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 MARCH 31, 2011
 
 or
 
 o 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, 3RDFLOOR

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 o  No o
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).
 
 Large accelerated filer  ̈
Accelerated filer xNon-accelerated filer  ̈
Smaller reporting company   ̈(Do not check if a smaller reporting company)
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No x
 
 As of May 4, 2011, there were 52,669,710 shares of the issuer’s common stock outstanding.
  
 
 LIVEPERSON, INC.
 MARCH 31, 2011
 FORM 10-Q
 INDEX
 
 PAGEPART I.
FINANCIAL INFORMATION
4ITEM 1.
FINANCIAL STATEMENTS
4CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2011 (UNAUDITED) AND DECEMBER 31, 2010
4UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
5UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
6NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
18ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
26ITEM 4.
CONTROLS AND PROCEDURES
27PART II.
OTHER INFORMATION
28ITEM 1.
LEGAL PROCEEDINGS
28ITEM 1A.
RISK FACTORS
28ITEM 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)
 
 March 31, 2011


December 31, 2010(Unaudited)


(Note 1(B))ASSETSCurrent assets:Cash and cash equivalents

$
67,119


$
61,336Accounts receivable, net of allowance for doubtful accounts of $621 and $561 as of March 31, 2011 and December 31, 2010, respectively


19,606



16,491Prepaid expenses and other current assets


5,046



6,341Deferred tax assets, net


1,540



1,529Total current assets


93,311



85,697Property and equipment, net


12,491



12,762Intangibles, net


1,806



2,124Goodwill


24,090



24,015Deferred tax assets, net


3,645



3,876Deferred implementation costs, net of current


172



164Security deposits


500



499Other assets


1,980



2,006Total assets

$
137,995


$
131,143LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:Accounts payable

$
6,736


$
6,416Accrued expenses


9,099



12,111Deferred revenue


6,720



5,570Total current liabilities


22,555



24,097Deferred revenue, net of current


421



513Other liabilities


1,980



1,890Total liabilities


24,956



26,500Commitments and contingenciesStockholders’ equity:Preferred stock, $.001 par value per share; 5,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2011 and December 31, 2010


—



—Common stock, $.001 par value per share; 100,000,000 shares authorized, 52,516,835 shares issued and outstanding at March 31, 2011 and 51,753,842 shares issued and outstanding at December 31, 2010


53



52Additional paid-in capital


210,233



205,063Accumulated deficit


(96,942
)


(100,173
)Accumulated other comprehensive loss


(305
)


(299
)Total stockholders’ equity


113,039



104,643Total liabilities and stockholders’ equity

$
137,995


$
131,143
 
 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

EndedMarch 31,2011


2010Revenue

$
30,382


$
25,308Operating expenses:Cost of revenue


8,095



6,632Product development


4,377



3,606Sales and marketing


8,860



7,690General and administrative


3,960



3,792Amortization of intangibles


11



83Total operating expenses


25,303



21,803Income from operations


5,079



3,505Other income (expense):Financial income (expense)


156



(49
)Interest income


14



23Total other income (expense), net


170



(26
)Income before provision for income taxes


5,249



3,479Provision for income taxes


2,018



1,343Net income

$
3,231


$
2,136Basic net income per common share

$
0.06


$
0.04Diluted net income per common share

$
0.06


$
0.04Weighted average shares outstanding used in basic net income per common share calculation


52,080,363



49,838,491Weighted average shares outstanding used in diluted net income per common share calculation


54,805,222



52,193,862
 
 SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
 CONSOLIDATED FINANCIAL STATEMENTS.
  5
 
 LIVEPERSON, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 UNAUDITED
 
 Three Months Ended

March 31,2011


2010CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
3,231


$
2,136Adjustments to reconcile net income to net cash provided by (used in) operating activities:Stock-based compensation expense


1,535



1,087Depreciation


1,634



1,053Amortization of intangibles


318



389Provision for doubtful accounts, net


60



—Deferred income taxes


220



(6
)CHANGES IN OPERATING ASSETS AND LIABILITIES:Accounts receivable


(3,175
)


(2,350
)Prepaid expenses and other current assets


1,323



466Deferred implementation costs


(8
)


—Security deposits


—



(166
)Other Assets


116



—Accounts payable


1,231



(740
)Accrued expenses


(3,024
)


(2,969
)Deferred revenue


1,058



695Net cash provided by (used in) operating activities


4,519



(405
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment, including capitalized software


(2,293
)


(578
)Acquisition of Proficient


(75
)


—Net cash used in investing activities


(2,368
)


(578
)CASH FLOWS FROM FINANCING ACTIVITIES:Excess tax benefit from the exercise of employee stock options


220



3Proceeds from issuance of common stock in connection with the exercise of options


3,416



6,275Net cash provided by financing activities


3,636



6,278Effect of foreign exchange rate changes on cash and cash equivalents


(4
)


(32
)Net increase in cash and cash equivalents


5,783



5,263Cash and cash equivalents at the beginning of the period


61,336



45,572Cash and cash equivalents at the end of the period

$
67,119


$
50,835
 
 Supplemental disclosure of non-cash investing activities:
 
 Cash flows from investing activities for the three months ended March 31, 2011 and March 31, 2010 does not include the purchase of approximately $319 and $1,315, respectively of capitalized equipment related to the Company’s collocation facility because the corresponding invoices are included in accounts payable for the corresponding three month period, and therefore did not have an impact on cash flows.
 
 During the three months ended March 31, 2011 and 2010, total net cash paid for income taxes was $1 and $69, respectively.
 
 SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
 CONSOLIDATED FINANCIAL STATEMENTS.
  6
 
 LIVEPERSON, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
 (1)
SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
 
 (A)SUMMARY OF OPERATIONS
 
 LivePerson, Inc. (the “Company” or “LivePerson”) 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, the Company’s 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 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, San Francisco and the United Kingdom.
 
 (B)UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 
 The accompanying condensed consolidated financial statements as of March 31, 2011 and for the three months ended March 31, 2011 and 2010 are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the consolidated financial position of LivePerson as of March 31, 2011, and the consolidated results of operations and cash flows for the interim periods ended March 31, 2011 and 2010. 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, 2010 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, 2010, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2011.
 
 (C)REVENUE RECOGNITION
 
 The majority of the Company’s revenue is generated from monthly service revenues and related professional services from the sale of  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 type of service, the level of client usage and website traffic, and in some cases, the number of orders placed via the Company’s online engagement solutions.
  For certain of the Company’s larger clients, the Company may provide call center labor through an arrangement with one or more of several qualified partners. For most of these clients, the Company passes the fee it incurs with the labor provider and its fee for the hosted services through to its customers in the form of a fixed fee for each order placed via the Company’s online engagement solutions. For these arrangements, the Company recognizes revenue net of the labor provider’s fee 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 majority of the Company’s larger clients also pay a professional services fee related to implementation. The Company defers these implementation fees and associated direct costs and recognizes them ratably over the expected term of the client relationship upon commencement of the hosting services. The Company may also charge professional service fees related to additional training, business consulting and analysis in support of the LivePerson services.
  7
 
 The Company also sells certain 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 add value to the customer on a standalone basis, the Company recognizes professional service fees upon completion and customer acceptance in accordance with FASB Accounting Standards Update 2009-13. 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. If a professional services arrangement does not qualify for separate accounting, the Company recognizes the fees, and the related labor costs, ratably over a period of 48 months, representing the Company’s current estimate of the term of the client relationship.
 
 For revenue generated from online transactions between Experts and Users, the Company recognizes revenue net of the Expert fees in accordance with ASC 605-45, “Principal Agent Considerations,” due to the fact that the Company performs as an agent without any risk of loss for collection. The Company collects a fee from the User 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.
  8
 
 The following table summarizes stock-based compensation expense related to employee stock options under ASC 718-10 included in Company’s Statements of Income for the three months ended March 31, 2011 and 2010:
 
 Three Months Ended

March 31,2011


2010Cost of revenue

$
298


$
214Product development expense


440



335Sales and marketing expense


336



280General and administrative expense


461



258Total stock based compensation included in operating expenses

$
1,535


$
1,087
 
 The per share weighted average fair value of stock options granted during the three months ended March 31, 2011 and 2010 was $6.26 and $3.33, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
 
 Three Months Ended

March 31,2011


2010Dividend yield


0.0
%


0.0
%Risk-free interest rate


3.46% - 3.68
%


3.61% - 3.80
%Expected life (in years)


5.0



5.0Historical volatility


61.2% - 61.3
%


60.3% - 60.5
%
 
 During 1998, the Company established the Stock Option and Restricted Stock Purchase Plan (the “1998 Plan”). Under the 1998 Plan, the Board of Directors could issue incentive stock options or nonqualified stock options to purchase up to 5,850,000 shares of common stock. The 2000 Stock Incentive Plan (the “2000 Plan”) succeeded the 1998 Plan. Under the 2000 Plan, the options which had been outstanding under the 1998 Plan were incorporated in the 2000 Plan increasing the number of shares available for issuance under the plan by approximately 4,150,000, thereby reserving for issuance 10,000,000 shares of common stock in the aggregate.
 
 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 March 31, 2011, approximately 14,260,000 shares of common stock were reserved for issuance under the 2009 Plan (taking into account all option exercises through March 31, 2011). As of March 31, 2011, there was approximately $13,489 of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost, as of March 31, 2011, is expected to be recognized over a weighted average period of approximately 2.1 years.
  In March 2000, the Company adopted the 2000 Employee Stock Purchase Plan with 450,000 shares of common stock initially reserved for issuance (the “2000 ESPP”). The 2000 ESPP expired on its terms on the last day of April 2010.
  In June 2010, our stockholders approved the 2010 Employee Stock Purchase Plan with 1,000,000 shares of common stock initially reserved for issuance. As of March 31, 2011, approximately 977,000 shares of common stock were reserved for issuance under the Employee Stock Purchase Plan (taking into account all share purchases through March 31, 2011).
  9
 
 A summary of the Company’s stock option activity and weighted average exercise prices follows:
 
 Options


Weighted

Average Exercise

PriceOptions outstanding at December 31, 2010


8,816,760


$
5.04Options granted


194,000



11.36Options exercised


(803,275
)


4.59Options cancelled


(263,965
)


6.75Options outstanding at March 31, 2011


7,943,520



5.19Options exercisable at March 31, 2011


3,088,845


$
3.89
 
 The total value of stock options exercised during the three months ended March 31, 2011 was approximately $5,155. The total intrinsic value of options exercisable at March 31, 2011 was approximately $26,655. The total intrinsic value of nonvested options at March 31, 2011 is approximately $32,226. The total intrinsic value of all outstanding options at March 31, 2011 is $58,881.
 
 A summary of the status of the Company’s nonvested shares as of December 31, 2010, and changes during the three months ended March 31, 2011 is as follows:
 
 Shares


Weighted

Average

Grant-Date

Fair ValueNonvested Shares at December 31, 2010


5,719,012


$
3.13Granted


194,000



6.26Vested


(794,372
)


2.58Cancelled


(263,965
)


3.72Nonvested Shares at March 31, 2011


4,854,675


$
3.33
 
 (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 months ended March 31, 2011 includes the effect of options to purchase 7,299,662 shares of common stock with a weighted average exercise price of $4.75. Diluted net income per common share for the three months ended March 31, 2010 includes the effect of options to purchase 6,372,395 shares of common stock with a weighted average exercise price of $3.34.
  10
 
 A reconciliation of shares used in calculating basic and diluted earnings per share follows:
 
 Three Months Ended March 31,2011


2010Basic


52,080,363



49,838,491Effect of assumed exercised options


2,724,859



2,355,371Diluted


54,805,222



52,193,862
 
 (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. 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 which are described in the summary of significant accounting policies. The Company allocates cost of revenue, sales and marketing and amortization of purchased intangibles to the segments, but it does not allocate product development expenses, general and administrative expenses and income tax expense because management does not use this information to measure performance of the operating segments. There are currently no intersegment sales.
 
 Summarized financial information by segment for the three months ended March 31, 2011, 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

$
25,585


$
—


$
25,585


$
—Hosted services — Consumer


3,658



—



—



3,658Professional services


1,139



—



1,139



—Total revenue


30,382



—



26,724



3,658Cost of revenue


8,095



—



7,188



907Sales and marketing


8,860



—



7,315



1,545Amortization of intangibles


11



—



11



—Unallocated corporate expenses


8,337



8,337



—



—Operating income (loss)

$
5,079


$
(8,337
)

$
12,210


$
1,206
  11
 
 Summarized financial information by segment for the three months ended March 31, 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

$
20,913


$
—


$
20,913


$
—Hosted services — Consumer


3,458



—



—



3,458Professional services


937



—



937



—Total revenue


25,308



—



21,850



3,458Cost of revenue


6,632



—



5,684



948Sales and marketing


7,690



—



6,028



1,662Amortization of intangibles


83



—



11



72Unallocated corporate expenses


7,398



7,398



—



—Operating income (loss)

$
3,505


$
(7,398
)

$
10,127


$
776
 
 Revenues attributable to domestic and foreign operations follow:
 
 March 31,2011


2010United States

$
23,602


$
19,305United Kingdom


3,703



3,318Other countries


3,077



2,685Total revenue

$
30,382


$
25,308
 
 Long-lived assets by geographic region follow:
 
 March 31, 2011


December 31, 2010United States

$
28,670


$
29,352Israel


13,871



13,736United Kingdom


2,143



2,358Total long-lived assets

$
44,684


$
45,446
 
 (G)GOODWILL AND INTANGIBLE ASSETS
 
 The changes in the carrying amount of goodwill for the three months ended March 31, 2011 are as follows:
 
 Total


Business


ConsumerBalance as of December 31, 2010

$
24,015


$
15,991


$
8,024Adjustments to goodwill:Contingent earnout payments (see Note 3)


75



75



—Balance as of March 31, 2011

$
24,090


$
16,066


$
8,024
  12
 
 The changes in the carrying amount of goodwill for the year ended December 31, 2010 are as follows:
 
 Total


Business


ConsumerBalance as of December 31, 2009

$
23,920


$
15,896


$
8,024Adjustments to goodwill:Contingent earnout payments (see Note 3)


95



95



—Balance as of December 31, 2010

$
24,015


$
15,991


$
8,024
 
 Intangible assets are summarized as follows (see Note 3):
 
 Acquired Intangible Assets
 
 As of March 31, 2011Gross

Carrying

Amount


Weighted

Average

Amortization

Period


Accumulated

AmortizationAmortizing intangible assets:Technology

$
6,199


3.8 years


$
4,796Customer contracts


2,400


3.0 years



2,400Trade names


630


3.0 years



630Non-compete agreements


410


1.2 years



410Patents


475


11.0 years



72Other


235


3.0 years



235Total

$
10,349






$
8,543
 
 As of December 31, 2010Gross

Carrying

Amount


Weighted

Average

Amortization

Period


Accumulated

AmortizationAmortizing intangible assets:Technology

$
6,199


3.8 years


$
4,489Customer contracts


2,400


3.0 years



2,400Trade names


630


3.0 years



630Non-compete agreements


410


1.2 years



410Patents


475


11.0 years



61Other


235


3.0 years



235Total

$
10,349






$
8,225
 
 Amortization expense is calculated on a straight-line basis over the estimated useful life of the asset. Aggregate amortization expense for intangible assets was $318 and $389 for the three months ended March 31, 2011 and 2010, respectively. For the three months ended March 31, 2011 and 2010, a portion of this amortization is included in cost of revenue. Estimated amortization expense for the next five years is: $646 in 2011, $43 in 2012, $43 in 2013, $43 in 2014, $43 in 2015 and $199 thereafter.
  13
 
 (H)RECENTLY ISSUED ACCOUNTING STANDARDS
  In December 2010, the FASB has issued ASU No. 2010-28, Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU reflects the decision reached in EITF Issue No. 10-A. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption was not permitted. This update will have an impact on the Company’s accounting in the future for any reporting units with zero or negative carrying amounts.
  In January 2010, the FASB published 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 did 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. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.
 
 (2)BALANCE SHEET COMPONENTS
 
 Property and Equipment
 
 Property and equipment is summarized as follows:
 
 March 31, 2011


December 31, 2010Computer equipment and software

$
25,521


$
25,002Furniture, equipment and building improvements


2,700



1,85628,221



26,858Less accumulated depreciation


15,730



14,096Total

$
12,491


$
12,762
  14
 
 Accrued Expenses
 
 Accrued expenses consist of the following:
 
 March 31, 2011


December 31, 2010Payroll and other employee related costs

$
4,103


$
6,973Professional services, consulting and other vendor fees


4,289



4,211Sales commissions


271



565Other


436



362Total

$
9,099


$
12,111
 
 (3)ACQUISITIONS
 
 Proficient Systems
 
 On July 18, 2006, the Company acquired Proficient Systems, Inc. (“Proficient”), a provider of hosted proactive chat solutions that help companies generate revenue on their web sites. This transaction was accounted for under the purchase method of accounting and, accordingly, the operating results of Proficient were included in the Company’s consolidated results of operations from the date of acquisition. The acquisition added several U.K. based financial services clients and provided an innovative product marketing team. During the three months ended March 31, 2011, the Company incurred additional costs related to the earn-out litigation in the amount of $75, resulting in an increase in goodwill. During the twelve months ended December 31, 2010, the Company incurred additional costs related to the earn-out litigation in the amount of $95, 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. In accordance with the purchase agreement, the earn-out consideration was 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 (“Plaintiff”). The complaint filed by the Shareholders’ Representative sought certain documentation relating to calculation of the earn-out consideration, and demanded 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. The case recently proceeded to trial, which ended on November 4, 2010. Post-trial filings were due on November 19, 2010. In the event that the Court finds in whole or in part for Plaintiff, the Company would be required to pay monetary damages in the amount held by the Court to have been underpaid in the earn-out. The Company is presently unable to reasonably estimate the amount of actual damages, if any, that will be awarded by the Court. If the Court were to find in favor of Plaintiff on every claim at issue in the litigation, the maximum potential damages award would be approximately $6,000. Should the Company be required to pay any damages award, the associated expense would be allocated to goodwill in connection with Proficient acquisition.
  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. The net asset was allocated to “Intangibles, net.”
 
 (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:
 
 ·
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.
 15
 
 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 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
 
 Leases
 
 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 months ended March 31, 2011 and 2010 was approximately $1,689 and $1,428, 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 $150 and $139 of employer matching contributions for the three months ended March 31, 2011 and 2010, 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, or Plaintiff, 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. The case recently proceeded to trial, which ended on November 4, 2010. Post-trial filings were due on November 19, 2010. In the event that the Court finds in whole or in part for Plaintiff, the Company would be required to pay monetary damages in the amount held by the Court to have been underpaid in the earn-out. The Company is presently unable to reasonably estimate the amount of actual damages, if any, that will be awarded by the Court. If the Court were to find in favor of Plaintiff on every claim at issue in the litigation, the maximum potential damages award would be approximately $6,000. Should the Company be required to pay any damages award, the associated payment would be allocated to goodwill in connection with Proficient acquisition.
  16
 
 On November 3, 2010, Gemini IP LLC filed an amended complaint in a suit pending in the United States District Court for the Eastern District of Texas, adding patent infringement allegations against the Company and various other defendants, including LANDesk Software, Inc., Saba Software, Inc., Genesys S.A. d/b/a Genesys Conferencing, Genesys Conferencing, Inc., Avaya Inc., Best Buy Co., Inc., Bomgar Corporation, ConnectWise, Inc., Elsinore Technologies Inc., GFI Software Ltd., GFI USA, Inc., GFI Software Development, Ltd., LogMeIn, Inc., N-able Technologies Incorporated, NTR Global, Venti Solutions, LLC, Zoho Corporation, Zenith Infotech Ltd., International Business Machines Corp., Samsung Electronics America, Inc., Samsung Electronics Co., Ltd., Samsung Telecommunications America, LLC, AT&T, Inc., Sony Corporation, and Sony Corporation of America. Gemini seeks damages for past infringement, and an injunction against future infringement of the patent in suit. The Company believes Gemini’s claims are without merit. On January 10, 2011, the Company answered the complaint, asserting numerous affirmative defenses including non-infringement and invalidity of the patent in suit, and we also counterclaimed for a declaratory judgment of non-infringement and invalidity of the patent in suit. The Court has set an initial scheduling conference in this matter for June 1, 2011; no schedule for proceedings in this matter has been set by the Court at this time. The Company intends to vigorously defend against Gemini’s allegations, and vigorously pursue our counterclaims.  The Company has not accrued for this contingency as of March 31, 2011, because the amount of loss, if any, cannot be reasonably estimated at this time.
 
 From time to time, the Company is involved in other legal proceedings arising in the ordinary course of its business. While the Company cannot assure you as to the ultimate outcome of any legal proceedings, the Company is not currently a party to any other legal proceeding that management believes would have a material adverse effect on its financial position or results of operations.
  17
 
 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 service providers (“Experts”) with individual consumers (“Users”) 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 Experts and Users.
 
 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:
 
 ·
Expanding Business with Existing Customers and Adding New Customers.   We are expanding our sales capacity by adding enterprise sales agents, and we have recently established a midmarket sales group focused on adding new customers that are larger than our typical SMB customers, but smaller than our typical enterprise customers. We have also expanded our efforts to retain existing SMB customers through increased interaction with them during the early stages of their usage of our services.
 
 ·
Introducing New Products and Capabilities.We are investing in product marketing, R&D and executive personnel to support our expanding efforts to build and launch new products and capabilities to support existing customer deployments, and to further expand our total addressable market. These investments are initially focused in the areas of online marketing engagement and chat transcript text analysis. Over time, we expect to develop and launch additional capabilities that leverage our existing market position as a leader in proactive, intelligence-driven online engagement.
 
 ·
Creating and Supporting an Open Development Platform.We have recently introduced an open development platform capability, supported by a community and developer tools that enable third-party developers to create and deliver new applications that leverage our existing customer base and proactive engagement technology.  By creating and supporting this platform, we expect to enable both independent developers and R&D personnel within our customer base to accelerate their product development and innovation, and to expand the value and usage of our current and future products and capabilities.
 
 ·
Expanding our international presence.We continue to increase our investment in sales and support personnel in the United Kingdom and Western Europe, particularly France and Germany. We are also working with sales and support partners as we expand our investment in the Asia-Pacific region. We continue to improve the multi-language and translation capabilities within our hosted solutions to further support international expansion.
  18
 
 FIRST QUARTER 2011
 
 Financial overview of the three months ended March 31, 2011 compared to the three months ended March 31, 2010:
 
 ·
Revenue increased 20.0% to $30.4 million from $25.3 million.
 
 ·
Gross profit margin decreased to 73.4% from 73.8%.
 
 ·
Operating expenses increased to $25.3 million from $21.8 million.
 
 ·
Net income increased 51% to $3.2 million from $2.1 million.
 
 The significant accounting policies which we believe are 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 ASC 605-25, “Revenue Recognition with Multiple-Element Arrangements.” We charge a monthly fee, which varies by type of service, the level of client usage and website traffic, and in some cases, the number of orders placed via our online engagement solutions.
 
 For certain of our larger clients, we may provide call center labor through an arrangement with one or more of several qualified partners. For most of these clients, we pass the fee we incur with the labor provider and our fee for the hosted services through to our customers in the form of a fixed fee for each order placed via our online engagement solutions. For these arrangements, we recognize revenue net of the labor provider’s fee in accordance with ASC 605-45, “Principal Agent Considerations,” due to the fact that we perform as an agent without risk of loss for collection.
 
 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 add value to the customer on a standalone basis, we recognize professional service fees upon completion and customer acceptance in accordance with FASB Accounting Standards Update 2009-13. 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.  If a professional services arrangement does not qualify for separate accounting, we recognize the fees, and the related labor costs, ratably over a period of 48 months, representing our current estimate of the term of the client relationship.
 
 For revenue generated from online transactions between Experts and Users, we recognize revenue net of Expert fees in accordance with ASC 605-45, “Principal Agent Considerations,” due to the fact that we perform as an agent without 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.
  19


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 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.
 
 As of March 31, 2011, there was approximately $13.5 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 2.1 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.
 Though our concentration of credit risk is limited due to our large number of customers, we do have several large customers. If we experience a significant write-off from one of these large customers, it could have a material adverse impact on our consolidated financial statements. No single customer accounted for or exceeded 10% of our total revenue in the three months ended March 31, 2011 and 2010. One customer accounted for approximately 19% of accounts receivable as of March 31, 2011. One customer accounted for approximately 22% of accounts receivable at December 31, 2010. During the three months ended March 31, 2011, we increased our allowance for doubtful accounts by $60,000 to $621,000, principally due to an increase in accounts receivable as a result of increased sales and, to a lesser extent, to an increase in the proportion of our receivables due from customers with greater credit risk. A larger proportion of receivables are due from larger corporate clients that typically have longer payment cycles.
 
 GOODWILL
 
 In accordance with ASC 350-10, “Goodwill and Other Intangible Assets,” goodwill and indefinite-lived intangible assets are not amortized, but reviewed for impairment upon the occurrence of events or changes in circumstances that would reduce the fair value below its carrying amount. Goodwill is required to be tested for impairment at least annually. Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. To assist in the process of determining goodwill impairment, we 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.
  20
 
 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 ACCOUNTING STANDARDS
  In December 2010, the FASB has issued ASU No. 2010-28, Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU reflects the decision reached in EITF Issue No. 10-A. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption was not permitted. This update will have an impact on our accounting in the future for any reporting units with zero or negative carrying amounts.
  In January 2010, the FASB published 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 did not have an impact on our 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. The adoption of this update did not have a material impact on our consolidated financial statements.
  21
  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 88% and 86% of total revenue for the three months ended March 31, 2011 and 2010, respectively. Revenue attributable to our monthly hosted Business services accounted for 96% of total Business revenue for the three months ended March 31, 2011 and 2010. 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 and is recognized net of Expert fees and accounted for approximately 12% and 14% of total revenue for the three months ended March 31, 2011 and 2010, respectively.
 
 We also have entered into contractual arrangements that complement our direct sales force and online sales efforts. These are primarily with call center service companies, pursuant to which LivePerson is paid a commission based on revenue generated by these service companies from our referrals. To date, revenue from such commissions has not been material.
 
 OPERATING EXPENSES
 
 Our cost of revenue consists of:
 
 ·
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.
  22
 
 During the three months ended March 31, 2011, we increased our allowance for doubtful accounts by $60,000 to $621,000, principally due to an increase in accounts receivable as a result of increased sales and, to a lesser extent, to an increase in the proportion of our receivables due from customers with greater credit risk. A larger proportion of receivables are due from larger corporate clients that typically have longer payment cycles. During 2010, we increased our allowance for doubtful accounts by $166,000 to approximately $561,000, principally due to an increase in accounts receivable as a result of increased sales. A larger proportion of receivables are due from larger corporate clients that typically have longer payment cycles. 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 months ended March 31, 2011 and 2010 consist of:
 
 Three Months Ended

March 31,2011


2010Stock-based compensation expense related to ASC 718-10

$
1,535


$
1,087Total

$
1,535


$
1,087
 
 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 Experts and Users.
 
 COMPARISON OF THREE MONTHS ENDED MARCH 31, 2011 AND 2010
 
 Revenue – Business.   Revenue increased by 22% to $26.7 million in the three months ended March 31, 2011, from $21.8 million in the comparable period in 2010. This increase is primarily attributable to increased revenue from existing clients who increased their use of our services in the amount of approximately $3.0 million, net of cancellations; to revenue from new clients in the amount of approximately $1.6 million; and, to a lesser extent, to professional services revenue of approximately $203,000. Our revenue growth has traditionally been driven by a mix of revenue from new clients as well as expansion from existing clients.
 
 Revenue – Consumer. Revenue increased by 6% to $3.7 million in the three months ended March 31, 2011, from $3.5 million in the comparable period in 2010. This increase is primarily attributable to an increase in gross revenue of approximately $106,000 as a result of increased chat minutes. In addition, net revenue also increased due to an increase in the fees we charge the Experts of approximately $94,000.
 
 Cost of Revenue – Business. Cost of revenue consists of compensation costs relating to employees who provide customer service to our clients, compensation costs relating to our network support staff, the cost of supporting our server and network infrastructure, and allocated occupancy costs and related overhead. Cost of revenue increased by 26% to $7.2 million in the three months ended March 31, 2011, from $5.7 million in the comparable period in 2010. This increase in expense is primarily attributable to an increase for primary and backup server facilities and allocated overhead related to costs of supporting our server and network infrastructure of approximately $798,000 as a result of increased revenue and an increase in total compensation and related costs for additional and existing customer service and network operations personnel in the amount of approximately $659,000. This increase in cost of revenue in excess of revenue growth was driven primarily by increased investment in more robust business continuity capabilities within our hosting facilities. In addition, costs related to data collection and storage has increased, as we have improved the scope and quality of the analytical reporting we provide to our larger customers.
 
 Cost of Revenue – Consumer. Cost of revenue consists of compensation costs relating to employees who provide customer service to Experts and Users, compensation costs relating to our network support staff, the cost of supporting our server and network infrastructure, credit card and transaction processing fees and related costs, and allocated occupancy costs and related overhead. Cost of revenue decreased by 4% to $907,000 in the three months ended March 31, 2011, from $948,000 in the comparable period in 2010. This decrease is primarily attributable to a decrease in total compensation and related costs for customer service and network support personnel of approximately $46,000.
  23
  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 21% to $4.4 million in the three months ended March 31, 2011, from $3.6 million in the comparable period in 2010.  This increase is primarily attributable to an increase in compensation and related costs for additional and existing product development personnel as a result of our increased efforts to expand our product offerings of approximately $792,000. We are increasing our investment in new product development efforts to expand future product offerings. We are also investing in partner programs that enable third-parties to develop value-added software applications for our existing and future customers.
 
 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 and allocated occupancy costs and related overhead. Sales and marketing expenses increased by 21% to $7.3 million in the three months ended March 31, 2011, from $6.0 million in the comparable period in 2010. This increase is primarily attributable to an increase in compensation and related costs for additional and existing sales and marketing personnel of approximately $1.1 million and an increase in advertising, public relations and trade show exhibit expenses 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 7% to $1.5 million in the three months ended March 31, 2011, from $1.7 million in the comparable period in 2010. This decrease is primarily attributable to a decrease in compensation and related costs for marketing personnel of approximately $98,000 and to decreased advertising and promotional expenses of approximately $35,000 driven by improved efficiency in search engine optimization.
 
 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 4% to $4.0 million in the three months ended March 31, 2011, from $3.8 million in the comparable period in 2010.  This increase is primarily attributable to an increase in compensation and related expenses for additional and existing accounting, legal and human resource personnel in the amount of approximately $301,000, partially offset by decreases in recruiting and other professional fees of approximately $184,000.
 
 Amortization of Intangibles. Amortization expense was $11,000 in the three months ended March 31, 2011 and relates to the purchase of patents in August 2009. Amortization expense was $83,000 in the three months ended March 31, 2010 and relates primarily to the acquisition costs recorded as a result of our acquisition of Kasamba in October 2007. The decrease is attributable to the fact that a portion of the intangible asset related to the Kasamba acquisition was fully amortized in 2010. Additional amortization expense in the amount of $306 is included in cost of revenue for the three months ended March 31, 2011 and 2010. Amortization expense is expected to be approximately $1.0 million in the year ended December 31, 2011.
 
 Other Income (Expense). Financial income was $156,000 in the three months ended March 31, 2011 and relates to favorable currency rate movements of our NIS deposits. Financial expense was $49,000 in the three months ended March 31, 2010 and relates to unfavorable currency rate movements related to our Israeli operations. Interest income was $14,000 and $23,000 in the three months ended March 31, 2011 and 2010, respectively, and consists of interest earned on cash and cash equivalents. This decrease is primarily attributable to decreases in short-term interest rates partially offset by increases in cash and cash equivalents.
 
 Provision for Income Taxes. Our effective tax rate was 38% and 39% for the three months ended March 31, 2011 and 2010, respectively, resulting in a provision for income taxes of $2.0 million and $1.3 million for the three months ended March 31, 2011 and 2010, respectively.
 
 Net Income. We had net income of $3.2 million and $2.1 million in the three months ended March 31, 2011 and 2010, respectively. Revenue increased $5.1 million, while operating expenses increased by $3.5 million and provision for income taxes increased by approximately $675,000, contributing to a net increase in income from operations of approximately $1.1 million.
  24
 
 LIQUIDITY AND CAPITAL RESOURCES
 
 As of March 31, 2011, we had approximately $67.1 million in cash and cash equivalents, an increase of approximately $5.8 million from December 31, 2010. This increase is primarily attributable to net cash provided by operating activities and, to a lesser extent, proceeds from the issuance of common stock in connection with the exercise of stock options by employees and the excess tax benefit from the exercise of employee stock options, partially offset by the purchases of fixed assets related to the build-out of our collocation facility. We invest our cash in short-term money market funds.
 
 Net cash provided by operating activities was $4.5 million in the three months ended March 31, 2011 and consists primarily of net income and non-cash expenses related to ASC 718-10, amortization of intangibles and depreciation and increases in deferred revenue, accounts payable and deferred income taxes partially offset by an increase in accounts receivable and a decrease in accrued expenses. Net cash used in operating activities was $405,000 in the three months ended March 31, 2010 and consisted primarily of net income and non-cash expenses related to ASC 718-10, amortization of intangibles and depreciation offset by an increase in accounts receivable and a decrease in accounts payable and accrued expenses.
 
 Net cash used in investing activities was $2.4 million and $578,000 in the three months ended March 31, 2011 and 2010, respectively, and was due primarily to the purchase of fixed assets for our collocation facilities.
 
 Net cash provided by financing activities was $3.6 million in the three months ended March 31, 2011 and consisted primarily of the proceeds from the issuance of common stock in connection with the exercise of stock options by employees and the excess tax benefit from the exercise of employee stock options. Net cash provided by financing activities was $6.3 million in the three months ended March 31, 2010 and consisted primarily of the proceeds from the issuance of common stock in connection with the exercise of stock options by employees.
 
 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. As of March 31, 2011, we had an accumulated deficit of approximately $96.9 million. These losses were 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.
  25
  CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 
 We do not have any special purposes entities, and other than operating leases, which are described below; we do not engage in off-balance sheet financing arrangements.
 
 We lease facilities and certain equipment under agreements accounted for as operating leases. These leases generally require us to pay all executory costs such as maintenance and insurance. Rental expense for operating leases for the three months ended March 31, 2011 and 2010 was approximately $1.7 million and $1.4 million, respectively.
 
 As of March 31, 2011, our principal commitments were approximately $21.7 million under various operating leases, of which approximately $5.3 million is due in 2011. We currently expect that our principal commitments for the year ending December 31, 2011 will not exceed $8.0 million in the aggregate.
 
 Our contractual obligations at March 31, 2011 are summarized as follows:
 
 Payments due by period(in thousands)Contractual Obligations

Total


Less than 1

year


1-3 years


3-5 years


More than 5

yearsOperating leases

$
21,678


$
5,323


$
11,728


$
2,625


$
2,002Total

$
21,678


$
5,323


$
11,728


$
2,625


$
2,002
 
 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 three months ended March 31, 2011, the U.S. dollar depreciated approximately 2% as compared to the NIS which had a negative impact on our results of operations and financial conditions when compared to the same period in 2010. During the three month period ended March 31, 2011, expenses generated by our Israeli operations totaled $9.7 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 three months ended March 31, 2011, we increased our allowance for doubtful accounts by $60,000 to $621,000, principally due to an increase in accounts receivable as a result of increased sales and, to a lesser extent, to an increase in the proportion of our receivables due from customers with greater credit risk. A larger proportion of receivables are due from larger corporate clients that typically have longer payment cycles. We did not increase our allowance for doubtful accounts in the three months ended March 31, 2010.
 
 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.
  26
 
 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 March 31, 2011. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2011 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 three months ended March 31, 2011 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.
  27
 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, or Plaintiff, on May 12, 2009 alleges that we 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. The case recently proceeded to trial, which ended on November 4, 2010. Post-trial filings were due on November 19, 2010. In the event that the Court finds in whole or in part for Plaintiff, we would be required to pay monetary damages in the amount held by the Court to have been underpaid in the earn-out. We are presently unable to reasonably estimate the amount of actual damages, if any, that will be awarded by the Court. If the Court were to find in favor of Plaintiff on every claim at issue in the litigation, the maximum potential damages award would be approximately $6.0 million. Should we be required to pay any damages award, the associated payment would be allocated to goodwill in connection with Proficient acquisition.
  On November 3, 2010, Gemini IP LLC filed an amended complaint in a suit pending in the United States District Court for the Eastern District of Texas, adding patent infringement allegations against us and various other defendants, including LANDesk Software, Inc., Saba Software, Inc., Genesys S.A. d/b/a Genesys Conferencing, Genesys Conferencing, Inc., Avaya Inc., Best Buy Co., Inc., Bomgar Corporation, ConnectWise, Inc., Elsinore Technologies Inc., GFI Software Ltd., GFI USA, Inc., GFI Software Development, Ltd., LogMeIn, Inc., N-able Technologies Incorporated, NTR Global, Venti Solutions, LLC, Zoho Corporation, Zenith Infotech Ltd., International Business Machines Corp., Samsung Electronics America, Inc., Samsung Electronics Co., Ltd., Samsung Telecommunications America, LLC, AT&T, Inc., Sony Corporation, and Sony Corporation of America. Gemini seeks damages for past infringement, and an injunction against future infringement of the patent in suit. We believe Gemini's claims are without merit. On January 10, 2011, we answered the complaint, asserting numerous affirmative defenses including non-infringement and invalidity of the patent in suit, and we also counterclaimed for a declaratory judgment of non-infringement and invalidity of the patent in suit. The Court has set an initial scheduling conference in this matter for June 1, 2011; no schedule for proceedings in this matter has been set by the Court at this time. We intend to vigorously defend against Gemini’s allegations, and vigorously pursue our counterclaims. We have not accrued for this contingency as of March 31, 2011, because the amount of loss, if any, cannot be reasonably estimated at this time.
  From time to time, we are involved in other legal proceedings arising in the ordinary course of our business. While we cannot assure you as to the ultimate outcome of any legal proceedings, we are currently not a party to any other legal proceeding that management believes would have a material adverse effect on our financial position or results of operations.
 
 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; our ability to retain existing clients and attract new clients; risks related to new regulatory or other legal requirements that could materially impact our business; 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; risks related to our international operations, particularly our operations in Israel, and the civil and political unrest in that region; responding to rapid technological change and changing client preferences; our ability to retain key personnel and attract new personnel; risks related to the operational integration of acquisitions; 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 our common stock being traded on more than one market, which may result in additional variations in the trading price of our common stock. 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 15, 2011.
 
 There are no material changes to the risk factors described in the Form 10-K.
  28
 
 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.
 
 The following table summarizes repurchases of our common stock under our stock repurchase program during the three months ended March 31, 2011:
 
 Period

Total Number of

Shares Purchased


Average Price Paid per

Share


Total Number of

Shares Purchased

as Part of Publicly

Announced Plans or

Programs


Approximate Dollar

Value of Shares that

May Yet Be

Purchased Under

the Plans or

Programs(1)1/1/2011 – 1/31/2011


—


$
—



—


$
6,365,0002/1/2011 – 2/28/2011


—



—



—



6,365,0003/1/2011 – 3/31/2011


—



—



—



6,365,000Total


—


$
—



—


$
6,365,000
 
 (1)
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 March 31, 2011, approximately $6.4 million remained available for purchases under the program.
  29
 
 ITEM 6. EXHIBITS
 
 The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
 
 10.1
Forms of Grant Agreements under the 2009 Stock Incentive Plan
 
 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 President (the principal 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 the principal 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: May 6, 2011
By:
/s/ ROBERT P. LOCASCIOName:
Robert P. LoCascioTitle:
Chief Executive Officer (duly authorized officer)Date: May 6, 2011
By:
/s/ TIMOTHY E. BIXBYName:
Timothy E. BixbyTitle:
President (principal

financial and accounting officer)
  31
 
 EXHIBIT INDEX
 
 EXHIBIT10.1

Forms of Grant Agreements under the 2009 Stock Incentive Plan31.1

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 President (the principal 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 the principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32