Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors.”
Key Metrics
Average Annual Revenue Per Enterprise and Mid-market Customer (“ARPC”) and revenue retention are currently the key performance metrics our management uses to assess the health and trajectory of the Company. These metrics should be viewed independently of revenue, deferred revenue and remaining performance obligations. ARPC increased to approximately $610,000 in 2023, as compared to approximately $545,000 in 2022. Revenue retention for our enterprise and mid-market customers on the Conversational Cloud, which represents the trailing-twelve-month change in total revenue from existing customers after upsells, downsells and attrition, was approximately 95%, below our target range of 105% to 115% in 2023, as compared to 2022, where our revenue retention rate for enterprise and mid-market customers on Conversational Cloud was within the target range.
Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). 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.
We believe that the assumptions and estimates associated with revenue recognition and valuation of goodwill have the greatest potential impact on our consolidated financial statements. 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. For further information on our significant accounting policies, see Note 1 – Description of Business and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.
Revenue Recognition
The majority of our revenue is generated from hosted service revenues, which is inclusive of our platform pricing model. 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.
Hosted Services Revenue
Hosted services 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 the Conversational Cloud. We have determined such access represents a stand-ready service provided continually throughout the contract term. As such, control and satisfaction of this stand-ready
43
performance obligation is deemed to occur over time. We recognize 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 our performance. Subscription contracts are generally one year or longer in length, billed monthly, quarterly or annually in advance. Additionally, for certain of our larger customers, we may provide call center labor through an arrangement with one or more of several qualified vendors. For most of these customers, we pass the fee we incur with the labor provider and its fee for the hosted services through to our customers in the form of a fixed fee for each order placed via our online engagement solutions. For these Gainshare arrangements, we act as a principal in a transaction if we control the specified goods or services before they are transferred to the customer.
Professional Services Revenue
Professional Services revenue is reported at the amount that reflects the ultimate consideration we expect to receive in exchange for such services. The Company’s professional services revenue consists of fees that provide customers with product support and updates during the term of the arrangement, which is typically one year or longer in length, billed monthly, quarterly or annually in advance. Revenue is generally recognized ratably over the contract term. The Company’s professional services revenue also includes custom support services, which differ from the Company’s standard product support. These custom support revenues are recognized as the services are performed.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. We evaluate goodwill for impairment on an annual basis in the third quarter, and more frequently whenever events or substantive changes in circumstances indicate that it is more likely than not that the carrying value of a reporting unit exceeds its fair value in accordance with ASC 820, “Fair Value Measurement.” In performing the goodwill impairment test, we first assess qualitative factors to determine the existence of impairment. If the qualitative factors indicate that the carrying value of a reporting unit more likely than not exceeds its fair value, we proceed to a quantitative test to measure the existence and amount, if any, of goodwill impairment. We may also choose to bypass the qualitative assessment and proceed directly to the quantitative test. In performing the quantitative test, impairment loss is recorded to the extent that the carrying value of the reporting unit exceeds its assessed fair value. We determine the fair value using the income and market approaches. During the fourth quarter of 2023, the Company voluntarily changed its annual goodwill testing date from September 30 to October 1. The Company believes this change of method of applying the accounting principle is preferable, as it more closely aligns the annual impairment testing date with the most current information from the budgeting and strategic planning process and provides management with sufficient time to complete its annual assessment. This change will be applied prospectively, as retrospective application would be impracticable.
In connection with the annual impairment test completed as of September 30, 2023 using the quantitative “Step 1” assessment, we determined the fair value of our reporting units, using both an income approach and a market approach. The income approach uses a discounted cash flow model that reflects our assumptions regarding revenue growth rates, operating margins, risk-adjusted discount rate, terminal period growth rate, economic and market trends and other expectations about the anticipated operating results of the reporting units. Under the market approach, we estimate the fair value based on market multiples of revenues derived from comparable publicly traded companies with operating characteristics similar to the reporting units.
Based on our 2023 annual goodwill impairment test, the Company recorded a non-cash impairment charge of $11.9 million in our consolidated statements of operations, representing a portion of goodwill related to the WildHealth reporting unit. This conclusion was primarily based upon slower growth in existing revenue streams and strategic decisions to reduce or eliminate investment in new and existing revenue streams previously planned for expansion. Our latest available financial forecasts at the time of the annual goodwill impairment test reflected lower cash flows than previously projected related to the WildHealth reporting unit. There were no impairments of our Business reporting unit, as the fair value of this reporting unit substantially exceeded its carrying value.
44
Recently Issued Accounting Standards
See Note 1 – Description of Business and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for additional information about recent accounting guidance not yet adopted and recently adopted accounting pronouncements.
Results of Operations
We enable brands to leverage the Conversational Cloud’s sophisticated intelligence engine to connect with consumers through an integrated suite of mobile and online business messaging technologies. The Conversational Cloud enables businesses to have conversations with millions of consumers as personally as they would with one consumer.
Revenue
The following tables set forth our results of operations for the years presented and as a percentage of our revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
Year Ended December 31, Year Ended December 31,
(Dollars in thousands)
Revenue decreased by 22% to $402.0 million for the year ended December 31, 2023, from $514.8 million for the year ended December 31, 2022. This decrease in revenue is driven primarily by decreases in hosted services of approximately $79.5 million and Professional Services of approximately $33.3 million.
Included in hosted services is a decrease in revenue that is variable based on interactions and usage of approximately $40.8 million for the year ended December 31, 2023. Further, on March 20, 2023, the Company completed the sale of Kasamba and therefore ceased recognizing revenue related to Kasamba effective on the transaction close date. This sale eliminated the entire Consumer segment, as a result of which revenue is presented within a single consolidated segment. Hosted services for Consumer included $7.1 million, $37.1 million, and $37.7 million for the years ended December 31, 2023, 2022, and 2021, respectively, relating to Kasamba. The decrease in Professional Services revenue is driven by the build out of the Claire Holdings, Inc. (“Claire”) joint venture platform, which resulted in a decrease of approximately $34.9 million for the year ended December 31, 2023. Refer to Note 19 - Related Parties, for additional information about the commercial agreement arrangement.
The ARPC for our enterprise and mid-market customers was approximately $610,000 for the trailing twelve months ended December 31, 2023, as compared to $545,000 for the trailing twelve months ended December 31, 2022. Revenue retention for our enterprise and mid-market customers on the Conversational Cloud was below our target range of 105% to 115% for 2023, but was within this range for 2022.
Revenue increased by 10% to $514.8 million for the year ended December 31, 2022, from $469.6 million for the year ended December 31, 2021. This increase in Business revenue is driven primarily by increases in hosted services of approximately $10.5 million and an increase in Professional Services of approximately $34.6 million. The increase in professional services is primarily driven by increased revenue related to the Claire joint venture platform. The increase in hosted services is primarily related to the acquisitions of e-bot7 GmbH (“e-bot7”), Callinize, Inc. (dba Tenfold) (“Tenfold”) and VoiceBase, Inc. (“VoiceBase”), partially offset by a decrease in revenue that is variable based on interactions and usage of approximately $21.7 million.
We have experienced headwinds in our expansion and retention efforts that have slowed our ability to attract new customers to our product, and we have experienced cancellations and downsell. Further, we have observed customers tending to cancel on shorter notice than previously. We are also actively marketing a sale of WildHealth, which contributed $3.4 million of revenue during the fourth quarter, inclusive of approximately $2.0 million received through delayed Medicare reimbursement. While we are observing a positive operational impact from recent changes to our go-to-market motion, considering the length of our sales and renewal cycles, there can be no assurance that we will be able to fully mitigate or reverse these unfavorable trends, and it would take time for these operational changes to translate into significant improvements to key financial metrics.
45
Cost of Revenue
Cost of revenue consists of compensation costs relating to employees who provide customer service to our customers, compensation costs relating to our network support staff, outside labor provider costs, the cost of supporting our server and network infrastructure, and allocated occupancy costs and related overhead.
Year Ended December 31, Year Ended December 31,
(Dollars in thousands)
Percentage of total revenue 36 % 36 % 36 % 33 %
Cost of revenue decreased by 23% to $142.8 million for the year ended December 31, 2023, from $184.7 million for the year ended December 31, 2022. This decrease in expense is primarily attributable to a decrease in outsourced labor and related costs of approximately $30.2 million, a decrease in salary and related employee expenses of approximately $17.5 million due to attrition from prior year and a decrease in compensation expense due to the settlement of earn-outs related to prior acquisitions of approximately $5.4 million, partially offset by an increase in software, hosting and other expenses of approximately $11.2 million.
Cost of revenue increased by 18% to $184.7 million for the year ended December 31, 2022, from $156.9 million for the year ended December 31, 2021. This increase in expense is primarily attributable to an increase in salary and related employee expenses of approximately $10.9 million, an increase in contingent compensation of approximately $3.3 million in conjunction with acquisitions, an increase in amortization expense of approximately $11.2 million primarily driven by the acquisitions of e-bot7, Tenfold and VoiceBase, and an increase in business services and outsourced subcontracted labor of approximately $3.2 million. The increases were partially offset by a decrease in software expense of approximately $0.3 million and a decrease of $0.4 million related to other expenses.
Sales and Marketing
Sales and marketing expenses consist of compensation and related expenses for sales and marketing personnel, as well as advertising, marketing events, public relations, trade show exhibit expenses and allocated occupancy costs and related overhead.
Year Ended December 31, Year Ended December 31,
(Dollars in thousands)
Percentage of total revenue 31 % 42 % 42 % 35 %
Sales and marketing expenses decreased by 41% to $125.7 million for the year ended December 31, 2023, from $214.0 million for the year ended December 31, 2022.This decrease was primarily attributable to a decrease in salary and employee-related expenses of approximately $40.8 million due to attrition from the prior year, a decrease in marketing expenses of approximately $35.1 million, a decrease in outsourced labor of approximately $4.9 million, and a decrease in compensation expense due to the settlement of earn-outs related to prior acquisitions of approximately $2.4 million.
Sales and marketing expenses increased by 29% to $214.0 million for the year ended December 31, 2022, from $165.4 million for the year ended December 31, 2021. This is primarily related to an increase in salary and employee-related expenses of approximately $38.1 million, an increase in marketing events, advertising, and public relations of approximately $4.1 million an increase in contingent compensation of approximately $1.8 million in conjunction with acquisitions, an increase of restructuring costs of approximately $1.6 million and an increase in software expense of approximately $1.5 million, with the
46
remaining net increase related to several other sales and marketing business expenses. These increases were partially offset by a decrease in outsourcing subcontracted labor of approximately $0.4 million.
General and Administrative
Our general and administrative expenses consist of compensation and related expenses for executive, accounting, legal, human resources and administrative personnel, professional fees and other general corporate expenses.
Year Ended December 31, Year Ended December 31,
(Dollars in thousands)
Percentage of total revenue 23 % 23 % 23 % 16 %
General and administrative expenses decreased by 24% to $91.6 million for the year ended December 31, 2023, from $120.6 million for the year ended December 31, 2022.This is primarily related to a decrease of $44.6 million in stock-based compensation expense, primarily due to the settlement of earn-outs in 2023. Additionally, there was a decrease in business services and outsourced labor of approximately $5.2 million, a decrease in salary and related employee expenses of approximately $4.2 million and a decrease in facilities expenses of approximately $1.5 million, partially offset by an increase in other expenses of approximately $26.3 million due to leadership transition costs and increased legal fees recognized in the year ended December 31, 2023.
General and administrative expenses increased by 57% to $120.6 million for the year ended December 31, 2022, from $76.8 million for the year ended December 31, 2021. This is primarily related to an increase in contingent compensation of approximately $30.5 million in conjunction with acquisitions, an increase in salary and employee-related expenses of approximately $3.2 million, an increase in restructuring and other one-time expenses of $6.1 million, an increase in outsourcing subcontracted labor of approximately $3.3 million and net $0.8 million increase of several other general and administrative expenses.
Product Development
Our product development expenses consist of compensation and related expenses for product development personnel as well as allocated occupancy costs and related overhead and outsourced labor and expenses for testing new versions of our software.
Year Ended December 31, Year Ended December 31,
(Dollars in thousands)
Percentage of total revenue 31 % 38 % 38 % 34 %
Product development costs decreased by 36% to $124.8 million for the year ended December 31, 2023, from $193.7 million for the year ended December 31, 2022.This decrease is primarily related to a decrease in salary and employee-related expenses of approximately $43.3 million, a decrease in compensation expense due to the settlement of earn-outs related to prior acquisitions of approximately $20.1 million, and a decrease in business services and outsourced labor of approximately $6.2 million, partially offset by depreciation expenses of approximately $2.3 million.
Product development costs increased by 22% to $193.7 million for the year ended December 31, 2022, from $158.4 million for the year ended December 31, 2021. This is primarily related to an increase in contingent compensation of approximately $13.7 million in conjunction with acquisitions, an increase in salaries and employee-related expenses of
47
approximately $5.4 million, an increase in business services and outsourcing subcontracted labor of approximately $5.4 million, an increase in backup server facilities of approximately $5.9 million related to costs supporting our backup servers and an increase in depreciation expense of approximately $5.0 million.
We continued to make investments in public cloud migration, and in enhancing and expanding new features of the Conversational Cloud, including Voice. During the years ended December 31, 2023, 2022, and 2021, $19.4 million, $39.2 million, and $36.1 million was capitalized, respectively.
Restructuring Costs
Restructuring costs consist of reprioritizing and reallocating resources to focus on areas believed to show high growth potential.
Year Ended December 31, Year Ended December 31,
(Dollars in thousands)
Percentage of total revenue 6 % 4 % 4 % 1 %
Restructuring costs increased by 14% to $22.7 million for the year ended December 31, 2023, from $20.0 million for the year ended December 31, 2022. This increase is attributable to IT infrastructure contract termination costs of approximately $5.7 million, partially offset by lower costs related to the restructuring initiative, which commenced during the second quarter of 2022, primarily consisting of severance and other associated costs related to the reduction in our workforce. In 2023, due to the changing technology landscape related to the evolution of LLMs, we were able to identify opportunities for significant cost savings because the latest generation of LLMs is able to build a bot in minutes, enabling reduction of headcount previously devoted to bot-building. Additionally, we have moved to a product-led growth structure where we flattened the organization to align to more efficient sales and service support ratios. Refer to Note 14 – Restructuring for additional information about the restructuring initiative.
Restructuring costs increased by 488% to $20.0 million for the year ended December 31, 2022, from $3.4 million for the year ended December 31, 2021. This increase is attributable primarily as a result of an increase in restructuring costs related to severance and other compensation costs. During the second quarter of 2022, we began a restructuring initiative to realign our cost structure to better reflect significant product and business model innovation and changes over the past year due to acquisitions and factors outside our control. As part of the restructuring initiative, we reoriented our global product and engineering organization for greater efficiency and focus, and reallocated some spending to increase our investment in customer success and go-to-market initiatives.
Amortization of Purchased Intangibles
Year Ended December 31, Year Ended December 31,
(Dollars in thousands)
Percentage of total revenue 1 % 1% 1% —%
Amortization expense for purchased intangibles decreased by 5% to $3.5 million for the year ended December 31, 2023, from $3.7 million for the year ended December 31, 2022. The year-over-year variance is primarily attributable to the impairment of WildHealth developed technology in the year ended December 31, 2023.
Amortization expense for purchased intangibles increased by 80% to $3.7 million for the year ended December 31, 2022 from $2.0 million for the year ended December 31, 2021. The year-over-year variance is primarily attributable to amortization of patents and customer relationships as well as the intangible assets acquired in the three acquisitions that occurred in 2021.
48
Impairment of Goodwill
Year Ended December 31, Year Ended December 31,
(Dollars in thousands)
Impairment of goodwill $ 11,895 $ — 100% $ — $ — —%
Percentage of total revenue 3 % —% —% —%
Goodwill impairment was approximately $11.9 million for the year ended December 31, 2023. This non-cash charge was a result of our September 30, 2023 annual goodwill impairment test and was attributable to the WildHealth reporting unit. There were no impairment charges for the years ended December 31, 2022 and 2021.
Impairment of Intangibles and Other Assets
Year Ended December 31, Year Ended December 31,
(Dollars in thousands)
Impairment of intangibles and other assets $ 7,974 $ — 100% $ — $ — —%
Percentage of total revenue 2 % —% —% —%
Impairment of intangibles and other assets was approximately $8.0 million for the year ended December 31, 2023. During the fourth quarter of fiscal year 2023, the Company recognized an impairment charge of $5.0 million related to fixed assets associated with internal-use software development projects that were discontinued and determined to have no future economic benefit. The Company further recognized an immaterial non-cash impairment charge of $3.0 million related to intangible assets – developed technology associated with WildHealth, as a result of the Company’s annual impairment test of its intangible assets.
There were no impairment charges for the years ended December 31, 2022 and 2021.
Total Other Income (Expense), net
Total other income (expense), net consists primarily of fair value adjustments for earn-outs, foreign currency gains and losses and income (loss) from our equity method investment. Interest income includes interest income from cash deposits, amortization of debt discount, amortization of issuance costs, and interest expense from our convertible senior notes.
Year Ended December 31, Year Ended December 31,
(Dollars in thousands)
Total other income (expense), net increased to income of $15.1 million for the year ended December 31, 2023 from an expense of $2.1 million for the year ended December 31, 2022. The increase is primarily due to a gain of $10.0 million related to a legal settlement, a gain of $7.2 million resulting from the repurchase of 2024 Notes, a $4.6 million change in fair value of earn-out as a result of settlements, related to prior acquisitions, and reduced losses recognized related to the Company’s equity method investment compared to the year ended December 31, 2022. The remaining amount of total other income (expense), net fluctuation is attributable to currency rate fluctuations.
49
Total other income (expense), net decreased by $32.0 million to an expense of $2.1 million for the year ended December 31, 2022, from an expense of $34.1 million for the year ended December 31, 2021. This decrease was primarily attributable to a decrease in interest expense due to the adoption of ASU 2020-06 and the elimination of the debt discount that was previously being amortized to interest expense over the contractual term of 2024 Notes and the 2026 Notes, a gain related to the fair value adjustment for earn-outs recorded during the third quarter of 2022, partially offset by the loss in equity earnings related to the launch of Claire, a joint venture, during the year ended December 31, 2022.
Provision For (Benefit From) Income Taxes
Year Ended December 31, Year Ended December 31,
(Dollars in thousands)
We had a provision for income taxes of $4.2 million for the year ended December 31, 2023 and a provision for income taxes of $1.7 million for the year ended December 31, 2022. Our consolidated effective tax rate was impacted by the statutory income tax rates applicable to each of the jurisdictions in which we operate, valuation allowance recorded against losses generated in the U.S. and Germany and changes to unrecognized tax benefits in Israel. The overall tax provision recorded represents tax on non-U.S. earnings in the various jurisdictions in which we operate, a tax charge of $0.8 million for valuation allowance on certain LivePerson, Inc. net operating losses in connection with the sale of the Kasamba business and additional accruals related to unrecognized tax benefits. The increase in tax expense is primarily due to a change in the amount of valuation allowance recognized related to acquisition and sale activity of the company year over year. The total tax expense associated with non-U.S. jurisdictions is relatively consistent between periods.
In prior periods, we had a tax provision for income taxes of $1.7 million for the year ended December 31, 2022 and a tax benefit for income taxes of $2.4 million for the year ended December 31, 2021. Our consolidated effective tax rate was impacted by the statutory income tax rates applicable to each of the jurisdictions in which we operate, movement of valuation allowance recorded against deferred tax activities of the U.S. and Germany and changes to unrecognized benefits in Israel. During 2022, we recorded a benefit of $1.6 million for a release of valuation allowance on certain LivePerson, Inc. net operating losses in connection with the acquisition of WildHealth. The increase in tax expense is primarily due to a change in the amount of valuation allowance recognized related to acquisitions. The total tax expense associated with non-U.S. jurisdictions is relatively consistent between periods.
Liquidity and Capital Resources
The following describes the Company’s cash flows for the years ended December 31, 2022, 2021, and 2020:
Year Ended December 31,
(In thousands)
As of December 31, 2023, we had approximately $212.9 million in cash, cash equivalents, and restricted cash, a decrease of approximately $179.3 million from December 31, 2022. The decrease is primarily attributable to payment of approximately $149.7 million in cash for the repurchase of approximately $157.5 million in aggregate principal amount of the 2024 Notes, coupled with the payment of bonuses in cash and various other uses of cash for operating purposes. The decrease was partially offset by $13.8 million in cash proceeds from the divestiture of Kasamba.
50
Cash Flows from Operating Activities
Net cash used in operating activities was $19.8 million in the year ended December 31, 2023. Our net loss was $100.4 million, which includes the effect of non-cash expenses related to depreciation of $32.6 million, amortization of purchased intangibles and finance leases of $22.2 million, amortization of debt issuance costs of $4.0 million, allowance for credit losses of $3.3 million, a goodwill impairment of $11.9 million, intangible and other assets impairment of $8.0 million related to our WildHealth reporting unit and internal-use software development costs, a $4.6 million change in fair value of contingent consideration and stock-based compensation of $11.9 million, partially offset by a gain on divestiture of $17.6 million and a gain on repurchase of convertible notes of $7.2 million. Net cash used in operating activities was further driven by a decrease in accounts payable of $13.6 million, a decrease in deferred revenue of $3.2 million, a decrease in other liabilities of $7.8 million, a decrease in accounts receivable of $1.5 million, an increase in accrued expenses and other current liabilities of $24.3 million, an increase in prepaid expenses and other current assets of $3.4 million, and an increase in contract acquisition costs of $5.0 million.
Net cash used in operating activities was $62.1 million in the year ended December 31, 2022. Our net loss was $225.7 million for the year ended December 31, 2022, which includes the effect of non-cash expenses related to stock-based compensation expense, change in fair value of contingent consideration, depreciation, amortization of purchased intangibles, finance leases, convertible debt issuance costs, gain on settlement of leases, allowance for credit losses, increases in accounts receivable, prepaid expenses and other current assets, accrued expenses and other current liabilities, contract acquisition costs, other assets, and decreases in deferred revenue and operating lease liabilities.
Cash Flows from Investing Activities
Net cash used in investing activities was $18.8 million in the year ended December 31, 2023 which was primarily driven by purchases of fixed assets and capitalization of internally developed software, partially offset by the proceeds from the sale of Kasamba. Net cash used in investing activities was $56.9 million in the year ended December 31, 2022 which was driven primarily by purchases of property and equipment, including capitalized software, payments for the WildHealth acquisition, net of cash acquired and cash infusion into the Claire joint venture.
Cash Flows from Financing Activities
Net cash used in financing activities was $151.1 million in the year ended December 31, 2023 which was primarily driven by the repurchase of our 2024 Notes. Net cash provided by financing activities was $1.6 million in the year ended December 31, 2022 driven primarily by proceeds from issuance of common stock in connection with the exercise of stock options by employees, partially offset by principal payments for financing leases and the repurchase of common stock.
We have incurred significant expenses to develop our technology and services, to hire employees in our customer service and sales and marketing departments, and for the amortization of purchased intangible assets, as well as acquisition costs and non-cash compensation costs. Historically, we have incurred net losses and negative cash flows for various quarterly and annual periods since our inception, including during numerous quarters and annual periods in the past several years. As of December 31, 2023, we had an accumulated deficit of approximately $857.0 million.
Our principal sources of liquidity are the net proceeds from the issuance of our convertible senior notes, after deducting purchaser discounts and debt issuance costs paid by us, issuance of common stock in connection with the exercise of options, and payments received from customers using our products. We anticipate that our current cash and cash equivalents will be sufficient to satisfy our working capital and capital requirements for at least the next 12 months. However, we cannot assure you that we will not require additional funds prior to such time, and we would then seek to sell additional equity or debt securities through public financings, or seek alternative sources of financing. Further, we plan to refinance the 2026 Notes on or prior to their maturity, and we are currently reviewing our capital structure with a goal of refinancing the 2026 Notes. We cannot assure you that additional funding will be available on favorable terms, when needed, if at all. If we are unable to obtain any necessary financing, we may be required to further reduce the scope of our planned sales and marketing and product development efforts, which could materially adversely affect our financial condition and operating results. In addition, we may require additional funds in order to fund more rapid expansion, to develop new or enhanced services or products, or to invest in or acquire complementary businesses, technologies, services or products.
The Company may from time to time, subject to board authorization and any applicable restrictions under contracts to which it may be or become a party, depending upon market conditions and the Company’s financing needs, use available funds to
51
refinance or repurchase its outstanding debt or equity securities in privately negotiated or open market transactions, by tender offer or otherwise, in compliance with applicable laws, rules and regulations, at prices and on terms the Company deems appropriate (which, in the case of debt securities, may be below par) and subject to the Company’s cash requirements for other purposes and other factors management deems relevant.
We do not engage in off-balance sheet financing arrangements.
Capital Expenditures
Total capital expenditures in 2023 were approximately $28.7 million, primarily related to software capitalization and to the continued investment in our co-location facilities. We anticipate that our current cash and cash equivalents and cash from operations will be sufficient to fund our capital expenditures for at least the next 12 months.
Indemnifications
We enter into service and license agreements in the ordinary course of business. Pursuant to some of these agreements, we agree to indemnify certain customers from and against certain types of claims and losses suffered or incurred by them as a result of using our products.
We also have agreements whereby certain of our officers and our directors are indemnified for certain events or occurrences. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a directors and officers insurance policy that reduces our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Currently, we have no liabilities recorded for these agreements as of December 31, 2023.
Contractual Obligations
Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As of December 31, 2023, the value of our non-cancellable unconditional purchase obligations was approximately $36.0 million, primarily relating to contracts with vendors in connection with IT infrastructure and cloud computing-related services. See Note 12 – Commitments and Contingencies in the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for additional information regarding our purchase obligations.
We also lease certain facilities and data centers under non-cancellable operating lease arrangements that expire at various dates through 2028. See Note 10 – Leases in the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for additional information regarding our lease obligations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risks
Our Israeli operations have currency rate fluctuation risk associated with the exchange rate movement of the U.S. dollar against the NIS. For the year ended December 31, 2023, the U.S. dollar appreciated on average by approximately 9.8% against the NIS as compared to December 31, 2022. For the year ended December 31, 2023, expenses generated by our Israeli operations totaled approximately $33.4 million. Based on our exposure to NIS exchange rate fluctuation against a dollar as of December 31, 2023, a 1% increase or decrease in the value of the NIS would increase or decrease our income before income taxes by approximately $0.3 million. We actively monitor the movement of the U.S. dollar against the NIS, Pound Sterling, Euro, Australian dollar, and Japanese Yen and have considered the use of financial instruments, including but not limited to derivative financial instruments, which could mitigate such risk. If we determine that our risk of exposure materially exceeds the potential cost of derivative financial instruments, we may in the future enter into these types of arrangements.
Collection Risks
Our accounts receivable are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. During 2023, we
52
increased our allowance for credit losses from approximately $9.2 million to approximately $9.3 million. During 2022, we increased our allowance for credit losses from approximately $6.3 million to approximately $9.2 million. A large proportion of receivables are due from larger corporate customers that typically have longer payment cycles. We base our allowance for credit losses on specifically identified credit risks of customers, historical trends and other information that we believe to be reasonable. Receivables are written-off and charged against the applicable recorded allowance when we have exhausted collection efforts without success. We adjust our allowance for credit losses when accounts previously reserved have been collected.
An allowance for credit losses is established for losses expected to be incurred on accounts receivable balances. Judgment is required in the estimation of the allowance and we evaluate the collectability of our accounts receivable and contract assets based on a combination of factors. If we become aware of a customer’s inability to meet its financial obligations, a specific allowance is recorded to reduce the net receivable to the amount reasonably believed to be collectible from the customer. For all other customers, we use an aging schedule and recognize allowances for credit losses based on the creditworthiness of the debtor, the age and status of outstanding receivables, the current business environment and our historical collection experience adjusted for current expectations for the customer or industry. Accounts receivable are written off against the allowance for uncollectible accounts when we determine amounts are no longer collectible.
Interest Rate Risk
Our investments consist of cash and cash equivalents. Therefore, changes in market interest rates do not affect in any material respect the value of the investments as recorded by us.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial conditions or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
53
Item 8. Financial Statements and Supplementary Data
LIVEPERSON, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 243) 55
Consolidated Balance Sheets as of December 31, 2023 and 2022 57
Notes to Consolidated Financial Statements 63
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
LivePerson, Inc.
New York, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of LivePerson, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 4, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Goodwill – Business reporting unit
As described in Notes 1 and 5 to the consolidated financial statements, the Company’s consolidated goodwill balance was $285.6 million as of December 31, 2023. Goodwill is tested for impairment at the reporting unit level on an annual basis, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company’s business. If these estimates or their related assumptions change in the future, the Company may be required to record impairment. In connection with the annual impairment test completed as of September 30, 2023 using the quantitative “Step 1” assessment, the Company determined the fair value of its reporting units, using both an income approach and a market approach. The income
55
approach uses a discounted cash flow model that reflects management assumptions that mainly relate to revenue growth rates and operating margins. There were no impairments in the Company’s Business reporting unit, as the fair value of this reporting unit exceeded its carrying value.
We identified the valuation of goodwill for the Business reporting unit as a critical audit matter. Management’s determination of the fair value of the Business reporting unit required the use of significant judgment due to the subjectivity and uncertainty of the revenue growth rates and operating margins assumptions used in the income approach. Auditing these elements involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address these matters.
The primary procedures we performed to address this critical audit matter included:
•Evaluating the reasonableness of the assumptions regarding revenue growth rates and operating margins by: i) evaluating the consistency of the revenue growth rates and operating margins with historical results, and ii) evaluating the consistency of the revenue growth rates and operating margins with the Company’s objectives and strategies.
•Testing the accuracy and completeness of information used by management to determine revenue growth rates.
/s/ BDO USA, P.C.
We have served as the Company’s auditor since 2005.
New York, New York
March 4, 2024
56
LIVEPERSON, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS (In thousands)
Current assets:
Prepaid expenses and other current assets (Note 1) 26,981 23,747
Assets held for sale — 30,984
Operating lease right-of-use assets (Note 10) 4,135 1,604
Investment in joint venture (Note 17) — 2,264
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued expenses and other current liabilities (Note 7) 97,024 129,244
Convertible senior notes (Note 8) 72,393 —
Liabilities associated with assets held for sale — 10,357
Convertible senior notes, net of current portion (Note 8) 511,565 737,423
Operating lease liabilities, net of current portion (Note 10) 2,173 682
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.001 par value - 5,000,000 shares authorized; none issued — —
Accumulated other comprehensive loss (8,484) (10,677)
See accompanying notes to consolidated financial statements.
57
LIVEPERSON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
(In thousands, except share and per share amounts)
Costs, expenses and other: (1) (2)
Impairment of goodwill 11,895 — —
Impairment of intangibles and other assets 7,974 — —
Gain on divestiture (17,591) — —
Amortization of purchased intangible assets 3,505 3,678 2,045
Other income (expense), net:
Provision for (benefit from) income taxes 4,163 1,727 (2,404)
Net loss per share of common stock:
Weighted-average shares used to compute net loss per share:
(1)Amounts include stock-based compensation expense, as follows:
(2)Amounts include depreciation expense, as follows:
See accompanying notes to consolidated financial statements.
58
LIVEPERSON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Year Ended December 31,
(In thousands)
Other comprehensive (loss) income:
Foreign currency translation adjustment 2,193 (5,113) (5,644)
See accompanying notes to consolidated financial statements.
59
LIVEPERSON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Shares Amount Shares Amount
(In thousands, except share data)
Other comprehensive loss — — — — — — (5,644) (5,644)
Common stock issued upon exercise of stock options 272,770 — — — 1,327 — — 1,327
Other comprehensive loss — — — — — — (5,113) (5,113)
Common stock issued upon exercise of stock options 66,736 — — — 175 — — 175
Other comprehensive loss — — — — — — 2,136 2,136
See accompanying notes to consolidated financial statements.
60
LIVEPERSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(In thousands)
OPERATING ACTIVITIES:
Accretion of debt discount on convertible senior notes — — 33,309
Impairment of goodwill 11,895 — —
Impairment of intangible and other assets 7,974 — —
Change in fair value of contingent consideration 4,629 (8,516) —
Gain on repurchase of convertible notes (7,200) — —
Gain on divestiture (17,591) — —
Gain on settlement of leases — (242) (3,483)
Equity loss in joint venture 2,264 — —
Changes in operating assets and liabilities, net of acquisitions:
Prepaid expenses and other current assets (3,411) (5,979) (3,178)
Net cash (used in) provided by operating activities (19,765) (62,101) 3,247
INVESTING ACTIVITIES:
Proceeds from divestiture 13,819 — —
Payments for acquisitions, net of cash acquired — (3,430) (70,759)
Repayment of debt acquired in acquisition — — (21,177)
Investment in joint venture — (2,264) —
FINANCING ACTIVITIES:
Principal payments for financing leases (3,330) (3,734) (3,558)
Repurchase of common stock — (221) (709)
Payment for repurchase of convertible senior notes (149,702) — —
Cash classified within current assets held for sale 10,011 (10,011) —
61
Year Ended December 31,
Supplemental disclosure of other cash flow information:
Supplemental disclosure of non-cash investing and financing activities:
Right-of-use assets obtained in exchange for finance lease liabilities 3,693 — —
Issuance of shares of common stock to settle cash awards — 17,300 33,503
Supplemental disclosure of non-cash financing activities related to acquisitions
See accompanying notes to consolidated financial statements.
62
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting Policies
LivePerson, Inc. is the enterprise leader in digital customer conversation. Over the past decades, consumers have made digital conversations a primary way to communicate with others. Since 1998, we have enabled meaningful connections between consumers and our customers through our platform and currently power more than one billion connections and conversations each month. These digital and artificial intelligence (“AI”)-powered conversations decrease costs and increase revenue for our brands, resulting in more convenient, personalized and content-rich journeys across the entire consumer lifecycle, and across consumer channels. AI has accelerated our capability to leverage prior conversations and our customers’ existing investments in Generative AI and Large Language Models (“LLMs”) to enhance the consumer experience and to improve results for our customers by empowering them to leverage the latest developments in AI and LLMs, in a safe and secure environment.
The Conversational Cloud, the Company’s enterprise-class digital customer conversation platform, is trusted by the world’s top brands to accelerate their contact center transformation, orchestrate conversations across all channels, departments and systems, increase agent productivity, and deliver more personalized, AI-empowered customer experiences. The Conversational Cloud powers conversations across each of a brand’s primary digital channels, including mobile apps, mobile and desktop web browsers, short messaging service (“SMS”), social media and third-party consumer messaging platforms. Brands can also use the Conversational Cloud to message consumers when they dial a 1-800 number instead of forcing them to navigate interactive voice response systems and wait on hold. Most recently, the Conversational Cloud has been enhanced to provide a secure platform with appropriate guardrails to deploy Generative AI and LLMs in ways that help consumers and drive results for brands without sacrificing trust.
LivePerson’s digital customer conversation platform enables what the Company calls “the tango” of humans, LivePerson bots, third-party bots and LLMs, whereby humans act as bot managers, overseeing AI-powered conversations and seamlessly stepping into the flow when a personal touch is needed. Agents become highly efficient, leveraging the AI engine (including generative AI capabilities) to surface 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 bots, the Conversational Cloud offers brands a comprehensive approach to scaling automations across their millions of customer conversations.
Principles of Consolidation
The consolidated financial statements reflect the operations of LivePerson and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Equity Method Investment
The Company utilizes the equity method to account for investments when it possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when an investor possesses 20% or more of the voting interests of the investee, and conversely, the ability to exercise significant influence is presumed not to exist when an investor possesses less than 20% of the voting interests of the investee. These presumptions may be overcome based on specific facts and circumstances that demonstrate an ability to exercise significant influence is restricted or demonstrate an ability to exercise significant influence notwithstanding a smaller voting interest, such as with the Company’s 19.2% equity method investment in Claire Holdings, Inc. (“Claire”), due to the Company’s seat on the entity’s board of directors which provides the Company the ability to exert significant influence. In applying the equity method, the Company records the investment at cost and subsequently increases or decreases the carrying amount of the investment by its proportionate share of the net earnings or losses. The Company records dividends or other equity distributions as reductions in the carrying value of the investment. The Company assesses the carrying value of equity method investment on a periodic basis to see if there has been a decline in carrying value that is not temporary. When deciding whether a decline in carrying value is more than temporary, a number of factors are considered, including the investee’s financial condition and business prospects, as well as the Company’s investment intentions.
Variable Interest Entities
63
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the financial statements of LivePerson, its wholly-owned subsidiaries, and each variable interest entity (“VIE”) for which the Company is the primary beneficiary. The Company consolidates entities in which it has a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.
The Company evaluates whether an entity in which it has a variable interest is considered a variable interest entity. VIEs are generally entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest (i.e., ability to make significant decisions through voting rights and a right to receive the expected residual returns of the entity or an obligation to absorb the expected losses of the entity).
Under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation”, an entity consolidates a VIE if it is determined to be the primary beneficiary of the VIE. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company periodically reassesses whether it is the primary beneficiary of a VIE. See Note 18 – Variable Interest Entities for the Company’s assessment of VIEs.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.
Items subject to such estimates and assumptions include:
•stock-based compensation expense;
•allowance for credit losses;
•the period of benefit for deferred contract acquisition costs;
•valuation of goodwill;
•valuation and useful lives of other long-lived assets;
•fair value of assets acquired and liabilities assumed in business combinations;
•income taxes; and
•recognition, measurement, and disclosure of contingent liabilities.
As of the date of issuance of the financial statements, the Company is not aware of any material specific events or circumstances that would require it to update its estimates, judgments, or to revise the carrying values of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s consolidated financial statements.
Foreign Currency Translation
The Company’s operations are conducted in various countries around the world and the financial statements of its foreign subsidiaries are reported in the applicable foreign currencies (functional currencies). Financial information is translated from the applicable functional currency to the United States of America (“U.S.”) dollar (the reporting currency) for inclusion in the Company’s consolidated financial statements. Income, expenses, and cash flows are translated at weighted average exchange rates prevailing during the fiscal period, and assets and liabilities are translated at fiscal period-end exchange rates. Resulting translation adjustments are included as a component of accumulated other comprehensive loss in stockholders’ equity. Foreign exchange transaction gains or losses are included in other income (expense), net in the accompanying consolidated statements of operations.
Cash, Cash Equivalents and Restricted Cash
64
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. Cash equivalents, which primarily consist of money market funds, are recorded at cost, which approximates fair value. Restricted cash primarily relates to funds held in connection with the divestiture of Kasamba. See Note 20 – Divestiture for additional information.
Prepaid expenses and other current assets
The following table presents the detail of prepaid expenses and other current assets as of the dates presented:
December 31,
(In thousands)
Total prepaid expenses and other current assets $ 26,981 $ 23,747
Goodwill, Intangibles and Other Long-Lived Assets
Goodwill and Intangible Assets
Goodwill represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. Goodwill is not amortized, but is tested for impairment at the reporting unit level using either a qualitative or quantitative assessment on an annual basis, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company’s business. If these estimates or their related assumptions change in the future, the Company may be required to record impairment for these assets. As of December 31, 2023, our reporting units included Business and WildHealth. During the fourth quarter of 2023, the Company voluntarily changed its annual goodwill testing date from September 30 to October 1. The Company believes this change of method of applying the accounting principle is preferable, as it more closely aligns the annual impairment testing date with the most current information from the budgeting and strategic planning process and provides management with sufficient time to complete its annual assessment. This change will be applied prospectively, as retrospective application would be impracticable. The Company completed its most recent annual evaluation of impairment as of September 30, 2023 using a quantitative assessment method.
The Company has the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. However, the Company may elect to bypass the qualitative assessment and proceed directly to the quantitative impairment test. The impairment test involves comparing the fair value of the reporting unit to its carrying value, including goodwill. A goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value. The impairment is limited to the carrying amount of goodwill. The Company’s assessment of goodwill impairment as of September 30, 2023, resulted in a noncash impairment of $11.9 million of goodwill for its WildHealth reporting unit. See Note 5 – Goodwill and Other Intangible Assets, Net for additional information.
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC 360-10-35, “Accounting for Impairment or Disposal of Long-Lived Assets”. Acquired intangible assets consist of identifiable intangible assets, primarily developed technology and customer relationships, resulting from our acquisitions. Intangible assets are recorded at fair value on the date of acquisition. During the year ended December 31, 2023, the Company recognized an immaterial non-cash impairment charge of $3.0 million associated with WildHealth developed technology. See Note 5 – Goodwill and Other Intangible Assets, Net for additional information.
65
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment, Net
Property and equipment are stated at cost, net of accumulated depreciation, and amortization. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. The Company reviews the estimated useful lives of its fixed assets on an ongoing basis.
Internal-Use Software Development Costs
The Company capitalizes its costs to develop its internal use software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. These costs are included in property and equipment in the Company’s consolidated balance sheets and are amortized on a straight-line basis over the estimated useful life of the related asset, which approximates five years. Management evaluates the useful lives of these assets on an annual basis. Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed as incurred.
The Company reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the asset (or asset group) may not be recoverable. Events and changes in circumstances considered by the Company in determining whether the carrying value of long-lived assets may not be recoverable, include, but are not limited to, significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry or economic trends, and changes in the Company’s business strategy. Impairment testing is performed at an asset level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (an “asset group”). An impairment loss would be recognized when estimated discounted future cash flows expected to result from the use of the asset (or asset group) and its eventual disposition are less than its carrying amount.
Business Combinations
The Company allocates the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets. Although the Company believes the assumptions and estimates it has made are reasonable, they are based in part on historical experience, market conditions, and information obtained from management of the acquired companies and are inherently uncertain. Examples of judgments used to estimate the fair value of intangibles assets include, but are not limited to, future expected cash flows, expected customer attrition rates, estimated obsolescence rates, and discount rates. These estimates are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is no later than one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded in the consolidated statements of operations. See Note 9 – Acquisitions for additional information.
Divestitures
The Company classifies long-lived assets and liabilities to be disposed of as held for sale in the period in which they are available for immediate sale in their present condition and the sale is probable and expected to be completed within one year. The Company initially measures assets and liabilities held for sale at the lower of their carrying value or fair value less costs to sell. When the divestiture represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results, the disposal is presented as a discontinued operation.
Advertising
The Company expenses the cost of advertising and promoting its services as incurred in the sales and marketing expense on the consolidated statement of operations. Such costs totaled approximately $10.9 million, $45.5 million, and $41.2 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Research and Development
66
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and development (“R&D”) costs are expensed when incurred, except for certain internal-use software development costs, which may be capitalized as noted above. R&D expenses consist primarily of personnel and related headcount costs, costs of professional services associated with the ongoing development of the Company’s technology, and allocated overhead.
Stock-Based Compensation
Compensation related to stock-based awards to employees and directors is measured and recognized in the Company’s consolidated statements of operations based on the fair value of the awards granted. The Company estimates the fair value of its stock options using the Black Scholes option pricing model. The stock-based compensation expense relating to stock options is recognized on a straight-line basis over the period during which the employee or director is required to provide service in exchange for the award, usually the vesting period, which is generally three to four years.
Restricted stock units (“RSUs”) are generally subject to a service-based vesting condition over three to four years. The valuation of these RSUs is based solely on the Company’s stock price on the date of grant, and the corresponding compensation expense is amortized on a straight-line basis.
Performance-Vesting Restricted Stock Units (“PRSUs”) granted are generally subject to both a service-based vesting condition and a performance-based vesting condition. PRSUs will vest upon the achievement of specified performance targets and subject to continued service through the applicable vesting dates. The associated compensation cost is recognized over the requisite service period when it is probable that the performance condition will be satisfied.
In accordance with ASC 718-10, “Stock Compensation”, the Company measures stock-based awards at fair value and recognizes compensation expense for all stock-based payment awards made to its employees and directors, including employee stock options. See Note 13 – Stockholders’ Equity for additional information.
Leases
We determine if an arrangement is or contains a lease at contract inception. In certain of our lease arrangements, judgment is required in determining if a contract contains a lease. For these arrangements, there is judgment in evaluating if the arrangement involves an identified asset that is physically distinct or whether we have the right to substantially all of the capacity of an identified asset that is not physically distinct. In arrangements that involve an identified asset, there is also judgment in evaluating if we have the right to direct the use of that asset. Operating leases are recorded in our consolidated balance sheets. Right-of-use (“ROU”) assets and lease liabilities are measured at the lease commencement date based on the present value of the remaining lease payments over the lease term, determined using the discount rate for the lease at the commencement date. Because the rate implicit in our leases is not readily determinable, we use our incremental borrowing rate as the discount rate, which approximates the interest rate at which we could borrow on a collateralized basis with similar terms and payments and in similar economic environments. Optional periods to extend the lease, including by not exercising a termination option, are included in the lease term when it is reasonably certain that the option will be exercised. We account for lease and non-lease components, principally common area maintenance for our facilities leases, as a single lease component. Variable costs, such as maintenance and utilities based on actual usage, are not included in the measurement of ROU assets and lease liabilities but are expensed when the event determining the amount of variable consideration to be paid occurs. The lease expense is recognized on a straight-line basis over the lease term. Our real estate leases asset class with an initial expected term of 12 months or less (short-term) is not accounted for on our consolidated balance sheets. Our finance leases are recorded in property and equipment, net in our consolidated balance sheets. For finance leases, interest expense on the lease liability is recognized based on the incremental borrowing rate and the ROU assets are amortized on a straight-line basis over the shorter of the lease term or the useful life of the ROU assets.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that the tax change occurs. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled
67
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. We include interest accrued on the underpayment of income taxes and certain interest expense and penalties, if any, related to unrecognized tax benefits as a component of the income tax provision. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Comprehensive Loss
In accordance with ASC 220, “Comprehensive Income”, the Company reports by major components and as a single total, the change in its net assets during the period from non-owner sources. Comprehensive loss consists of net loss and accumulated other comprehensive loss, which includes certain changes in equity that are excluded from net loss. The Company’s comprehensive loss for all periods presented is related to the effect of foreign currency translation.
Recently Issued Accounting Pronouncements
In December 2023, FASB issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. (“ASU”) 2023-09 should be applied on a prospective basis, but retrospective application is permitted. The Company is currently evaluating the potential impact of adopting this new guidance on its consolidated financial statements and related disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. The updated standard is effective for annual periods beginning in fiscal 2025 and interim periods beginning in the first quarter of fiscal 2026. Early adoption is permitted. We are currently evaluating the impact that the updated standard will have on our financial statement disclosures.
In August 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement, which addresses the accounting for contributions made to a joint venture, upon formation, in a joint venture’s separate financial statements. The amendments require certain joint ventures to apply a new basis of accounting upon formation by recognizing and initially measuring most of their assets and liabilities at fair value. The objectives of the amendments are to provide decision-useful information to investors and other allocators of capital in a joint venture’s financial statements and also to reduce diversity in practice. ASU 2023-05 is effective for both public and private joint venture entities with a formation date on or after January 1, 2025. Early adoption is permitted. Entities may elect to apply the guidance retrospectively to joint ventures with a formation date prior to January 1, 2025. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements and related disclosures.
In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements, which amends certain provisions of ASC 842 that apply to arrangements between related parties under common control. Specifically, the ASU: 1) Offers private companies, as well as not-for-profit entities that are not conduit bond obligors, a practical expedient that gives them the option of using the written terms and conditions of a common-control arrangement when determining whether a lease exists and the subsequent accounting for the lease, including the lease’s classification and 2) Amends the accounting for leasehold improvements in common-control arrangements for all entities. ASU 2023-01 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted in any annual or interim period as of the beginning of the related fiscal year. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements and related disclosures.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions to clarify that a contractual restriction on the sale of an equity security is not considered part of a unit of account of the equity security, and, therefore, is not considered in measuring fair value. The
68
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments also require the following disclosures for equity securities subject to the contractual sale restrictions.
1.The fair value of equity securities subject to the contractual sale restrictions reflected on the balance sheet.
2.The nature and remaining duration of the restriction(s).
3.The circumstances that could cause a lapse in the restriction(s).
This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within those financial years. The Company does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements and related disclosures.
Note 2. Revenue Recognition
The majority of the Company’s revenue is generated from hosted service revenues, which is inclusive of its platform pricing model. 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.
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 $402.0 million, $514.8 million, and $469.6 million was recognized during the years ended December 31, 2023, 2022, and 2021, respectively.
The Company defers all incremental commission costs to obtain the contract. These contract acquisition costs, which are comprised of prepaid sales commissions, have balances at December 31, 2023 and 2022 of $37.4 million and $43.8 million, respectively. The Company amortizes these costs over the related period of benefit using the customer expected life that the Company determined to be four 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.
None of the Company’s contracts contain a significant financing component. During the year ended December 31, 2023, we recognized approximately $8.9 million of revenue from performance obligations satisfied during the year ended December 31, 2022, in connection with delivery of products and services related to COVID-19 testing. Refer to Note 15 – Legal Matters for additional details.
Hosted Services Revenue
Hosted services 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 the Conversational Cloud, the Company’s enterprise-class digital customer conversation 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 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.
69
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Professional Services Revenue
Professional Services revenue is reported at the amount that reflects the ultimate consideration the Company expects to receive in exchange for such services. Our professional services revenue consists of fees that provide customers with product support and updates during the term of the arrangement, which is typically one year or longer in length, billed; monthly, quarterly or annually in advance. Revenue is generally recognized ratably over the contract term. Our professional services revenue also includes custom support services, which differ from our standard product support. These professional services revenues are recognized as the services are performed.
Disaggregated Revenue
The following table presents the Company’s revenues disaggregated by revenue source:
Year Ended December 31,
(In thousands)
Revenue:
(1) On March 20, 2023, the Company completed the sale of Kasamba and therefore ceased recognizing revenue related to Kasamba effective on the transaction close date. This sale eliminated the entire Consumer segment, as a result of which revenue is presented within a single consolidated segment. Hosted services included $7.1 million, $37.1 million, and $37.7 million for the years ended December 31, 2023, 2022, and 2021, respectively, relating to Kasamba.
Remaining Performance Obligation
As of December 31, 2023, the aggregate amount of the total transaction price allocated in contracts with original duration of one year or greater to the remaining performance obligations was $317.5 million. Approximately 92% 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 cancellable 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 less than one year. Such remaining performance obligations represent unsatisfied or partially unsatisfied performance obligations 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 (“SSP”) basis. Judgment is required to determine the SSP for each distinct performance obligation. The Company determines the SSP based on its overall pricing objectives, taking into consideration market conditions and other factors, including the value of its contracts, product offerings and the cloud applications sold.
70
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue by Geographic Location
The Company is domiciled in the United States and has international operations around the globe. The following table presents the Company’s revenues attributable to domestic and foreign operations for the periods presented:
Year Ended December 31,
(In thousands)
——————————————
(1)Canada, Latin America, and South America.
(2)Europe, the Middle East and Africa (“EMEA”).
(3)Includes revenue from the United Kingdom (“U.K.”) of $44.8 million, $55.3 million, and $56.7 million for the years ended December 31, 2023, 2022, and 2021, respectively, and from the Netherlands of $0.8 million, $6.6 million, and $4.8 million for the years ended December 31, 2023, 2022, and 2021, respectively.
(4) Asia-Pacific (“APAC”).
Information about Contract Balances
The deferred revenue balance consists of services, which have been invoiced upfront, and are recognized as revenue only when the revenue recognition criteria are met.
In some arrangements, the Company allows customers to pay for access to the Conversational Cloud 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, net of allowances on the consolidated balance sheet.
The Company recognized revenue of $86.8 million and $98.3 million for the fiscal years ended December 31, 2023 and 2022, respectively, which was included in the corresponding contract liability balance at the beginning of the year.
The deferred revenue balance consists of services, which have been invoiced upfront, and are recognized as revenue only when the revenue recognition criteria are met. Our long-term deferred revenues are included in Other liabilities on the consolidated balance sheets.
The opening and closing balances of the Company’s accounts receivable, unbilled receivables, and deferred revenues are as follows:
(In thousands)
71
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense in connection with contract acquisition cost was approximately $27.6 million and $36.4 million for the years ended December 31, 2023 and 2022, respectively.
Accounts Receivable, Net
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for credit losses is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable, based on historical write-off experience. The Company reviews its allowance for credit losses monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis. We maintain general reserves on a collective basis by considering factors such as historical experience, creditworthiness, the age of the trade receivable balances, and current economic conditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. The activity in the allowance for credit loss is as follows:
December 31,
(In thousands)
Note 3. Net Loss Per Share
Basic earnings per share (“EPS”) excludes dilution for common stock equivalents and is computed by dividing net income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is calculated based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. Potentially dilutive securities consist of common stock options, restricted stock units, contingently issuable shares and convertible securities. The dilutive effect of stock options, restricted stock units and contingently issuable shares is reflected in diluted EPS by application of the treasury stock method. The dilutive effect of convertible securities is reflected in the diluted EPS by application of the “if-converted” method. The “if-converted” method is only assumed in periods where such application would be dilutive. In applying the “if-converted” method for diluted EPS, the Company would assume conversion of the 0.750% Convertible Senior Notes due 2024 (“2024 Notes”) at a ratio of 25.9182 shares of its common stock per $1,000 principal amount of the 2024 Notes. The Company would assume conversion of the 2026 Notes at a ratio of 13.2933 shares of its common stock per $1,000 principal amount of the 2026 Notes. Assumed converted shares of the Company’s common stock are weighted for the period the Notes were outstanding. See Note 8 – Convertible Senior Notes, Net of Current Portion and Capped Call Transactions for additional information about the Notes.
Reconciliation of shares used in calculating basic and diluted EPS for the years ended December 31, 2023, 2022, and 2021, were as follows:
Year Ended December 31,
Net loss per share, basic and diluted $ (1.28) $ (3.03) $ (1.80)
During the third quarter of 2023, the Company reached settlement agreements regarding the final portions of the VoiceBase and Tenfold earn-outs for approximately $15.0 million and $13.0 million, respectively. These settlements were paid in shares during the year ended December 31, 2023. Additionally, during the fourth quarter of 2023, the Company reached a settlement agreement regarding the eBot-7 earn-out for approximately $8.0 million, which was paid in shares during the year ended December 31, 2023. The assumed conversion of the earn-out settlements would have no impact on the basic and diluted
72
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EPS as presented in the table above.Further, the following securities were excluded from the computation of diluted EPS for the years ended December 31, 2023 and 2022, as their effect would have been anti-dilutive:
Year Ended December 31,
Note 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 was previously organized into two operating segments for purposes of making operating decisions and assessing performance. The Business segment enables brands to leverage the Conversational Cloud’s sophisticated intelligence engine to connect with consumers through an integrated suite of mobile and online business messaging technologies. The Consumer segment facilitated online transactions between independent service providers (“Experts”) and individual consumers (“Users”) seeking information and knowledge for a fee via mobile and online messaging. During the first quarter of 2023, the Consumer segment (consisting solely of the Kasamba business) was divested. As a result, the divestiture of Kasamba eliminated the Company’s Consumer segment. See Note 20 – Divestiture for additional information.
Subsequent to the divestiture of Kasamba, the chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, evaluates performance, makes operating decisions, and allocates resources based on the financial information presented on a consolidated basis. Accordingly, management has determined that the Company operates as one operating and reportable segment.
Geographic Information
The Company is domiciled in the United States and has international operations around the globe. The following table presents the Company’s long-lived assets by geographic region as of the dates set forth below:
December 31,
(In thousands)
——————————————
(1)U.K., Japan, France, Italy, Spain, Canada, and Singapore.
73
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Goodwill and Intangible Assets, Net
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2023 and 2022 are as follows:
Consolidated
(In thousands)
Adjustments to goodwill:
Foreign exchange adjustment (2,488)
Goodwill reclassified to assets held for sale (8,024)
Adjustments to goodwill:
Goodwill impairment (1) (11,895)
Foreign exchange adjustment 1,312
(1)The amount represents the entire accumulated goodwill impairment balance as of December 31, 2023.
In connection with the annual impairment test completed as of September 30, 2023 using the quantitative “Step 1” assessment, the Company determined the fair value of its reporting units, using both an income approach and a market approach. The income approach uses a discounted cash flow model that reflects management assumptions regarding revenue growth rates, operating margins, risk-adjusted discount rate, terminal period growth rate, economic and market trends and other expectations about the anticipated operating results of the reporting units. Under the market approach, the fair value is estimated based on market multiples of revenues derived from comparable publicly traded companies with operating characteristics similar to the reporting units.
As a result of the Company’s annual goodwill impairment test in the third quarter of 2023, the Company recorded a non-cash impairment charge of $11.9 million in the consolidated statements of operations during the year ended December 31, 2023, to recognize the impairment of goodwill in the WildHealth reporting unit. This conclusion was primarily based upon slower growth in existing revenue streams and strategic decisions to reduce or eliminate investment in new and existing revenue streams previously planned for expansion. The Company’s latest available financial forecasts at the time of the annual goodwill impairment test reflected lower cash flows than previously projected related to the WildHealth reporting unit.
There were no impairments in the Company’s Business reporting unit, as the fair value of this reporting unit substantially exceeded its carrying value.
In connection with the divestiture of Kasamba under the Consumer segment, the Company recorded a reduction to its goodwill of $8.0 million during the year ended December 31, 2022. See Note 20 – Divestiture for additional information.
74
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets, Net
Intangible assets, net are summarized as follows:
(In thousands) (In years)
Amortizing intangible assets:
(In thousands) (In years)
Amortizing intangible assets:
Amortization expense is calculated over the estimated useful life of the asset. Aggregate amortization expense for intangible assets and finance leases, net was $22.2 million, $22.1 million, and $9.3 million for the years ended December 31, 2023, 2022, and 2021, respectively, and a portion of this amortization was included in cost of revenue in the consolidated statements of operations.
Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable and the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows that are expected to result from the use of the asset. As a result of our impairment test in the third quarter of 2023, the Company recognized an immaterial non-cash impairment charge of $3.0 million included in the impairment of intangibles and other assets in the consolidated statements of operations, related to our intangible assets – developed technology associated with WildHealth, due to updated forecasts as discussed above. The fair value of these intangible assets as of September 30, 2023 was estimated using a relief from royalty method. A terminal multiple was applied on an assumed sale of the asset group subsequent to the life of the primary asset. There were no impairments of intangible assets during the year ended December 31, 2022.
75
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2023, estimated annual amortization expense for the next five years and thereafter is as follows:
Estimated Amortization Expense
(In thousands)
Note 6. Property and Equipment, Net
Property and equipment are stated at cost, net of accumulated depreciation, and amortization. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. The Company reviews the estimated useful lives of its fixed assets on an ongoing basis. The following table presents the detail of property and equipment as follows:
December 31,
(In thousands)
Finance lease right-of-use assets 2 3,060 3,083
Less assets held for sale (Note 20) — (11,223)
Aggregate depreciation and amortization expense for property and equipment was $32.6 million, $32.3 million, and $27.4 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Expenditures for routine maintenance and repairs are charged to operating expense as incurred. Major renewals and improvements are capitalized and depreciated over their estimated useful lives.
During the fourth quarter ended December 31, 2023, the Company recorded a noncash impairment charge of $5.0 million related to capitalized software development costs. The impairment charges were included in the consolidated statements of operations for the year ended December 31, 2023. These impairment charges pertained to internal projects that were discontinued and had no future economic benefit. There were no impairments of property and equipment during the year ended December 31, 2022.
76
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Accrued Expenses and Other Current Liabilities
The following table presents the detail of accrued expenses and other current liabilities as of the dates presented:
December 31,
(In thousands)
Professional services and consulting and other vendor fees $ 67,585 $ 51,067
Payroll and other employee-related costs 20,767 19,182
Short-term contingent earn-out — 47,819
Total accrued expenses and other current liabilities $ 97,024 $ 129,244
Note 8. Convertible Senior Notes, Net of Current Portion and Capped Call Transactions
Convertible Senior Notes due 2024 and Capped Calls
In March 2019, the Company issued $230.0 million aggregate principal amount of its 0.750% Convertible Senior Notes due 2024 in a private placement. Interest on the 2024 Notes is payable semi-annually in arrears on March 1 and September 1 of each year.
The 2024 Notes will mature on March 1, 2024, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds from the offering of the 2024 Notes, after deducting debt issuance costs, was approximately $221.4 million.
Each $1,000 in principal amount of the 2024 Notes is initially convertible into 25.9182 shares of the Company’s common stock par value $0.001, which is equivalent to an initial conversion price of approximately $38.58 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its 2024 Notes in connection with such a corporate event. The 2024 Notes are not redeemable prior to the maturity date of the 2024 Notes and no sinking fund is provided for the 2024 Notes. If the Company undergoes a fundamental change (as defined in the indenture governing the 2024 Notes) prior to the maturity date, holders may require the Company to repurchase for cash all or any portion of their 2024 Notes in principal amounts of $1,000 or a multiple thereof at a fundamental change repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Holders of the 2024 Notes may convert their 2024 Notes at their option at any time prior to the close of business on the business day immediately preceding November 1, 2023, in multiples of $1,000 principal amount, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2019 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the 2024 Notes on each applicable trading day as determined by the Company; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the indenture governing the 2024 Notes) per $1,000 principal amount of 2024 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate for the 2024 Notes on each such trading day; or (3) upon the occurrence of specified corporate events. On or after November 1, 2023, holders may convert all or any portion of their 2024 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date,
77
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election.
During a portion of the year ended December 31, 2023, the conditions allowing holders of the 2024 Notes to convert were met.
The 2024 Notes are senior unsecured obligations of the Company.
Prior to the adoption of ASU 2020-06 on January 1, 2022, the Company separated the 2024 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that did not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $52.9 million and was determined by deducting the fair value of the liability component from the par value of the 2024 Notes. The equity component was not remeasured as long as it continued to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, was amortized to interest expense at an effective interest rate over the contractual term of the 2024 Notes. This accounting treatment no longer applies under ASU 2020-06.
Prior to the adoption of ASU 2020-06 on January 1, 2022, the Company allocated the total amount of issuance costs incurred of approximately $8.6 million to the liability and equity components of the 2024 Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were approximately $6.6 million, were recorded as an additional debt discount and were amortized to interest expense using the effective interest method over the contractual term of the 2024 Notes. Issuance costs attributable to the equity component were approximately $2.0 million and recorded as a reduction of additional paid in capital in stockholders’ equity. This accounting treatment no longer applies under ASU 2020-06.
As a result of the adoption of ASU 2020-06, the 2024 Notes are accounted for as a single liability, and the carrying amount of the 2024 Notes, after giving effect to the March 2023 repurchases described below, is $72.4 million as of December 31, 2023, consisting of principal of $72.5 million, net of unamortized debt issuance costs of $0.1 million. The 2024 Notes were classified as short-term liabilities in the accompanying consolidated balance sheet as of December 31, 2023. The remaining term over which the 2024 Notes’ debt issuance costs will be amortized is 0.2 years at an effective interest rate of 1.57% for the year ended December 31, 2023.
In connection with the offering of the 2024 Notes, the Company entered into privately-negotiated capped call option transactions with certain counterparties (the “2024 capped calls”). The 2024 capped calls each have an initial strike price of approximately $38.58 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes. The 2024 capped calls have initial cap prices of $57.16 per share, subject to certain adjustment events. The 2024 capped calls cover, subject to anti-dilution adjustments, approximately 5.96 million shares of common stock. The 2024 capped calls are generally intended to reduce or offset the potential dilution to the common stock upon any conversion of the 2024 Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The 2024 capped calls expire on March 1, 2024, subject to earlier exercise. The 2024 capped calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the 2024 capped calls are subject to certain specified additional disruption events that may give rise to a termination of the 2024 capped calls, including changes in law, failure to deliver, and hedging disruptions. The 2024 capped calls are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost of $23.2 million incurred to purchase the 2024 capped calls was recorded as a reduction to additional paid-in capital in the accompanying consolidated balance sheets.
On March 21, 2023, the Company entered into individual privately negotiated transactions (the “Note Repurchase Agreements”) with certain holders of its 2024 Notes, pursuant to which the Company agreed to pay an aggregate of approximately $149.7 million in cash for the repurchase of approximately $157.5 million in aggregate principal amount of the 2024 Notes (the “Note Repurchases”). As of December 31, 2023, the Company recognized a $7.2 million gain, net of transaction costs of $0.5 million on debt extinguishment, which represented the difference between the carrying value and the fair value of the 2024 Notes just prior to Note Repurchases.
Upon completion of the Note Repurchases, the aggregate principal amount of the 2024 Notes was reduced by $157.5 million to $72.5 million and the carrying amount of the 2024 Notes reduced by $228.3 million to $72.0 million. A
78
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
corresponding portion of the 2024 capped calls were terminated in connection following the Note Repurchases as required by their terms for minimal consideration.
Convertible Senior Notes due 2026 and Capped Calls
In December 2020, the Company issued $517.5 million aggregate principal amount of its 0% Convertible Senior Notes due 2026 (the “2026 Notes” and together with the 2024 Notes, the “Notes”) in a private placement.
The 2026 Notes will mature on December 15, 2026, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds from the offering of the 2026 Notes, after deducting debt issuance costs, was approximately $505.3 million.
Each $1,000 in principal amount of the 2026 Notes is initially convertible into 13.2933 shares of the Company’s common stock par value $0.001, which is equivalent to an initial conversion price of approximately $75.23 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid special interest.In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its 2026 Notes in connection with such a corporate event. The 2026 Notes are not redeemable prior to the maturity date of the 2026 Notes and no sinking fund is provided for the 2026 Notes. If the Company undergoes a fundamental change (as defined in the indenture governing the 2026 Notes) prior to the maturity date, holders may require the Company to repurchase for cash all or any portion of their 2026 Notes in principal amounts of $1,000 or a multiple thereof at a fundamental change repurchase price equal to 100% of the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid special interest to, but excluding, the fundamental change repurchase date.
Holders of the 2026 Notes may convert their 2026 Notes at their option at any time prior to the close of business on the business day immediately preceding August 15, 2026, in multiples of $1,000 principal amount, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2021 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the 2026 Notes on each applicable trading day as determined by the Company; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the indenture governing the 2026 Notes) per $1,000 principal amount of 2026 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate for the 2026 Notes on each such trading day; (3) with respect to any 2026 Notes that the Company calls for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after August 15, 2026, holders may convert all or any portion of their 2026 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election.
During the twelve months ended December 31, 2023, the conditions allowing holders of the 2026 Notes to convert were not met.
The 2026 Notes are senior unsecured obligations of the Company.
Prior to the adoption of ASU 2020-06 on January 1, 2022, the Company separated the 2026 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that did not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $162.5 million and was determined by deducting the fair value of the liability component from the par value of the 2026 Notes. The equity component was not remeasured as long as it continued to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, was amortized to interest expense at an effective interest rate over the contractual term of the 2026 Notes. This accounting treatment no longer applies under ASU 2020-06.
Prior to the adoption of ASU 2020-06 on January 1, 2022, the Company allocated the total amount of issuance costs incurred of approximately $12.2 million to the liability and equity components of the 2026 Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were approximately
79
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$8.5 million, were recorded as an additional debt discount and are amortized to interest expense using the effective interest method over the contractual term of the 2026 Notes. Issuance costs attributable to the equity component were approximately $3.7 million and recorded as a reduction of additional paid in capital in stockholders’ equity. This accounting treatment no longer applies under ASU 2020-06.
As a result of the adoption of ASU 2020-06, the 2026 Notes are accounted for as a single liability, and the carrying amount of the 2026 Notes is $511.5 million as of December 31, 2023, consisting of principal of $517.5 million, net of unamortized issuance costs of $6.0 million. The 2026 Notes were classified as long-term liabilities in the accompanying consolidated balance sheets as of December 31, 2023. The remaining term over which the 2026 Notes’ debt issuance costs will be amortized is2.9 years at an effective interest rate on the debt was 0.40% for the year ended December 31, 2023.
In connection with the offering of the 2026 Notes, the Company entered into privately-negotiated capped calloption transactions with certain counterparties (the “2026 capped calls”). The 2026 capped calls each have an initial strike price of approximately $75.23 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. The 2026 capped calls have initial cap prices of $105.58 per share, subject to certain adjustment events. The 2026 capped calls cover, subject to anti-dilution adjustments, approximately 6.88 million shares of common stock. The 2026 capped calls are generally intended to reduce or offset the potential dilution to the common stock upon any conversion of the 2026 Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The 2026 capped calls expire on December 15, 2026, subject to earlier exercise. The 2026 capped calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the 2026 capped calls are subject to certain specified additional disruption events that may give rise to a termination of the 2026 capped calls, including changes in law, failure to deliver, and hedging disruptions. The 2026 capped calls are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost of $46.1 million incurred to purchase the 2026 capped calls was recorded as a reduction to additional paid-in capital in the accompanying consolidated balance sheet.
Unamortized debt issuance costs incurred in connection with securing the Company’s financing arrangements are presented in the consolidated balance sheets as a direct deduction from the carrying amount of the outstanding borrowings, consistent with debt discounts. All deferred financing costs are amortized to interest expense. The net carrying amount of the liability component of the Notes as of December 31, 2023 and 2022 was as follows:
December 31,
(In thousands)
Less: Short-term debt, net 72,393 —
The following table sets forth the interest expense recognized related to the Notes:
Year Ended December 31,
(In thousands)
Amortization of debt discount — — 33,309
Interest expense of $4.9 million, $5.5 million, and $37.5 million is reflected as a component of interest expense, net in the accompanying consolidated statement of operations for the years ended December 31, 2023, 2022, and 2021, respectively.
80
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Acquisitions
WildHealth
In February 2022, the Company completed the acquisition of 100% of the equity of WildHealth, Inc. (“WildHealth”), a precision medicine company operating in the United States, for a total purchase price of $22.3 million. The purchase price consisted of approximately $4.6 million in cash and $17.7 million in shares of common stock of the Company. As part of the purchase price, the Company issued 776,825 common shares that had a total fair value of $20.8 million based on the closing market price of $26.81 per share on the acquisition date of February 7, 2022. The transaction was accounted for as a business combination. In connection with the acquisition, the Company entered into stock forfeiture agreements with certain employees of WildHealth, under which a portion of the purchase price would be subject to vesting conditions based on continuing employment post acquisition. The Company allocated the purchase consideration subject to the stock forfeiture agreements between pre and post combination periods.
The purchase price allocation resulted in approximately $15.5 million of goodwill, $8.3 million of intangible assets and net liabilities assumed of $1.5 million. WildHealth is part of the Business segment and is a separate reporting unit. Goodwill is primarily attributed to synergies from future expected economic benefits, including enhanced revenue growth from expanded capabilities. The goodwill was not deductible for tax purposes. The intangible assets are being amortized over their expected period of benefit. A deferred tax liability for the identified intangibles has been recorded for $1.6 million and an indemnification asset of $1.2 million relating to a pre-acquisition liability assumed as of December 31, 2022.
The following table sets forth the fair value of the identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (dollars in thousands):
Fair Value Useful life
(In thousands) (In years)
Amortizing intangible assets:
Developed technology $ 7,100 5.0
Fellowship content 600 5.0
Total amortizing intangible assets $ 8,300
Based on our 2023 annual goodwill impairment test, the Company recorded a non-cash impairment charge of $11.9 million in our consolidated statements of operations, representing a portion of goodwill related to the WildHealth reporting unit. Additionally, based on the impairment test in the third quarter of 2023, the Company recognized an immaterial non-cash impairment charge of $3.0 million included in the cost of revenue in the consolidated statements of operations, related to our intangible assets – developed technology associated with WildHealth. See Note 5 – Goodwill and Intangible Assets, Net for additional information.
Additionally, former stockholders of WildHealth had the right to receive in the aggregate up to an additional $120.0 million earn-out (to be settled in the Company’s equity or cash at the Company’s election, but with the cash election restricted to 18.0 percent of the total earn-out) based upon satisfaction of certain financial milestones over the period from October 31, 2022 through December 31, 2025. The Company accounted for the earn-out as a compensation arrangement in accordance with ASC 718, “Compensation - Stock Compensation,” pursuant to which such earn-out payments are classified as liability awards to be recognized over the requisite service periods. On May 30, 2023, the Company and stockholders of WildHealth agreed to amend the terms of the merger agreement with respect to certain contingent potential earn-out payments under the agreement. Pursuant to the amended terms, in full satisfaction of all potential earn-out payments under the merger agreement, the parties agreed that the Company would pay (a) a lump sum cash payment of $12.0 million, less applicable withholding taxes to pre-acquisition stockholders, and (b) in the event of a future direct or indirect sale of WildHealth on or before May 30, 2033, the former WildHealth stockholders will receive an additional cash payment equal to 30% of the then-current equity value of WildHealth less all applicable escrows and closing payments and costs, up to a maximum payment of $23.0 million. On May 31, 2023, the Company made the lump sum payment of $12.0 million in connection with the settlement and reversed the preexisting accrued stock-based compensation of $40.2 million. As of December 31, 2023, there is no remaining
81
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
earn-out liability related to WildHealth. The contingent cash settlement feature was deemed not probable as of December 31, 2023 and, therefore, the award was not recorded as a liability.
Note 10. Leases
The Company has non-cancelable operating and finance leases for its corporate offices and other service agreements. Its leases have remaining lease terms of less than one to five years, some of which include options to extend. The Company uses the non-cancelable lease term when recognizing the ROU assets and lease liabilities, unless it is reasonably certain that a renewal or termination option will be exercised.
The Company continues to actively assess its global lease portfolio. However, any additional de-recognition of right-of-use assets and incurrence of various one-time expenses in connection with early termination of additional leases are not expected to be material to its financial condition or results of operations.
Supplemental cash flow information related to leases for the periods listed are as follows:
Year Ended December 31,
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases $ 3,448 $ 4,885 $ 2,927
Operating cash flows for finance leases 93 196 362
The components of lease costs for the periods listed are as follows:
Year Ended December 31,
(In thousands)
Finance lease cost
Weighted Average Remaining Lease Term:
Operating leases 2.1 years 1.5 years
Finance leases 0.9 years 1.1 years
Weighted Average Discount Rate:
Operating leases 7 % 7 %
Finance leases 7 % 4 %
82
LIVEPERSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental balance sheet information related to leases is as follows:
(In thousands)
Assets
Operating ROU assets Operating lease ROU assets $ 4,135 $ 1,604
Finance ROU assets Property and equipment, net 3,060 3,083
Liabilities
Current:
Operating lease liabilities Operating lease liability $ 2,719 $ 2,160
Non-current:
Finance lease liabilities Other liabilities 85 191
Future minimum lease payments under non-cancellable operating and finance leases (with an initial or remaining lease term in excess of one year) are as follows:
Operating Leases Finance Leases
Year Ending December 31, (In thousands)