Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number: 000-30141
LIVEPERSON, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
13-3861628
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer Identification No.)
 
 
 
475 Tenth Avenue, 5th Floor
New York, New York
 
10018
(Address of Principal Executive Offices)
 
(Zip Code)
(212) 609-4200
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically 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 ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).
Large accelerated filer ý
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
On July 27, 2018, 62,408,378 shares of the registrant’s common stock were outstanding.

1



LIVEPERSON, INC.
June 30, 2018
FORM 10-Q
INDEX

 
 
PAGE
Part I.
Financial Information
 
 
 
Item 1.
Financial Statements (Unaudited):
 
 
 
 
Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017
 
 
 
 
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017
 
 
 
 
Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2018 and 2017
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
Part II.
Other Information
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
 
Signatures
 

2



FORWARD-LOOKING STATEMENTS
 
STATEMENTS IN THIS 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 PROGRESSES, AND THEREFORE IT SHOULD BE CLEARLY UNDERSTOOD THAT THE INTERNAL PROJECTIONS AND BELIEFS UPON WHICH WE BASE OUR EXPECTATIONS MAY CHANGE PRIOR TO THE END OF EACH QUARTER OR THE YEAR. ALTHOUGH THESE EXPECTATIONS MAY CHANGE, WE ARE UNDER NO OBLIGATION TO INFORM YOU IF THEY DO. OUR 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)
(UNAUDITED)
 
June 30,
2018
 
December 31,
2017
 
 
 
(Note 1)
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and cash equivalents
$
69,747

 
$
56,115

Cash held as collateral
216

 
1,451

Accounts receivable, net of allowance for doubtful accounts of $1,672 and $1,318 as of June 30, 2018 and December 31, 2017, respectively
38,109

 
37,926

Prepaid expenses and other current assets
16,885

 
7,352

Total current assets
124,957

 
102,844

Property and equipment, net
38,066

 
34,705

Intangibles, net
12,321

 
12,366

Goodwill
80,473

 
80,531

Deferred tax assets
817

 
753

Other assets
1,787

 
1,600

Total assets
$
258,421

 
$
232,799

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable
$
6,207

 
$
5,481

Accrued expenses and other current liabilities
39,252

 
48,011

Deferred revenue
47,375

 
35,563

Total current liabilities
92,834

 
89,055

Deferred revenue
2,131

 

Other liabilities
2,584

 
2,766

Deferred tax liability
1,020

 
915

Total liabilities
98,569

 
92,736

 
 
 
 
Commitments and contingencies


 


STOCKHOLDERS’ EQUITY:
 

 
 

Common stock
62

 
60

Additional paid-in capital
337,238

 
305,676

Treasury stock
(3
)
 
(3
)
Accumulated deficit
(173,983
)
 
(163,135
)
Accumulated other comprehensive loss
(3,462
)
 
(2,535
)
Total stockholders’ equity
159,852

 
140,063

Total liabilities and stockholders’ equity
$
258,421

 
$
232,799

 
See Notes to Condensed Consolidated Financial Statements (unaudited).

4



LIVEPERSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenue
 
$
61,660

 
$
54,074

 
$
119,901

 
$
104,993

Costs and expenses (1) (2)
 
 

 
 

 
 
 
 

Cost of revenue (3)
 
16,036

 
15,134

 
29,990

 
28,915

Sales and marketing
 
25,392

 
23,392

 
49,523

 
45,092

General and administrative
 
11,499

 
10,437

 
21,622

 
20,130

Product development
 
14,219

 
9,326

 
27,471

 
19,285

Restructuring costs
 
1,906

 
2,076

 
2,084

 
2,315

Amortization of purchased intangibles
 
424

 
470

 
848

 
942

Total costs and expenses
 
69,476

 
60,835

 
131,538

 
116,679

Loss from operations
 
(7,816
)
 
(6,761
)
 
(11,637
)
 
(11,686
)
Other income (expense), net
 
31

 
(99
)
 
160

 
221

Loss before provision for income taxes
 
(7,785
)
 
(6,860
)
 
(11,477
)
 
(11,465
)
Provision for income taxes
 
536

 
673

 
47

 
1,744

Net loss
 
$
(8,321
)
 
$
(7,533
)
 
$
(11,524
)
 
$
(13,209
)
 
 
 
 
 
 
 
 
 
Net loss per share of common stock:
 
 
 
 
 
 
 
 
Basic
 
$
(0.14
)
 
$
(0.13
)
 
$
(0.20
)
 
$
(0.24
)
Diluted
 
$
(0.14
)
 
$
(0.13
)
 
$
(0.20
)
 
$
(0.24
)
 
 
 
 
 
 
 
 
 
Weighted-average shares used to compute net loss per share:
 
 
 
 
 
 
 
Basic
 
58,648,195

 
55,954,158

 
57,982,648

 
55,964,568

Diluted
 
58,648,195

 
55,954,158

 
57,982,648

 
55,964,568

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Amounts include stock-based compensation expense, as follows:
 
 
 
 
 
 
 
Cost of revenue
 
$
230

 
$
117

 
$
384

 
$
193

Sales and marketing
 
1,373

 
754

 
2,259

 
1,408

General and administrative
 
1,182

 
774

 
2,022

 
1,436

Product development
 
1,041

 
702

 
1,599

 
1,223

 
 
 
 
 
 
 
 
 
(2) Amounts include depreciation expense, as follows:
 
 
 
 
 
 
 
Cost of revenue
 
$
1,931

 
$
1,870

 
$
3,847

 
$
3,635

Sales and marketing
 
371

 
408

 
727

 
789

General and administrative
 
274

 
340

 
520

 
590

Product development
 
852

 
427

 
1,692

 
824

 
 
 
 
 
 
 
 
 
(3) Amounts include amortization of purchased intangibles, as follows:
 
 
 
 
 
 
 
Cost of revenue
 
$
287

 
$
959

 
$
574

 
$
1,918

 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements (unaudited).


5



LIVEPERSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
 
Three Months Ended
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(8,321
)
 
$
(7,533
)
 
$
(11,524
)
 
$
(13,209
)
Foreign currency translation adjustment
1,486

 
(1,220
)
 
927

 
(4,618
)
Comprehensive loss
$
(6,835
)
 
$
(8,753
)
 
$
(10,597
)
 
$
(17,827
)
 
See Notes to Condensed Consolidated Financial Statements (unaudited).


6



LIVEPERSON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 
Six Months Ended
 
June 30,
 
2018
 
2017
OPERATING ACTIVITIES:
 

 
 

Net loss
$
(11,524
)
 
$
(13,209
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
 

Stock-based compensation expense
6,264

 
4,260

Depreciation
6,786

 
5,838

Amortization of purchased intangibles
1,422

 
2,860

Amortization of tenant allowance
(83
)
 
(83
)
Deferred income taxes
41

 
(13
)
Provision for doubtful accounts, net
862

 
958

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(1,045
)
 
6,011

Prepaid expenses and other current assets
(9,531
)
 
(3,864
)
Other assets
(187
)
 
(31
)
Accounts payable
34

 
(3,881
)
Accrued expenses and other current liabilities
(8,771
)
 
(3,204
)
Deferred revenue
13,943

 
9,477

Other liabilities
(218
)
 
245

Net cash (used in) provided by operating activities
(2,007
)
 
5,364

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment, including capitalized software
(9,664
)
 
(7,011
)
Cash held as collateral for foreign exchange forward contracts
1,235

 
205

Payments for acquisitions and intangible assets, net of cash acquired
(392
)
 
(239
)
Net cash used in investing activities
(8,821
)
 
(7,045
)
 
 
 
 
FINANCING ACTIVITIES:
 

 
 

Proceeds from issuance of common stock in connection with the exercise of options
25,667

 
2,588

Repurchase of common stock
(1,345
)
 
(1,781
)
Net cash provided by financing activities
24,322

 
807

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
138

 
4,350

CHANGE IN CASH AND CASH EQUIVALENTS
13,632

 
3,476

CASH AND CASH EQUIVALENTS - Beginning of the period
56,115

 
50,889

CASH AND CASH EQUIVALENTS - End of the period
$
69,747

 
$
54,365

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION: 
 
 
 
Cash paid for income taxes
$
5,553

 
$
659

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchase of property and equipment recorded in accounts payable
$
774

 
$
41

Issuance of 85,861 shares of common stock in connection with the BotCentral transaction on January 24, 2018
$
1,000

 
$

 
See Notes to Condensed Consolidated Financial Statements (unaudited).

7



LIVEPERSON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Description of Business and Basis of Presentation
LivePerson, Inc. (the “Company” or “LivePerson”) was incorporated in the State of Delaware in November 1995 and the LivePerson service was introduced in November 1998. In April 2000, the Company completed an initial public offering and is currently traded on the NASDAQ Global Select Market and the Tel Aviv Stock Exchange. LivePerson is headquartered in New York City with U.S. offices in Alpharetta (Georgia), Mountain View (California) and Seattle (Washington), and international offices in Amsterdam (Netherlands), Berlin (Germany), London (United Kingdom), Mannheim (Germany), Melbourne (Australia), Milan (Italy), Paris (France), Ra'anana (Israel), Reading (United Kingdom), Tel Aviv (Israel), and Tokyo (Japan). 
LivePerson provides mobile and online business messaging solutions that power digital communication between brands and consumers. LiveEngage, the Company’s enterprise-class, cloud-based platform, enables businesses and consumers to connect through conversational interfaces, such as in-app and mobile messaging, while leveraging bots and artificial intelligence (AI) to increase efficiency. As consumers have reoriented their digital lives around the smartphone, messaging apps have become their preferred communication channel to connect with each other. LivePerson allows brands to align with this new consumer preference, and deploy messaging at scale for customer care, marketing, and sales, instead of requiring that consumers use email or call a 1-800 number.
LiveEngage was designed to securely deploy messaging, coupled with bots and AI, at scale for brands with tens of millions of customers and many thousands of customer care agents. LiveEngage powers conversations across each of a brand’s primary digital channels, including mobile apps, mobile and desktop web browsers, short message services (SMS), social media and third-party consumer messaging platforms. Brands can also use LiveEngage to message consumers when they dial a 1-800 number instead of having them navigate interactive voice response systems (IVR) and wait on hold. The platform seamlessly integrates with third-party bots, enabling brands to manage both AI- based agents and human agents from a single console.
LivePerson optimizes campaign outcomes for sales and service transactions by combining website visitor data with other historical, behavioral, and operational information to develop insights into each step of a consumer’s journey. LivePerson’s products, coupled with its domain knowledge, industry expertise and consulting services, have been proven to maximize the effectiveness of consumer engagement.
The Company’s primary revenue source is from the sale of LivePerson services to businesses of all sizes. The Company also offers an online marketplace that connects independent service providers (“Experts”) who provide information and knowledge for a fee via real-time chat with individual consumers (“Users”).
Basis of Presentation
The accompanying condensed consolidated financial statements as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the consolidated financial position of LivePerson as of June 30, 2018, and the consolidated results of operations, comprehensive loss and cash flows for the interim periods ended June 30, 2018 and 2017. 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, 2017 has been derived from audited consolidated financial statements at that date.
Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2018.
Principles of Consolidation
The condensed consolidated financial statements include the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

8



Use of Estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from management’s estimates.
Recently Issued Accounting Standards    
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No.2018-07 "Compensation —Stock Compensation (Topic 718) —Improvements to Nonemployee Share-Based Payment Accounting" ("ASU 2018-07"). This new standard expands the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. ASU 2018-05 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is currently evaluating the impact of this updated standard, but does not believe this update will have a significant impact on its consolidated financial statements.
In March 2018, the FASB issued ASU No.2018-05 "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118" ("ASU 2018-05"). This new standard adds SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date on which the Tax Cuts and Jobs Act (H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018) was signed into law. ASU 2018-05 is effective upon inclusion in the FASB Codification. The Company is currently evaluating the impact of this updated standard, but does not believe this update will have a significant impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02 "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). This new standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendments in ASU 2018-02 affects any entity that is required to apply the provisions of Topic 220 and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The Company is currently evaluating the impact of this updated standard, but does not believe this update will have a significant impact on its consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12").  This new standard refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes, for investors and analysts. ASU 2017-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, for public companies. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard. The Company does not expect the adoption of ASU 2017-12 to have a material effect on its financial position, results of operations or cash flows.
In January 2017, FASB issued ASU No. 2017-04, "Intangibles —Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" (“ASU 2017-04”). This update addresses concerns over the cost and complexity of the two-step goodwill impairment test. The amendments in this update remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 is effective for financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods. The Company does not expect the adoption of ASU 2017-04 to have a material effect on its financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, “Revenue from Contracts with Customers”. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest

9



comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018. The Company is currently assessing the provisions of this guidance and evaluating the timing and impact the guidance will have on its consolidated financial statements and related disclosures. The Company is also in the process of aggregating lease documentation for review. The adoption of this ASU primarily impacts the balance sheet through the recognition of a right-of-use asset and a lease liability for all leases with terms in excess of twelve months. This guidance is effective January 1, 2019 using a modified retrospective transition approach with early adoption permitted.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("Topic 606"). Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605, "Revenue Recognition" ("Topic 605"), and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. Topic 606 also includes Subtopic 340-40, "Other Assets and Deferred Costs - Contracts with Customers", which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as the "new standard."
The Company adopted the requirements of the new standard as of January 1, 2018, utilizing the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for the reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported in accordance with its historic accounting under Topic 605.
The impact of adopting the new standard as of January 1, 2018 on revenues was not material. The primary impact of adopting the new standard relates to the deferral of incremental commission costs of obtaining subscription contracts. The Company recorded an addition to opening retained earnings of $0.7 million as of January 1, 2018 due to the impact of adopting the new standard, with the impact related to the deferral of incremental commission costs. Under Topic 605, the Company deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the term of the related subscription contract, which was generally one year. Under the new standard, the Company defers all incremental commission costs to obtain the contract. The prepaid commission balance as of June 30, 2018 is $7.9 million. The Company amortizes these costs over the related period of benefit using the customer expected life that the Company determined to be three to five years which is consistent with the transfer to the customer of the services to which the asset relates.
2.
Revenue Recognition 
The majority of the Company’s revenue is generated from monthly service revenues and related professional services from the sale of the LivePerson services. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

The Company determines revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the Company satisfies a performance obligation.
    
Total revenue of $61.7 million and $119.9 million recognized during the three months and six months ended June 30, 2018, under Topic 606, was not materially different from what would have been recognized under Topic 605.

Hosted Services- Business Revenue

Hosted Services Business revenue is reported at the amount that reflects the ultimate consideration expected to be received and primarily consist of fees that provide customers access to LiveEngage, the Company’s enterprise-class, cloud-based platform. The Company has determined such access represents a stand-ready service provided continually throughout the contract term. As such, control and satisfaction of this stand-ready performance obligation is deemed to occur over time. The Company recognizes this revenue over time on a ratable basis over the contract term, beginning on the date that access to the LiveEngage platform is made available to the customer. The passage of time is deemed to be the most faithful depiction of the transfer of control of the services as the customer simultaneously receives and consumes the benefit provided by the Company’s performance. Subscription contracts are generally one year or longer in length, billed, monthly, quarterly or annually in advance. There is no significant

10



variable consideration related to these arrangements. Additionally, for certain of the Company's larger customers, the Company may provide call center labor through an arrangement with one or more of several qualified vendors. For most of these customers, the Company passes the fee it incurs with the labor provider and its fee for the hosted services through to its customers in the form of a fixed fee for each order placed via the Company's online engagement solutions. For these Pay for Performance ("PFP") arrangements in accordance with ASC-606, "Principal Agent Considerations", the Company acts as a principal in a transaction if it controls the specified goods or services before they are transferred to the customer.

Professional Services Revenues

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

Contracts with Multiple Performance Obligations

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

Hosted Services- Consumer Revenue

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

Deferred Revenues

The Company records deferred revenues when cash payments are received or due in advance of its performance. The increase in the deferred revenue balance for the six months ended June 30, 2018 is primarily driven by cash payments received or due in advance of satisfying its performance obligations, partially offset by $26.2 million of revenues recognized that were included in the deferred revenue balance as of December 31, 2017. The following table presents deferred revenue by revenue source (amounts in thousands):
 
 
Deferred Revenue
 
 
 As of June 30, 2018
 
As of December 31, 2017
Hosted services – Business
 
$
38,063

 
$
27,011

Hosted services – Consumer
 

 

Professional services
 
11,443

 
8,552

Total deferred revenue
 
$
49,506

 
$
35,563



11



Disaggregated Revenue

The following table presents the Company's revenues disaggregated by revenue source (amounts in thousands):
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
(1) 
2018
 
2017
(1) 
Revenue:
 
 
 
 
 
 
 
 
Hosted services – Business
$
48,331

 
$
43,927

 
$
95,759

 
$
85,420

 
Hosted services – Consumer
4,952

 
4,460

 
9,632

 
8,630

 
Professional services
8,377

 
5,687

 
14,510

 
10,943

 
Total revenue
$
61,660

 
$
54,074

 
$
119,901

 
$
104,993

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

The following table presents the Company’s revenues attributable to domestic and foreign operations for the periods presented (amounts in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
United States
$
35,572

 
$
34,078

 
$
69,643

 
$
65,763

Other Americas (1)
2,547

 
1,968

 
3,806

 
3,940

Total Americas
38,119

 
36,046

 
73,449

 
69,703

EMEA (2) (4)
17,519

 
13,953

 
34,438

 
27,465

APAC (3)
6,022

 
4,075

 
12,014

 
7,825

Total revenue
$
61,660

 
$
54,074

 
$
119,901

 
$
104,993

(1) Canada, Latin America and South America
(2) Europe, the Middle East and Africa (“EMEA”)
(3) Asia-Pacific (“APAC”)
(4) Includes revenues from the United Kingdom of $11.9 million and $9.1 million for the three months ended June 30, 2018 and 2017, respectively, and $23.5 million and $18.2 million six months ended June 30, 2018 and 2017, respectively.

Information about Contract Balances

Amounts collected in advance of services being provided are accounted for as deferred revenue. Nearly all of the Company's deferred revenue balance is related to Hosted Services- Business Revenue.
In some arrangements, the Company allows customers to pay for access to LiveEngage over the term of the software license. The Company refers to these as subscription transactions. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables, anticipated to be invoiced in the next twelve months, are included in accounts receivable on the consolidated balance sheet. The opening and closing balances of the Company's accounts receivable, unbilled receivables, and deferred revenues are as follows (amounts in thousands):
 
Accounts Receivable
 
Unbilled Receivable
 
Deferred Revenue (current)
 
Deferred Revenue (long term)
Opening Balance as of December 31, 2017
$
30,342

 
$
7,584

 
$
35,563

 
$

Increase (decrease), net
(640
)
 
823

 
11,812

 
2,131

Ending Balance as of June 30, 2018
$
29,702

 
$
8,407

 
$
47,375

 
$
2,131


As of June 30, 2018, the Company expects to recognize the long term performance obligations in 2019.




12



3. Net Loss Per Share

The Company calculates earnings per share (“EPS”) in accordance with the provisions of ASC 260-10 and the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 98. Under ASC 260-10, basic EPS excludes dilution for common stock equivalents and is computed by dividing net income or loss attributable to common shareholders by the weighted average number of common shares outstanding for the period. All options, warrants or other potentially dilutive instruments issued for nominal consideration are required to be included in the calculation of basic and diluted net income attributable to common stockholders. Diluted EPS is calculated using the treasury stock method and reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock.
Diluted net loss per common share for the three and six months ended June 30, 2018 does not include the effect of 9,784,690 outstanding common stock awards, as the effect of their inclusion is anti-dilutive. Diluted net loss per common share for the three and six months ended June 30, 2017 does not include the effect of 9,423,000 outstanding common stock awards, as the effect of their inclusion is anti-dilutive.
A reconciliation of shares used in calculating basic and diluted net loss per share follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Basic
58,648,195

 
55,954,158

 
57,982,648

 
55,964,568

Effect of assumed exercised options

 

 

 

Diluted
58,648,195

 
55,954,158

 
57,982,648

 
55,964,568

4.
Segment Information
The Company accounts for its segment information in accordance with the provisions of ASC 280-10, “Segment Reporting.” ASC 280-10 establishes annual and interim reporting standards for operating segments of a company. ASC 280-10 requires disclosures of selected segment-related financial information about products, major customers, and geographic areas based on the Company’s internal accounting methods. The Company is organized into two operating segments for purposes of making operating decisions and assessing performance. The Business segment enables brands to leverage LiveEngage’s sophisticated intelligence engine to connect with consumers through an integrated suite of mobile and online business messaging technologies. The Consumer segment facilitates online transactions between independent service providers (“Experts”) and individual consumers (“Users”) seeking information and knowledge for a fee via mobile and online messaging. Both segments currently generate their revenue primarily in the United States. The chief operating decision maker, who is the chief executive officer, evaluates performance, makes operating decisions, and allocates resources based on the operating income of each segment. The reporting segments follow the same accounting polices used in the preparation of the Company’s condensed consolidated financial statements which are described in the summary of significant accounting policies. The Company allocates cost of revenue, sales and marketing and amortization of purchased intangibles to the segments, but it does not allocate product development expenses, general and administrative expenses, restructuring costs and income tax expense because management does not use this information to measure performance of the operating segments. There are currently no inter-segment sales.
Summarized financial information by segment for the three months ended June 30, 2018, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision maker, follows (amounts in thousands):
 
Business
 
Consumer
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Hosted services – Business
$
48,331

 
$

 
$

 
$
48,331

Hosted services – Consumer

 
4,952

 

 
4,952

Professional services
8,377

 

 

 
8,377

Total revenue
56,708

 
4,952

 

 
61,660

Cost of revenue
15,086

 
950

 

 
16,036

Sales and marketing
23,339

 
2,053

 

 
25,392

Amortization of purchased intangibles
424

 

 

 
424

Unallocated corporate expenses

 

 
27,624

 
27,624

Operating income (loss)
$
17,859

 
$
1,949

 
$
(27,624
)
 
$
(7,816
)

13



Summarized financial information by segment for the three months ended June 30, 2017, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision maker, follows (amounts in thousands):
 
Business
 
Consumer
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Hosted services – Business
$
43,927

 
$

 
$

 
$
43,927

Hosted services – Consumer

 
4,460

 

 
4,460

Professional services
5,687

 

 

 
5,687

Total revenue
49,614

 
4,460

 

 
54,074

Cost of revenue
14,206

 
928

 

 
15,134

Sales and marketing
21,242

 
2,150

 

 
23,392

Amortization of purchased intangibles
470

 

 

 
470

Unallocated corporate expenses

 

 
21,839

 
21,839

Operating income (loss)
$
13,696

 
$
1,382

 
$
(21,839
)
 
$
(6,761
)

Summarized financial information by segment for the six months ended June 30, 2018, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision maker, follows (amounts in thousands):
 
Business
 
Consumer
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Hosted services – Business
$
95,759

 
$

 
$

 
$
95,759

Hosted services – Consumer

 
9,632

 

 
9,632

Professional services
14,510

 

 

 
14,510

Total revenue
110,269

 
9,632

 

 
119,901

Cost of revenue
28,004

 
1,986

 

 
29,990

Sales and marketing
45,062

 
4,461

 

 
49,523

Amortization of purchased intangibles
848

 

 

 
848

Unallocated corporate expenses

 

 
51,177

 
51,177

Operating income (loss)
$
36,355

 
$
3,185

 
$
(51,177
)
 
$
(11,637
)

Summarized financial information by segment for the six months ended June 30, 2017, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision maker, follows (amounts in thousands):
 
Business
 
Consumer
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Hosted services – Business
$
85,420

 
$

 
$

 
$
85,420

Hosted services – Consumer

 
8,630

 

 
8,630

Professional services
10,943

 

 

 
10,943

Total revenue
96,363

 
8,630

 

 
104,993

Cost of revenue
27,112

 
1,803

 

 
28,915

Sales and marketing
40,785

 
4,307

 

 
45,092

Amortization of purchased intangibles
942

 

 

 
942

Unallocated corporate expenses

 

 
41,730

 
41,730

Operating income (loss)
$
27,524

 
$
2,520

 
$
(41,730
)
 
$
(11,686
)




14



Geographic Information
The Company is domiciled in the United States and has international operations in the Israel, United Kingdom, Asia-Pacific, Latin America and Western Europe, particularly France and Germany. The following table presents the Company’s long-lived assets by geographic region as of the dates presented (amounts in thousands):
 
June 30,
 
December 31,
 
2018
 
2017
United States
$
99,307

 
$
95,716

Israel
13,597

 
13,079

Australia
9,134

 
9,504

Netherlands
7,992

 
8,363

Other (1)
3,434

 
3,293

Total long-lived assets
$
133,464

 
$
129,955

(1) United Kingdom, Germany, Japan, France and Italy
No individual customer accounted for 10% or more of consolidated revenue for any of the periods presented. No individual customer accounted for 10% or more of accounts receivable as of June 30, 2018 and December 31, 2017.
5.
Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the six months ended June 30, 2018 are as follows (amounts in thousands):
 
Business
 
Consumer
 
Consolidated
Balance as of December 31, 2017
$
72,507

 
$
8,024

 
$
80,531

Adjustments to goodwill:
 
 
 
 
 
Foreign exchange adjustment
(58
)
 

 
(58
)
Balance as of June 30, 2018
$
72,449

 
$
8,024

 
$
80,473

Intangible Assets
Intangible assets are summarized as follows (amounts in thousands):
 
 As of June 30, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Weighted
Average
Amortization
Period
Amortizing intangible assets:
 
 
 
 
 
 
 
Technology
$
29,040

 
$
(22,879
)
 
$
6,161

 
5.3 years
Customer relationships
15,973

 
(11,110
)
 
4,863

 
8.0 years
Trade names
1,287

 
(1,287
)
 

 
2.1 years
Non-compete agreements
1,437

 
(1,437
)
 

 
2.3 years
Patents
1,832

 
(562
)
 
1,270

 
13.3 years
Other
262

 
(235
)
 
27

 
2.7 years
Total
$
49,831

 
$
(37,510
)
 
$
12,321

 
 


15



 
As of December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Weighted
Average
Amortization
Period
Amortizing intangible assets:
 
 
 
 
 
 
 
Technology
$
27,882

 
$
(22,197
)
 
$
5,685

 
5.3 years
Customer relationships
15,978

 
(10,457
)
 
5,521

 
8.0 years
Trade names
1,289

 
(1,283
)
 
6

 
2.1 years
Non-compete agreements
1,439

 
(1,439
)
 

 
2.3 years
Patents
1,620

 
(493
)
 
1,127

 
13.1 years
Other
262

 
(235
)
 
27

 
2.7 years
Total
$
48,470

 
$
(36,104
)
 
$
12,366

 
 
 
Amortization expense is calculated over the estimated useful life of the asset. Aggregate amortization expense for intangible assets was $0.7 million and $1.4 million for the three months ended June 30, 2018 and 2017, respectively, and $1.4 million and $2.9 million for the six months ended June 30, 2018 and 2017, respectively. For the three and six months ended June 30, 2018 and 2017, respectively, a portion of this amortization is included in cost of revenue. Estimated amortization expense for the next five years is as follows (amounts in thousands):  
 
Estimated Amortization Expense
2018
$
1,422

2019
2,641

2020
2,452

2021
2,240

2022
1,893

Thereafter
1,673

Total
$
12,321

BotCentral
In January 2018, the Company acquired the employees and technology assets of BotCentral, a Silicon Valley based startup, for an approximate purchase price of $1.0 million in common stock of the Company. The Company incurred an additional $0.2 million related to acquisition costs. This transaction was accounted for as an asset purchase. The aggregate amount of approximately $1.2 million is included in "Intangibles, net" on the Company's June 30, 2018 condensed consolidated balance sheet. While an active participant in the LiveEngage for Bots partner program, the BotCentral team created a number of bot solutions for major brands in banking, insurance, and travel, running on LivePerson's conversational platform. With the team's expertise and knowledge of the LiveEngage platform, the team is bringing valuable insight for LivePerson's customers and partners, and enabling the company to more rapidly optimize its bot deployment capabilities, and grow the ecosystem.

6.
Property and Equipment
The following table presents the detail of property and equipment for the periods presented (amounts in thousands):
 
June 30,
2018
 
December 31,
2017
Computer equipment and software
$
109,885

 
$
100,392

Furniture, equipment and building improvements
13,691

 
13,546

 
123,576

 
113,938

Less: accumulated depreciation
(85,510
)
 
(79,233
)
Total
$
38,066

 
$
34,705



16



7.
Accrued Expenses and Other Current Liabilities
The following table presents the detail of accrued expenses and other current liabilities for the periods presented (amounts in thousands):
 
June 30,
2018
 
December 31,
2017
Payroll and other employee related costs
$
13,357

 
$
16,431

Professional services and consulting and other vendor fees
16,318

 
15,674

Unrecognized tax benefits
2,277

 
4,924

Sales commissions
4,147

 
5,259

Restructuring (see Note 11)
2,577

 
2,338

Other
576

 
3,385

Total
$
39,252

 
$
48,011


8.
Fair Value Measurements
The Company measures its cash equivalents at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs reflect: quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
Financial Assets and Liabilities
The carrying amount of cash, accounts receivable, and accounts payable approximate their fair value due to their short-term nature. The Companys assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of June 30, 2018 and December 31, 2017, are summarized as follows (amounts in thousands). The Company’s restricted cash balance of $0.2 million at June 30, 2018 and $1.5 million at December 31, 2017 is not held in a money market account and is not included in the following table.
 
June 30, 2018
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
2,817

 
$

 
$

 
$
2,817

 
$
2,806

 
$

 
$

 
$
2,806

Foreign currency derivative contracts

 

 

 

 

 
65

 

 
65

Total assets
$
2,817

 
$

 
$

 
$
2,817

 
$
2,806

 
$
65

 
$

 
$
2,871

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative contracts
$

 
$

 
$

 
$

 
$

 
$
2

 
$

 
$
2

Total liabilities
$

 
$

 
$

 
$

 
$

 
$
2

 
$

 
$
2

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

17



fair value. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions based on the best information available.
The Company's money market funds are measured at fair value on a recurring basis based on quoted market prices in active markets and are classified as level 1 within the fair value hierarchy. On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived tangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. The Company uses an income approach and inputs that constitute level 3. During the third quarter of each year, the Company evaluates goodwill for impairment at the reporting unit level. The Company uses qualitative factors in accordance with ASU No. 2011-08 to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  This measurement is classified based on level 3 input.
Derivative Financial Instruments
The Company is exposed to foreign exchange risks that in part are managed by using derivative financial instruments. The Company entered into foreign currency forward contracts related to risks associated with foreign operations. The Company does not use derivatives for trading purposes. Derivatives are recorded at their estimated fair values based upon Level 2 inputs. Derivatives designated and effective as cash flow hedges are reported as a component of other comprehensive income and reclassified to earnings in the same periods in which the hedged transactions impact earnings. Gains and losses related to derivatives not meeting the requirements of hedge accounting and the portion of derivatives related to hedge ineffectiveness are recognized in current earnings.
In accordance with the foreign currency forward contracts, the Company was required to pledge cash as collateral security to be maintained at the bank. The collateral shall remain in control of the lender, and these funds can be used to satisfy the outstanding obligation. Accordingly, the Company had cash at the bank of approximately $0.2 million at June 30, 2018 and $1.5 million at December 31, 2017, which is recorded as cash held as collateral in current assets.
The following summarizes certain information regarding the Company’s outstanding foreign currency derivative contracts related primarily to intercompany receivables and payables for the periods presented (in thousands):
 
 As of June 30, 2018
 
As of December 31, 2017
Notional amount of foreign currency derivative contracts
$

 
$
2,866

Fair value of foreign currency derivatives contracts
$

 
$
63

The fair value of the Company’s derivative instruments is summarized below (in thousands):
 
 
 
Fair Value of Derivative Instruments
 
Balance Sheet Location
 
 As of June 30, 2018
 
As of December 31, 2017
Derivative Assets
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 

 
 
Foreign currency derivatives contracts
Prepaid expenses and other current assets
 
$

 
$
65

Derivative Liabilities
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency derivatives contracts
Accrued expenses and other liabilities
 
$

 
$
2

The following summarizes certain information regarding the Company’s derivatives that are not designated or are not effective as hedges (in thousands):
 
 
Gain (losses) on Derivative Instruments Recognized in Statements of Operations
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
Location
 
2018
 
2017
 
2018
 
2017
Foreign currency derivatives contracts
 
Other (income) expense
 
$

 
$
38

 
$
(50
)
 
$
213



18



9.
Commitments and Contingencies
Contractual Obligations
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 June 30, 2018 and 2017 was approximately $2.3 million. Rental expense for operating leases for the six months ended June 30, 2018 and 2017 was approximately $4.6 million.
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 $6,000. Matching contributions are deposited into the employee’s 401(k) account and are subject to 5 year graded vesting. Salaries and related expenses include $0.4 million of employer matching contributions for both the three months ended June 30, 2018 and 2017. Salaries and related expenses include $0.9 million and $0.8 million of employer matching contributions for the six months ended June 30, 2018 and 2017, respectively.
Letters of Credit
As of June 30, 2018, the Company has a $1.9 million letter of credit outstanding substantially in favor of a certain landlord for office space. In addition, the Company has a letter of credit totaling $0.1 million as a security deposit for the due performance by the Company of the terms and conditions of a supply contract. There were no draws against these letters of credit during the six months ended June 30, 2018
10.
Stockholders Equity
Common Stock
As of June 30, 2018, there were 100,000,000 shares of common stock authorized, and 62,366,602 shares issued and outstanding. As of December 31, 2017, there were 100,000,000 shares of common stock authorized, and 59,663,969 shares issued and outstanding. The par value for common shares is $0.001.
Preferred Stock
As of June 30, 2018 and December 31, 2017, there were 5,000,000 shares of preferred stock authorized, and zero shares issued and outstanding. The par value for preferred shares is $0.001.
Stock Repurchase Program
On December 10, 2012, the Company’s Board of Directors approved a stock repurchase program through June 30, 2014. Under the stock repurchase program, the Company is authorized to repurchase shares of its common stock, in the open market or privately negotiated transactions, at times and prices considered appropriate by the Board of Directors depending upon prevailing market conditions and other corporate considerations. On March 13, 2014, the Company’s Board of Directors increased the aggregate purchase price of the stock repurchase program from $30.0 million to $40.0 million. On July 23, 2014, the Company’s Board of Directors increased the aggregate purchase price of the stock repurchase program from $40.0 million to $50.0 million. On February 16, 2016, the Company's Board of Directors increased the aggregate purchase price of the total stock repurchase program by an additional $14.0 million. On November 21, 2016, the Company's Board of Directors increased the aggregate purchase price of the stock repurchase program from $64.0 million to $74.0 million and extended the expiration date of the program out to December 31, 2017. On May 7, 2018, the Company's Board of Directors ratified the extension to December 31, 2018 of the repurchase program, effective as of January 1, 2018. There were 93,750 shares repurchased under this program during the six months ended June 30, 2018, which were recorded in treasury stock at par on the condensed consolidated balance sheets as of June 30, 2018. As of June 30, 2018, approximately $17.1 million remained available for purchase under the program.
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.

19



The per share weighted average fair value of stock options granted was $8.15 and $3.55 during the three months ended June 30, 2018 and 2017, respectively, and $6.26 and $3.50 during the six months ended June 30, 2018 and 2017, 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Dividend yield
0.0%
 
0.0%
 
0.0%
 
0.0%
Risk-free interest rate
2.6% - 2.8%
 
1.7% - 1.9%
 
2.5% - 2.8%
 
1.7% - 1.9%
Expected life (in years)
5
 
5
 
5
 
5
Historical volatility
43.7% - 48.4%
 
46.6% - 47.6%
 
43.7% - 48.4%
 
46.6% - 47.6%
A description of the methods used in the significant assumptions used to estimate the fair value of stock-based compensation awards follows:
Dividend yield – The Company uses 0% as it has never issued dividends and does not anticipate issuing dividends in the near term.
Risk-free interest rate – The Company uses the market yield on U.S. Treasury securities at five years with constant maturity, representing the current expected life of stock options in years.
Expected life – The Company uses historical data to estimate the expected life of a stock option.
Historical volatility – The Company uses a trailing five year from grant date to determine volatility.
Stock Option Plans
During 1998, the Company established the Stock Option and Restricted Stock Purchase Plan (the “1998 Plan”). Under the 1998 Plan, the Board of Directors could issue incentive stock options or nonqualified stock options or other equity-based awards in respect of up to 5,850,000 shares of common stock. The 2000 Stock Incentive Plan (the “2000 Plan”) succeeded the 1998 Plan. Under the 2000 Plan, the options which had been outstanding under the 1998 Plan were incorporated in the 2000 Plan increasing the number of shares available for issuance under the 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 (as amended and restated, the “2009 Plan”) as a successor to the 2000 Plan. Under the 2009 Plan, the options which had been outstanding under the 2000 Plan were incorporated into the 2009 Plan and the Company increased the number of shares available for issuance under the plan by 6,000,000. The Company amended the 2009 Plan (the “Amended 2009 Plan”) effective June 7, 2012. The Amended 2009 Plan increased the number of shares authorized for issuance under the plan by an additional 4,250,000.
On June 2, 2017, the Company's Board of Directors amended and restated the Amended 2009 Plan effective April 30, 2017. The amended and restated plan increased the number of shares authorized for issuance under the plan by an additional 4,000,000, thereby reserving for issuance 27,817,744 shares of common stock in the aggregate. Options to acquire common stock granted thereunder have 10-year terms. As of June 30, 2018, approximately 2.2 million shares of common stock were reserved for issuance under the Amended 2009 Plan (taking into account all option exercises and other equity award settlements through June 30, 2018).
Employee Stock Purchase Plan
In June 2010, the Company’s stockholders approved the 2010 Employee Stock Purchase Plan with 1,000,000 shares of common stock initially reserved for issuance. Subject to stockholder approval, which was obtained on June 2, 2017, the Company's Board of Directors amended and restated the 2010 Employee Stock Purchase Plan effective April 30, 2017. The amended and restated plan increased the number of shares authorized for issuance under the plan by an additional 1,000,000, thereby reserving for issuance 2,000,000 shares of common stock in the aggregate. As of June 30, 2018, approximately 0.9 million shares of common stock were reserved for issuance under the Employee Stock Purchase Plan (taking into account all share purchases through June 30, 2018).
Inducement Plan
During January 2018, the Company established the Inducement Plan (the “2018 Plan”). Under the 2018 Plan, the Board of Directors can issue incentive stock options or nonqualified stock options or other equity-based awards in respect of up to 1,500,000 shares of common stock. On April 25, 2018, the Company's Board of Directors amended and restated the 2018 Plan (the "Amended 2018 Plan"). The Amended 2018 Plan increased the number of shares authorized for issuance under the plan by

20



an additional 500,000 shares, thereby reserving for issuance 2,000,000 shares of common stock in the aggregate. As of June 30, 2018, approximately 0.6 million shares of common stock were reserved for issuance under the Amended 2018 Plan (taking into account all option exercises and other equity award settlements through June 30, 2018).
Stock Option Activity
A summary of the Company’s stock option activity and weighted average exercise prices follows:
 
Stock Option Activity
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in thousands)
 
Options (in thousands)
 
Weighted
Average
Exercise Price
 
 
Balance outstanding at December 31, 2017
7,959

 
$
10.71

 
 
 
 
Granted
1,765

 
14.10

 
 
 
 
Exercised
(2,273
)
 
10.73

 
 
 
 
Cancelled or expired
(274
)
 
9.49

 
 
 
 
Balance outstanding at June 30, 2018
7,177

 
$
11.58

 
7.03
 
$
68,433

Options vested and expected to vest
6,189

 
$
11.46

 
6.66
 
$
59,773

Options exercisable at June 30, 2018
3,658

 
$
11.04

 
4.99
 
$
36,802

The total fair value of stock options exercised during the six months ended June 30, 2018 was approximately $12.1 million. As of June 30, 2018, there was approximately $17.2 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 3.0 years.
The following table summarizes information about outstanding and vested stock options as of June 30, 2018:
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
 
Number of Shares Outstanding (in thousands)
 
Weighted-Average Remaining Contractual Life (Years)
 
Weighted-Average Exercise Price
 
Number of Shares (in thousands)
 
Weighted-Average Exercise Price
$1.79 - $7.45
 
708

 
5.26
 
$
6.33

 
485

 
$
6.01

$7.60 - $7.60
 
748

 
8.39
 
7.60

 
214

 
7.60

$7.95 - $9.55
 
830

 
6.59
 
9.20

 
583

 
9.21

$9.90 - $10.13
 
727

 
6.03
 
10.09

 
650

 
10.09

$10.31 - $11.95
 
726

 
7.50
 
11.23

 
377

 
10.84

$11.96 - $12.32
 
87

 
3.04
 
12.12

 
88

 
12.12

$12.45 - $12.45
 
930

 
9.63
 
12.45

 

 

$12.46 - $13.59
 
810

 
4.07
 
13.28

 
747

 
13.26

$14.30- $15.85
 
726

 
9.33
 
14.60

 
16

 
15.77

$15.96 - $21.75
 
885

 
6.60
 
17.87

 
498

 
17.27

 
 
 
 
 
 
 
 
 
 
 
 
 
7,177

 
7.03
 
$
11.58

 
3,658

 
$
11.04



21



Restricted Stock Unit Activity
A summary of the Company’s restricted stock units (“RSUs”) activity and weighted average exercise prices follows:
 
Restricted Stock Unit Activity
 
 
 
Number of Shares (in thousands)
 
Weighted Average
Grant Date Fair Value (Per Share)
 
Aggregate Fair Value (in thousands)
Balance outstanding at December 31, 2017
1,123

 
$
9.03

 
$

Awarded
1,843

 
15.13

 

Released
(251
)
 
9.05

 

Forfeited
(107
)
 
8.02

 

Non-vested and outstanding at June 30, 2018
2,608

 
$
13.38

 
$
55,026

Expected to vest
1,798

 
$
12.80

 
$
37,936

RSUs granted to employees generally vest over a four-year period or upon achievement of certain performance conditions. In accordance with ASU 2017-09, as of June 30, 2018, total unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested RSUs was approximately $33.4 million and the weighted-average remaining vesting period was 3 years.

11.
Restructuring
The Company’s restructuring costs related to wind-down and severance costs associated with re-prioritizing and reallocating resources to focus on areas showing high growth potential. The expense associated with this restructuring was approximately $1.9 million and $2.1 million during the three months ended June 30, 2018 and 2017, respectively and approximately $2.1 million and $2.3 million during the six months ended June 30, 2018 and 2017, respectively. The restructuring liability was approximately $2.6 million as of June 30, 2018 and $2.3 million as of December 31, 2017. It is classified as accrued expenses and other current liabilities on the condensed consolidated balance sheets.
The following table presents the detail of the liability for the Company's restructuring charges for the periods presented (amounts in thousands):
 
June 30, 2018
 
December 31, 2017
Balance, Beginning of the year
$
2,338

 
$
2,551

Severance and other associated costs
2,084

 
648

Cash payments
(1,845
)
 
(2,807
)
Wind down cost legacy platform

 
1,946

Balance, End of period
$
2,577

 
$
2,338


The following table presents the detail of expenses for the Company's restructuring charges for the three months ended June 30, 2018 (amounts in thousands):
 
June 30, 2018
 
June 30, 2017
Severance and other associated costs
$
1,906

 
$
289

Wind down cost legacy platform

 
1,787

Total restructuring costs
$
1,906

 
$
2,076


The following table presents the detail of expenses for the Company's restructuring charges for the six months ended June 30, 2018 (amounts in thousands):
 
June 30, 2018
 
June 30, 2017
Severance and other associated costs
$
2,084

 
$
399

Wind down cost legacy platform

 
1,916

Total restructuring costs
$
2,084

 
$
2,315



22




12.
Legal Matters
The Company previously filed an intellectual property suit against [24]7 Customer, Inc. in the Southern District of New York on March 6, 2014 seeking damages on the grounds that [24]7 reverse engineered and misappropriated the Company's technology to develop competing products and misused the Company's business information.  On June 22, 2015, [24]7 Customer, Inc. filed suit against the Company in the Northern District of California alleging patent infringement.  On December 7, 2015, [24]7 Customer Inc. filed a second patent infringement suit against the Company, also in the Northern District of California.  On March 16, 2017, the New York case was voluntarily transferred and consolidated with the two California cases in the Northern District of California for all pre-trial purposes.  Recent rulings by both the Court and the United States Patent Office in the Company’s favor have invalidated the majority of [24]7 patents that were asserted in the patent cases.  Trial for the Company’s intellectual property and other claims asserted against [24]7 in the original litigation is currently set for April 2019.  The Company believes the claims filed by [24]7 are without merit and intends to defend them vigorously.
The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where the Company assesses the likelihood of loss as probable.
From time to time, the Company is involved in or subject to legal, administrative and regulatory proceedings, claims, demands and investigations arising in the ordinary course of business, including direct claims brought by or against the Company with respect to intellectual property, contracts, employment and other matters, as well as claims brought against the Company’s customers for whom the Company has a contractual indemnification obligation. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matter as appropriate and in compliance with ASC 450. The accruals or estimates, if any, resulting from the foregoing analysis, are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, as applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
From time to time, third parties assert claims against the Company regarding intellectual property rights, privacy issues and other matters arising in the ordinary course of business. Although the Company cannot be certain of the outcome of any litigation or the disposition of any claims, nor the amount of damages and exposure, if any, that the Company could incur, the Company currently believes that the final disposition of all existing matters will not have a material adverse effect on our business, results of operations, financial condition or cash flows. In addition, in the ordinary course of business, the Company is also subject to periodic threats of lawsuits, investigations and claims. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.


23



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

General

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

Overview

LivePerson was incorporated in the State of Delaware in November 1995 and the LivePerson service was introduced in November 1998.  LivePerson makes life easier by transforming how people communicate with brands. LiveEngage, the Company’s enterprise-class, cloud-based platform, enables businesses and consumers to connect through conversational interfaces, such as in-app and mobile messaging, while leveraging bots and Artificial Intelligence (AI) to increase efficiency. As consumers have reoriented their digital lives around the smartphone, messaging apps have become their preferred communication channel to connect with each other. LivePerson allows brands to align with this new consumer preference, and deploy messaging at scale for customer care, marketing and sales, instead of requiring that consumers use email or call a 1-800 number. More than 18,000 businesses, including Adobe, Citibank, EE, HSBC, IBM, L'Oreal, Orange, PNC, and The Home Depot employ our technology to keep pace with rising customer service expectations and to align with preferences for digital communication channels.
We are organized into two operating segments: Business and Consumer. The Business segment enables brands to leverage LiveEngage’s sophisticated intelligence engine to connect with consumers through an integrated suite of mobile and online business messaging technologies. The Consumer segment facilitates online transactions between independent service providers (“Experts”) and individual consumers (“Users”) seeking information and knowledge for a fee via mobile and online messaging.
In order to sustain growth in these segments, our strategy is to expand our position as the leading provider of online and mobile messaging solutions that transform how people communicate with brands. To accomplish this, we are focused on the following current initiatives:
Strengthening Our Position in both Existing and New Markets and Growing Our Recurring Revenue Base. LivePerson plans to continue to develop its market position by increasing its customer base, and expanding within its installed base. We will continue to focus primarily on key target markets: automotive, financial services, retail, technology, telecommunications, and travel/hospitality within both our enterprise and mid-market sectors, as well as the small business (SMB) sector. Healthcare, insurance, real estate and energy utilities are new target industries and natural extensions of our primary target markets. We plan to leverage our LiveEngage platform to replace a portion of calls traditionally made to 1-800 numbers with text and mobile messaging, and to increase adoption of real-time, campaign-based messaging across our customer’s online properties. We intend to collaborate with our large installed customer base to optimize the value and effectiveness that brands derive from our services. We are also focused on strengthening our recurring revenue stream by signing larger, long-term, and more strategic deals.
One of the key ways we are developing our market position is by hosting customer summits for executive level attendees from our targeted enterprise customer base and prospects. These customer summits feature existing customers that have demonstrated strong success with messaging and bots on LiveEngage. We believe that scaled reference customers advocating the adoption of messaging on LiveEngage to targeted peer groups will be a key driver of our growth. In 2017, we increased the pacing and scale of these summits, a pattern that we have continued in 2018.
     Fuel Increased Usage by Expanding Messaging Channels, Use Cases and Interaction Types. LiveEngage currently supports numerous messaging endpoints including branded mobile apps, mobile and desktop web browsers, IVRs, SMS, Facebook Messenger and LINE. We intend to increase the number of endpoints supported by the LiveEngage platform to include additional third-party social apps and device-based systems. We also intend to broaden the use cases of LiveEngage across our customer base, to support care, sales, marketing and retail footprints. In addition, LivePerson continues to expand the breadth of interaction types available to customers on the platform. For example, in addition to our broad suite of messaging and real-time chat

24



technologies, customers have access to content delivery, analytics, cobrowse, and PCI compliance, as well as proprietary and third-party bot offerings. LivePerson offers a platform pricing model, which provides businesses access to our entire suite of messaging technologies across their entire agent pool for a pre-negotiated cost per interaction. We believe this model will lead to growth opportunities for LivePerson as customers adopt new messaging channels, use cases and interaction types.
    Leverage Partners to Enhance our Offering. In addition to developing our own applications, we continue to cultivate a partner ecosystem capable of offering additional applications and services to our customers. The pace of our ecosystem expansion has accelerated in 2018, as we built on our existing integrations with Facebook Messenger and LINE, by adding integrations to to Apple Business Chat, Google Rich Business Messenger, WhatsApp, Alexa and Google Home. These popular conversational interfaces enable brands the opportunity to connect to millions of consumers, which in turn can increase traffic on our platform.
Our offering is vendor agnostic, empowering our customers to manage a mix of different bots, human agents and technologies from one control panel, thereby optimizing contact center efficiency. In 2017, LivePerson launched the LiveEngage for Bots program and we have subsequently integrated LiveEngage with multiple artificial intelligence/bots vendors, including IBM Watson. LivePerson's proprietary and third-party AI/bots enable brands to partially or fully automate communications with their customers. In addition, we have opened up access to our platform and our products with application programming interfaces (APIs) that allow third parties to develop on top of our platform. Customers and partners can utilize these APIs to build our capabilities into their own applications and to enhance our applications with their services. In 2017, we allocated additional resources to supporting partners and we expect this investment to increase as our partner network expands.
     Maintaining Market Leadership in Technology and Security Expertise. As described above, we are devoting significant resources to creating new products and enabling technologies designed to accelerate innovation. In order to better support our customers and to attract the best talent, LivePerson is globalizing research and development. We now have tech centers in Israel; Mannheim, Germany; New York; Atlanta; Mountain View, California; and Seattle. We evaluate emerging technologies and industry standards and continually update our technology in order to retain our leadership position in each market we serve. We monitor legal and technological developments in the area of information security and confidentiality to ensure our policies and procedures meet or exceed the demands of the world’s largest and most demanding corporations. We believe that these efforts will allow us to effectively anticipate changing customer and consumer requirements in our rapidly evolving industry.
     International Presence. LivePerson is focused on expanding its international revenue contribution, which increased to 37% of total revenue in 2017, from 34% in 2016 and 33% in 2015. LivePerson generated positive results from previous investments in direct sales and services personnel in the United Kingdom and Western Europe. We also continued to focus on expanding our presence in the Asia Pacific region, leveraging our relationships with partners.
     Continuing to Build Brand Recognition. As a pioneer of brand-to-consumer digital messaging, LivePerson enjoys strong brand recognition and credibility. We continue to develop relationships with the media, industry analysts and relevant business associations to enhance awareness of our leadership within the care, sales, tech and marketing industries. With a vision of becoming the leader in messaging, we’ve hosted several private executive events for our customers and prospects, highlighting our expertise and the breadth of our services. These private executive events have led us to close several high-profile deals and we are continuing them throughout 2018. Our focus on connecting large enterprise businesses and their millions of consumers securely and at scale is a primary differentiator for LivePerson and a key component of our marketing strategy. We strategically target decision makers and influencers within several key vertical markets, leveraging customer successes to generate increased awareness and demand for brand-to-consumer messaging. In addition, our brand name may also be visible to both business users and consumers on a brand’s website, within the dialog messaging window. We also engage in digital marketing campaigns that promote our brand on web searches and third-party sites.
      Increasing the Value of Our Service to Our Customers. Leveraging LiveEngage to shift communication between consumers and brands from 1-800 number calls to AI and human-powered messaging is the most important initiative in LivePerson's history. We believe that adoption of LiveEngage will align brands with consumer communication preferences, improve the customer experience and reduce contact center costs. Our platform strategy makes available the full suite of LivePerson’s capabilities through a single solution. In addition, the open architecture of LiveEngage will enable LivePerson to rapidly add new capabilities either directly or through partners. For example, we see opportunities for additional efficiencies in the contact center through the integration of artificial intelligence and bots. Because we directly manage the server infrastructure, we can make new features available to our customers immediately upon release, without customer or end-user installation of software or hardware. Our strategy is to continue to enhance the LiveEngage messaging platform and to leverage the substantial amount of mobile and online consumer data we collect, with the aim of increasing agent efficiency, decreasing customer care costs, improving the customer experience and increasing customer lifetime value.
Evaluating Strategic Alliances and Acquisitions When Appropriate. We have successfully integrated several acquisitions over the past decade. While we have in the past, and may from time to time in the future, engage in discussions regarding acquisitions or strategic transactions or to acquire other companies that can accelerate our growth or broaden our product offerings, we currently have no binding commitments with respect to any future acquisitions or strategic transactions.

25




Key Metrics
Financial overview of the three months ended June 30, 2018 compared to the three months ended June 30, 2017:
Total revenue increased 14% to $61.7 million from $54.1 million
Revenue from our Business segment increased 14% to $56.7 million from $49.6 million.
Gross profit margin increased to 74% from 72%.
Cost and expenses increased 14% to $69.5 million from $60.8 million.
Net loss increased to $8.3 million from net loss of $7.5 million.
Average annual revenue per enterprise and mid-market customer was greater than $255,000 over the trailing twelve months ended June 30, 2018, as compared to greater than $205,000 for the trailing twelve months ended June 30, 2017.
The revenue retention rate for full service customers on LiveEngage was greater than 100% over the trailing twelve months ended June 30, 2018, continuing the trend of 100% plus revenue retention that we reported in 2017. Revenue retention rate measures the percentage of revenue retained at quarter end, from full service customers that were on LiveEngage at the same period a year ago.

Adjusted EBITDA and Adjusted Net Income
To provide investors with additional information regarding our financial results, we have disclosed adjusted EBITDA and adjusted net income, which are non-GAAP financial measures. The tables below present a reconciliation of adjusted EBITDA and adjusted net income to net loss, the most directly comparable GAAP financial measures.
We have included adjusted EBITDA and adjusted net income in this Quarterly Report on Form 10-Q because these are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA and adjusted net income can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the payment of bonuses to our executive officers. Accordingly, we believe that adjusted EBITDA and adjusted net income provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;
adjusted EBITDA does not consider the potentially dilutive impact of restructuring cost;
adjusted EBITDA does not consider the potentially dilutive impact of other non-recurring costs;
adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and
other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

26



Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA for each of the periods indicated (amounts in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
Reconciliation of Adjusted EBITDA
 
 
 
 
 
 
 
 
GAAP net loss
$
(8,321
)
 
$
(7,533
)
 
$
(11,524
)
 
$
(13,209
)
 
Amortization of purchased intangibles
711

 
1,429

 
1,422

 
2,860

 
Stock-based compensation
3,826

 
2,347

 
6,264

 
4,260

 
Depreciation
3,428

 
3,045

 
6,786

 
5,838

 
Other non-recurring costs
1,768

(1) 
1,534

(2) 
3,038

(3) 
3,358

(2) 
Restructuring costs
1,906

(4) 
2,075

(5) 
2,084

(4) 
2,315

(6) 
Provision for income taxes
536

 
673

 
47

 
1,744

 
Other income, net
(31
)
 
99

 
(160
)
 
(221
)
 
Adjusted EBITDA
$
3,823

 
$
3,669

 
$
7,957

 
$
6,945

 
 
 
 
 
 
 
 
 
 
(1) Includes litigation costs of $1.2 million, consulting costs of $0.4 million, and executive relocation costs of $0.2 million for the three months ended June 30, 2018.
(2) Includes litigation costs of $1.5 million and $3.4 million for the three and six months ended June 30, 2017.
(3) Includes litigation costs of $2.1 million, consulting costs of $0.4 million, executive recruitment costs of $0.3 million, and executive relocation costs of $0.2 million for the six months ended June 30, 2018.
(4) Includes severance costs of $1.9 million and $2.1 million for the three and six months ended June 30, 2018.
(5) Includes wind down costs of legacy platform of $1.8 million and severance costs of $0.3 million for the three months ended June 30, 2017.
(6) Includes wind down costs of legacy platform of $1.9 million and severance costs of $0.4 million for the six months ended June 30, 2017.
Our use of adjusted net income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
although amortization is a non-cash charge, the assets being amortized may have to be replaced in the future, and adjusted net income does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
adjusted net income does not consider the potentially dilutive impact of equity-based compensation;
adjusted net income does not consider the potentially dilutive impact of restructuring cost;
adjusted net income does not consider the potentially dilutive impact of other non-recurring costs;
adjusted net income does not consider the potentially dilutive impact of deferred tax asset valuation allowance; and
other companies, including companies in our industry, may calculate adjusted net income differently, which reduces its usefulness as a comparative measure.

27



Because of these limitations, you should consider adjusted net income alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results. The following table presents a reconciliation of adjusted net (loss) income for each of the periods indicated (amounts in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
Reconciliation of Adjusted Net Income
 
 
 
 
 
 
 
 
Pre-tax GAAP loss
$
(7,785
)
 
$
(6,860
)
 
$
(11,477
)
 
$
(11,465
)
 
Amortization of purchased intangibles
711

 
1,429

 
1,422

 
2,860

 
Stock-based compensation
3,826

 
2,347

 
6,264

 
4,260

 
Other non-recurring costs
1,768

(1) 
1,534

(2) 
3,038

(3) 
3,358

(2) 
Restructuring costs
1,906

(4) 
2,075

(5) 
2,084

(4) 
2,315

(6) 
Pre-tax adjusted net income
426

 
525

 
1,331

 
1,328

 
Income tax effect of non-GAAP items (7)
(107
)
 
(184
)
 
(333
)
 
(465
)
 
Adjusted net income
$
319

 
$
341

 
$
998

 
$
863

 
 
 
 
 
 
 
 
 
 
(1) Includes litigation costs of $1.2 million, consulting costs of $0.4 million, and executive relocation costs of $0.2 million for the three months ended June 30, 2018.
(2) Includes litigation costs of $1.5 million and $3.4 million for the three and six months ended June 30, 2017.
(3) Includes litigation costs of $2.1 million, consulting costs of $0.4 million, executive recruitment costs of $0.3 million, and executive relocation costs of $0.2 million for the six months ended June 30, 2018.
(4) Includes s