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 JUNE 30, 2010




or




 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934




For
the transition period from ____________________ to
____________________




Commission
file number: 000-30141




LIVEPERSON, INC.


(Exact
Name of Registrant as Specified in Its Charter)





DELAWARE
              
              13-3861628(State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              
              (IRS
      Employer Identification No.)462
      SEVENTH AVENUE, 3RD
      FLOOR
                NEW
      YORK, NEW YORK
              
              10018(Address
      of Principal Executive Offices)
              
              (Zip
      Code)





(212)
609-4200


(Registrant’s
Telephone Number, Including Area Code)





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes 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  ̈  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 x
                  Non-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
August 2, 2010, there were 51,027,989 shares of the issuer’s common stock
outstanding.





LIVEPERSON, INC.


JUNE
30, 2010


FORM
10-Q




INDEX




PagePART
      I.
                            FINANCIAL
      INFORMATIONITEM
      1.
                            FINANCIAL
      STATEMENTS
                            4CONDENSED
      CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2010 (UNAUDITED) AND DECEMBER
      31, 2009
                            4UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS
      ENDED JUNE 30, 2010 AND 2009
                            5UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
      JUNE 30, 2010 AND 2009
                            6NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                            8ITEM
      2.
                            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                            18ITEM
      3.
                            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                            27ITEM
      4.
                            CONTROLS
      AND PROCEDURES
                            28PART
      II.
                            OTHER
      INFORMATIONITEM
      1.
                            LEGAL
      PROCEEDINGS
                            28ITEM
      1a.
                            RISK
      FACTORS
                            29ITEM
      2.
                            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                            29ITEM
      6.
                            EXHIBITS
                            30




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)




June
      30,
                  2010
              
              
              December 31,
                  2009(Unaudited)
              
              
              (Note1(B))ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              52,839
              
              
              $
              45,572Accounts
      receivable, net of allowance for doubtful accounts of $410 as of June 30,
      2010
                and
      $395 as of December 31, 2009
              
              
              12,629
              
              
              
              10,265Prepaid
      expenses and other current assets
              
              
              3,845
              
              
              
              3,661Deferred
      tax assets, net
              
              
              1,052
              
              
              
              1,460Total
      current assets
              
              
              70,365
              
              
              
              60,958Property
      and equipment, net
              
              
              11,558
              
              
              
              9,551Intangibles,
      net
              
              
              2,832
              
              
              
              2,821Goodwill
              
              
              23,920
              
              
              
              23,920Deferred
      tax assets, net
              
              
              5,226
              
              
              
              4,777Deferred
      implementation costs, net of current
              
              
              153
              
              
              
              136Security
      deposits
              
              
              475
              
              
              
              326Other
      assets
              
              
              1,794
              
              
              
              1,792Total
      assets
              
              $
              116,323
              
              
              $
              104,281LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              7,044
              
              
              $
              5,375Accrued
      expenses
              
              
              8,286
              
              
              
              10,895Deferred
      revenue
              
              
              4,770
              
              
              
              4,692Total
      current liabilities
              
              
              20,100
              
              
              
              20,962Deferred
      revenue, net of current
              
              
              629
              
              
              
              506Other
      liabilities
              
              
              1,679
              
              
              
              1,676Total
      liabilities
              
              
              22,408
              
              
              
              23,144Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $.001 par value per share; 5,000,000 shares authorized, 0 shares
      issued and outstanding at June 30, 2010 and December 31,
    2009
              
              
              —
              
              
              
              —Common
      stock, $.001 par value per share; 100,000,000 shares authorized,
      51,005,403 shares issued and outstanding at June 30, 2010 and 49,435,682
      shares issued and outstanding at December 31, 2009
              
              
              51
              
              
              
              49Additional
      paid-in capital
              
              
              199,743
              
              
              
              190,692Accumulated
      deficit
              
              
              (105,680
              )
              
              
              (109,432
              )Accumulated
      other comprehensive loss
              
              
              (199
              )
              
              
              (172
              )Total
      stockholders’ equity
              
              
              93,915
              
              
              
              81,137Total
      liabilities and stockholders’ equity
              
              $
              116,323
              
              
              $
              104,281





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
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009Revenue
              
              $
              26,398
              
              
              $
              20,541
              
              
              $
              51,706
              
              
              $
              40,460Operating
      expenses:Cost
      of revenue
              
              
              7,178
              
              
              
              5,228
              
              
              
              13,810
              
              
              
              9,513Product
      development
              
              
              3,908
              
              
              
              3,138
              
              
              
              7,514
              
              
              
              5,839Sales
      and marketing
              
              
              8,452
              
              
              
              6,908
              
              
              
              16,142
              
              
              
              13,412General
      and administrative
              
              
              4,175
              
              
              
              3,157
              
              
              
              7,967
              
              
              
              6,679Amortization
      of intangibles
              
              
              83
              
              
              
              272
              
              
              
              166
              
              
              
              544Total
      operating expenses
              
              
              23,796
              
              
              
              18,703
              
              
              
              45,599
              
              
              
              35,987Income
      from operations
              
              
              2,602
              
              
              
              1,838
              
              
              
              6,107
              
              
              
              4,473Other
      (expense) income:Financial
      (expense) income
              
              
              (41
              )
              
              
              23
              
              
              
              (90
              )
              
              
              (96
              )Interest
      income
              
              
              30
              
              
              
              21
              
              
              
              53
              
              
              
              56Total
      other (expense) income, net
              
              
              (11
              )
              
              
              44
              
              
              
              (37
              )
              
              
              (40
              )Income
      before provision for income taxes
              
              
              2,591
              
              
              
              1,882
              
              
              
              6,070
              
              
              
              4,433Provision
      for income taxes
              
              
              975
              
              
              
              748
              
              
              
              2,318
              
              
              
              2,028Net
      income
              
              $
              1,616
              
              
              $
              1,134
              
              
              $
              3,752
              
              
              $
              2,405Basic
      net income per common share
              
              $
              0.03
              
              
              $
              0.02
              
              
              $
              0.07
              
              
              $
              0.05Diluted
      net income per common share
              
              $
              0.03
              
              
              $
              0.02
              
              
              $
              0.07
              
              
              $
              0.05Weighted
      average shares outstanding used in basic net income per common share
      calculation
              
              
              50,921,609
              
              
              
              47,611,657
              
              
              
              50,383,042
              
              
              
              47,540,614Weighted
      average shares outstanding used in diluted net income per common share
      calculation
              
              
              53,416,706
              
              
              
              48,650,478
              
              
              
              52,803,871
              
              
              
              48,301,914





SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED


CONSOLIDATED
FINANCIAL STATEMENTS.


5





LIVEPERSON, INC.




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(IN
THOUSANDS)


UNAUDITED





Six
      Months Ended
                  June
      30,2010
              
              
              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
              
              $
              3,752
              
              
              $
              2,405Adjustments
      to reconcile net income to net cash provided by operating
      activities:Stock-based
      compensation expense
              
              
              2,173
              
              
              
              2,279Depreciation
              
              
              2,335
              
              
              
              1,627Amortization
      of intangibles
              
              
              778
              
              
              
              1,158Deferred
      income taxes
              
              
              (42
              )
              
              
              297Provision
      for doubtful accounts
              
              
              15
              
              
              
              —CHANGES
      IN OPERATING ASSETS AND LIABILITIES:Accounts
      receivable
              
              
              (2,379
              )
              
              
              (250
              )Prepaid
      expenses and other current assets
              
              
              (199
              )
              
              
              (2
              )Deferred
      implementation costs
              
              
              (17
              )
              
              
              —Security
      deposits
              
              
              (150
              )
              
              
              26Accounts
      payable
              
              
              (312
              )
              
              
              278Accrued
      expenses
              
              
              (2,594
              )
              
              
              541Deferred
      revenue
              
              
              201
              
              
              
              220Net
      cash provided by operating activities
              
              
              3,561
              
              
              
              8,579CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment, including capitalized software
              
              
              (2,339
              )
              
              
              (3,259
              )Acquisition
      of NuConomy, net of cash acquired
              
              
              (789
              )
              
              
              —Acquisition
      of Proficient
              
              
              —
              
              
              
              (81
              )Net
      cash used in investing activities
              
              
              (3,128
              )
              
              
              (3,340
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repurchase
      of common stock
              
              
              —
              
              
              
              (28
              )Excess
      tax benefit from the exercise of employee stock options
              
              
              34
              
              
              
              305Proceeds
      from issuance of common stock in connection with the exercise of
      options
              
              
              6,846
              
              
              
              267Net
      cash provided by financing activities
              
              
              6,880
              
              
              
              544Effect
      of foreign exchange rate changes on cash and cash
    equivalents
              
              
              (46
              )
              
              
              (16
              )Net
      increase in cash and cash equivalents
              
              
              7,267
              
              
              
              5,767Cash
      and cash equivalents at the beginning of the period
              
              
              45,572
              
              
              
              25,500Cash
      and cash equivalents at the end of the period
              
              $
              52,839
              
              
              $
              31,267





Supplemental
disclosure of non-cash investing activities:




Cash
flows from investing for the six months ended June 30, 2010 does not include the
purchases of approximately $1,578 of capitalized equipment related to the
Company’s colocation facility as the corresponding invoices are included in
accounts payable at June 30, 2010, and therefore did not have an impact on cash
flows for the period.


6


Cash
flows from investing for the six months ended June 30, 2009 does not include the
purchases of approximately $65 of capitalized equipment related to the Company’s
colocation facility as the corresponding invoices are included in accounts
payable at June 30, 2009, and therefore did not have an impact on cash flows for
the period.




During
the six months ended June 30, 2009, the Company settled a pre-acquisition
contingency resulting in a decrease in accrued expenses in the amount of
$566.




SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED


CONSOLIDATED
FINANCIAL STATEMENTS.


7





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”) provides online engagement solutions that
facilitate real-time assistance and expert advice. Connecting businesses and
independent service providers with individual consumers seeking help on the Web,
their hosted software platform creates more relevant, compelling and
personalized online experiences.  The Company was incorporated in 1995
and commenced operations in 1996.




The
Company’s primary revenue source is from the sale of the LivePerson services to
businesses of all sizes. The Company also facilitates online transactions
between independent service providers (“Experts”) who provide 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 June 30, 2010 and
for the three and six months ended June 30, 2010 and 2009 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 June 30, 2010, and the consolidated results of operations and cash flows for
the interim periods ended June 30, 2010 and 2009. 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, 2009 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, 2009, included in the Company’s Annual Report on Form 10-K filed with the
SEC on March 11, 2010.




(C)
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.


8


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 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.




(D)
STOCK-BASED COMPENSATION




The
Company follows FASB ASC 718-10, “Stock Compensation,” which addresses the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services, with a primary focus on transactions in which an entity
obtains employee services in share-based payment transactions. ASC 718-10
requires measurement of the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). Incremental compensation costs arising from
subsequent modifications of awards after the grant date must be
recognized.




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 Income. Stock-based compensation recognized in the Company’s
Consolidated Statements of Income for the three and six months ended June 30,
2010 and 2009 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.




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 six months ended June 30, 2010 and 2009:




Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009Cost
      of revenue
              
              $
              196
              
              
              $
              207
              
              
              $
              410
              
              
              $
              366Product
      development expense
              
              
              327
              
              
              
              372
              
              
              
              662
              
              
              
              673Sales
      and marketing expense
              
              
              277
              
              
              
              292
              
              
              
              557
              
              
              
              600General
      and administrative expense
              
              
              286
              
              
              
              247
              
              
              
              544
              
              
              
              640Total
      stock based compensation included in operating expenses
              
              $
              1,086
              
              
              $
              1,118
              
              
              $
              2,173
              
              
              $
              2,279




9





The per
share weighted average fair value of stock options granted and assumed during
the three and six months ended June 30, 2010 was $3.97 and $3.81, respectively.
The per share weighted average fair value of stock options granted and assumed
during the three and six months ended June 30, 2009 was $1.73 and $1.15,
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
                    June
      30,
                
                
                Six
      Months Ended
                    June
      30,2010
                
                
                2009
                
                
                2010
                
                
                2009Dividend
      yield
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %Risk-free
      interest rate
                
                
                3.2%
      - 3.7
                %
                
                
                3.2%
      - 3.9
                %
                
                
                3.2%
      - 3.8
                %
                
                
                2.8%
      - 3.9
                %Expected
      life (in years)
                
                
                5.0
                
                
                
                5.0
                
                
                
                5.0
                
                
                
                5.0Historical
      volatility
                
                
                60.4%
      - 61.6
                %
                
                
                65.0%
      - 65.6
                %
                
                
                60.3%
      - 61.6
                %
                
                
                65.0%
      - 68.2
                %





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.




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 June 30, 2010, approximately 16,292,000 shares of common stock were
reserved for issuance under the 2009 Plan (taking into account all option
exercises through June 30, 2010). As of June 30, 2010, there was approximately
$15,476 of total unrecognized compensation cost related to nonvested share-based
compensation arrangements. That cost, as of June 30, 2010, is expected to be
recognized over a weighted average period of approximately 2.5
years.




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, 2009
              
              
              8,711,808
              
              
              $
              3.82Options
      granted
              
              
              3,008,145
              
              
              
              6.98Options
      exercised
              
              
              (1,550,971
              )
              
              
              4.46Options
      cancelled
              
              
              (388,646
              )
              
              
              4.54Options
      outstanding at June 30, 2010
              
              
              9,780,336
              
              
              
              4.67Options
      exercisable at June 30, 2010
              
              
              4,033,899
              
              
              $
              3.83





The total
intrinsic value of stock options exercised during the period ended June 30, 2010
was approximately $4,557. The total intrinsic value of options exercisable at
June 30, 2010 was approximately $11,974. The total intrinsic value of options
expected to vest at June 30, 2010 is approximately $10,255.


10


A summary
of the status of the Company’s nonvested shares as of December 31, 2009, and
changes during the six months ended June 30, 2010 is as follows:




Shares
              
              
              Weighted
                  Average
                  Grant
                  Date
      Fair
                  ValueNonvested
      Shares at December 31, 2009
              
              
              4,247,893
              
              
              $
              2.13Granted
              
              
              3,008,145
              
              
              
              3.81Vested
              
              
              (1,198,401
              )
              
              
              2.37Cancelled
              
              
              (311,200
              )
              
              
              2.49Nonvested
      Shares at June 30, 2010
              
              
              5,746,437
              
              
              $
              2.94





(E)
BASIC AND DILUTED NET INCOME PER SHARE




The
Company calculates earnings per share (“EPS”) in accordance with the provisions
of ASC 260-10 and the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 98.
Under ASC 260-10, basic EPS excludes dilution for common stock equivalents and
is computed by dividing net income or loss attributable to common shareholders
by the weighted average number of common shares outstanding for the period. All
options, warrants or other potentially dilutive instruments issued for nominal
consideration are required to be included in the calculation of basic and
diluted net income attributable to common stockholders. Diluted EPS is
calculated using the treasury stock method and reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock and resulted in the issuance of common
stock.




Diluted
net income per common share for the three and six months ended June 30, 2010
includes the effect of options to purchase 6,471,753 and 6,271,753 shares,
respectively, of common stock with a weighted average exercise price of $3.51
and $3.42, respectively. Diluted net income per common share for the three and
six months ended June 30, 2009 includes the effect of options to purchase
4,204,317 and 1,864,067 shares, respectively, of common stock with a weighted
average exercise price of $1.83 and $1.31, respectively.




A reconciliation of shares used in calculating basic and diluted
earnings per share follows:




Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009Basic
              
              
              50,921,609
              
              
              
              47,611,657
              
              
              
              50,383,042
              
              
              
              47,540,614Effect
      of assumed exercised options
              
              
              2,495,097
              
              
              
              1,038,821
              
              
              
              2,420,829
              
              
              
              761,300Diluted
              
              
              53,416,706
              
              
              
              48,650,478
              
              
              
              52,803,871
              
              
              
              48,301,914





(F)
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 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 and income
taxes because management does not use this information to measure performance of
the operating segments. There are currently no inter-segment
sales.


11


Summarized
financial information by segment for the three months ended June 30, 2010, 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
              
              $
              21,823
              
              
              $
              —
              
              
              $
              21,823
              
              
              $
              —Hosted
      services — Consumer
              
              
              3,428
              
              
              
              —
              
              
              
              —
              
              
              
              3,428Professional
      services
              
              
              1,147
              
              
              
              —
              
              
              
              1,147
              
              
              
              —Total
      revenue
              
              
              26,398
              
              
              
              —
              
              
              
              22,970
              
              
              
              3,428Cost
      of revenue
              
              
              7,178
              
              
              
              —
              
              
              
              6,250
              
              
              
              928Sales
      and marketing
              
              
              8,452
              
              
              
              —
              
              
              
              6,664
              
              
              
              1,788Amortization
      of intangibles
              
              
              83
              
              
              
              —
              
              
              
              11
              
              
              
              72Unallocated
      corporate expenses
              
              
              8,083
              
              
              
              8,083
              
              
              
              —
              
              
              
              —Operating
      income (loss)
              
              $
              2,602
              
              
              $
              (8,083
              )
              
              $
              10,045
              
              
              $
              640





Summarized financial information by segment for the three months
ended June 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
              
              $
              16,943
              
              
              $
              —
              
              
              $
              16,943
              
              
              $
              —Hosted
      services — Consumer
              
              
              2,878
              
              
              
              —
              
              
              
              —
              
              
              
              2,878Professional
      services
              
              
              720
              
              
              
              —
              
              
              
              720
              
              
              
              —Total
      revenue
              
              
              20,541
              
              
              
              —
              
              
              
              17,663
              
              
              
              2,878Cost
      of revenue
              
              
              5,228
              
              
              
              —
              
              
              
              4,340
              
              
              
              888Sales
      and marketing
              
              
              6,908
              
              
              
              —
              
              
              
              5,005
              
              
              
              1,903Amortization
      of intangibles
              
              
              272
              
              
              
              —
              
              
              
              200
              
              
              
              72Unallocated
      corporate expenses
              
              
              6,295
              
              
              
              6,295
              
              
              
              —
              
              
              
              —Operating
      income (loss)
              
              $
              1,838
              
              
              $
              (6,295
              )
              
              $
              8,118
              
              
              $
              15





Revenues
attributable to domestic and foreign operations for the three months ended June
30, 2010 and 2009, follows:




June
      30,2010
              
              
              2009United
      States
              
              $
              20,196
              
              
              $
              15,841United
      Kingdom
              
              
              3,519
              
              
              
              2,218Other
      countries
              
              
              2,683
              
              
              
              2,482Total
      revenue
              
              $
              26,398
              
              
              $
              20,541




12


Summarized
financial information by segment for the six months ended June 30, 2010, 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
              
              $
              42,736
              
              
              $
              —
              
              
              $
              42,736
              
              
              $
              —Hosted
      services — Consumer
              
              
              6,886
              
              
              
              —
              
              
              
              —
              
              
              
              6,886Professional
      services
              
              
              2,084
              
              
              
              —
              
              
              
              2,084
              
              
              
              —Total
      revenue
              
              
              51,706
              
              
              
              —
              
              
              
              44,820
              
              
              
              6,886Cost
      of revenue
              
              
              13,810
              
              
              
              —
              
              
              
              11,934
              
              
              
              1,876Sales
      and marketing
              
              
              16,142
              
              
              
              —
              
              
              
              12,692
              
              
              
              3,450Amortization
      of intangibles
              
              
              166
              
              
              
              —
              
              
              
              22
              
              
              
              144Unallocated
      corporate expenses
              
              
              15,481
              
              
              
              15,481
              
              
              
              —
              
              
              
              —Operating
      income (loss)
              
              $
              6,107
              
              
              $
              (15,481
              )
              
              $
              20,172
              
              
              $
              1,416





Summarized
financial information by segment for the six months ended June 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
              
              $
              33,658
              
              
              $
              —
              
              
              $
              33,658
              
              
              $
              —Hosted
      services — Consumer
              
              
              5,407
              
              
              
              —
              
              
              
              —
              
              
              
              5,407Professional
      services
              
              
              1,395
              
              
              
              —
              
              
              
              1,395
              
              
              
              —Total
      revenue
              
              
              40,460
              
              
              
              —
              
              
              
              35,053
              
              
              
              5,407Cost
      of revenue
              
              
              9,513
              
              
              
              —
              
              
              
              7,766
              
              
              
              1,747Sales
      and marketing
              
              
              13,412
              
              
              
              —
              
              
              
              9,909
              
              
              
              3,503Amortization
      of intangibles
              
              
              544
              
              
              
              —
              
              
              
              400
              
              
              
              144Unallocated
      corporate expenses
              
              
              12,518
              
              
              
              12,518
              
              
              
              —
              
              
              
              —Operating
      income (loss)
              
              $
              4,473
              
              
              $
              (12,518
              )
              
              $
              16,978
              
              
              $
              13





Revenues
attributable to domestic and foreign operations for the six months ended June
30, 2010 and 2009, follows:




June
      30,2010
              
              
              2009United
      States
              
              $
              41,195
              
              
              $
              31,402United
      Kingdom
              
              
              5,147
              
              
              
              4,396Other
      countries
              
              
              5,364
              
              
              
              4,662Total
      revenue
              
              $
              51,706
              
              
              $
              40,460





Long-lived
assets by geographic region follows:




June
      30, 2010
                
                
                December
      31, 2009United
      States
                
                $
                32,211
                
                
                $
                29,508Israel
                
                
                13,747
                
                
                
                13,815Total
      long-lived assets
                
                $
                45,958
                
                
                $
                43,323




13




(G)
GOODWILL AND INTANGIBLE ASSETS
  There
were no changes in the carrying amount of goodwill in the six months ended June
30, 2010.
  The
changes in the carrying amount of goodwill for the year ended December 31, 2009
are as follows:


Total
              
              
              Business
              
              
              ConsumerBalance
      as of December 31, 2008
              
              $
              24,
      388
              
              
              $
              15,798
              
              
              $
              8,590Adjustments
      to goodwill:Contingent
      earnout payments
              
              
              98
              
              
              
              98
              
              
              
              —Settlement
      of pre-acquisition contingency
              
              
              (566
              )
              
              
              —
              
              
              
              (566
              )Balance
      as of December 31, 2009
              
              $
              23,920
              
              
              $
              15,896
              
              
              $
              8,024




Intangible
assets are summarized as follows (see Note 3):




Acquired Intangible Assets




As
      of June 30, 2010Gross
                    Carrying
                    Amount
                
                
                Weighted
                    Average
                    Amortization
                    Period
                
                
                Accumulated
                    AmortizationAmortizing
      intangible assets:Technology
                
                $
                5,410
                
                
                3.8
      years
                
                
                $
                3,876Customer
      contracts
                
                
                2,400
                
                
                3.0
      years
                
                
                
                2,400In
      process research and development
                
                
                789
                
                
                —
                
                
                
                —Trade
      names
                
                
                630
                
                
                3.0
      years
                
                
                
                577Non-compete
      agreements
                
                
                410
                
                
                1.2
      years
                
                
                
                410Patents
                
                
                475
                
                
                11.0
      years
                
                
                
                40Other
                
                
                235
                
                
                3.0
      years
                
                
                
                214Total
                
                $
                10,349
                
                
                
                
                
                $
                7,517





As
      of December 31, 2009Gross
                    Carrying
                    Amount
                
                
                Weighted
                    Average
                    Amortization
                    Period
                
                
                Accumulated
                    AmortizationAmortizing
      intangible assets:Technology
                
                $
                5,410
                
                
                3.8
      years
                
                
                $
                3,262Customer
      contracts
                
                
                2,400
                
                
                3.0
      years
                
                
                
                2,400Trade
      names
                
                
                630
                
                
                3.0
      years
                
                
                
                473Non-compete
      agreements
                
                
                410
                
                
                1.2
      years
                
                
                
                410Patents
                
                
                475
                
                
                11.0
      years
                
                
                
                18Other
                
                
                235
                
                
                3.0
      years
                
                
                
                176Total
                
                $
                9,560
                
                
                
                
                
                $
                6,739





Amortization
expense is calculated on a straight-line basis over the estimated useful life of
the asset. Aggregate amortization expense for intangible assets was $389 and
$778 for the three and six months ended June 30, 2010, respectively, and $579
and $1,158 for the three and six months ended June 30, 2009, respectively.
Estimated amortization expense for the next five years is: $707 in 2010, $964 in
2011, $43 in 2012, $43 in 2013, $43 in 2014 and $243 thereafter. In process
research and development is currently classified as an indefinite lived asset
and will continue to be evaluated for impairment on a periodic basis. When the
technology is placed in service, the Company will amortize the balance over the
assets estimated useful life.




14




(H) RECENTLY ISSUED FASB ACCOUNTING STANDARDS
UPDATES


In
January 2010, the FASB published FASB Accounting Standards Update 2010-06, Fair
Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair
Value Measurements. This update requires some new disclosures and clarifies some
existing disclosure requirements about fair value measurement as set forth in
Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial reporting.
Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:
(a) a reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers; and (b) in the reconciliation for fair value
measurements using significant unobservable inputs, a reporting entity should
present separately information about purchases, sales, issuances, and
settlements. In addition, ASU 2010-06 clarifies the requirements of the
following existing disclosures: for purposes of reporting fair value measurement
for each class of assets and liabilities, a reporting entity needs to use
judgment in determining the appropriate classes of assets and liabilities and
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
ASU 2010-06 is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. As ASU
2010-06 relates specifically to disclosures, it will not have an impact on the
Company’s consolidated financial statements.




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 its consolidated financial statements.




(2) BALANCE SHEET COMPONENTS




Property
and Equipment




Property
and equipment is summarized as follows:




June 30, 2010
                
                
                December 31, 2009Computer
      equipment and software
                
                $
                21,278
                
                
                $
                17,045Furniture,
      equipment and building improvements
                
                
                920
                
                
                
                81122,198
                
                
                
                17,856Less
      accumulated depreciation
                
                
                10,640
                
                
                
                8,305Total
                
                $
                11,558
                
                
                $
                9,551





Accrued
Expenses




Accrued
expenses consist of the following:




June 30, 2010
                
                
                December 31, 2009Payroll
      and other employee related costs
                
                $
                4,449
                
                
                $
                7,557Professional
      services and consulting and other vendor fees
                
                
                2,765
                
                
                
                2,370Sales
      commissions
                
                
                618
                
                
                
                608Other
                
                
                454
                
                
                
                360Total
                
                $
                8,286
                
                
                $
                10,895




15




(3)
ACQUISITIONS




ProficientSystems




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. During the twelve months
ended December 31, 2009, the Company incurred additional costs related to the
earn-out litigation in the amount of $98, resulting in an increase in
goodwill.




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.




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. During the twelve
months ended December 31, 2009, the Company settled a pre-acquisition
contingency resulting in a $566 decrease in goodwill.




NuConomy
Ltd.




On April
13, 2010, the Company acquired all of the outstanding shares of NuConomy Ltd.
(“NuConomy”), an Israeli-based development-stage company whose web analytics and
optimization platform is intended to help companies better assess and understand
website and social marketing performance, in exchange for aggregate cash
consideration of $800. This transaction was accounted for as an asset
purchase.




(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. 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:


16


·
            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 combination of
discounted cash flows, prior transactions and quoted price methods to determine
the fair market value of the reporting unit. This measurement is classified
based on level 3 input.




(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 six months ended June 30, 2010 was approximately $1,749
and $3,177, respectively. Rental expense for operating leases for the three and
six months ended June 30, 2009 was approximately $1,182 and $2,223,
respectively.




Employee
Benefit Plans




The
Company has a 401(k) defined contribution plan covering all eligible employees.
The Company provides for employer matching contributions equal to 50% of
employee contributions, up to the lesser of 5% of eligible compensation or $6.
Matching contributions are deposited in to the employees 401(k) account and are
subject to 5 year graded vesting. Salaries and related expenses include $104 and
$244 of employer matching contributions for the three and six months ended June
30, 2010, respectively. Salaries and related expenses include $90 and $198 of
employer matching contributions for the three and six months ended June 30,
2009, 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 amended complaint
filed by the Shareholders’ Representative on May 12, 2009 alleges that the
Company breached the merger agreement by failing to properly account for net
annualized revenue, 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.


17


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, U.S.
Patent No. 6,915,336, is invalid and not infringed by the Company’s products. On
July 10, 2009, InstantService filed a motion to dismiss one of four causes of
action. A hearing on the motion was held on March 22, 2010 at which the Court
denied InstantService’s motion to dismiss. InstantService filed an answer to the
Company’s first amended complaint on April 5, 2010, and asserted counterclaims
against the Company. On April 29, 2010, the Company filed its reply to
InstantService’s counterclaims. On May 20, 2010, InstantService filed amended
counterclaims alleging infringement of U.S. Patent No. 6,144,670 and U.S. Patent
No. 7,315,518 and adding as counterclaim plaintiffs Art Technology Group, Inc.
and ITXC IP Holdings, S.A.R.L. This case is in the early stages and discovery is
ongoing. The Company intends to vigorously pursue its claims and to vigorously
defend against InstantService's counterclaims.




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.




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.




We are
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:


18




·
            Upgrading our
      technology.  We are increasing the level of automation
      used to deploy our services within the business segment 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. We are implementing a new billing platform for the consumer
      segment that will allow greater fee structure flexibility in how we charge
      consumers.




·
              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 and expanding 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”). In addition, we created a
      middle-market sales team to target companies that have growing contact
      centers and moderate website traffic. With a targeted product offering and
      dedicated sales team, we can more effectively serve this area of the
      market.




SECOND QUARTER 2010




Highlights of the second quarter 2010 compared to the second quarter 2009 are as
follows:




·
            Revenue
      increased 29% to $26.4 million from $20.5
  million.




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




·
            Operating
      expenses increased to $23.8 million from $18.7
  million.




·
            Net
      income increased 43% to $1.6 million from $1.1
  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.




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




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.




19




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, the
first day of our fiscal year. Our Consolidated Financial Statements as of and
for the years ended December 31, 2009, 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 Statement of
Income for the periods ended June 30, 2010 and 2009 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
June 30, 2010, there was approximately $15.5 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 2.5 years.




ACCOUNTS
RECEIVABLE




Our
customers are located primarily 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 six months ended June 30,
2010 and 2009. One customer accounted for approximately 24% of accounts
receivable at June 30, 2010. One customer accounted for approximately 12% of
accounts receivable at December 31, 2009. During the six months ended June 30,
2010, we increased our allowance for doubtful accounts by $15,000 to
approximately $410,000, 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.




20




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 will obtain appraisals from an
independent valuation firm. In addition to the use of an independent valuation
firm, we will 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.




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.




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
January 2010, the FASB published FASB Accounting Standards Update 2010-06, Fair
Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair
Value Measurements. This update requires some new disclosures and clarifies some
existing disclosure requirements about fair value measurement as set forth in
Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial reporting.
Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:
(a) a reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers; and (b) in the reconciliation for fair value
measurements using significant unobservable inputs, a reporting entity should
present separately information about purchases, sales, issuances, and
settlements. In addition, ASU 2010-06 clarifies the requirements of the
following existing disclosures: for purposes of reporting fair value measurement
for each class of assets and liabilities, a reporting entity needs to use
judgment in determining the appropriate classes of assets and liabilities and
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
ASU 2010-06 is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. As ASU
2010-06 relates specifically to disclosures, it will not have an impact on our
consolidated financial statements.




21




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.




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 87% of total revenue for the three and
six months ended June 30, 2010, respectively. Revenue attributable to our
monthly hosted Business services accounted for 95% of total Business revenue for
the three and six months ended June 30, 2010, respectively. Revenue from our
Business segment accounted for 86% and 87% of total revenue for the three and
six months ended June 30, 2009, respectively. Revenue attributable to our
monthly hosted Business services accounted for 96% of total Business revenue for
the three and six months ended June 30, 2009, respectively. 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
from our Consumer segment is generated from online transactions between Experts
and Users is recognized net of expert fees and accounted for approximately 13%
of total revenue for the three and six months ended June 30, 2010, respectively.
Revenue generated from online transactions between Experts and Users accounted
for approximately 14% and 13% of total revenue for the three and six months
ended June 30, 2009, 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.




22


OPERATING
EXPENSES
  Our cost
of revenue consists of:


·
              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 payment 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 six months ended June 30, 2010, we increased our allowance for doubtful
accounts by $15,000 to approximately $410,000, 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 the six months ended June 30, 2009, we did
not increase our allowance for doubtful accounts. 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 six months ended June 30, 2010
and 2009 consist of:




Three Months Ended
                  June 30,
              
              
              Six Months Ended
                  June 30,2010
              
              
              2009
              
              
              2010
              
              
              2009Stock-based
      compensation expense related to ASC 718-10
              
              $
              1,086
              
              
              $
              1,118
              
              
              $
              2,173
              
              
              $
              2,279Total
              
              $
              1,086
              
              
              $
              1,118
              
              
              $
              2,173
              
              
              $
              2,279





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.




23




Comparison
of Three and Six Months Ended June 30, 2010 and 2009




Revenue – Business. Revenue
increased by 30% and 28% to $23.0 million and $44.8 million in the three and six
months ended June 30, 2010, respectively, from $17.7 million and $35.1 million
in the comparable periods in 2009. This increase is primarily attributable to
revenue from new clients in the amount of approximately $2.5 million and $5.1
million, respectively, increased revenue from existing clients in the amount of
approximately $2.3 million and $3.8 million, respectively, net of cancellations,
and an increase in professional services revenue of approximately $427,000 and
$688,000, respectively. Our revenue growth has typically been driven by a mix of
revenue from newly added clients as wells as expansion of existing
clients.




Revenue – Consumer. Revenue
increased by 19% and 27% to $3.4 million and $6.9 million in the three and six
months ended June 30, 2010, respectively, from $2.9 million and $5.4 million in
the comparable periods in 2009. This increase is attributable to an increase in
gross revenue as a result of increased chat minutes.




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 44%
to $6.3 million in the three months ended June 30, 2010 from $4.3 million in the
comparable period in 2009. The increase is primarily attributable to expenses
for primary and backup server facilities and allocated overhead related costs of
supporting our server and network infrastructure of approximately $1.1 million
as a result of increased revenue and costs related to additional account
management and network operations personnel and to increased compensation costs
for existing personnel in the amount of $769,000. Cost of revenue increased by
54% to $11.9 million in the six months ended June 30, 2010 from $7.8 million in
the comparable period in 2009. The increase is primarily attributable to
expenses for primary and backup server facilities and allocated overhead related
costs of supporting our server and network infrastructure of approximately and
$1.7 million as a result of increased revenue and costs related to additional
account management and network operations personnel and to increased
compensation costs for existing personnel in the amount of $2.3
million.




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 increased by
4% to $928,000 in the three months ended June 30, 2010 from $888,000 in the
comparable period in 2009. The increase is primarily attributable to an increase
in credit card and transaction processing fees of approximately $28,000. Cost of
revenue increased by 7% to $1.9 million in the six months ended June 30, 2010,
from $1.7 million in the comparable period in 2009. The increase is primarily
attributable to an increase in credit card and transaction processing fees of
approximately $73,000, an increase in costs related to additional customer
service and network support personnel of approximately $23,000 and costs of
supporting our server and network infrastructure in the amount of approximately
$22,000.




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 increased by 25% to $3.9 million
in the three months ended June 30, 2010 from $3.1 million in the comparable
period in 2009. This increase is primarily attributable to an increase in costs
related to additional product development personnel as a result of our increased
efforts to expand our product offerings and to increases in compensation costs
for existing product development personnel of approximately $615,000. The
increase is also attributable to an increase in allocated occupancy costs and
related overhead in the amount of approximately $165,000. Product development
costs increased by 29% to $7.5 million in the six months ended June 30, 2010,
from $5.8 million in the comparable period in 2009. This increase is primarily
attributable to an increase in total compensation costs for product development
personnel of approximately $1.4 million and allocated occupancy costs and
related overhead in the amount of approximately $237,000.




24


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, trade show exhibit expenses as well as allocated occupancy
costs and related overhead. Sales and marketing expenses increased by 33% to
$6.7 million in the three months ended June 30, 2010 from $5.0 million in the
comparable period in 2009. This increase is primarily attributable to an
increase in costs related to additional sales and marketing personnel of
approximately $1.3 million, an increase in advertising, public relations and
trade show exhibit expenses of approximately $237,000 and allocated occupancy
cost and related overhead in the amount of approximately $105,000. Sales and
marketing expenses increased by 28% to $12.7 million in the six months ended
June 30, 2010 from $9.9 million in the comparable period in 2009. This increase
is primarily attributable to an increase in costs related to additional sales
and marketing personnel of approximately $2.3 million, an increase in
advertising, public relations and trade show exhibit expenses of approximately
$139,000 and allocated occupancy cost and related overhead in the amount of
approximately $150,000.  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, trade show exhibit expenses and allocated occupancy costs and related
overhead. Sales and marketing expenses decreased by 6% to $1.8 million in the
three months ended June 30, 2010 from $1.9 million in the comparable period in
2009. This decrease is primarily attributable to a decrease in spending related
to online promotion of approximately $186,000 driven by improved efficiency in
search engine optimization. This decrease was partially offset by an increase in
compensation and allocated overhead for marketing personnel of approximately
$61,000. Sales and marketing expense remained flat at $3.5 million in the six
months ended June 30, 2010 compared to the same period in 2009. A decrease in
spending related to online promotion of approximately $62,000 was partially
offset by an increase in compensation and allocated overhead for marketing
personnel in the amount of approximately $10,000.




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 increased by 32%
to $4.2 million in the three months ended June 30, 2010 from $3.2 million in the
comparable period in 2009.This increase is attributable to increases in
recruiting and related costs, rent, legal and other professional fees in the
amount of approximately $904,000. General and administrative expenses increased
by 19% to $8.0 million in the six months ended June 30, 2010 from $6.7 million
in the comparable period in 2009. This increase is primarily attributable to an
increase in costs for corporate learning and development, recruiting and related
costs, rent, legal and other professional fees in the amount of approximately
$1.3 million.




Amortization of Intangibles.
Amortization expense was $83,000 and $166,000 in the three and six months ended
June 30, 2010, respectively, as compared to $272,000 and $544,000 in the
comparable periods in 2009, respectively, and relates primarily to acquisition
costs recorded as a result of our acquisition of Kasamba in October 2007 and
Proficient in July 2006. This decrease is attributable to the fact that the
intangible assets related to the Proficient acquisition were fully amortized in
2009. Additional amortization expense in the amount of $307,000 and $614,000 are
included in cost of revenue for the three and six months ended June 30, 2010 and
2009, respectively. Amortization expense is expected to be approximately $1.5
million in the year ended December 31, 2010.




Other (Expense) Income.
Financial expense was $41,000 in the three months ended June 30, 2010 and
relates to unfavorable currency rate movements related to our Israeli
operations. Financial income was $23,000 in the three months ended June 30, 2009
and relates to favorable currency rate movements related to our Israeli
operations. Financial expense was $90,000 and $96,000 in the six months ended
June 30, 2010 and 2009, respectively, and relates to unfavorable currency rate
movements related to our Israeli operations. Interest income was $30,000 and
$53,000 in the three and six months ended June 30, 2010, compared to $21,000 and
$56,000 in the comparable periods in 2009, respectively, and consists of
interest earned on cash and cash equivalents. These increases are primarily
attributable to our increases in cash and cash equivalents.




Provision for Income Taxes.
Our effective tax rate was 38% for the three and six months ended June 30, 2010,
resulting in a provision for income taxes of $975,000 and $2.3 million in the
three and six months ended June 30, 2010, respectively. Our effective tax rate
was 40% and 46% for the three and six months ended June 30, 2009, respectively,
resulting in a provision for income taxes of $748,000 and $2.0 million in the
comparable periods in 2009, respectively.




Net Income. We had net income
of $1.6 million and $3.8 million in the three and six months ended June 30,
2010, as compared to net income of $1.1 million and $2.4 million for the
comparable periods in 2009, respectively. Revenue increased by $5.9 million and
$11.2 million, respectively, while operating expenses increased by $5.1 million
and $9.6 million, respectively, contributing to a net increase in income from
operations of approximately $765,000 and $1.6 million, respectively. Our
increase in income from operations is partially offset by decreases in other
income of approximately $56,000, for the three months ended June 30, 2010, and
increases in income taxes of $227,000 and $289,000 in the three and six months
ended June 30, 2010, respectively.




25




LIQUIDITY
AND CAPITAL RESOURCES




As of
June 30, 2010, we had approximately $52.8 million in cash and cash equivalents,
an increase of approximately $7.3 million from December 31, 2009.




Net cash
provided by operating activities was $3.6 million for the six months ended June
30, 2010 and consisted primarily of net income, non-cash expenses related to ASC
718-10, amortization of intangibles and depreciation partially offset by an
increase in accounts receivable and decreases in accounts payable and accrued
expenses. Net cash provided by operating activities was $8.6 million for the six
months ended June 30, 2009 and consisted primarily of net income, non-cash
expenses related to the adoption of ASC 718-10, to the amortization of
intangibles and depreciation, and to increases in accounts payable and deferred
revenue, partially offset by an increase in accounts receivable. The decrease in
cash provided by operations for the six months ended June 30, 2010 as compared
to June 30, 2009, is driven by an increase in accounts receivable primarily as a
result of increased sales and by a decrease in accrued expenses related to the
timing of payments related to estimated taxes and employee bonuses.




Net cash
used in investing activities was $3.1 million and $3.3 million in the six months
ended June 30, 2010 and 2009, respectively, and was due primarily to the
purchase of fixed assets and the acquisition of NuConomy in April
2010.




Net cash
provided by financing activities was $6.9 million for the six months ended June
30, 2010 and consisted primarily of the excess tax benefit from exercise of
employee stock options and the proceeds from issuance of common stock in
connection with the exercise of stock options by employees. Net cash provided by
financing activities was $544,000 for the six months ended June 30, 2009 and
consisted primarily of the excess tax benefit from exercise of employee stock
options and the proceeds from issuance of common stock in connection with the
exercise of stock options by employees, partially offset by the repurchase of
common stock.




We have
incurred significant expenses 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. Historically, we incurred significant quarterly net losses
from inception through June 30, 2003, significant negative cash flows from
operations in our quarterly periods from inception through December 31, 2002 and
negative cash flows from operations of $124,000 in the three month period ended
March 31, 2004. As of June 30, 2010, we had an accumulated deficit of
approximately $105.7 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.




26




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
six months ended June 30, 2010 was approximately $1.7 million and $3.2 million,
respectively, and approximately $1.2 million and $2.2 million for the three and
six months ended June 30, 2009, respectively.




As of June 30, 2010, our principal
commitments were approximately $16.5 million under various operating leases, of
which approximately $2.8 million is due in 2010. We do not currently expect that
our principal commitments for the year ending December 31, 2010 will exceed $7.0
million in the aggregate. Our capital expenditures are not currently expected to
exceed $7.0 million in 2010.




Our
contractual obligations at June 30, 2010 are summarized as follows:







Payments due by period(in thousands)Total
              
              
              Less than 1
                  year
              
              
              1-3 years
              
              
              3-5 years
              
              
              More than 5
                  yearsContractual ObligationsOperating
      leases
              
              $
              16,513
              
              
              $
              2,801
              
              
              $
              7,516
              
              
              $
              3,625
              
              
              $
              2,571Total
              
              $
              16,513
              
              
              $
              2,801
              
              
              $
              7,516
              
              
              $
              3,625
              
              
              $
              2,571





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Currency
Rate Fluctuations




As a
result of the expanded 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 six months
ended June 30, 2010, the U.S. dollar depreciated against the NIS which had a
negative impact on our results of operations and financial condition when
compared to the same period in 2009. During the six month period ended June 30,
2010, expenses generated by our Israeli operations totaled $16.1 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 and have considered
the use of financial instruments, including but not limited to derivative
financial instruments, which could mitigate such risk. 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 the six months ended June 30, 2010, we increased our allowance for
doubtful accounts $15,000 to approximately $410,000, 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 2009, we increased our
allowance for doubtful accounts by $68,000 to approximately $408,000,
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 $13,000 of previously reserved accounts, leaving a net
allowance for doubtful accounts of $395,000.




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.




27




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 June 30, 2010. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of June 30, 2010
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 June 30, 2010 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 only provide 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, have been detected.




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 amended complaint filed by the
Shareholders’ Representative on May 12, 2009 alleges that the Company breached
the merger agreement by failing to properly account for net annualized revenue,
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, U.S. Patent No. 6,915,336, is invalid and
not infringed by our products. On July 10, 2009, InstantService filed a motion
to dismiss one of four causes of action. A hearing on the motion was held on
March 22, 2010 at which the Court denied InstantService’s motion to dismiss.
InstantService filed an answer to our first amended complaint on April 5, 2010,
and asserted counterclaims against us. On April 29, 2010, we filed our reply to
InstantService’s counterclaims. On May 20, 2010, InstantService filed amended
counterclaims alleging infringement of U.S. Patent No. 6,144,670 and U.S. Patent
No. 7,315,518 and adding as counterclaim plaintiffs Art Technology Group, Inc.
and ITXC IP Holdings, S.A.R.L. This case is in the early stages and discovery is
ongoing. We intend to vigorously pursue our claims and to vigorously defend
against InstantService's counterclaims.




28




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; the adverse effect that the global
recession may have on our business; competition in the real-time sales,
marketing, customer service and online engagement solutions market; risks
related to the operational integration of acquisitions; risks related to new
regulatory or other legal requirements that could materially impact our
business; risks related to our international operations, particularly our
operations in Israel, and the civil and political unrest in that region;
impairments to goodwill that result in significant charges to earnings;
volatility of the value of certain currencies in relation to the U.S. dollar,
particularly the New Israeli Shekel, U.K. pound and Euro; 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 defects that could
disrupt the LivePerson services; privacy concerns relating to the Internet that
could result in new legislation or negative public perception; risks related to
the regulation or possible misappropriation of personal information; legal
liability and/or negative publicity for the services provided to consumers via
our technology platforms; risks related to protecting our intellectual property
rights or potential infringement of the intellectual property rights of third
parties; and risks related to the volatility of our stock price. 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 11, 2010.




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




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




On May
14, 2010, our Board of Directors approved a stock repurchase program through
June 30, 2012.




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 $10.0 million. As of June 30, 2010, $10.0 million
remained available for purchase under the program.




The
following table summarizes repurchases of our common stock under our stock
repurchase program during the quarter ended June 30, 2010:




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
                    orPrograms4/1/2010
      – 4/30/2010
                
                
                —
                
                
                $
                —
                
                
                
                —
                
                
                $
                10,000,0005/1/2010
      – 5/31/2010
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                10,000,0006/1/2010
      – 6/30/2010
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                10,000,000Total
                
                
                —
                
                
                $
                —
                
                
                
                —
                
                
                $
                10,000,000




29





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




30


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:
      August 6, 2010
                  By:
                  /s/
      ROBERT P. LOCASCIOName:
                  Robert
      P. LoCascioTitle:
                  Chief
      Executive Officer (duly authorized
                    officer)Date:
      August 6, 2010
                  By:
                  /s/
      TIMOTHY E. BIXBYName:
                  Timothy
      E. BixbyTitle:
                  President
      and Chief Financial Officer (principal financial and accounting
      officer)


31


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




32