UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒      QUARTERLY REPORT PURSUANT TO

SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	LPSN	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	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 ☒

On November 4, 2020, 66,885,182 shares of the registrant’s common stock were outstanding.

1

LIVEPERSON, INC. September 30, 2020 FORM 10-Q INDEX
		PAGE
Part I.	Financial Information	4
Item 1.	Financial Statements (Unaudited):	4
	Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	5
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019	6
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019	7
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2020 and 2019	7
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019	10
	Notes to Condensed Consolidated Financial Statements	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	58
Item 4.	Controls and Procedures	59
Part II.	Other Information	59
Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Mine Safety Disclosures	61
Item 5.	Other Information	61
Item 6.	Exhibits	62
Signatures		63

2

FORWARD-LOOKING STATEMENTS

STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q ABOUT LIVEPERSON, INC. (“LIVEPERSON”) 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 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

4

LIVEPERSON, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
	September 30, 2020			December 31, 2019
				(Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	198,694		$	176,523
Accounts receivable, net of allowances of $8,994 and $4,226 as of September 30, 2020 and December 31, 2019, respectively	66,483			87,620
Prepaid expenses and other current assets	20,112			13,964
Total current assets	285,289			278,107
Operating lease right of use asset	786			15,680
Property and equipment, net	91,081			76,236
Contract acquisition costs	41,095			31,965
Intangibles, net	11,040			11,812
Goodwill	95,086			94,987
Deferred tax assets	2,194			2,179
Other assets	1,754			1,744
Total assets	$	528,325		$	512,710
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	9,629		$	12,302
Accrued expenses and other current liabilities	100,138			62,778
Deferred revenue	90,359			88,751
Operating lease liability	6,295			6,602
Total current liabilities	206,421			170,433
Deferred revenue, net of current portion	243			438
Convertible senior notes, net	187,147			179,012
Other liabilities	111			72
Operating lease liability, net of current portion	9,310			12,865
Deferred tax liability	1,398			1,355
Total liabilities	404,630			364,175
Commitments and contingencies (Note 11)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value - 5,000,000 shares authorized, none issued	—			—
Common stock, $0.001 par value - 200,000,000 shares authorized, 69,457,299 and 66,543,073 shares issued, 66,747,469 and 63,833,243 shares outstanding as of September 30, 2020 and December 31, 2019, respectively	69			67
Additional paid-in capital	505,028			436,557
Treasury stock	(3		)	(3		)
Accumulated deficit	(378,629		)	(283,562		)
Accumulated other comprehensive loss	(2,770		)	(4,524		)
Total stockholders’ equity	123,695			148,535
Total liabilities and stockholders’ equity	$	528,325		$	512,710

 

See Notes to Condensed Consolidated Financial Statements (unaudited).

5

LIVEPERSON, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Revenue	$	94,804		$	75,175		$	264,495		$	212,536
Costs and expenses (1) (2)
Cost of revenue (3)	27,692			20,120			78,218			56,818
Sales and marketing	32,775			41,774			110,073			114,153
General and administrative	14,891			13,958			47,713			41,889
Product development	27,736			20,577			80,417			58,932
Restructuring costs	26,442			1,425			29,635			1,909
Amortization of purchased intangibles	411			447			1,219			1,346
Total costs and expenses	129,947			98,301			347,275			275,047
Loss from operations	(35,143		)	(23,126		)	(82,780		)	(62,511		)
Other (expense) income, net
Interest expense, net	(3,159		)	(2,189		)	(9,161		)	(4,873		)
Other (expense) income, net	(508		)	379			(2,484		)	862
Total other (expense) income, net	(3,667		)	(1,810		)	(11,645		)	(4,011		)
Loss before (benefit from) provision for income taxes	(38,810		)	(24,936		)	(94,425		)	(66,522		)
(Benefit from) provision for income taxes	(100		)	936			(87		)	2,227
Net loss	$	(38,710	)	$	(25,872	)	$	(94,338	)	$	(68,749	)
Net loss per share of common stock:
Basic	$	(0.58	)	$	(0.41	)	$	(1.44	)	$	(1.10	)
Diluted	$	(0.58	)	$	(0.41	)	$	(1.44	)	$	(1.10	)
Weighted-average shares used to compute net loss per share:
Basic	66,451,414			63,014,802			65,504,571			62,268,439
Diluted	66,451,414			63,014,802			65,504,571			62,268,439
(1) Amounts include stock-based compensation expense, as follows:
Cost of revenue	$	2,288		$	763		$	5,735		$	1,911
Sales and marketing	1,873			2,050			9,536			5,744
General and administrative	3,618			2,605			10,428			7,995
Product development	7,753			3,650			20,472			9,889
(2) Amounts include depreciation expense, as follows:
Cost of revenue	$	2,710		$	2,208		7,619			6,192
Sales and marketing	511			423			1,798			1,210
General and administrative	53			221			207			677
Product development	2,674			1,305			7,599			3,726
(3) Amounts include amortization of purchased intangibles, as follows:
Cost of revenue	$	286		$	285		$	854		$	854

See Notes to Condensed Consolidated Financial Statements (unaudited).

6

LIVEPERSON, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (IN THOUSANDS) (UNAUDITED)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Net loss	$	(38,710	)	$	(25,872	)	$	(94,338	)	$	(68,749	)
Foreign currency translation adjustment	2,292			1,676			1,754			1,876
Comprehensive loss	$	(36,418	)	$	(24,196	)	$	(92,584	)	$	(66,873	)

     

See Notes to Condensed Consolidated Financial Statements (unaudited).

7

LIVEPERSON, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(IN THOUSANDS, EXCEPT SHARE DATA)

Three Months Ended September 30,
	2020																				2019
		Common Stock			Treasury Stock					Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss						Common Stock			Treasury Stock					Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss
		Shares	Amount		Shares		Amount											Total			Shares	Amount		Shares		Amount											Total
Balance at June 30		68,731,477	$	69	(2,709,830	)	$	(3	)	$	488,229	$	(339,919	)	$	(5,062	)	$	143,314		65,398,798	$	66	(2,704,706	)	$	(3	)	$	412,253	$	(230,368	)	$	(4,631	)	$	177,317
Common stock issued upon exercise of stock options		544,693	—		—		—			7,072		—			—			7,072			460,961	—		—		—			5,647		—			—			5,647
Common stock issued upon vesting of restricted stock units		162,346	—		—		—			—		—			—			—			142,236	—		—		—			—		—			—			—
Stock-based compensation		—	—		—		—			9,423		—			—			9,423			—	—		—		—			6,486		—			—			6,486
Common stock issued under Employee Stock Purchase Plan		18,783	—		—		—			304		—			—			304			33,101	—		—		—			1,160		—			—			1,160
Net loss		—	—		—		—			—		(38,710		)	—			(38,710		)	—	—		—		—			—		(25,872		)	—			(25,872		)
Other comprehensive loss		—	—		—		—			—		—			2,292			2,292				—		—		—			—		—			(1,676		)	(1,676		)
Balance at September 30		69,457,299	$	69	(2,709,830	)	$	(3	)	$	505,028	$	(378,629	)	$	(2,770	)	$	123,695		66,035,096	$	66	(2,704,706	)	$	(3	)	$	425,546	$	(256,240	)	$	(6,307	)	$	163,062

8

Nine Months Ended September 30,
	2020																			2019
	Common Stock			Treasury Stock					Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss						Common Stock			Treasury Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss
	Shares	Amount		Shares		Amount											Total			Shares	Amount		Shares		Amount												Total
Balance at December 31, 2019 and 2018	66,543,073	$	67	(2,709,830	)	$	(3	)	$	436,557	$	(283,562	)	$	(4,524	)	$	148,535		63,676,046	$	64	(2,681,285	)	$	(3	)	$	362,590		$	(187,491	)	$	(4,431	)	$	170,729
Common stock issued upon exercise of stock options	1,147,351	1		—		—			14,106		—			—			14,107			1,350,507	1		—		—			14,727			—			—			14,728
Common stock issued upon vesting of restricted stock units	664,150	—		—		—			—		—			—			—			896,410	1		—		—			—			—			—			1
Common stock as earnout payment in connection with AdvantageTec Inc.	11,508	—		—		—			293		—			—			293			—	—		—		—			—			—			—			—
Stock-based compensation	—	—		—		—			26,375		—			—			26,375			—	—		—		—			18,175			—			—			18,175
Bonus cash payment settled in shares of the Company's common stock	991,905	1		—		—			24,656		—			—			24,657			—	—		—		—			—			—			—			—
ASU 2016-13 (Topic 326) Adjustment (See note 1)	—	—		—		—			—		(729		)	—			(729		)	—	—		—		—			—			—			—			—
Common stock issued under Employee Stock Purchase Plan	99,312	—		—		—			3,041		—			—			3,041			112,133	—		—		—			3,033			—			—			3,033
Common stock repurchase	—	—		—		—			—		—			—			—			—	—		(23,421	)	—			(709		)	—			—			(709		)
Equity component of convertible senior notes	—	—		—		—			—		—			—			—			—	—		—		—			52,900			—			—			52,900
Equity component of convertible senior notes issuance costs	—	—		—		—			—		—			—			—			—	—		—		—			(1,986		)	—			—			(1,986		)
Purchase of capped call option	—	—		—		—			—		—			—			—			—	—		—		—			(23,184		)	—			—			(23,184		)
Net loss	—	—		—		—			—		(94,338		)	—			(94,338		)	—	—		—		—			—			(68,749		)	—			(68,749		)
Other comprehensive loss	—	—		—		—			—		—			$	1,754		1,754			—	—		—		—			—			—			(1,876		)	(1,876		)
Balance at September 30	69,457,299	$	69	(2,709,830	)	$	(3	)	$	505,028	$	(378,629	)	$	(2,770	)	$	123,695		66,035,096	$	66	(2,704,706	)	$	(3	)	$	425,546		$	(256,240	)	$	(6,307	)	$	163,062

See Notes to Condensed Consolidated Financial Statements (unaudited).

9

    

LIVEPERSON, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
	Nine Months Ended
	September 30,
	2020			2019
OPERATING ACTIVITIES:
Net loss	$	(94,338	)	$	(68,749	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation expense	46,171			25,539
Depreciation and amortization	17,223			11,805
Non-cash restructuring costs	19,085			—
Amortization of tenant allowance	—			(387		)
Amortization of purchased intangibles	2,073			2,200
Amortization of debt issuance costs	908			663
Accretion of debt discount on convertible senior notes	7,227			5,278
Changes in fair value of contingent consideration	(263		)	(328		)
Provision for doubtful accounts	2,627			1,570
Deferred income taxes	47			198
Changes in operating assets and liabilities:
Accounts receivable	19,231			(9,334		)
Prepaid expenses and other current assets	(6,055		)	(7,880		)
Contract acquisition costs noncurrent	(8,156		)	(11,312		)
Other assets	(35		)	(144		)
Accounts payable	(4,572		)	(419		)
Accrued expenses and other current liabilities	36,904			(7,300		)
Deferred revenue	(164		)	17,942
Operating lease liabilities	(287		)	—
Other liabilities	29			214
Net cash provided by (used in) operating activities	37,655			(40,444		)
INVESTING ACTIVITIES:
Purchases of property and equipment, including capitalized software	(32,904		)	(33,559		)
Payments for intangible assets	(1,259		)	(695		)
Net cash used in investing activities	(34,163		)	(34,254		)
FINANCING ACTIVITIES:
Repurchase of common stock	—			(709		)
Proceeds from issuance of common stock in connection with the exercise of options and ESPP	17,147			17,761
Proceeds from issuance of convertible senior notes	—			230,000
Payment of issuance costs in connection with convertible senior notes	—			(8,618		)
Payments related to contingent consideration	—			(487		)
Purchase of capped call option	—			(23,184		)
Net cash provided by financing activities	17,147			214,763
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	1,532			(1,361		)
CHANGE IN CASH AND CASH EQUIVALENTS	22,171			138,704
CASH AND CASH EQUIVALENTS - Beginning of the period	176,523			66,449
CASH AND CASH EQUIVALENTS - End of the period	$	198,694		$	205,153

10

LIVEPERSON, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION:
Cash paid for income taxes	$	4,321	$	2,126
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property and equipment recorded in accounts payable	$	1,273	$	1,694
Issuance of 11,508 shares of common stock as earnout payment in connection with AdvantageTec Inc.	$	294	$	—
Issuance of 991,905 shares of common stock to settle cash awards	$	24,656	$	—
Debt offering costs, accrued but not paid	$	—	$	18

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.         Description of Business and Basis of Presentation

LivePerson, Inc. (the “Company” or “LivePerson”) makes life easier for people and brands everywhere through messaging powered by AI making Conversational Commerce possible, and humans. During the past decade, the consumers have made the mobile device the center of their digital lives, and they have made mobile messaging the center of communication with friends, family and peers. The Company’s technology enables consumers to connect with businesses through these same preferred conversational interfaces, including Facebook Messenger, SMS, WhatsApp, Apple Business Chat, Google Rich Business Messenger and Alexa. These messaging conversations harness human agents, bots and Artificial Intelligence (AI) to power convenient, personalized and content-rich journeys across the entire consumer lifecycle, from discovery and research, to sales, service and support, and even marketing, social and brick and mortar engagements. For example, consumers can look up product info like ratings, images and pricing, search for stores, see product inventory, schedule appointments, apply for credit, approve repairs, make purchases or payments - all without ever leaving the messaging channel. These AI and human-assisted conversational experiences constitute the Conversational Space.

The Conversational Cloud (formerly "LiveEngage"), the Company’s enterprise-class cloud-based platform, enables businesses to become conversational by securely deploying messaging, coupled with bots and AI, at scale for brands with tens of millions of customers and many thousands of customer care agents. The Conversational Cloud powers conversations across each of a brand’s primary digital channels, including mobile apps, mobile and desktop web browsers, short message service (SMS), social media and third-party consumer messaging platforms. Brands can also use Conversational Cloud to message consumers when they dial a 1-800 number instead of forcing them to navigate interactive voice response systems (IVRs) and wait on hold. Similarly, Conversational Cloud can receive traditional emails and convert them into messaging conversations, or embed messaging conversations directly into web advertisements, rather than redirect consumers to static website landing pages.

LivePerson's robust, cloud-based suite of rich messaging, real-time chat, AI and automation offerings features consumer and agent facing bots, intelligent routing and capacity mapping, real-time intent detection and analysis, queue prioritization, customer sentiment, analytics and reporting, content delivery, Payment Card Industry (PCI) compliance, cobrowsing and a sophisticated proactive targeting engine. With Conversational Cloud, agents can manage all conversations with consumers through a single console interface, regardless of which disparate messaging endpoints the consumers originate from -- i.e., WhatsApp, Line, Apple Business Chat, IVR, social, email, Alexa, or WeChat. An extensible application programming interface (API) stack facilitates a lower cost of ownership by facilitating robust integration into back-end systems, as well as enabling developers to build their own programs and services on top of the platform. More than 40 APIs and software development kits are available on Conversational Cloud.

LivePerson’s Conversational AI offerings put the power of bot development, training, management and analysis into the hands of the contact center and its agents, the teams most familiar with how to structure sales and service conversations to drive successful outcomes. The platform enables what we call “the tango” of humans, AI and bots, whereby human agents act as bot managers, overseeing AI-powered conversations and seamlessly stepping into the flow when a personal touch is needed. Agents become ultra-efficient, leveraging the AI engine to serve up relevant content, define next-best actions and take over repetitive transactional work, so that the agent can focus on relationship building. By seamlessly integrating messaging with the Company’s proprietary Conversational AI, as well as third-party bots, Conversational Cloud offers brands a comprehensive approach to scaling automations across their millions of customer conversations.

Complementing the Company’s proprietary messaging and Conversational AI offerings are teams of technical, solutions and consulting professionals that have developed deep domain expertise in the implementation and optimization of conversational services across industries and messaging endpoints. LivePerson is a leading authority in the Conversational Space. LivePerson’s products, coupled with the Company’s domain knowledge, industry expertise and professional services, have been proven to maximize the effectiveness of the Conversational Space and deliver measurable return on investment. Certain of the Company’s customers have achieved the following advantages from the Company’s offerings:

• the ability for each agent to manage as many as 40 messaging conversations at a time, as compared to one at a time for a voice agent and two to four at a time for a good chat agent. Adding AI and bots provides even greater scale to the number of conversations managed;

• labor efficiency gains of at least two times that of a voice agents, effectively cutting labor costs by at least 50%;

• improving the overall customer experience, thereby fueling customer satisfaction increases of up to 20 percentage points, and enhancing retention and loyalty;

• more convenient, personalized and content-rich conversations that increase sales conversion by up to 20%, increase average order value and reduce abandonment;

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

• more satisfied contact center agents, thereby reducing agent churn by up to 50%;

• maintain a valued connection with consumers via mobile devices, either through native applications, websites, text messages, or third-party messaging platforms;

• leverage spending that drives visitor traffic by increasing visitor conversions;

• refine and improve performance by understanding which initiatives deliver the highest rate of return; and

• increase lead generation by providing a single platform that engages consumers through advertisements and listings on branded and third-party websites.

As a “cloud computing” or software-as-a-service (SaaS) provider, LivePerson provides solutions on a hosted basis. This model offers significant benefits over premise-based software, including lower up-front costs, faster implementation, lower total cost of ownership, scalability, cost predictability, and simplified upgrades. Organizations that adopt a fully-hosted, multi-tenant architecture that is maintained by LivePerson eliminate the majority of the time, server infrastructure costs, and IT resources required to implement, maintain, and support traditional on-premise software.

To further enhance our platform, in September 2020 we signed a partnership with Infosys, a leader in next-generation digital services and consulting. We will work with Infosys to transform our technology infrastructure on the public cloud, to build integrated solutions and a global practice around our Conversational Cloud to sell into their channels and global enterprise customer base, and to redefine how the world's top brands communicate.

More than 18,000 businesses, including HSBC, Orange, The Home Depot, and GM Financial use our conversational solutions to orchestrate humans and AI, at scale, and create a convenient, deeply personal relationship with their customers.

LivePerson's consumer services offering is an online marketplace that connects independent service providers (Experts) who provide information and knowledge for a fee via mobile and online messaging with individual consumers (Users). Users seek assistance and advice in various categories including personal counseling and coaching, computers and programming, education and tutoring, spirituality and religion, and other topics.

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, and maintains a globally distributed, remote workforce. In 2020, due to health concerns related to the global novel coronavirus disease ("COVID-19") pandemic, the Company vacated its physical offices around the world, and began transitioning to a work-from-anywhere model, leveraging its expertise in AI and asynchronous communication to support operations, culture and productivity in this new environment.

Basis of Presentation

The accompanying condensed consolidated financial statements as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the consolidated financial position of LivePerson as of September 30, 2020, and the consolidated results of operations, comprehensive loss and cash flows for the interim periods ended September 30, 2020 and 2019. 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, 2019 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, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2020.

Principles of Consolidation

The condensed consolidated financial statements include the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

Many of our estimates require increased judgment due to the significant volatility, uncertainty and economic disruption of the COVID-19 pandemic. We will continue to monitor the effects of the COVID-19 pandemic, and our estimates and judgments may change materially as new events occur or additional information becomes available to us.

Recently Issued Accounting Standards    

In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity”, which simplifies the accounting for convertible instruments by eliminating existing accounting models that require separation of a cash conversion or beneficial conversion feature from the host contract. Accordingly, a convertible debt instrument will be accounted as a single liability measured at its amortized cost and a convertible preferred stock will be accounted as a single equity instrument measured at its historical cost, as long as no other embedded features require bifurcation as derivatives and the convertible debt was not issued at a substantial premium. The ASU also simplifies the derivative scope exception for accounting for contracts in an entity's own equity by:

• Removing certain conditions required to meet the settlement criterion

• Clarifying that Instruments that are not indexed to the issuer's own stock must be remeasured at fair value through earnings at each reporting period

• Clarifying the scope of reassessment guidance and disclosure requirements in Subtopic 815-40. The ASU also makes targeted improvements to the disclosure requirements for convertible instruments and earnings-per-share guidance.

For SEC filers, excluding smaller reporting companies, the ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The ASU specifies that the guidance should be adopted as of the beginning of the annual fiscal year. The Company is assessing what impact ASU 2020-06 will have on its condensed consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The new guidance is intended to simplify the accounting for income taxes by removing certain exceptions and by updating accounting requirements around franchise taxes, goodwill recognized for tax purposes, the allocation of current and deferred tax expense among legal entities, among other minor changes. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company is assessing what impact ASU 2019-12 will have on its condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326)”, in order to improve financial reporting of expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment methodology in prior GAAP with a methodology that requires consideration of a broader range of information to estimate credit losses. Such required disclosures include, but are not limited to, the Company's methodology for estimating its allowance for credit losses. The Company adopted ASU 2016-13 effective January 1, 2020 and applied the guidance using a modified retrospective approach requiring that the Company recognize the cumulative effect of initially applying the impairment standard as an adjustment to opening accumulated deficit for the incremental increase in its allowance for credit losses as of January 1, 2020 over its allowance for bad debts as of December, 31, 2019, which amounted to $0.7 million. The Company will continue to actively monitor the impact of the recent COVID-19 pandemic on expected credit losses.

In January 2017, the FASB issued Accounting Standards Update ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, which eliminates the computation of the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record a goodwill impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

permitted. The Company adopted ASU 2017-04 in the first quarter of 2020 which reduced the complexity surrounding the evaluation of goodwill for impairment. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which clarifies the accounting for implementation costs in cloud computing arrangements. The new standard aligns the treatment of implementation costs incurred by customers in cloud computing arrangements that are service contracts with the treatment of similar costs incurred to develop or obtain internal-use software. Under the new standard, implementation costs are deferred and presented in the same financial statement caption on the condensed consolidated balance sheet as a prepayment of related arrangement fees. The deferred costs are recognized over the term of the arrangement in the same financial statement caption in the condensed consolidated income statement as the related fees of the arrangement. The Company adopted ASU 2018-15 in the first quarter of 2020 and the impact of the adoption was not material to the Company's condensed consolidated financial statements.

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 the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. No single customer accounted for or exceeded 10% of our total revenue for the three and nine months ended September 30, 2020.

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 $94.8 million and $75.2 million was recognized during the three months ended September 30, 2020 and 2019, respectively, and $264.5 million and $212.5 million was recognized during the nine months ended September 30, 2020 and 2019, respectively.

Under Topic 606, the Company defers all incremental commission costs (contract acquisition costs) to obtain the contract. The contract acquisition costs, which are comprised of prepaid sales commissions, have balances at September 30, 2020 and December 31, 2019 of $41.1 million and $32.0 million, respectively. The Company amortizes these costs over the related period of benefit using the customers expected life that the Company determines to be three to five years, which is consistent with the transfer to the customer of the services to which the asset relates. The Company classifies contract acquisition costs as long-term unless they have an original amortization period of one year or less.

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 Conversational Cloud, 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 Conversational Cloud 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 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 Gainshare (formerly Pay for Performance) 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.

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 Conversational Cloud 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.

Remaining Performance Obligation

As of September 30, 2020, the aggregate amount of the total transaction price allocated in contracts with original duration of greater than one year to the remaining performance obligations was $237.3 million. Approximately 90% of the Company’s remaining performance obligations is expected to be recognized during the next 24 months, with the balance recognized thereafter. The aggregate balance of unsatisfied performance obligations represents contracted revenue that has not yet been recognized, and does not include contract amounts that are cancelable by the customer, amounts associated with optional renewal periods, and any amounts related to performance obligations, which are billed and recognized as they are delivered. The Company has elected the optional exemption, which allows for the exclusion of the amounts for remaining performance obligations that are part of contracts with an original expected duration of one year or less. Such remaining performance obligations represent unsatisfied or partially unsatisfied performance obligation pursuant to ASC 606.

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 remits 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 the Company’s performance. The increase in the deferred revenue balance as of September 30, 2020 is primarily driven by cash payments received or due in advance of satisfying the Company’s performance obligations, partially offset by $84.9 million of revenues recognized that were included in the deferred revenue balance as of December 31, 2019.

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents deferred revenue by revenue source (amounts in thousands):

	Deferred Revenue
	As of September 30, 2020		As of December 31, 2019
Hosted services – Business	$	87,466	$	82,892
Hosted services – Consumer	815		687
Professional services – Business	2,078		5,172
Total deferred revenue - short term	$	90,359	$	88,751
Hosted services – Business	—		—
Professional services – Business	243		438
Total deferred revenue - long term	$	243	$	438

Disaggregated Revenue

The following table presents the Company's revenues disaggregated by revenue source (amounts in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020	2019
Revenue:
Hosted services – Business	$	74,396	$	57,824	$