accounting and,
accordingly, the operating results of Kasamba were included in the Company’s
consolidated results of operations from October 3, 2007. The acquisition
represents the Company’s initial expansion beyond its historical
business-to-business focus into the business-to-consumer market, and is also
expected to extend the value the Company delivers to its growing base of
business customers through a community that connects consumers with experts in a
range of categories. During the twelve months ended December 31, 2008, the
Company reduced accrued acquisitions costs in the amount of $7, reduced the
valuation reserve on acquired net operating losses in the amount of $842 and
recorded an impairment charge in the amount of $23,501, resulting in a decrease
in goodwill in the amount of $24,350. During the nine months ended September 30,
2009, the Company settled a pre-acquisition contingency resulting in a $566
decrease in goodwill.
  17
  The
components of the intangible assets are as follows:
  Weighted
                    Average Useful
                    Life (months)
                
                
                AmountTechnology
                
                
                48
                
                
                $
                4,910Trade
      name
                
                
                36
                
                
                
                630Expert
      network
                
                
                36
                
                
                
                235Non-compete
      agreements
                
                
                12
                
                
                
                310Total
                
                
                
                
                
                $
                6,085
  The net
intangible assets of $2,743 and $3,880 are included in “Assets - Intangibles,
net” on the Company’s September 30, 2009 and December 31, 2008 balance sheets,
respectively.
  (4)  FAIR
VALUE MEASUREMENTS
  Effective
January 1, 2008, the Company adopted ASC 820-10, Fair Value Measurements, for
financial assets and liabilities. This ASC defines fair value, establishes a
framework for measuring fair value, and expands the related disclosure
requirements. The ASC indicates, among other things, that a fair value
measurement assumes a transaction to sell an asset or transfer a liability
occurs in the principal market for the asset or liability or, in the absence of
a principal market, the most advantageous market for the asset or liability. As
noted in Note 1(h) above, the Company adopted the provisions of ASC 820-10 with
respect to its non-financial assets and liabilities during the first quarter of
fiscal 2009. In order to increase consistency and comparability in fair value
measurements, ASC 820-10 establishes a hierarchy for observable and unobservable
inputs used to measure fair value into three broad levels, which are described
below:
  ·
              Level
      1: Quoted prices (unadjusted) in active markets that are accessible at the
      measurement date for assets or liabilities. The fair value hierarchy gives
      the highest priority to Level 1
inputs.
  ·
              Level
      2:  Observable prices that are based on inputs not quoted on
      active markets, but corroborated by market
data.
  ·
              Level
      3:  Unobservable inputs are used when little or no market data
      is available. The fair value hierarchy gives the lowest priority to Level
      3 inputs.
  In
determining fair value, the Company utilizes valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs to the
extent possible as well as considers counterparty credit risk in its assessment
of fair value.
  On a
nonrecurring basis, the Company uses fair value measures when analyzing asset
impairment. Long-lived tangible assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If it is determined such indicators are present and the
review indicates that the assets will not be fully recoverable, based on
undiscounted estimated cash flows over the remaining amortization periods, their
carrying values are reduced to estimated fair value. The Company uses an income
approach and inputs that constitute level 3. During the third quarter of each
year, the Company evaluates goodwill and indefinite-lived intangibles for
impairment at the reporting unit level. The Company uses a discounted cash flow
analysis to determine the fair market value of the reporting unit. This
measurement is classified based on level 3 input.
  18
  (5)  COMMITMENTS
AND CONTINGENCIES
  The
Company leases facilities and certain equipment under agreements accounted for
as operating leases. These leases generally require the Company to pay all
executory costs such as maintenance and insurance. Rental expense for operating
leases for the three and nine months ended September 30, 2009 was approximately
$1,279 and $3,502, respectively. Rental expense for operating leases for the
three and nine months ended September 30, 2008 was approximately $682 and
$1,878, respectively.
  (6)  LEGAL
MATTERS
  On July
31, 2007, the Company was served with a complaint filed in the United States
District Court for the Southern District of New York by the Shareholders’
Representative of Proficient Systems, Inc. In connection with the July 2006
acquisition of Proficient, the Company was contingently required to issue up to
2,050,000 shares of common stock based on the terms of an earn-out provision in
the merger agreement. In accordance with the terms of the earn-out provision,
the Company issued 1,127,985 shares of LivePerson common stock in the second
quarter of 2007 to the former shareholders of Proficient. The complaint filed by
the Shareholders’ Representative sought certain documentation relating to
calculation of the earn-out consideration, and demands payment of damages on the
grounds that substantially all of the remaining contingently issuable earn-out
shares should have been paid. The Company believes the claims are without merit,
intends to vigorously defend against this lawsuit, and does not currently expect
that the calculation of the total shares issued will differ significantly from
the amount issued to date.
  On May
15, 2009, the Company filed a complaint in the United States District Court for
the Southern District of New York against InstantService, Inc.
(“InstantService”) asserting claims that InstantService infringes the U.S.
Patent Nos. 6,519,628 and 7,526,439 owned by the Company. The Company is seeking
damages for infringement and an injunction against future infringement of its
patents. On June 2, 2009, the Company filed a first amended complaint seeking a
declaratory judgment that a patent purportedly owned by InstantService is
invalid and not infringed by the Company’s products. InstantService has not
answered the complaint and has not filed counterclaims, but did file a motion to
dismiss one of four causes of action. The case is in its early stages. The
Company believes its claims have merit and that InstantService’s motion to
dismiss is without merit. The Company intends to vigorously pursue its
claims.
  The
Company is not currently party to any other legal proceedings. From time to
time, the Company may be subject to various claims and legal actions arising in
the ordinary course of business.
  ITEM
      2.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
  GENERAL
  Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which are prepared in
conformity with accounting principles generally accepted in the United States of
America. As such, we are required to make certain estimates, judgments and
assumptions that management believes are reasonable based upon the information
available. We base these estimates on our historical experience, future
expectations and various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for our judgments
that may not be readily apparent from other sources. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting periods. These estimates and assumptions relate to estimates of the
carrying amount of goodwill, intangibles, stock based-compensation, valuation
allowances for deferred income taxes, accounts receivable, the expected term of
a client relationship, accruals and other factors. We evaluate these estimates
on an ongoing basis. Actual results could differ from those estimates under
different assumptions or conditions, and any differences could be
material.
  19


OVERVIEW




LivePerson
provides online engagement solutions that facilitate real-time assistance and
expert advice. Connecting businesses and independent experts with individual
consumers seeking help on the Web, our hosted software platform creates more
relevant, compelling, and personalized online experiences. We were incorporated
in the State of Delaware in November 1995 and the LivePerson service was
introduced initially in November 1998.




The
Company is organized into two operating segments. The Business segment
facilitates real-time online interactions — chat, voice/click-to-call, email and
self-service/knowledgebase for global corporations of all sizes. The Consumer
segment facilitates online transactions between independent Experts and
individual consumers.




In order
to sustain growth in these segments, our strategy is to expand our position as
the leading provider of online engagement solutions that facilitate real-time
assistance and expert advice. To accomplish this, we are focused on the
following current initiatives:




·
            Upgrading our
      technology. We are increasing the level of automation used to
      deploy our services with customers enabling faster, more efficient
      deployment and expansion. We are also investing in data reporting tools
      that will enable our customers to analyze their online businesses at a
      more detailed level and with greater reporting
  flexibility.




·
            Expanding our international
      presence. We are increasing our investment in large international
      markets primarily in Western Europe where we can leverage our brand
      recognition and potentially expand our client
  base.




·
            Reorganizing our sales
      organization to improve operating efficiencies. We recently
      restructured our sales force with a single head of sales to leverage
      symmetries between our direct sales force and the sales force for small
      and mid-sized businesses (“SMB”).




THIRD
QUARTER 2009




Highlights
of the third quarter 2009 compared to the third quarter 2008 are as
follows:




·
            Revenue
      increased 15% to $22.3 million from $19.4
  million.




·
            Gross
      profit margin increased to 75% from
73%.




·
            Operating
      expenses decreased 2% to $18.6 million from $18.9
  million.




·
            Net
      income increased 453% to $2.3 million from $0.4
  million.




The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating the reported consolidated financial results
include the following:




REVENUE
RECOGNITION




The
majority of our revenue is generated from monthly service revenues and related
professional services from the sale of the LivePerson services. Because we
provide our application as a service, we follow the provisions of ASC
605-10-S99, “Revenue Recognition” and 605-25, “Revenue Recognition with
Multiple-Element Arrangements”. We charge a monthly fee, which varies by service
and client usage. The majority of our larger clients also pay a professional
services fee related to implementation. We defer these implementation fees and
associated direct costs and recognize them ratably over the expected term of the
client relationship upon commencement of the hosting services. We may also
charge professional service fees related to additional training, business
consulting and analysis in support of the LivePerson services.


20


We also
sell certain of the LivePerson services directly via Internet download. These
services are marketed as LivePerson Pro and LivePerson Contact Center for SMBs,
and are paid for almost exclusively by credit card. Credit card payments
accelerate cash flow and reduce our collection risk, subject to the merchant
bank’s right to hold back cash pending settlement of the transactions. Sales of
LivePerson Pro and LivePerson Contact Center may occur with or without the
assistance of an online sales representative, rather than through face-to-face
or telephone contact that is typically required for traditional direct
sales.




We
recognize monthly service revenue based upon the fee charged for the LivePerson
services, provided that there is persuasive evidence of an arrangement, no
significant Company obligations remain, collection of the resulting receivable
is probable and the amount of fees to be paid is fixed or determinable. Our
service agreements typically have twelve month terms and are terminable or may
terminate upon 30 to 90 days’ notice without penalty. When professional service
fees provide added value to the customer on a standalone basis, we recognize
professional service fees upon completion and customer acceptance because we
have established objective and reliable evidence of the fair value of the
undelivered hosting services. If a professional services arrangement does not
qualify for separate accounting, we recognize the fees, and the related labor
costs, ratably over a period of 48 months, representing our current estimate of
the term of the client relationship.




For
revenue generated from online transactions between Experts and Users, we
recognize revenue net of expert fees in accordance with ASC 605-45, “Principal
Agent Considerations”, due to the fact that we perform as an agent without any
risk of loss for collection. We collect a fee from the consumer and retain a
portion of the fee, and then remit the balance to the expert. Revenue from these
transactions is recognized when there is persuasive evidence of an arrangement,
no significant Company obligations remain, collection of the resulting
receivable is probable and the amount of fees to be paid is fixed or
determinable.




STOCK-BASED
COMPENSATION




We follow
ASC 718-10, “Stock Compensation”, which addresses the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services, with a primary focus on transactions in which an entity obtains
employee services in share-based payment transactions. ASC 718-10 is a revision
to SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees,” and its related implementation guidance. ASC 718-10 requires
measurement of the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award (with
limited exceptions). Incremental compensation costs arising from subsequent
modifications of awards after the grant date must be recognized.




We
adopted ASC 718-10 using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006. Our
Consolidated Financial Statements as of and for the years ended December 31,
2008, 2007 and 2006 reflect the impact of ASC 718-10. In accordance with the
modified prospective transition method, our Consolidated Financial Statements
for prior periods have not been restated to reflect, and do not include, the
impact of ASC 718-10.




ASC
718-10 requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our Consolidated Statements of
Income. Stock-based compensation recognized in our Consolidated Statements of
Income for the periods ended September 30, 2009 and 2008 includes compensation
expense for share-based awards granted prior to, but not fully vested as of
January 1, 2006 based on the grant date fair value estimated in accordance with
ASC 718-10 as well as compensation expense for share-based awards granted
subsequent to January 1, 2006 in accordance with ASC 718-10. We currently use
the Black-Scholes option pricing model to determine grant date fair
value.




As of
September 30, 2009, there was approximately $7.8 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements.
That cost is expected to be recognized over a weighted average period of
approximately 1.9 years.


21


ACCOUNTS
RECEIVABLE




Our
customers are primarily concentrated in the United States. We perform ongoing
credit evaluations of our customers’ financial condition (except for customers
who purchase the LivePerson services by credit card via Internet download) and
have established an allowance for doubtful accounts based upon factors
surrounding the credit risk of customers, historical trends and other
information that we believe to be reasonable, although they may change in the
future. If there is a deterioration of a customer’s credit worthiness or actual
write-offs are higher than our historical experience, our estimates of
recoverability for these receivables could be adversely affected. Our
concentration of credit risk is limited due to the large number of customers. No
single customer accounted for or exceeded 10% of our total revenue in the three
and nine months ended September 30, 2009 and 2008. Two customers accounted for
approximately 23% of accounts receivable at September 30, 2009. No single
customer accounted for or exceeded 10% of accounts receivable at
December 31, 2008. We increased our allowance for doubtful accounts by
$30,000 in the nine months ended September 30, 2009. This increase was
principally due to an increase in accounts receivable as a result of increased
sales and to the fact that a larger proportion of receivables are due from
larger corporate clients that typically have longer payment cycles.




GOODWILL




In
accordance with ASC 350-10, “Goodwill and Other Intangible Assets,” goodwill and
indefinite-lived intangible assets are not amortized, but reviewed for
impairment upon the occurrence of events or changes in circumstances that would
reduce the fair value below its carrying amount. Goodwill is required to be
tested for impairment at least annually. Determining the fair value of a
reporting unit under the first step of the goodwill impairment test and
determining the fair value of individual assets and liabilities of a reporting
unit (including unrecognized intangible assets) under the second step of the
goodwill impairment test is judgmental in nature and often involves the use of
significant estimates and assumptions. Similarly, estimates and assumptions are
used in determining the fair value of other intangible assets. These estimates
and assumptions could have a significant impact on whether or not an impairment
charge is recognized and also the magnitude of any such charge. To assist in the
process of determining goodwill impairment, we obtain appraisals from an
independent valuation firm. In addition to the use of an independent valuation
firm, we perform internal valuation analyses and consider other market
information that is publicly available. Estimates of fair value are primarily
determined using discounted cash flows and market comparisons. These approaches
use significant estimates and assumptions including projected future cash flows
(including timing), discount rates reflecting the risk inherent in future cash
flows, perpetual growth rates, determination of appropriate market comparables
and the determination of whether a premium or discount should be applied to
comparables.




In
accordance with ASC 350-10, we completed our annual impairment test in the third
quarter of 2009. Based on this test, we determined that no impairment had
occurred. Beginning in the first quarter of 2009, we adopted the provisions of
ASC 820-10. The adoption of this ASC did not have a material impact on our
consolidated financial statements.




IMPAIRMENT
OF LONG-LIVED ASSETS




In
accordance with ASC 360-10, “Accounting for the Impairment or Disposal of
Long-lived Assets,” long-lived assets, such as property, plant and equipment and
purchased intangibles subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying value of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying value of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying value of the
asset exceeds the fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the lower of the
carrying value or the fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.


22


USE
OF ESTIMATES




The
preparation of our consolidated financial statements in accordance with
accounting principles generally accepted in the U.S. requires our management to
make a number of estimates and assumptions relating to the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
revenue and expenses during the period. Significant items subject to such
estimates and assumptions include the carrying amount of goodwill, intangibles,
stock-based compensation, valuation allowances for deferred income tax assets,
accounts receivable, the expected term of a client relationship, accruals and
other factors. Actual results could differ from those estimates.




RECENTLY
ISSUED FASB ACCOUNTING STANDARDS UPDATES




In
October 2009, FASB Accounting Standards Update 2009-13 addressed the accounting
for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than as a combined unit.
Specifically, this update amends the criteria in Subtopic 605-25, Revenue
Recognition-Multiple-Element Arrangements, for separating consideration in
multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method. In
addition, this guidance significantly expands required disclosures related to a
vendor’s multiple-deliverable revenue arrangements. FASB Accounting Standards
Update 2009-13 is effective prospectively for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010.
Early adoption is permitted. We are currently assessing the impact of this
update on our consolidated financial statements.




In
September 2009, the FASB published FASB Accounting Standards Update No. 2009-12,
Fair Value Measurements and Disclosures (Topic 820)—Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its Equivalent). This
update amends Subtopic 820-10, Fair Value Measurements and Disclosures—Overall,
to permit a reporting entity to measure the fair value of certain investments
based on the net asset value per share of the investment (or its equivalent).
This update also requires new disclosures, by major category of investments
about the attributes of investments within the scope of this amendment to the
Codification. The guidance in this update is effective for interim and annual
periods ending after December 15, 2009. The adoption of this update will not
have a material impact on our consolidated financial statements.




In August
2009, FASB Accounting Standards Update 2009-05 included amendments to Subtopic
820-10, Fair Value Measurements and Disclosures—Overall, for the fair value
measurement of liabilities and provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the techniques provided for in this update. This update also clarifies
that when estimating the fair value of a liability, a reporting entity is not
required to include a separate input or adjustment to other inputs relating to
the existence of a restriction that prevents the transfer of a liability and
that both a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when traded as
an asset in an active market when no adjustments to the quoted price of the
asset are required are Level 1 fair value measurements. The adoption of this
update did not have a material impact on our consolidated financial
statements.




In July
2009, the FASB issued ASC 105-10, “Generally Accepted Accounting Principles”.
ASC 105-10 established the FASB Accounting Standards Codification as the single
source of authoritative U.S. generally accepted accounting principles (“U.S.
GAAP”) recognized by the FASB to be applied by nongovernmental entities. ASC
105-10 will supersede all existing non-SEC accounting and reporting standards.
All other nongrandfathered non-SEC accounting literature not included in ASC
105-10 will become nonauthoritative. Following ASC 105-10, the FASB will not
issue new standards in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards
Updates, which will serve only to: (a) update the Codification; (b) provide
background information about the guidance; and (c) provide the bases for
conclusions on the change(s) in the Codification. ASC 105-10 and the
Codification are effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of ASC 105-10 did
not have a material impact on our consolidated financial
statements.


23


In May
2009, the FASB issued ASC No. 855-10, “Subsequent Events”. ASC 855-10
established general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. Specifically, ASC 855-10 provides; (a) the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements; (b) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements; and (c) the disclosures that an entity should
make about events or transactions that occurred after the balance sheet date.
ASC 855-10 is effective for interim or annual financial periods ending after
June 15, 2009, and shall be applied prospectively. The adoption of this FASB did
not have a material impact on our consolidated financial
statements.




In April
2009, the FASB issued ASC 825-10-65, Interim Disclosures about Fair Value of
Financial Instruments. ASC 825-10-65 amends ASC 825-10-50, Disclosures About
Fair Value of Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. ASC 825-10-65 also amends ASC 270-10,
Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods. ASC 825-10-65 is effective
for interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. ASC 825-10-65 does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, ASC 825-10-65 requires
comparative disclosures only for periods ending after initial adoption. The
adoption of this ASC did not have a material impact on our consolidated
financial statements.




In April
2009, the FASB issued ASC No. 805-10, “Accounting for Assets Acquired and
Liabilities assumed in a Business Combination That Arise from Contingencies — an
amendment of FASB Statement No. 141 (Revised December 2007), Business
Combinations”. ASC 805-10 addresses application issues raised by preparers,
auditors, and members of the legal profession on initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination. ASC 805-10 is
effective for assets or liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. ASC
805-10 will have an impact on our accounting for any future acquisitions and on
our consolidated financial statements.




In April
2008, the FASB issued ASC 350-10, “Determination of the Useful Life of
Intangible Assets”. ASC 350-10 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under ASC 350-10, “Goodwill and Other Intangible
Assets”. ASC 350-10 is effective for fiscal years beginning after December 15,
2008. The adoption of this ASC did not have a material impact on our
consolidated financial statements.




In March
2008, the FASB issued ASC 815-10, “Disclosures about Derivative Instruments and
Hedging Activities — an amendment of FASB Statement No. 133”. ASC 815-10
requires enhanced disclosures regarding derivatives and hedging activities,
including: (a) the manner in which an entity uses derivative instruments;
(b) the manner in which derivative instruments and related hedged items are
accounted for under Accounting Standards Codification 815-10, “Accounting
for Derivative Instruments and Hedging Activities”; and (c) the effect of
derivative instruments and related hedged items on an entity’s financial
position, financial performance, and cash flows. ASC 815-10 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. ASC 815-10 relates specifically to disclosures, it
currently has no impact on our consolidated financial statements.




In
December 2007, the FASB issued ASC 805-10, “Business Combinations”. ASC 805-10
established principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree, and the
goodwill acquired. ASC 805-10 also established disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. ASC 805-10 is effective for fiscal years beginning after December
15, 2008. ASC 805-10 will have an impact on our accounting for any future
acquisitions and on our consolidated financial statements.


24


In
September 2006, the FASB issued ASC 820-10, “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. ASC 820-10 applies to other
accounting pronouncements that require or permit fair value measurements, but
does not require any new fair value measurements. ASC 820-10 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years, with the exception of all
non-financial assets and liabilities, which will be effective for years
beginning after November 15, 2008. We adopted the required provisions of ASC
820-10 that became effective in our first quarter of 2008. The adoption of these
provisions did not have a material impact on our consolidated financial
statements. In February 2008, the FASB issued ASC 820-10-15, “Effective Date of
FASB ASC 820-10”. ASC 820-10-15 delays the effective date of ASC 820-10 for
nonfinancial assets and nonfinancial liabilities, except for certain items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). In October 2008, the FASB issued ASC
820-10-35, “Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active”. ASC 820-10-35 applies to financial assets within the
scope of accounting pronouncements that require or permit fair value
measurements in accordance with ASC 820-10. This ASC clarifies the application
of ASC 820-10 in determining the fair values of assets or liabilities in a
market that is not active. In April 2009, the FASB issued ASC 820-10-65,
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly”. ASC 820-10-65 does not change the definition of fair value as detailed
in ASC 820-10, but provides additional guidance for estimating fair value in
accordance with ASC 820-10 when the volume and level of activity for the asset
or liability have significantly decreased. The provisions of ASC 820-10-65 are
effective for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009. If early
adoption is elected for either ASC 320-10 or ASC 825-10 and ASC 270-10, ASC
820-10-65 must also be adopted early.




REVENUE




The
majority of our revenue is generated from monthly service revenues and related
professional services from the sale of the LivePerson services. We charge a
monthly fee, which varies by service and client usage. The majority of our
larger clients also pay a professional services fee related to implementation. A
large proportion of our revenue from new clients comes from large corporations.
These companies typically have more significant implementation requirements and
more stringent data security standards. Such clients also have more
sophisticated data analysis and performance reporting requirements, and are
likely to engage our professional services organization to provide such analysis
and reporting on a recurring basis.




Revenue
from our Business segment accounted for 86% of total revenue for the three and
nine months ended September 30, 2009. Revenue attributable to our monthly hosted
Business services accounted for 96% of total Business revenue for the three and
nine months ended September 30, 2009. Revenue from our Business segment
accounted for 86% and 85% of total revenue for the three and nine months ended
September 30, 2008, respectively. Revenue attributable to our monthly hosted
Business services accounted for 94% of total Business revenue for the three and
nine months ended September 30, 2008. Our service agreements typically have
twelve month terms and, in some cases, are terminable or may terminate upon 30
to 90 days’ notice without penalty. Given the time required to schedule training
for our clients’ operators and our clients’ resource constraints, we have
historically experienced a lag between signing a client contract and recognizing
revenue from that client. This lag has recently ranged from 30 to 90
days.




Revenue
generated from online transactions between Experts and Users is recognized net
of expert fees and accounted for approximately 14% of total revenue for the
three and nine months ended September 30, 2009. Revenue generated from online
transactions between Experts and Users accounted for approximately 14% and 15%
of total revenue for the three and nine months ended September 30, 2008,
respectively.




We also
have entered into contractual arrangements that complement our direct sales
force and online sales efforts. These are primarily with Web hosting and call
center service companies, pursuant to which LivePerson is paid a commission
based on revenue generated by these service companies from our referrals. To
date, revenue from such commissions has not been material.




OPERATING
EXPENSES




Our cost
of revenue consists of:


25


·
            compensation
      costs relating to employees who provide customer support and
      implementation services to our
clients;




·
            compensation
      costs relating to our network support
staff;




·
            depreciation
      of certain hardware and software;




·
            allocated
      occupancy costs and related
overhead;




·
            the
      cost of supporting our infrastructure, including expenses related to
      server leases, infrastructure support costs and Internet
      connectivity;




·
            the
      credit card fees and related processing costs associated with the consumer
      and SMB services; and




·
            amortization
      of certain intangibles.




Our
product development expenses consist primarily of compensation and related
expenses for product development personnel, allocated occupancy costs and
related overhead, outsourced labor and expenses for testing new versions of our
software. Product development expenses are charged to operations as
incurred.




Our sales
and marketing expenses consist of compensation and related expenses for sales
personnel and marketing personnel, online marketing, allocated occupancy costs
and related overhead, advertising, sales commissions, public relations,
promotional materials, travel expenses and trade show exhibit
expenses.




Our
general and administrative expenses consist primarily of compensation and
related expenses for executive, accounting, legal and human resources personnel,
allocated occupancy costs and related overhead, professional fees, provision for
doubtful accounts and other general corporate expenses.




During
the nine months ended September 30, 2009, we increased our allowance for
doubtful accounts by $30,000 to approximately $370,000, principally due to an
increase in accounts receivable as a result of increased sales and to the fact
that a larger proportion of receivables are due from larger corporate clients
that typically have longer payment cycles. During 2008, we increased our
allowance for doubtful accounts by $148,000 to approximately $356,000,
principally due to an increase in accounts receivable as a result of increased
sales and to the fact that a larger proportion of receivables are due from
larger corporate clients that typically have longer payment cycles, and we wrote
off approximately $16,000 of previously reserved accounts, leaving a net
allowance for doubtful accounts of $340,000. We base our allowance for doubtful
accounts on specifically identified credit risks of customers, historical trends
and other information that we believe to be reasonable. We adjust our allowance
for doubtful accounts when accounts previously reserved have been
collected.




NON-CASH
COMPENSATION EXPENSE




The net
non-cash compensation amounts for the three and nine months ended September 30,
2009 and 2008 consist of:




Three
      Months Ended
                  September
      30,
              
              
              Nine
      Months Ended
                  September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Stock-based
      compensation expense related to ASC 718-10
              
              $
              1,211
              
              
              $
              1,014
              
              
              $
              3,491
              
              
              $
              3,178Total
              
              $
              1,211
              
              
              $
              1,014
              
              
              $
              3,491
              
              
              $
              3,178




26




RESULTS
      OF OPERATIONS




The
Company is organized into two operating segments. The Business segment
facilitates real-time online interactions — chat, voice/click-to-call, email and
self-service/knowledgebase for global corporations of all sizes. The Consumer
segment facilitates online transactions between independent Experts and
individual Users.




Comparison
of Three and Nine Months Ended September 30, 2009 and 2008




Revenue - Business. Revenue
increased by 14% and 16% to $19.1 million and $54.2 million in the three and
nine months ended September 30, 2009, respectively, from $16.7 million and $46.9
million in the comparable periods in 2008. This increase is primarily
attributable to increased revenue from existing clients in the amount of
approximately $2.0 million and $5.7 million, respectively, net of cancellations
and, to a lesser extent, to revenue from new clients in the amount of
approximately $0.7 million and $2.3 million, respectively, partially offset by a
decrease in professional services revenue of approximately $237,000 and
$542,000, respectively. Our revenue growth has typically been driven by a mix of
revenue from newly added clients as well as expansion of existing
clients.




Revenue - Consumer. Revenue
increased by 18% and 5% to $3.1 million and $8.5 million in the three and nine
months ended September 30, 2009, respectively, from $2.6 million and $8.1
million in the comparable periods in 2008. The increase in the three months
ended September 30, 2009 is primarily attributable to a 15% increase in the fee
we charge Experts in the amount of approximately $290,000 and, to a lesser
extent, to an increase in gross revenue in the amount of approximately $200,000.
The increase in the nine months ended September 30, 2009 is primarily
attributable to the 15% increase in the fee we charge Experts in the amount of
approximately $830,000 partially offset by lower total gross revenue in the
amount of approximately $430,000.




Cost of Revenue - Business.
Cost of revenue consists of compensation costs relating to employees who provide
customer service to our clients, compensation costs relating to our network
support staff, the cost of supporting our server and network infrastructure and
allocated occupancy costs and related overhead. Cost of revenue increased by 8%
to $4.6 million in the three months ended September 30, 2009 from $4.3 million
in the comparable period in 2008. This increase in expenses is primarily
attributable to an increase for primary and backup server facilities and
allocated overhead related to costs of supporting our server and network
infrastructure of approximately $441,000 as a result of increased revenue and
was partially offset by a decrease in total compensation costs related to
customer service and network operations personnel in the amount of approximately
$156,000. Cost of revenue decreased by 1% to $12.4 million in the nine months
ended September 30, 2009, from $12.5 million in the comparable period in 2008.
This decrease is primarily attributable to lower total compensation costs
related to customer service and network operations personnel in the amount of
approximately $805,000 partially offset by an increase in expenses for primary
and backup server facilities and allocated overhead related to costs of
supporting our server and network infrastructure of approximately $657,000 as a
result of increased revenue.




Cost of Revenue - Consumer.
Cost of revenue consists of compensation costs relating to employees who provide
customer service to Experts and Users, compensation costs relating to our
network support staff, the cost of supporting our server and network
infrastructure, credit card and transaction processing fees and related costs,
and allocated occupancy costs and related overhead. Cost of revenue decreased by
7% to $892,000 in the three months ended September 30, 2009 from $958,000 in the
comparable period in 2008. This decrease is primarily attributable to lower
total compensation costs for our customer service and network support personnel
and costs of supporting our server and network infrastructure in the amount of
approximately $82,000 and was partially offset by an increase in allocated
overhead related to costs of supporting our server and network infrastructure in
the amount of approximately $18,000. Cost of revenue decreased by 7% to $2.6
million in the nine months ended September 30, 2009 from $2.8 million in the
comparable period in 2008. This decrease is primarily attributable to lower
total compensation costs for our customer service and network support personnel
and costs of supporting our server and network infrastructure in the amount of
approximately $263,000 and was partially offset by an increase for primary and
backup server facilities in the amount of approximately $94,000.




Product Development. Our
product development expenses consist primarily of compensation and related
expenses for product development personnel as well as allocated occupancy costs
and related overhead. Product development costs decreased by 6% and 9% to $3.1
million and $8.9 million in the three and nine months ended September 30, 2009,
respectively, from $3.3 million and $9.9 million in the comparable periods in
2008. This decrease is primarily attributable to lower total compensation costs
for product development personnel as a result of favorable currency rate
movements related to our Israeli operations as compared to the same periods in
2008.


27


Sales and Marketing -
Business. Our sales and marketing expenses consist of compensation and
related expenses for sales and marketing personnel, as well as advertising,
public relations and trade show exhibit expenses. Sales and marketing expenses
increased by 5% and 10% to $4.8 million and $14.7 million in the three and nine
months ended September 30, 2009, respectively, from $4.6 million and $13.4
million in the comparable periods in 2008. This increase is primarily
attributable to an increase in costs related to additional sales and marketing
personnel of approximately $205,000 and $1.4 million for the three and nine
months ended September 30, 2009, respectively. This increase relates to our
continued efforts to enhance our brand recognition and increase sales lead
activity.




Sales and Marketing -
Consumer. Our sales and marketing expenses consist of compensation and
related expenses for marketing personnel, as well as online promotion, public
relations and trade show exhibit expenses. Sales and marketing expenses
decreased by 16% to $1.7 million in the three months ended September 30, 2009
from $2.1 million in the comparable period in 2008. This decrease is primarily
attributable to a decrease in advertising and promotional expenses of
approximately $319,000. Sales and marketing expense decreased by 5% to $5.2
million in the nine months ended September 30, 2009 from $5.5 million in the
comparable period in 2008. This decrease is primarily attributable to a decrease
in advertising and promotional expenses of approximately $867,000 and was
partially offset by an increase in compensation and allocated overhead for
marketing personnel in the amount of approximately $615,000.




General and Administrative.
Our general and administrative expenses consist primarily of compensation and
related expenses for executive, accounting, legal, human resources and
administrative personnel. General and administrative expenses decreased by 3% to
$3.3 million in the three months ended September 30, 2009 from $3.4 million in
the comparable period in 2008. This decrease is primarily attributable to a
decrease in franchise taxes, bank fees and recruiting costs in the amount of
approximately $312,000, partially offset by an increase in legal expenses in the
amount of approximately $203,000. General and administrative expenses remained
flat at $10 million in the nine months ended September 30, 2009
compared  to the comparable period in 2008. An increase in
compensation expense of approximately $524,000 was offset by a decrease in
franchise taxes, bank fees and recruiting costs in the amount of approximately
$596,000.




Amortization of Intangibles.
Amortization expense was $118,000 and $662,000 in the three and nine months
ended September 30, 2009, respectively, as compared to $352,000 and $1.1 million
in the comparable periods in 2008, respectively. Amortization expense included
in cost of revenue – consumer was $307,000 and $921,000 in the three and nine
months ended September 30, 2009 and 2008, respectively. Amortization expense in
2009 and 2008 relates primarily to intangible assets as a result of our
acquisitions of Kasamba in October 2007 and Proficient in July 2006.
Amortization expense is expected to be approximately $2.0 million in the year
ended December 31, 2009.




Other Income (Expense).
Financial income was $75,000 in the three months ended September 30, 2009 and
relates to favorable currency rate movements related to our Israeli operations.
Financial expense was $123,000 in the three months ended September 30, 2008 and
relates to unfavorable currency rate movements related to our Israeli
operations. Financial expense was $21,000 and $125,000 in the nine months ended
September 30, 2009 and 2008, respectively, and relates to unfavorable currency
rate movements related to our Israeli operations.  Interest income was
$15,000 and $71,000 in the three and nine months ended September 30, 2009,
compared to $79,000 and $270,000 in the comparable periods in 2008,
respectively, and consists of interest earned on cash and cash equivalents.
These decreases are primarily attributable to decreases in short-term interest
rates.




Provision for (Benefit from) Income
Taxes.  Provision for income taxes was $1.5 million and $3.5
million in the three and nine months ended September 30, 2009. In the three
months ended September 30, 2008, we recorded a provision for income taxes in the
amount of $21,000. In the nine months ended September 30, 2008, we recorded a
benefit from income taxes in the amount of $68,000.


28


Net Income. We had net income
of $2.3 million and $4.7 million in the three and nine months ended September
30, 2009, as compared to net income of $410,000 and $7,000 for the comparable
periods in 2008. Revenue increased by $2.9 million and $7.7 million,
respectively, while operating expenses decreased by $331,000 and $698,000,
respectively, contributing to a net increase in income from operations of
approximately $3.2 million and $8.4 million, respectively. We also had an
increase in other income of $134,000 in the three months ended September 30,
2009 and a decrease in other income of $95,000 in the nine months ended
September 30, 2009.




LIQUIDITY
AND CAPITAL RESOURCES




As of
September 30, 2009, we had approximately $36.5 million in cash and cash
equivalents, an increase of approximately $11.0 million from December 31,
2008.




Net cash
provided by operating activities was $12.8 million for the nine months ended
September 30, 2009 and consisted primarily of non-cash expenses related to ASC
718-10, amortization of intangibles and depreciation, and to increases in
accounts payable, accrued expenses and deferred revenue, partially offset by an
increase in accounts receivable and prepaid expenses. Net cash provided by
operating activities was $6.3 million for the nine months ended September 30,
2008 and consisted primarily of non-cash expenses related to the adoption of ASC
718-10, amortization of intangibles and depreciation and to increases in
accounts payable and deferred revenue, partially offset by an increase in
accounts receivable, a decrease in accrued expenses and an increase in prepaid
expenses.




Net cash
used in investing activities was $4.7 million and $5.6 million in the nine
months ended September 30, 2009 and 2008, respectively, and was due primarily to
the purchase of fixed assets.




Net cash
provided by financing activities was $2.8 million for the nine months ended
September 30, 2009 and consisted primarily of the excess tax benefit from
exercise of employee stock options and the proceeds from the issuance of common
stock in connection with the exercise of stock options by employees partially
offset by the repurchase of common stock. Net cash used in financing activities
was $3.0 million for the nine months ended September 30, 2008 and consisted
primarily of the repurchase of common stock partially offset by the proceeds
from the issuance of common stock in connection with the exercise of stock
options by employees.




We have
incurred significant costs to develop our technology and services, to hire
employees in our customer service, sales, marketing and administration
departments, and for the amortization of intangible assets, as well as non-cash
compensation costs. As of September 30, 2009, we had an accumulated deficit of
approximately $112.5 million. These losses have been funded primarily through
the issuance of common stock in our initial public offering and, prior to the
initial public offering, the issuance of convertible preferred
stock.




We
anticipate that our current cash and cash equivalents will be sufficient to
satisfy our working capital and capital requirements for at least the next 12
months. However, we cannot assure you that we will not require additional funds
prior to such time, and we would then seek to sell additional equity or debt
securities through public financings, or seek alternative sources of financing.
We cannot assure you that additional funding will be available on favorable
terms, when needed, if at all. If we are unable to obtain any necessary
additional financing, we may be required to further reduce the scope of our
planned sales and marketing and product development efforts, which could
materially adversely affect our business, financial condition and operating
results. In addition, we may require additional funds in order to fund more
rapid expansion, to develop new or enhanced services or products or to invest in
complementary businesses, technologies, services or products.




CONTRACTUAL
OBLIGATIONS AND COMMITMENTS




We do not
have any special purposes entities, and other than operating leases, which are
described below, we do not engage in off-balance sheet financing
arrangements.




We lease
facilities and certain equipment under agreements accounted for as operating
leases. These leases generally require us to pay all executory costs such as
maintenance and insurance. Rental expense for operating leases for the three and
nine months ended September 30, 2009 was approximately $1.3 million and $3.5
million, respectively, and approximately $682,000 and $1.9 million for the three
and nine months ended September 30, 2008.




29


As of
September 30, 2009, our principal commitments were approximately $6.3 million
under various operating leases, of which approximately $1.3 million is due in
2009. We do not currently expect that our principal commitments for the year
ending December 31, 2009 will exceed $5.0 million in the aggregate. Our capital
expenditures are not currently expected to exceed $9.0 million in
2009.




Our
contractual obligations at September 30, 2009 are summarized as
follows:




Payments due by period(in thousands)Contractual
      Obligations
              
              Total
              
              
              Less than 1
                  year
              
              
              1-3
      years
              
              
              3-5
      years
              
              
              More than 5
                yearsOperating
      leases
              
              $
              6,323
              
              
              $
              1,308
              
              
              $
              5,015
              
              
              $
              —
              
              
              $
              —Total
              
              $
              6,323
              
              
              $
              1,308
              
              
              $
              5,015
              
              
              $
              —
              
              
              $
              —





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Currency
Rate Fluctuations




As a
result of the expanding scope of our Israeli operations, our currency rate
fluctuation risk associated with the exchange rate movement of the U.S. dollar
against the New Israeli Shekel (“NIS”) has increased. During the year ended
December 31, 2008, the depreciation of the U.S. dollar against the NIS had an
increased adverse impact on our results of operations and financial condition
compared to earlier periods because the U.S. dollar cost of expenses incurred in
Israel increased. During the nine months ended September 30, 2009, the U.S
dollar appreciated against the NIS to levels more consistent with the recent
historical average which had a positive impact on our results of operations and
financial conditions when compared to 2008. During the nine month period ended
September 30, 2009, expenses generated by our Israeli operations totaled $17.1
million. We do not currently hedge our foreign currency risk
exposure.  We actively monitor the movement of the U.S. dollar against
the NIS and U.K. pound. If we determine that our risk of exposure materially
exceeds the potential cost of derivative financial instruments, we may in the
future enter in to these types of investments. The functional currency of our
wholly-owned Israeli subsidiaries, LivePerson Ltd. (formerly HumanClick Ltd.)
and Kasamba Ltd., is the U.S. dollar and the functional currency of our
operations in the United Kingdom is the U.K. pound.




Collection
Risk




Our
accounts receivable are subject, in the normal course of business, to collection
risks. We regularly assess these risks and have established policies and
business practices to protect against the adverse effects of collection risks.
During 2009, we increased our allowance for doubtful accounts by $30,000 to
approximately $370,000, principally due to an increase in accounts receivable as
a result of increased sales and to the fact that a larger proportion of
receivables are due from larger corporate clients that typically have longer
payment cycles. During 2008, we increased our allowance for doubtful accounts by
$148,000 to approximately $356,000, principally due to an increase in accounts
receivable as a result of increased sales and to the fact that a larger
proportion of receivables are due from larger corporate clients that typically
have longer payment cycles and we wrote off approximately $16,000 of previously
reserved accounts, leaving a net allowance for doubtful accounts of $340,000 at
December 31, 2008.




Interest
Rate Risk




Our
investments consist of cash and cash equivalents. Therefore, changes in the
market’s interest rates do not affect in any material respect the value of the
investments as recorded by us.


30


ITEM
4. CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




Our
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our “disclosure controls and procedures,” as that
term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), as of September 30, 2009. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of
September 30, 2009 to ensure that the information we are required to disclose in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and to ensure that such
information is accumulated and communicated to our management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.




Changes
in Internal Control Over Financial Reporting




There
were no changes in our internal control over financial reporting during the
quarter ended September 30, 2009 identified in connection with the evaluation
thereof by our management, including the Chief Executive Officer and Chief
Financial Officer, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.




Limitations
of the Effectiveness of Internal Control




A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the internal control system are
met. Because of the inherent limitations of any internal control system, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.


31





PART
II. OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS




On July
31, 2007, we were served with a complaint filed in the United States District
Court for the Southern District of New York by the Shareholders’ Representative
of Proficient Systems, Inc. In connection with the July 2006 acquisition of
Proficient, we were contingently required to issue up to 2,050,000 shares of
common stock based on the terms of an earn-out provision in the merger
agreement. In accordance with the terms of the earn-out provision, we issued
1,127,985 shares of LivePerson common stock in the second quarter of 2007 to the
former shareholders of Proficient. The complaint filed by the Shareholders’
Representative sought certain documentation relating to calculation of the
earn-out consideration, and demands payment of damages on the grounds that
substantially all of the remaining contingently issuable earn-out shares should
have been paid. We believe the claims are without merit, intend to vigorously
defend against this lawsuit, and do not currently expect that the calculation of
the total shares issued will differ significantly from the amount issued to
date.




On May
15, 2009, we filed a complaint in the United States District Court for the
Southern District of New York against InstantService, Inc. (“InstantService”)
asserting claims that InstantService infringes the U.S. Patent Nos. 6,519,628
and 7,526,439 owned by us. We are seeking damages for infringement and an
injunction against future infringement of our patents. On June 2, 2009, we filed
a first amended complaint seeking a declaratory judgment that a patent
purportedly owned by InstantService is invalid and not infringed by our
products. InstantService has not answered the complaint and has not filed
counterclaims, but did file a motion to dismiss one of four causes of
action.  The case is in its early stages.  We believe our
claims have merit and that InstantService’s motion to dismiss is without merit.
We intend to vigorously pursue our claims.




We are
not currently party to any other legal proceedings. From time to time, we may be
subject to various claims and legal actions arising in the ordinary course of
business.




ITEM
1A. RISK FACTORS




Risks
that could have a material and adverse impact on our business, results of
operations and financial condition include the following: potential fluctuations
in our quarterly and annual results; competition in the real-time sales,
marketing and customer service solutions market; risks related to adverse
business conditions experienced by our clients; risks related to the operational
integration of acquisitions; additional regulatory requirements, tax
liabilities, or currency exchange rate fluctuations could impact our business;
potential goodwill impairments; continued use by our clients of the LivePerson
services and their purchase of additional services; responding to rapid
technological change and changing client preferences; technology systems beyond
our control and technology-related issues or defects that could disrupt or
compromise the LivePerson services; the services provided to consumers via our
technology platforms could result in legal liability and/or negative publicity;
payment-related risks from credit and debit cards; risks related to the
regulation or possible misappropriation of personal information; risks related
to protecting our intellectual property rights or potential infringement of the
intellectual property rights of third parties; our history of losses; our
ability to license necessary third party software for use in our products and
services or successfully integrate third party software; our dependence on key
employees; competition for qualified personnel; the impact of new accounting
rules; the possible unavailability of financing as and if needed; risks related
to our international operations, particularly our operations in Israel, and the
civil and political unrest in that region; and our dependence on the continued
use of the Internet as a medium for commerce and the viability of the
infrastructure of the Internet. This list is intended to identify only certain
of the principal factors that could have a material and adverse impact on our
business, results of operations and financial condition. A more detailed
description of each of these and other important risk factors can be found under
the caption “Risk Factors” in our most recent Annual Report on Form 10-K, filed
on March 13, 2009.




There are
no material changes to the risk factors described in the Form
10-K.


32




ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




On March
5, 2009, our Board of Directors approved an extension of our existing stock
repurchase program through March 31, 2010. The program, originally announced in
February 2007 and first extended on March 10, 2008, was due to expire at the end
of the first quarter of 2009.




Under the
stock repurchase program, we are authorized to repurchase shares of our common
stock, in the open market or privately negotiated transactions, at times and
prices considered appropriate by our Board of Directors depending upon
prevailing market conditions and other corporate considerations, up to an
aggregate purchase price of $8.0 million. As of September 30, 2009, $3.9 million
remained available for purchases under the program. Our Board of Directors may
discontinue the program at any time.




The
following table summarizes repurchases of our common stock under our stock
repurchase program during the quarter ended September 30, 2009:




Period
              
              Total Number of
                  Shares Purchased
              
              
              Average Price Paid
                  per Share
              
              
              Total Number of
                  Shares Purchased
                  as Part of Publicly
                  Announced Plans
                  or Programs
              
              
              Approximate
                  Dollar
                  Value of Shares
                  that
                  May Yet Be
                  Purchased Under
                  the Plans or
                  Programs7/1/2009
      – 7/31/2009
              
              
              —
              
              
              $
              —
              
              
              
              —
              
              
              $
              3,946,0008/1/2009
      – 8/31/2009
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,946,0009/1/2009
      – 9/30/2009
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,946,000Total
              
              
              —
              
              
              $
              —
              
              
              
              —
              
              
              $
              3,946,000




ITEM
5. OTHER INFORMATION
  Employment
Letter for James J. Dicso
  James
J. Dicso, our Senior Vice President, Enterprise Sales and Service, entered into
a letter agreement with us dated November 6, 2009, setting forth certain terms
and conditions of his continued employment.  This agreement
supersedes Mr. Dicso’s November 3, 2004 offer letter.  The letter
sets forth Mr. Dicso’s current compensation consisting of an annualized base
salary of $250,000, as well as either annual incentive compensation or an annual
discretionary retention and performance bonus as determined by the
Company.  Mr. Dicso is entitled to such benefits as are available to
other employees (subject to any eligibility criteria) and is entitled to three
weeks of paid vacation.
  If
Mr. Dicso’s employment is terminated by us without cause other than during the
12-month period following a change of control (as such terms are defined in his
agreement), subject to Mr. Dicso signing a release of claims agreement
acceptable to the Company, he is entitled to receive (i) 6 months of his
then-current base salary as severance pay, (ii) to the extent he was eligible
and not already paid, the incentive compensation or discretionary bonus he would
have received for the prior fiscal year had he remained employed on the date
such incentive compensation or bonus was distributed, (iii) to the extent he is
eligible to receive incentive compensation or a discretionary bonus in the
fiscal year in which his employment is terminated, a pro-rated amount of the
incentive compensation or target bonus he would have received such year (or, if
such incentive compensation or bonus amount has not yet been determined, a
pro-rated amount of the incentive compensation or discretionary bonus, as
applicable, he received the prior fiscal year), and (iv) 6 months of COBRA
reimbursement for the percentage of the coverage premium that we pay on behalf
of similarly situated employees receiving the same type of
coverage.
  If
Mr. Dicso’s employment is terminated due to death or disability (as defined in
his agreement), he is entitled to receive subject to signing a release of claims
agreement acceptable to the Company:  (i) to the extent he was
eligible and not already paid, the incentive compensation or discretionary bonus
he would have received for the prior fiscal year had he remained employed,
payable on the date such incentive compensation or bonus was distributed, and
(ii) to the extent he was eligible to receive incentive compensation or a
discretionary bonus in the fiscal year in which his employment was terminated
due to death or disability, a pro-rated amount of the incentive compensation or
discretionary bonus, as applicable, he received the prior fiscal year for the
amount of time actually served prior to termination, or such other bonus amount
as may be determined by the Board of Directors.
  If
there is a change of control of the Company and, within 12 months following such
change of control, Mr. Dicso is terminated by us without cause or he resigns for
good reason (as such terms are defined in his agreement), subject to Mr. Dicso
signing a release of claims agreement acceptable to the company: (i) he is
entitled to receive (a) 9 months of his then-current base salary as severance
pay, (b) to the extent he was eligible and not already paid, the incentive
compensation or discretionary bonus he would have received for the prior fiscal
year had he remained employed on the date such incentive compensation or bonus
was distributed, (c) to the extent he is eligible to receive incentive
compensation or a discretionary bonus in the fiscal year in which his employment
is terminated, a pro-rated amount of the incentive compensation or bonus he
would have received such year (or, if such incentive compensation or bonus has
not yet been determined, a pro-rated amount of the incentive compensation or
discretionary bonus, as applicable, he received the prior fiscal year) for the
amount of time actually served prior to termination, and (d) 9 months of COBRA
reimbursement for the percentage of the coverage premium that we pay on behalf
of similarly situated employees receiving the same type of coverage; and (ii)
all option and other equity awards that would have vested during the 24-month
period following his termination date will become immediately vested and will
remain exercisable for 12 months following his termination date.
  33
  Employment
Letter for Kevin T. Kohn
  Kevin
T. Kohn, our Executive Vice President of Marketing, entered into a letter
agreement with us dated November 6, 2009, setting forth certain terms and
conditions of his continued employment.  This agreement supersedes Mr.
Kohn’s August 27, 2004 offer letter.  The letter agreement sets forth
Mr. Kohn’s current compensation consisting of an annualized base salary of
$220,500, as well as a discretionary annual retention and performance
bonus.  Mr. Kohn is entitled to such benefits as are available to
other employees (subject to any eligibility criteria) and is entitled to three
weeks of paid vacation.
  If
Mr. Kohn’s employment is terminated by us without cause other than during the
12-month period following a change of control (as such terms are defined in his
agreement), subject to Mr. Kohn signing a release of claims agreement acceptable
to the Company, he is entitled to receive (i) 6 months of his then-current base
salary as severance pay, (ii) to the extent it has not already been paid, the
discretionary bonus he would have received for the prior fiscal year had he
remained employed on the date such bonus was distributed, (iii) a pro-rated
amount of the discretionary bonus he would have received for the fiscal year in
which his employment is terminated (or, if such bonus has not yet been
determined, a pro-rated amount of the discretionary bonus he received the prior
fiscal year) for the amount of time actually served prior to termination, and
(iv) 6 months of COBRA reimbursement for the percentage of the coverage premium
that we pay on behalf of similarly situated employees receiving the same type of
coverage.
  If
Mr. Kohn’s employment is terminated due to death or disability (as defined in
his agreement), he is entitled to receive, subject to signing a release of
claims agreement acceptable to the Company:  (i) to the extent he was
eligible and not already paid, the discretionary bonus he would have received
for the prior fiscal year had he remained employed on the date such bonus was
distributed, and (ii) to the extent he was eligible to receive a discretionary
bonus in the fiscal year in which his employment was terminated due to death or
disability, a pro-rated amount of the discretionary bonus he received the prior
fiscal year for the amount of time actually served prior to termination, or such
other bonus amount as may be determined by the Board of Directors.
  If
there is a change of control of the Company and, within 12 months following such
change of control, Mr. Kohn is terminated by us without cause or he resigns for
good reason (as such terms are defined in his agreement), subject to Mr. Kohn
signing a release of claims agreement acceptable to the Company: (i) he is
entitled to receive (a) 6 months of his then-current base salary as severance
pay, (b) to the extent it has not already been paid, the discretionary bonus he
would have received for the prior fiscal year had he remained employed on the
date such bonus was distributed, (c) a pro-rated amount of the discretionary
bonus he would have received for the fiscal year in which his employment is
terminated (or, if such bonus has not yet been determined, a pro-rated amount of
the discretionary bonus he received the prior fiscal year) for the amount of
time actually served prior to termination, and (d) 6 months of COBRA
reimbursement for the percentage of the coverage premium that we pay on behalf
of similarly situated employees receiving the same type of coverage; and (ii)
all option and other equity awards that would have vested during the 12-month
period following his termination date will become immediately vested and will
remain exercisable for 12 months following his termination date.
 ITEM
6. EXHIBITS




The
following exhibits are filed as part of this Quarterly Report on Form
10-Q:




31.1
              Certification
      by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002
 
 31.2
              Certification
      by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002
 
 32.1
              Certification
      by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002
 
 32.2
                Certification
      by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002




34


SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.




LIVEPERSON,
      INC.(Registrant)Date:
      November 9, 2009
                    By:
                    /s/
      ROBERT P. LOCASCIOName:
                    Robert
      P. LoCascioTitle:
                    Chief
      Executive Officer (duly authorized officer)Date:
      November 9, 2009
                    By:
                    /s/
      TIMOTHY E. BIXBYName:
                    Timothy
      E. BixbyTitle:
                    President
      and Chief Financial Officer (principalfinancial
      and accounting
officer)










EXHIBIT
INDEX




EXHIBIT31.1
            
            Certification
      by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
            
            Certification
      by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
            
            Certification
      by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
            
            Certification
      by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002