LIVEPERSON INC 10-K

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 ) 71 Consolidated Balance Sheets as of December 31, 2022 and 2021 73 Consolidated Statements of Operations for the three years ended December 31, 2022, 2021, and 2020 74 Consolidated Statements of Comprehensive Loss for the three years ended December 31, 2022, 2021, and 2020 75 Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2022, 2021, and 2020 76 Consolidated Statements of Cash Flows for the three years ended December 31, 2022, 2021, and 2020 77 Notes to Consolidated Financial Statements 78 70 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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 , 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, 2022, 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 16, 2023 expressed an adverse 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 Matters 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 this 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. Business Combinations – Accounting for Earnouts As described in Note 9 to the Company’s consolidated financial statements, in February 2022, the Company completed the acquisition of WildHealth, Inc. (“WildHealth”) for $22.3 million paid at closing, plus additional earnout payments to equity holders of WildHealth of up to $120 million payable upon the achievement of certain financial milestones. The Company has accounted for the earnouts as a compensation arrangement. 71 We identified the accounting for the earnouts as part of purchase price or compensation as a critical audit matter. The principal considerations for our determination included the subjectivity and significant management judgment required to determine if the earn-outs represented contingent consideration or compensation given the terms of the agreements. Auditing management’s assessment of the substance of the earnout arrangement and evaluating the appropriateness of the classification of such payments involved a high degree of auditor judgment. The primary procedures we performed to address this critical audit matter included: • Testing the operating effectiveness of the controls over business combinations, including controls over identification, recognition and disclosure of contingent payments. • Reading and analyzing the executed purchase agreement and specific agreements with certain equity holders of WildHealth to understand the provisions of the earnouts, including evaluating the substance and classification of such contingent payments. /s/ BDO USA, LLP We have served as the Company’s auditor since 2005. New York, New York March 16, 2023 72 LIVEPERSON, INC. CONSOLIDATED BALANCE SHEETS December 31, 2022 2021 ASSETS (In thousands) Current assets: Cash and cash equivalents $ 391,781 $ 521,846 Accounts receivable, net of allowances of $ 9,239 and $ 6,338 as of December 31, 2022 and 2021, respectively 86,537 93,804 Prepaid expenses and other current assets 24,164 20,626 Assets held for sale (Note 20) 30,984 — Total current assets 533,466 636,276 Operating lease right-of-use assets (Note 10) 1,604 1,977 Property and equipment, net (Note 6) 126,499 124,726 Contract acquisition costs 43,804 40,675 Intangible assets, net (Note 5) 78,103 85,554 Goodwill (Note 5) 296,214 291,215 Deferred tax assets 4,423 5,034 Investment in joint venture (Note 17) 2,264 — Other assets 2,563 1,199 Total assets $ 1,088,940 $ 1,186,656 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 25,303 $ 16,942 Accrued expenses and other current liabilities (Note 7) 131,440 104,297 Deferred revenue (Note 2) 84,494 98,808 Operating lease liabilities (Note 10) 2,160 3,380 Liabilities associated with assets held for sale (Note 20) 10,357 — Total current liabilities 253,754 223,427 Deferred revenue, net of current portion (Note 2) 174 54 Convertible senior notes, net (Note 8) 737,423 574,238 Operating lease liabilities, net of current portion (Note 10) 682 2,733 Deferred tax liabilities 2,550 2,049 Other liabilities 26,269 34,718 Total liabilities 1,020,852 837,219 Commitments and contingencies (Note 12) Stockholders’ equity: Preferred stock, $ 0.001 par value - 5,000,000 shares authorized; none issued — — Common stock, $ 0.001 par value - 200,000,000 shares authorized; 78,350,984 and 74,980,546 shares issued, and 75,584,911 and 72,234,303 shares outstanding as of December 31, 2022 and 2021, respectively 78 75 Treasury stock, at cost; 2,766,073 and 2,746,243 shares as of December 31, 2022 and 2021, respectively ( 3 ) ( 3 ) Additional paid-in capital 771,052 871,788 Accumulated deficit ( 692,362 ) ( 516,859 ) Accumulated other comprehensive loss ( 10,677 ) ( 5,564 ) Total stockholders’ equity 68,088 349,437 Total liabilities and stockholders’ equity $ 1,088,940 $ 1,186,656 See accompanying notes to consolidated financial statements. 73 LIVEPERSON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2022 2021 2020 (In thousands, except share and per share amounts) Revenue $ 514,800 $ 469,624 $ 366,620 Costs and expenses: (1) (2) Cost of revenue (3) 184,699 156,880 106,268 Sales and marketing 214,027 165,421 149,773 General and administrative 120,625 76,757 60,557 Product development 193,688 158,390 108,414 Restructuring costs 19,967 3,397 29,420 Amortization of purchased intangible assets 3,678 2,045 1,639 Total costs and expenses 736,684 562,890 456,071 Loss from operations ( 221,884 ) ( 93,266 ) ( 89,451 ) Other expense, net: Interest expense, net ( 352 ) ( 37,406 ) ( 14,334 ) Other (expense) income, net ( 1,784 ) 3,294 ( 1,343 ) Total other expense, net ( 2,136 ) ( 34,112 ) ( 15,677 ) Loss before provision for (benefit from) income taxes ( 224,020 ) ( 127,378 ) ( 105,128 ) Provision for (benefit from) income taxes 1,727 ( 2,404 ) 2,466 Net loss $ ( 225,747 ) $ ( 124,974 ) $ ( 107,594 ) Net loss per share of common stock: Basic $ ( 3.03 ) $ ( 1.80 ) $ ( 1.63 ) Diluted $ ( 3.03 ) $ ( 1.80 ) $ ( 1.63 ) Weighted-average shares used to compute net loss per share: Basic 74,509,404 69,606,105 65,888,450 Diluted 74,509,404 69,606,105 65,888,450 (1) Amounts include stock-based compensation expense, as follows: Cost of revenue $ 9,933 $ 6,497 $ 6,511 Sales and marketing 19,575 16,942 16,106 General and administrative 40,690 15,487 15,772 Product development 39,440 30,730 27,557 (2) Amounts include depreciation expense, as follows: Cost of revenue $ 9,763 $ 10,186 $ 10,082 Sales and marketing 2,451 2,448 2,268 General and administrative 452 160 239 Product development 19,618 14,629 10,237 (3) Amounts include amortization of purchased intangibles and finance leases, as follows: Cost of revenue $ 18,434 $ 7,282 $ 1,913 See accompanying notes to consolidated financial statements. 74 LIVEPERSON, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Year Ended December 31, 2022 2021 2020 (In thousands) Net loss $ ( 225,747 ) $ ( 124,974 ) $ ( 107,594 ) Other comprehensive (loss) income: Foreign currency translation adjustment ( 5,113 ) ( 5,644 ) 4,604 Comprehensive loss $ ( 230,860 ) $ ( 130,618 ) $ ( 102,990 ) See accompanying notes to consolidated financial statements. 75 LIVEPERSON, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Equity Shares Amount Shares Amount (In thousands, except share data) Balance at December 31, 2019 66,543,073 $ 67 ( 2,709,830 ) $ ( 3 ) $ 436,557 $ ( 283,562 ) $ ( 4,524 ) $ 148,535 Common stock issued upon exercise of stock options 1,683,315 1 — — 21,353 — — 21,354 Common stock issued upon vesting of restricted stock units 915,827 1 — — — — — 1 Common stock as earnout payment in connection with AdvantageTec, Inc. 11,508 — — — 293 — — 293 Stock-based compensation — — — — 36,132 — — 36,132 Bonus cash payment settled in shares of the Company’s common stock 991,905 1 — — 24,656 — — 24,657 ASU 2016-13 (Topic 326) adjustment — — — — — ( 729 ) — ( 729 ) Common stock issued under Employee Stock Purchase Plan (ESPP) 118,637 — — — 4,002 — — 4,002 Equity component of convertible senior notes — — — — 162,534 — — 162,534 Equity component of convertible senior notes issuance costs — — — — ( 3,797 ) — — ( 3,797 ) Purchase of capped call option — — — — ( 46,058 ) — — ( 46,058 ) Net loss — — — — — ( 107,594 ) — ( 107,594 ) Other comprehensive loss — — — — — — 4,604 4,604 Balance at December 31, 2020 70,264,265 $ 70 ( 2,709,830 ) $ ( 3 ) $ 635,672 $ ( 391,885 ) $ 80 $ 243,934 Common stock issued upon exercise of stock options 864,227 1 — — 11,700 — — 11,701 Common stock issued upon vesting of restricted stock units 1,058,361 1 — — ( 1 ) — — — Stock-based compensation — — — — 58,422 — — 58,422 Bonus cash payment settled in shares of the Company’s common stock 538,000 1 — — 33,502 — — 33,503 Common stock repurchase 30,344 — ( 36,413 ) — ( 709 ) — — ( 709 ) Issuance of common stock in connection with acquisitions 2,130,213 2 — — 128,793 — — 128,795 Common stock issued under ESPP 95,136 — — — 4,409 — — 4,409 Net loss — — — — — ( 124,974 ) — ( 124,974 ) Other comprehensive income — — — — — — ( 5,644 ) ( 5,644 ) Balance at December 31, 2021 74,980,546 $ 75 ( 2,746,243 ) $ ( 3 ) $ 871,788 $ ( 516,859 ) $ ( 5,564 ) $ 349,437 Cumulative adjustment due to adoption of ASU 2020-06 — — — — ( 209,651 ) 50,244 — ( 159,407 ) Common stock issued upon exercise of stock options 272,770 — — — 1,327 — — 1,327 Common stock issued upon vesting of restricted stock units 1,204,430 1 — — ( 1 ) — — — Stock-based compensation — — — — 68,630 — — 68,630 Bonus cash payment settled in shares of the Company’s common stock 735,519 1 — — 17,299 — — 17,300 Common stock repurchase — — ( 19,830 ) — ( 222 ) — — ( 222 ) Issuance of common stock in connection with acquisitions 837,965 1 — — 17,636 — — 17,637 Common stock issued under ESPP 319,754 — — — 4,246 — — 4,246 Net loss — — — — — ( 225,747 ) — ( 225,747 ) Other comprehensive loss — — — — — — ( 5,113 ) ( 5,113 ) Balance at December 31, 2022 78,350,984 $ 78 ( 2,766,073 ) $ ( 3 ) $ 771,052 $ ( 692,362 ) $ ( 10,677 ) $ 68,088 See accompanying notes to consolidated financial statements. 76 LIVEPERSON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2022 2021 2020 (In thousands) OPERATING ACTIVITIES: Net loss $ ( 225,747 ) $ ( 124,974 ) $ ( 107,594 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Stock-based compensation expense 109,638 69,656 65,946 Depreciation 32,284 27,423 22,826 Loss on disposal — — 5,147 Amortization of purchased intangible assets and finance leases 22,112 9,327 3,552 Amortization of debt issuance costs 3,778 2,499 1,340 Accretion of debt discount on convertible senior notes — 33,309 11,564 Change in fair value of contingent consideration ( 8,516 ) — ( 263 ) Allowance for credit losses 5,644 4,879 3,211 Gain on settlement of leases ( 242 ) ( 3,483 ) — Deferred income taxes ( 1,161 ) ( 6,239 ) 579 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ( 38 ) ( 17,309 ) 6,371 Prepaid expenses and other current assets ( 5,979 ) ( 3,178 ) 23 Contract acquisition costs noncurrent ( 6,370 ) ( 1,876 ) ( 6,463 ) Other assets ( 153 ) 547 ( 37 ) Accounts payable 12,050 801 ( 733 ) Accrued expenses and other current liabilities 7,485 8,626 22,931 Deferred revenue ( 12,341 ) 7,774 ( 3,118 ) Operating lease liabilities ( 2,638 ) ( 4,590 ) 8,276 Other liabilities 8,093 55 47 Net cash (used in) provided by operating activities ( 62,101 ) 3,247 33,605 INVESTING ACTIVITIES: Purchases of property and equipment, including capitalized software ( 48,486 ) ( 45,703 ) ( 41,641 ) Payments for acquisitions, net of cash acquired ( 3,430 ) ( 70,759 ) — Purchases of intangible assets ( 2,680 ) ( 2,610 ) ( 1,835 ) Repayment of debt acquired in acquisition — ( 21,177 ) — Investment in joint venture ( 2,264 ) — — Net cash used in investing activities ( 56,860 ) ( 140,249 ) ( 43,476 ) FINANCING ACTIVITIES: Principal payments for financing leases ( 3,734 ) ( 3,554 ) ( 1,154 ) Repurchase of common stock ( 221 ) ( 709 ) — Proceeds from issuance of common stock in connection with the exercise of options and ESPP 5,573 16,110 25,355 Proceeds from issuance of convertible senior notes — ( 4 ) 517,500 Payment of issuance costs in connection with convertible senior notes — — ( 11,800 ) Purchase of capped call option — — ( 46,058 ) Net cash provided by financing activities 1,618 11,843 483,843 Effect of foreign exchange rate changes on cash and cash equivalents ( 3,981 ) ( 5,461 ) 3,657 Net (decrease) increase in cash, cash equivalents, and restricted cash including cash classified within current assets held for sale ( 121,324 ) ( 130,620 ) 477,629 Less: cash classified within current assets held for sale ( 10,011 ) — — Cash, cash equivalents, and restricted cash - beginning of year 523,532 654,152 176,523 Cash, cash equivalents, and restricted cash - end of year $ 392,197 $ 523,532 $ 654,152 77 Year Ended December 31, 2022 2021 2020 Reconciliation of cash, cash equivalents, and restricted cash to consolidated balance sheets: (In thousands) Cash and cash equivalents $ 391,781 $ 521,846 $ 654,152 Restricted cash in prepaid expenses and other current assets 416 1,686 — Total cash, cash equivalents, and restricted cash $ 392,197 $ 523,532 $ 654,152 Supplemental disclosure of other cash flow information: Cash paid for income taxes $ 3,237 $ 582 $ 4,651 Cash paid for interest 1,932 2,090 1,931 Non-cash investing and financing activities: Increase in convertible senior notes, net upon adoption of ASU 2020-06 (Note 1) $ ( 159,407 ) $ — $ — Purchase of property and equipment in accounts payable 1,022 470 1,638 Right-of-use assets obtained in exchange for operating lease liabilities — 2,125 — Right-of-use assets obtained in exchange for finance lease liabilities — — 10,818 Issuance of common shares as earn-out payment associated with business acquisitions — — 293 Issuance of shares of common stock to settle cash awards 17,300 33,503 24,657 Non-cash financing activities related to the e-bot7 acquisition in July 2021: Issuance of 351,462 shares of common stock — 20,012 — Fair value of contingent earn-out in connection with e-bot7 transaction 7,362 6,170 — Non-cash financing activities related to the Tenfold acquisition in November 2021: Issuance of 698,219 shares of common stock — 41,224 — Fair value of contingent earn-out in connection with Tenfold transaction 6,558 6,946 — Non-cash financing activities related to the VoiceBase acquisition in November 2021: Issuance of 1,080,532 shares of common stock 67,557 — Fair value of contingent earn-out in connection with VoiceBase transaction 16,067 16,714 — Non-cash financing activities related to the WildHealth acquisition in February 2022: Issuance of 776,825 shares of common stock 17,675 — — Fair value of contingent earn-out associated with WildHealth transaction 42,234 — — See accompanying notes to consolidated financial statements. 78 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Description of Business and Summary of Significant Accounting Policies Consumers have made mobile devices the center of their digital lives, and they have made digital conversational experiences the center of communication with friends, family and peers. LivePerson, Inc. (“LivePerson”, the “Company”, “we” or “our”) is a global leader in AI-powered customer conversations. Since 1998, LivePerson has enabled billions of meaningful connections between consumers and our customers. These speech or text conversations harness human agents, bots and AI to power convenient, personalized and content-rich journeys across the entire consumer lifecycle, and across consumer platforms. AI has accelerated our capability to leverage those prior conversations to enhance the consumer experience and to improve results for our customers. The Conversational Cloud, our enterprise-class cloud-based platform, enables businesses to have conversations with millions of consumers as personally as they would with a single consumer . The Conversational Cloud powers convers ations across each of a brand’s primary digital channels, including mobile apps, mobile and desktop web browsers, 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 IVRs and wait on hold. Similarly, the Conversational Cloud can ingest traditional emails and convert them into messaging conversations, or embed messaging conversations directly into web advertisements, rather than redirect consumers to static website landing pages. Agents can manage all conversations with consumers through a single console interface, regardless of where the conversations originated. LivePerson’s robust, cloud-based suite of rich messaging, real-time chat, AI and automation offerings features consumer and agent facing bots, intelligent routing and capacity mapping, real-time intent detection and analysis, queue prioritization, customer sentiment, analytics and reporting, content delivery, PCI compliance, co-browsing and a sophisticated proactive targeting engine. An extensible API stack facilitates a lower cost of ownership by facilitating robust integration into back-end systems, as well as enabling developers to build their own programs and services on top of the platform. LivePerson’s Conversational AI platform enables what we call “the tango” of humans, AI and bots, whereby human agents act as bot managers, overseeing AI-powered conversations and seamlessly stepping into the flow when a personal touch is needed. Agents become ultra-efficient, leveraging the AI engine to serve up relevant content, define next-best actions and take over repetitive transactional work so that the agent can focus on relationship building. By seamlessly integrating messaging with our proprietary Conversational AI, as well as third-party bots, the Conversational Cloud offers brands a comprehensive approach to scaling automations across their millions of customer conversations. Complementing the Company’s proprietary messaging and Conversational AI offerings are teams of technical, solutions and consulting professionals that have developed deep domain expertise in the implementation and optimization of conversational services across industries and messaging endpoints. LivePerson’s products, coupled with our domain knowledge, industry expertise and professional services, have been proven to maximize the impact of Conversational AI and deliver measurable return on investment for our customers. LivePerson was incorporated in the State of Delaware in November 1995 and the LivePerson service was introduced in November 1998. The Company completed an initial public offering in April 2000 and is currently traded on the Nasdaq and the TASE. LivePerson is headquartered in New York City. LivePerson has adopted an “employee-centric” workforce model that does not rely on traditional offices. During the second quarter of 2021, the Company decided to reoccupy some of its leased space to provide its employees with the option of working in an office space environment. 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 more than 20.0% of the voting interests of the investee, and conversely, the ability to exercise significant influence is presumed not to exist when an investor possesses 20% or less 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 79 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 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 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. Significant items subject to such estimates and assumptions include: • revenue recognition; • stock-based compensation expense; • accounts receivable; • valuation of goodwill; • valuation of intangible assets; • income taxes; and • legal contingencies. 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. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable which approximate fair value at December 31, 2022 because of the short-term nature of these instruments. The Company invests its cash and cash equivalents with financial institutions that it believes are of high quality, and the Company performs periodic evaluations of these instruments and the relative credit standings of the 80 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS institutions with which it invests. At certain times, the Company’s cash balances with any one financial institution may exceed Federal Deposit Insurance Corporation insurance limits. The Company believes it mitigates its risk by depositing its cash balances with high credit, quality financial institutions. The Company performs ongoing credit evaluations of its customers’ financial condition (except for customers who purchase the LivePerson services by credit card via internet download) and has established an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. Concentration of credit risk is limited due to the Company’s large number of customers. No single customer accounted for or exceeded 10% of revenue for 2022, 2021, or 2020. 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 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 gain or losses are included in other (expense) income, net in the accompanying consolidated statements of operations. Cash and Cash Equivalents 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. Accounts Receivable, Net Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience. The Company reviews its allowance for doubtful accounts 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. 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 doubtful accounts is as follows: Year Ended December 31, 2022 2021 2020 (In thousands) Balance, beginning of period $ 6,338 $ 5,344 $ 3,070 Additions charged to costs and expenses 5,644 4,879 3,211 Deductions/write-offs ( 2,743 ) ( 3,885 ) ( 1,666 ) ASU 2016-13 (Topic 326) adjustment — — 729 Balance, end of period $ 9,239 $ 6,338 $ 5,344 Property and Equipment 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, generally three to five years for equipment and software. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Depreciation expense, which includes amortization of internal use software totaled $ 32.3 million, $ 27.4 million, and $ 22.8 million for the years ended December 31, 2022, 2021, and 2020, respectively. 81 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Internal-Use Software Development Costs In accordance with ASC 350-40, “Internal-Use Software”, 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 . Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed as incurred. The Company capitalized internal-use software costs of $ 39.2 million, $ 36.1 million, and $ 33.9 million for the years ended December 31, 2022, 2021, and 2020, respectively. 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. During 2022, the Company recorded $ 15.5 million of goodwill with the acquisition of WildHealth. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates as three reporting units and has selected September 30 as the date to perform its annual impairment test. 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. 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 tests. 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. No goodwill impairment charges have been recorded for any period presented. Intangible assets with estima ble 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. Business Combinations Business combinations are accounted for using the acquisition method and accordingly, the assets acquired (including identified intangible assets), the liabilities assumed and any noncontrolling interest in the acquired business are recorded at their acquisition date fair values. The Company’s acquisition model typically provides for an initial payment at closing and for future additional contingent purchase price obligations. Contingent purchase price obligations are recorded as deferred acquisition consideration on the balance sheet at the acquisition date fair value and are remeasured at each reporting period. Changes in such estimated values are recorded in the results of operations. For further information, see Note 9 – Acquisitions . For each acquisition, the Company undertakes a detailed review to identify intangible assets and a valuation is performed for all such identified assets. The Company uses several market participant measurements to determine estimated value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies. A substantial portion of the intangible asset value that the Company acquires is the specialized know-how of the workforce, which is treated as part of goodwill and is not required to be valued separately. The majority of the value of the identifiable intangible assets acquired is derived from customer relationships, including the related customer contracts, as well as trade names. In executing the Company’s overall acquisition strategy, one of the primary drivers in identifying and executing a specific transaction is the existence of, or the ability to, expand the existing client relationships. The expected benefits of the Company’s acquisitions are typically shared across multiple agencies and regions. 82 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Impairment of Long-Lived Assets The carrying amounts of our long-lived assets, including property and equipment, lease right-of-use assets, capitalized internal-use software, costs to obtain customer contracts, and acquired intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful lives are shorter than originally estimated. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to future undiscounted net cash flows the asset is expected to generate over its remaining life. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. If the useful life is shorter than originally estimated, we amortize the remaining carrying value over the new shorter useful life. No long-lived asset impairment charges have been recorded for the years ended December 31, 2022 and December 31, 2021. 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 $ 45.5 million, $ 41.2 million, and $ 29.1 million for the years ended December 31, 2022, 2021, and 2020, respectively. Stock-Based Compensation In accordance with ASC 718-10, “Stock Compensation”, the Company measures stock based awards at fair value and recognizes compensation expense for all share-based payment awards made to its employees and directors, including employee stock options. The Company estimates the fair value of stock options granted using the Black-Scholes valuation model. This model requires the Company to make estimates and assumptions including, among other things, estimates regarding the length of time an employee will retain vested stock options before exercising them, the estimated volatility of its common stock price and the number of options that will be forfeited prior to vesting. The fair value is then recognized on a straight line basis over the requisite service period of the award, which is generally three to four years . Changes in these estimates and assumptions can materially affect the determination of the fair value of the stock-based compensation and consequently, the related amount recognized in the consolidated statement of operations. Deferred Rent The Company records rent expense on a straight-line basis over the term of the related lease. The difference between the rent expense recognized for financial reporting purposes and the actual payments made in accordance with the lease agreement is recognized as deferred rent liability included in other liabilities on the Company’s consolidated balance sheets. 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 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 in interest expense and penalties, if any, related to 83 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS unrecognized tax benefits in general and administrative expenses. 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 Standards In June 2022, the FASB issued Accounting Standards Update (“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 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 ASU 2022-03 to have a significant impact on its consolidated financial statements. Recently Adopted Accounting Standards In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by eliminating existing accounting models that require separation of a cash conversion or beneficial conversion feature from the host contract. Accordingly, a convertible debt instrument will be accounted as a single liability measured at its amortized cost and a convertible preferred stock will be accounted as a single equity instrument measured at its historical cost, as long as no other embedded features require bifurcation as derivatives and the convertible debt was not issued at a substantial premium. The ASU also makes targeted improvements to the disclosure requirements for convertible instruments and earnings per share guidance. The new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The Company adopted the updated guidance as of January 1, 2022, using a modified retrospective method with a cumulative-effect adjustment as of the adoption date. Comparative periods are not adjusted. As a result, the Company recognized a $ 50.2 million decrease to accumulated deficit, a $ 209.7 million decrease to additional paid-in capital, and a $ 159.4 million increase to convertible senior notes, net, in connection with the adoption of ASU 2020-06. The required use of the if-converted method did not impact the diluted net loss per share as the Company was in a net loss position. See Note 8 – Convertible Senior Notes, Net and Capped Call Transactions for a description of the convertible senior notes, net on the consolidated balance sheet. With the exception of the new standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2022, that are of significance or potential significance to the Company. Note 2. Revenue Recognition 84 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The majority of the Company’s revenue is generated from hosted service revenues, which is inclusive of its platform usage pricing model, and related professional services from the sale of the LivePerson services. Revenues are recognized when control of these services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. 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 $ 514.8 million, $ 469.6 million, and $ 366.6 million was recognized during the years ended December 31, 2022, 2021, and 2020, respectively. Under ASC 606, the Company defers all incremental commission costs (“contract acquisition costs”) to obtain the contract. The contract acquisition costs, which are comprised of prepaid sales commissions, have balances at December 31, 2022 and 2021 of $ 43.8 million and $ 40.7 million, respectively. The Company amortizes these costs over the related period of benefit using the customer expected life that the Company determined to be three to five years which is consistent with the transfer to the customer of the services to which the asset relates. The Company classifies contract acquisition costs as long-term unless they have an original amortization period of one year or less. Hosted Services - Business Revenue Hosted services - Business revenue is reported at the amount that reflects the ultimate consideration expected to be received and primarily consist of fees that provide customers access to the Conversational Cloud, the Company’s enterprise-class, cloud-based platform. The Company has determined such access represents a stand-ready service provided continually throughout the contract term. As such, control and satisfaction of this stand-ready performance obligation is deemed to occur over time. The Company recognizes this revenue over time on a ratable basis over the contract term, beginning on the date that access to the Conversational Cloud platform is made available to the customer. The passage of time is deemed to be the most faithful depiction of the transfer of control of the services as the customer simultaneously receives and consumes the benefit provided by the Company’s performance. Subscription contracts are generally one year or longer in length, billed monthly, quarterly or annually in advance. There is no significant variable consideration related to these arrangements. Additionally, for certain of the Company’s larger customers, the Company may provide call center labor through an arrangement with one or more of several qualified vendors. For most of these customers, the Company passes the fee it incurs with the labor provider and its fee for the hosted services through to its customers in the form of a fixed fee for each order placed via the Company’s online engagement solutions. For these Gainshare arrangements in accordance with ASC 606, “Principal Agent Considerations”, the Company acts as a principal in a transaction if it controls the specified goods or services before they are transferred to the customer. Professional Services Revenue Professional Services revenue primarily consists of fees for deployment and optimization services, as well as training delivered on an on-demand basis which is deemed to represent a distinct stand-ready performance obligation and is recognized at a point in time. Professional Services revenue is reported at the amount that reflects the ultimate consideration the Company expects to receive in exchange for such services. Control for the majority of the Company’s Professional Services contracts passes over time to the customer and is recognized ratably over the contracted period, as the passage of time is deemed to be the most faithful depiction of the transfer of control. For certain deployment services, which are not deemed to represent a distinct performance obligation, revenue will be recognized in the same manner as the fee for access to the Conversational Cloud platform, and as such will be recognized on a straight-line basis over the contract term. For services billed on a fixed price basis, revenue is recognized over time based on the proportion performed using time and materials as the measure of progress toward complete satisfaction of the performance obligation. Our Professional Services 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. 85 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Remaining Performance Obligation As of December 31, 2022, 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 $ 397.3 million. Approximately 88 % 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 obligation pursuant to ASC 606. Contracts with Multiple Performance Obligations Some of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors, including the value of its contracts, the cloud applications sold, and the number and types of users within its contracts. Hosted Services- Consumer Revenue For revenue from the Company’s Consumer segment generated from online transactions between Experts and Users, revenue is recognized at an amount net of Expert fees in accordance with ASC 606, “Principal Agent Considerations”, due primarily to the fact that the Expert is the primary obligor. Additionally, the Company performs as an agent without any risk of loss for collection, and is not involved in selecting the Expert or establishing the Expert’s fee. The Company collects a fee from the consumer and retains a portion of the fee, and then remits the balance to the Expert. Revenue from these transactions is recognized at the point in time when the transaction is complete and no significant performance obligations remain. Deferred Revenues The Company records deferred revenues when cash payments are received or due in advance of its performance. The decrease of $ 14.2 million in the deferred revenue balance as of the year ended December 31, 2022 is primarily driven by cash payments received or due in advance of satisfying performance obligations, partially offset by approximately $ 98.3 million of revenues recognized that were included in the deferred revenue balance as of December 31, 2021. The following table presents deferred revenue by revenue source: December 31, 2022 2021 (In thousands) Hosted services – Business $ 83,561 $ 94,107 Hosted services – Consumer (1) — 870 Professional services – Business 933 3,831 Total deferred revenue - current $ 84,494 $ 98,808 Professional services – Business $ 174 $ 54 Total deferred revenue - non-current $ 174 $ 54 (1) $ 0.8 million was reclassified to liabilities held for sale related to the planned divestiture of Kasamba, Inc. See Note 20 – Assets Held for Sale for further details. 86 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Disaggregated Revenue The following table presents the Company’s revenues disaggregated by revenue source: Year Ended December 31, 2022 2021 2020 (In thousands) Revenue: Hosted services – Business $ 375,325 $ 364,231 $ 286,588 Hosted services – Consumer 37,142 37,695 29,764 Professional services – Business 102,333 67,698 50,268 Total revenue $ 514,800 $ 469,624 $ 366,620 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, 2022 2021 2020 (In thousands) United States $ 350,349 $ 306,700 $ 230,557 Other Americas (1) 12,708 18,128 13,420 Total Americas 363,057 324,828 243,977 EMEA (2) 74,298 91,227 83,326 APAC 77,445 53,569 39,317 Total revenue $ 514,800 $ 469,624 $ 366,620 —————————————— (1) Canada, Latin America, and South America. (2) Includes revenue from the United Kingdom of $ 55.3 million, $ 56.7 million, and $ 53.4 million for the years ended December 31, 2022, 2021, and 2020, respectively. and from the Netherlands of $ 6.6 million, $ 4.8 million, and $ 3.2 million for the years ended December 31, 2022, 2021, and 2020, respectively. Information about Contract Balances Amounts collected in advance of services being provided are accounted for as deferred revenue. Nearly all of the Company’s deferred revenue balance is related to Hosted services - Business revenue . In some arrangements, the Company allows customers to pay for access to 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 on the consolidated balance sheet. The opening and closing balances of the Company’s accounts receivable, unbilled receivables, and deferred revenues are as follows: 87 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accounts Receivable Unbilled Receivable Contract Acquisition Costs (Non-current) Deferred Revenue (Current) Deferred Revenue (Non-current) (In thousands) Opening balance as of December 31, 2020 $ 61,801 $ 18,622 $ 41,021 $ 88,848 $ 409 Increase (decrease), net 7,458 5,923 ( 346 ) 9,960 ( 355 ) Balance as of December 31, 2021 $ 69,259 $ 24,545 $ 40,675 $ 98,808 $ 54 Increase (decrease), net ( 15,791 ) 8,524 3,129 ( 14,314 ) 120 Ending balance as of December 31, 2022 $ 53,468 $ 33,069 $ 43,804 $ 84,494 $ 174 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. All options, warrants, or other potentially dilutive instruments issued for nominal consideration are required to be included in the calculation of basic and diluted net income attributable to common stockholders. Diluted EPS is calculated using the “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 net income per share, the Company would assume conversion of the 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 2024 Notes and 2026 Notes (collectively, the “Notes”) were outstanding. The shares of common stock underlying the conversion option of the Notes were not included in the calculation of diluted income per share for the years ended December 31, 2022 and 2021. See Note 8 – Convertible Senior Notes, Net and Capped Call Transactions for a description of the Notes. Basic and diluted earnings per common share are calculated for the years ended December 31, 2022, 2021, and 2020, were as follows: Year Ended December 31, 2022 2021 2020 Net loss (in thousands) $ ( 225,747 ) $ ( 124,974 ) $ ( 107,594 ) Weighted average number of shares outstanding, basic and diluted 74,509,404 69,606,105 65,888,450 Net loss per share, basic and diluted $ ( 3.03 ) $ ( 1.80 ) $ ( 1.63 ) The anti-dilutive securities excluded from the shares used to calculate diluted net loss per share are as follows: December 31, 2022 2021 Shares subject to outstanding common stock options and employee stock purchase plan 4,459,324 4,782,487 Restricted stock units 5,234,733 3,732,013 Fair Value of Earnouts 12,049,211 1,150,504 Conversion option of the 2024 Notes 5,961,186 5,961,186 Conversion option of the 2026 Notes 6,879,283 6,879,283 34,583,737 22,505,473 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 88 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS requires disclosures of selected segment-related financial information about products, major customers, and geographic areas based on the Company’s internal accounting methods. The Company is organized into two operating segments for purposes of making operating decisions and assessing performance. The Business segment enables brands to leverage 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 facilitates online transactions between Experts and Users seeking information and knowledge for a fee via mobile and online messaging. Both segments currently generate their revenue primarily in the United States. The chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, evaluates performance, makes operating decisions, and allocates resources based on the operating income of each segment. The reporting segments follow the same accounting policies used in the preparation of the Company’s consolidated financial statements which are described in the summary of significant accounting policies. The Company allocates cost of revenue, sales and marketing and amortization of purchased intangibles to the segments, but it does not allocate product development expenses, general and administrative expenses, restructuring costs and income tax expense because management does not use this information to measure performance of the operating segments. There are currently no inter-segment sales. Summarized financial information by segment for the periods presented, based on the Company’s internal financial reporting system utilized by the Company’s CODM, follows: Year Ended December 31, 2022 Business Consumer Corporate Consolidated (In thousands) Revenue: Hosted services – Business $ 375,325 $ — $ — $ 375,325 Hosted services – Consumer — 37,142 — 37,142 Professional services – Business 102,333 — — 102,333 Total revenue 477,658 37,142 — 514,800 Cost of revenue 179,295 5,404 — 184,699 Sales and marketing 187,932 26,095 — 214,027 Amortization of purchased intangibles 3,678 — — 3,678 Unallocated corporate expenses — — 334,280 334,280 Operating income (loss) $ 106,753 $ 5,643 $ ( 334,280 ) $ ( 221,884 ) Year Ended December 31, 2021 Business Consumer Corporate Consolidated (In thousands) Revenue: Hosted services – Business $ 364,231 $ — $ — $ 364,231 Hosted services – Consumer — 37,695 — 37,695 Professional services – Business 67,698 — — 67,698 Total revenue 431,929 37,695 — 469,624 Cost of revenue 149,983 6,897 — 156,880 Sales and marketing 139,866 25,555 — 165,421 Amortization of purchased intangibles 2,045 — — 2,045 Unallocated corporate expenses — — 238,544 238,544 Operating income (loss) $ 140,035 $ 5,243 $ ( 238,544 ) $ ( 93,266 ) 89 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2020 Business Consumer Corporate Consolidated (In thousands) Revenue: Hosted services – Business $ 286,588 $ — $ — $ 286,588 Hosted services – Consumer — 29,764 — 29,764 Professional services – Business 50,268 — — 50,268 Total revenue 336,856 29,764 — 366,620 Cost of revenue 99,394 6,874 — 106,268 Sales and marketing 128,752 21,021 — 149,773 Amortization of purchased intangibles 1,639 — — 1,639 Unallocated corporate expenses — — 198,391 198,391 Operating income (loss) $ 107,071 $ 1,869 $ ( 198,391 ) $ ( 89,451 ) 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 presented: December 31, 2022 2021 (In thousands) United States $ 476,040 $ 444,318 Germany 46,323 52,342 Israel 4,064 20,754 Australia 12,057 12,771 Netherlands 3,470 4,566 Other (1) 13,520 15,629 Total long-lived assets $ 555,474 $ 550,380 —————————————— (1) United Kingdom, Japan, France, Italy, Spain, Canada, and Singapore Note 5. Goodwill and Intangible Assets, Net Goodwill The changes in the carrying amount of goodwill for the periods presented are as follows: Business Consumer Total (In thousands) Balance as of December 31, 2021 $ 283,191 $ 8,024 $ 291,215 Adjustments to goodwill: Acquisitions 15,511 — 15,511 Foreign exchange adjustments ( 2,488 ) — ( 2,488 ) Goodwill reclassified to assets held for sale — ( 8,024 ) ( 8,024 ) Balance as of December 31, 2022 $ 296,214 — 296,214 90 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the third quarter of each year, the Company evaluates goodwill for impairment at the reporting unit level. The Company uses qualitative factors in accordance with ASC 820 - Fair Value Measurement to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a goodwill impairment test. No impairment was recognized for the years ended December 31, 2022, 2021, and 2020. Intangible Assets, Net Intangible assets, net are summarized as follows (for details about the intangible assets acquired see Note 9 – Acquisitions ): December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Amortization Period (In thousands) (In years) Amortizing intangible assets: Technology $ 97,454 $ ( 45,907 ) $ 51,547 5.0 Customer relationships 31,987 ( 17,392 ) 14,595 10.0 Patents 11,088 ( 1,419 ) 9,669 12.8 Trademarks 1,044 ( 364 ) 680 5.0 Trade names 1,378 ( 402 ) 976 2.8 Other 979 ( 343 ) 636 4.1 Total $ 143,930 $ ( 65,827 ) $ 78,103 December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Amortization Period (In thousands) (In years) Amortizing intangible assets: Technology $ 90,626 $ ( 30,757 ) $ 59,869 5.1 Customer relationships 32,162 ( 15,164 ) 16,998 10.0 Patents 7,988 ( 1,137 ) 6,851 11.8 Trademarks 1,474 ( 135 ) 1,339 5.0 Trade names 460 ( 43 ) 417 2.1 Other 314 ( 234 ) 80 2.2 Total $ 133,024 $ ( 47,470 ) $ 85,554 91 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amortization expense is calculated over the estimated useful life of the asset. Aggregate amortization expense for intangible assets was $ 18.4 million, $ 5.6 million, and $ 2.8 million for the years ended December 31, 2022, 2021, and 2020, respectively, and a portion of this amortization was included in cost of revenue in the consolidated statements of operations. As of December 31, 2022, estimated annual amortization expense for the next five years and thereafter is as follows: Estimated Amortization Expense (In thousands) 2023 $ 17,954 2024 16,030 2025 15,631 2026 12,942 2027 1,331 Thereafter 14,215 Total $ 78,103 Note 6. Property and Equipment, Net The following table presents the detail of property and equipment as of the dates presented: December 31, 2022 2021 (In thousands) Computer equipment and software $ 128,206 $ 120,685 Internal-use software development costs 161,633 122,479 Finance lease right-of-use assets 3,083 6,797 Furniture, equipment and building improvements 506 258 Property and equipment, at cost 293,428 250,219 Less accumulated depreciation ( 155,706 ) ( 125,493 ) Property and equipment, net (1) 137,722 124,726 Less assets held for sale (Note 20) ( 11,223 ) — Property and equipment, net $ 126,499 $ — (1) As of December 31, 2022, property and equipment, net includes Assets held for sale of $ 11.2 million, which consists of the Company’s consumer segment, as further described in Note 20 – Assets Held for Sale. In accordance with its policy, the Company reviews the estimated useful lives of its fixed assets on an ongoing basis. As of December 31, 2022 and 2021, there was approximately $ 39.2 million and $ 36.1 million, respectively, of internal-use software development costs related to projects currently still in development, which are, therefore, not yet subject to amortization. Aggregate depreciation and amortization expense for property and equipment was $ 32.3 million, $ 27.4 million, and $ 22.8 million for the years ended December 31, 2022, 2021, and 2020, respectively. 92 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, 2022 2021 (In thousands) Professional services, consulting and other vendor fees $ 51,067 $ 58,811 Payroll and other employee related costs 19,182 29,855 Short-term contingent earn-out 47,819 — Sales commissions 4,402 4,269 Financing lease liability (Note 10) 2,569 3,738 Unrecognized tax benefits 2,196 2,424 Restructuring (Note 14) 803 1,694 Taxes other than income tax 1,148 918 Other 2,254 2,588 Accrued expenses and other current liabilities $ 131,440 $ 104,297 Note 8. Convertible Senior Notes, Net 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, which amount includes $ 30.0 million aggregate principal amount of such 2024 Notes issued pursuant to the exercise in full by the initial purchasers of their option to purchase additional 2024 Notes. Interest on the 2024 Notes is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2019. 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, paid, or payable by the Company, 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. 93 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 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, 2022, the conditions allowing holders of the 2024 Notes to convert were not met. The 2024 Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 2024 Notes; equal in right of payment with the Company’s existing and future liabilities that are not so subordinated; effectively subordinated to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries 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. In accounting for the 2024 Notes after the adoption of ASU 2020-06, the 2024 Notes are accounted for as a single liability, and the carrying amount of the 2024 Notes is $ 227.9 million as of December 31, 2022 , consisting of principal of $ 230.0 million, net of unamortized debt issuance costs of $ 2.1 million . The 2024 Notes were classified as long term liabilities as of December 31, 2022. The remaining term ov er which the 2024 Notes’ debt issuance costs will be amortized is 1.2 years. The effective interest rate on the debt was 1.53 % for the year ended December 31, 2022. 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 94 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 sheet. 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 in a private placement, which amount includes $ 67.5 million aggregate principal amount of such Notes issued pursuant to the exercise in full by the initial purchasers of their option to purchase additional 2026 Notes. 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, paid or payable by the Company, 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, 2022, the conditions allowing holders of the 2026 Notes to convert were not met. The 2026 Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 2026 Notes; equal in right of payment with the Company’s existing and future liabilities that are not so subordinated; effectively subordinated to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries 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 95 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $ 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. In accounting for the 2026 Notes after 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 $ 509.5 million as of December 31, 2022 , consisting of principal of $ 517.5 million, net of unamortized debt issuance costs of $ 8.0 million . The 2026 Notes were classified as long term liabilities as of December 31, 2022. The remaining term over which the 2026 Notes’ debt issuance costs will be amortized is 3.9 years. The effective interest rate on the debt was 0.40 % for the year ended December 31, 2022. In connection with the offering of the 2026 Notes, the Company entered into privately-negotiated capped call option 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. The net carrying amount of the liability component of the Notes as of December 31, 2022 (post-ASU 2020-06 adoption) and as of December 31, 2021 (pre-ASU 2020-06 adoption) was as follows: December 31, 2022 2021 (In thousands) Principal $ 747,500 $ 747,500 Unamortized discount — ( 162,960 ) Unamortized issuance costs ( 10,077 ) ( 10,302 ) Net carrying amount $ 737,423 $ 574,238 The net carrying amount of the equity component of the Notes as of December 31, 2022 (post-ASU 2020-06 adoption) and as of December 31, 2021 (pre-ASU 2020-06 adoption) was as follows: December 31, 2022 2021 (In thousands) Proceeds allocated to the conversion options (debt discount) $ — $ 215,434 Issuance costs — ( 5,783 ) Net carrying amount $ — $ 209,651 96 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the interest expense recognized related to the Notes: Year Ended December 31, 2022 2021 2020 (In thousands) Contractual interest expense $ 1,725 $ 1,725 $ 1,725 Amortization of issuance costs 3,778 2,499 1,340 Amortization of debt discount — 33,309 11,564 Total interest expense $ 5,503 $ 37,533 $ 14,629 Interest expense of $ 5.5 million, $ 37.5 million, and $ 14.6 million is reflected as a component of interest expense, net in the accompanying consolidated statement of operations for the years ended December 31, 2022, 2021, and 2020, respectively. Note 9. Acquisitions WildHealth In February 2022, the Company completed the acquisition of 100% of the equity of WildHealth, Inc. (“WildHealth”), which leverages advanced machine learning to combine DNA analysis, biometrics, microbiome testing and phenotypic data to provide people with a blueprint for truly optimized health and a maximized health span, 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 on the acquisition date of February 7, 2022. This acquisition is part of the Company’s strategy to accelerate its technology-driven healthcare offerings by combining a rich healthcare data platform with Conversational AI to enable B2B healthcare brands to scale and personalize patient engagement. 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 will be subject to vesting conditions based on continuing employment post acquisition. The Company has allocated the purchase consideration subject to the stock forfeiture agreements between pre and post combination periods. Former stockholders of WildHealth have 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 has 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 liability classified to be recognized over the requisite service periods. For the earn-outs, the Company accrued $ 42.2 million for the twelve months ended December 31, 2022 , which is reflected as a component of Other liabilities and accrued expenses and Other current liabilities in the accompanying consolidated balance sheets and as a component of stock-based compensation expense in the accompanying consolidated statements of operations. The purchase price allocation resulted in approximately $ 15.5 million of goodwill and $ 8.3 million of intangible assets. 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 will not be 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. The Company recorded an indemnification asset of $ 1.2 million relating to a pre-acquisition liability assumed. The following table summarizes the fair value amounts of identifiable assets acquired and liabilities assumed at the acquisition date: 97 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WildHealth Acquisition (In thousands) Assets acquired: Cash $ 1,353 Other current assets 382 Fixed assets 248 Intangible assets 8,300 Other assets 1,037 Total a ssets acquired $ 11,320 Liabilities assumed: Current liabilities assumed $ ( 1,463 ) Deferred tax liabilities ( 1,603 ) Other liabilities assumed ( 1,500 ) Total liabilities assumed ( 4,566 ) Net assets acquired 6,754 Total acquisition consideration 22,265 Goodwill $ 15,511 Other current assets acquired in connection with the acquisition consisted primarily of accounts receivable and other short term assets. Current liabilities assumed in connection with the acquisition consisted primarily of accounts payable, deferred revenue and other short term liabilities. The following summarizes the intangible assets acquired by category: Fair Value Useful life (In thousands) (In years) Amortizing intangible assets: Developed technology $ 7,100 5.0 Trade name 600 5.0 Fellowship content 600 5.0 Total amortizing intangible assets $ 8,300 The Company applied a multi-period excess earnings method of the income approach to estimate the fair values of the intangible assets acquired. The intangible assets acquired in the business acquisition were developed technology, trade name, and fellowship content for the fair value of $ 8.3 million, determined based on the estimated fair value of expected after-tax cash flows attributable to annual recurring revenue from customers. The Company applied various estimates and assumptions with respect to forecasted revenue growth rates, the revenue attributable to the existing customers over time and the discount rate. The fair values assigned to the other tangible and identifiable intangible assets acquired and liabilities assumed as part of the business combination were based on management’s estimates and assumptions. The Company began amortizing the intangible assets on the date of acquisition over a period of five years based on expected future cash flow. The amortization expense is recorded to amortization of purchased intangibles in the consolidated statements of operations. The Company incurre d $ 2.0 million i n acquisition costs related to the WildHealth transaction that was expensed in the period incurred, of which $ 0.4 million was expensed for the twelve months ended December 31, 2022 , a nd is included in general and administrative expense in the accompanying consolidated statements of operations. Pro Forma Financial Information The following unaudited pro forma information presents the combined results of operations as if the acquisition of WildHealth had been completed as of the beginning of the Company’s fiscal year 2021. The unaudited pro forma results include adjustments primarily related to the amortization of intangible assets and the inclusion of acquisition costs as of the earliest period presented. 98 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies, or the effect of the incremental costs incurred from integrating this company. For pro forma purposes, 2022 earnings were adjusted to exclude acquisition-related costs, and 2021 earnings were adjusted to include these costs. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations. The unaudited pro forma financial information was as follows: December 31, 2022 2021 (In thousands) Revenue $ 515,035 $ 472,626 Net Loss $ ( 224,773 ) $ ( 132,994 ) The amount of revenue and net loss of the WildHealth acquisition included in the Company’s consolidated statement of operations from the acquisition date to December 31, 2022 was $ 9.9 million and $ 23.4 million, respectively. e-Bot7 In July 2021, the Company acquired e-bot7 GmbH (“e-bot7”), a Conversational AI company based in Germany for a purchase price of $ 50.7 million. This acquisition is accounted for as a part of the Company’s Business segment. This transaction was accounted for as a business combination. The purchase price consisted of approximately $ 24.3 million in cash, $ 20.2 million in shares of common stock of the Company, and potential earn-out consideration of up to $ 8.8 million in common stock of the Company, which is based on achieving certain objectives and milestones and is included as part of the purchase price. The current fair value of the earn-out is $ 8.3 million. Also as part of the transaction, there is a potential earn-out consideration of up to $ 4.4 million payable in common stock of the Company that is being treated as compensation expense throughout the earning period. The earn-out consideration cannot exceed the maximum base earn-out consideration of $ 3.9 million. The base earn-out payment consists of the revenue earn-out payment only. The fair value of the revenue earn-out consideration is approximately $ 1.0 million of the current fair value of the earn-out of $ 8.3 million. The Company incurred $ 1.5 million in acquisition costs for this transaction that were expensed in the year ended December 31, 2021, and were included in General and administrative expense in the accompanying consolidated statements of operation s. The Company incurred $ 0.04 million in acquisition costs related to the e-bot7 transaction that was expensed for the year ended December 31, 2022 and is included in general and administrative expense in the accompanying consolidated statements of operations. The purchase price allocation resulted in approximately $ 45.1 million of goodwill and $ 7.7 million of intangible assets. The goodwill will not be 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. Tenfold In October 2021, the Company acquired Callinize Inc., dba Tenfold (“Tenfold”), a leading customer experience integration platform operating in the United States. Tenfold was built to integrate the world’s leading communication service providers with the leading CRM and support systems. The purchase price was $ 112.2 million. This acquisition is accounted for as a part of the Company’s Business segment. The transaction was accounted for as a business combination. The purchase price consisted of approximately $ 56.9 million in cash, $ 42.0 million in shares of common stock of the Company, potential earn-out consideration of up to $ 6.9 million in common stock of the Company, which is based on achieving certain objectives and milestones and is included as part of the purchase price, and replacement options of $ 6.4 million, which means an option granted by LivePerson to purchase its common stock granted under the Callinize Inc. dba Tenfold 2015 Stock Plan, as amended most recently as of June 26, 2019 (the “Tenfold Stock Plan”), whether vested or unvested. The current fair value of the earn-out 99 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS is $ 7.2 million, of which $ 2.0 million payable in common stock of the Company is being treated as compensation expense over the earning period. The earn-out consideration cannot exceed the maximum earn-out consideration of $ 14.3 million. As part of the acquisition, the Company also assumed the Tenfold Stock Plan and the outstanding vested and unvested options to purchase shares of common stock of Tenfold thereunder, and such options become exercisable to purchase shares of LivePerson’s common stock, subject to appropriate adjustments to the number of shares and the exercise price of each such option. In connection with the above, the Company registered 60,082,513 vested shares and 42,964,711 unvested shares under the Tenfold Stock Plan. We estimated the fair value of the aforementioned vested and unvested options at the completion of the acquisition at $ 31.5 million. Of the total consideration, $ 13.5 million was allocated to the purchase price (with $ 7.1 million of this paid in cash instead of shares), $ 4.0 million was related to earn-outs and escrow that were held back, $ 2.4 million was accelerated and expensed immediately following the closing, and $ 11.6 million was allocated to future services and will be expensed over the remaining requisite service periods of approximately four years on a straight-line basis. The estimated fair value of the stock options was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.0055 was applied to convert Tenfold’s outstanding stock awards into shares of LivePerson’s common stock. The purchase price allocation resulted in approximately $ 71.8 million of goodwill and $ 41.2 million of intangible assets. The goodwill will not be 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. VoiceBase In October 2021, the Company acquired VoiceBase, Inc. (“VoiceBase”), a leader in real-time speech recognition and voice analytics platform operating in the United States for a purchase price of $ 111.4 million. This acquisition is accounted for as a part of the Company’s Business segment. This transaction was accounted for as a business combination. The purchase price consisted of approximately $ 17.1 million in cash, $ 63.8 million in shares of common stock of the Company, a management retention plan (“MIP”) of $ 9.3 million to be paid in shares of common stock of the Company, potential earn-out consideration of up to $ 16.7 million in common stock of the Company, which is based on achieving certain objectives and milestones and is included as part of the purchase price, and replacement options of $ 4.5 million, which means an option granted by LivePerson to purchase its common stock granted under the VoiceBase, Inc. 2010 Equity Incentive Plan, as amended (the “VoiceBase Stock Plan”), whether vested or unvested. The current fair value of the earn-out is $ 17.3 million, of which $ 6.0 million payable in common stock of the Company is being treated as compensation expense over the earning period. The earn-out consideration cannot exceed the maximum earn-out consideration of $ 29.5 million. The MIP is a retention plan for the VoiceBase employees payable in two installments; 50% after the Company shares are registered with the SEC and 50% after January 1, 2022, but no later than March 16, 2022. These payments were made in 2022, in accordance with the agreement. As part of the acquisition, the Company also assumed the VoiceBase Stock Plan and the outstanding vested and unvested options to purchase shares of common stock of VoiceBase thereunder, and such options become exercisable to purchase shares of LivePerson’s common stock, subject to appropriate adjustments to the number of shares and the exercise price of each such option. In connection with the above, the Company registered 16,322,217 vested shares and 5,167,530 unvested shares under the VoiceBase Stock Plan. We estimated fair value of the aforementioned vested and unvested options at the completion of the acquisition at $ 5.9 million. Of the total consideration, $ 4.5 million was allocated to the purchase price, $ 0.8 million was accelerated and expensed immediately following the closing, and $ 0.7 million was allocated to future services and will be expensed over the remaining requisite service periods. Vesting schedules vary based on the VoiceBase Stock Plan. The estimated fair value of the stock options was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.0091 was applied to convert VoiceBase’s outstanding stock awards into shares of LivePerson’s common stock. The purchase price allocation resulted in approximately $ 81.3 million of goodwill and $ 28.8 million of intangible assets. The goodwill will not be 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. 100 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10. Leases The Company has operating and finance leases for its corporate offices and other service agreements. Our leases have remaining lease terms of less than one to four years , some of which include options to extend. For leases with a lease term greater than 12 months, right-of-use assets (“ROU assets”) and lease liabilities are recognized on the consolidated balance sheets at the commencement date based on the present value of the remaining fixed lease payments and includes only payments that are fixed and determinable at the time of commencement. In connection with the leases, the Company recognized operating lease right-of-use assets of $ 1.6 million and $ 2.0 million and an aggregate lease liability of $ 2.8 million and $ 6.1 million as of December 31, 2022 and December 31, 2021, respectively. On July 13, 2020, the Company announced its decision to transition to an employee-centric model under which employees will work remotely rather than in traditional offices. In connection with this decision, the Company abandoned 14 leases in its global portfolio of office leases during 2020. As a result, the Company recognized accelerated amortization to fully reduce the carrying value of the associated right-of-use assets between the decision date and the cease use date. During the second quarter of 2021, the Company decided to reoccupy some of its leased space to provide its employees with the option of working in an office space environment. There were no changes to the accounting for the lease liabilities associated with the leased office spaces. During 2022, the Company had a $ 0.2 million gain resulting from the settlement of leases, compared to a $ 3.5 million gain for 2021. As of December 31, 2022, due to a dispute in connection with one of the leases in Israel, the Company was required to pledge cash as collateral security to be maintained at an Israeli bank. The collateral security would remain in control of the bank, to be available in order to satisfy outstanding obligations under the lease contracts. Accordingly, the Company had cash at an Israeli bank of approximately $ 0.2 million at December 31, 2022 and approximately $ 1.5 million at December 31, 2021, which is recorded as restricted cash in Prepaid expenses and other current assets in the consolidated balance sheets. In the third quarter of 2021, the Company entered into a new lease in Australia and was required to pledge $ 0.2 million in cash as collateral security, which is also recorded as restricted cash in Prepaid expenses and other current assets in the consolidated balance sheets as of December 31, 2022 and 2021. 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, 2022 2021 2020 (In thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 4,885 $ 2,927 $ 4,901 Operating cash flows for finance leases 196 362 88 Financing cash flows for finance leases 3,734 3,554 1,154 The components of lease costs for the periods listed are as follows: Year Ended December 31, 2022 2021 2020 (In thousands) Finance lease cost Amortization of right-of-use assets $ 3,690 $ 3,718 $ 772 Interest 196 362 88 Operating lease cost 11,332 8,912 12,649 Total lease cost $ 15,218 $ 12,992 $ 13,509 101 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 December 31, 2021 Weighted Average Remaining Lease Term: Operating leases 1.5 years 2.5 years Finance leases 1.1 years 2.0 years Weighted Average Discount Rate: Operating leases 7 % 7 % Finance leases 4 % 4 % Supplemental balance sheet information related to leases is as follows: Classification on the Consolidated Balance Sheet December 31, 2022 December 31, 2021 (In thousands) Assets Operating ROU assets Operating lease ROU assets $ 1,604 $ 1,977 Finance ROU assets Property and equipment, net 3,083 6,797 Liabilities Current liabilities: Operating lease liability Operating lease liability $ 2,160 $ 3,380 Finance lease liability Accrued expenses and other current liabilities 2,569 3,738 Non-current liabilities: Operating lease liability Operating lease liability, net of current portion 682 2,733 Finance lease liability Other liabilities 191 2,780 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: December 31, 2022 Operating Leases Finance Leases Year Ending December 31, (In thousands) 2023 $ 2,320 $ 2,615 2024 346 115 2025 330 86 2026 137 — 2027 — — Thereafter — — Total minimum lease payments 3,133 2,816 Less: present value adjustment ( 291 ) ( 56 ) Present value of lease liabilities $ 2,842 $ 2,760 Rental expense for operating leases and other service agreements was approximately $ 15.2 million, $ 13.0 million and $ 13.5 million for the years ended December 31, 2022, 2021, and 2020, respectively. Note 11. Fair Value Measurements 102 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company measures its cash equivalents at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value: • Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. • Level 2: Inputs reflect: quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. • Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. Financial Assets and Liabilities The carrying amount of cash, accounts receivable, and accounts payable approximate their fair value due to their short-term nature. The Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of December 31, 2022 and December 31, 2021, are summarized as follows: December 31, 2022 Level 1 Level 2 Level 3 Total (In thousands) Assets: Cash equivalents: Money market funds $ 308,295 $ — $ — $ 308,295 Total assets $ 308,295 $ — $ — $ 308,295 Liabilities: Earn-outs treated as contingent consideration $ — $ — $ 20,722 $ 20,722 Earn-outs treated as liability awards $ — $ — $ 51,499 $ 51,499 Total liabilities $ — $ — $ 72,221 $ 72,221 December 31, 2021 Level 1 Level 2 Level 3 Total (In thousands) Assets: Cash equivalents: Money market funds $ 416,178 $ — $ — $ 416,178 Total assets $ 416,178 $ — $ — $ 416,178 Liabilities: Contingent earn-out $ — $ — $ 29,686 $ 29,686 Total liabilities $ — $ — $ 29,686 $ 29,686 In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of 103 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS fair value. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions based on the best information available. The Company’s money market funds are measured at fair value on a recurring basis based on quoted market prices in active markets and are classified as Level 1 within the fair value hierarchy. The Company’s contingent earn-out liability is measured at fair value on a recurring basis and is classified as Level 3 within the fair value hierarchy. On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived tangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. The Company uses an income approach and inputs that constitute Level 3. As of December 31, 2022, the fair value of the 2024 Notes and 2026 Notes, as further described in Note 8 – Convertible Senior Notes, Net and Capped Call Transactions above, was approximately $ 512.9 million. Management determines the fair value by utilizing an independent valuation specialist using the antithetic variable technique and is considered a Level 2 fair value measurement. The changes in fair value of the Level 3 liabilities are as follows: December 31, 2022 2021 (In thousands) Balance, Beginning of year $ 29,830 — Additions in the period 61,920 29,830 Change in fair value of contingent consideration ( 8,516 ) — Change in fair value of liability awards ( 11,013 ) 132 Payments — ( 132 ) Balance, End of year $ 72,221 $ 29,830 Certain former stakeholders of the Company’s acquisitions are eligible to receive additional cash or share considerations based on the attainment of certain operating metrics in the periods subsequent to the acquisitions of e-bot7, Tenfold and VoiceBase. These earn-out arrangements are accounted for as either contingent considerations arrangements or compensation arrangements. Contingent considerations are fair valued using significant inputs that are not observable in the market. The earn-outs determined to be compensatory are remeasured each reporting period based on whether the performance targets are probable of being achieved and recognized over the related service periods. For the year ended December 31, 2022, the Company recognized $ 49.3 million as a component of stock-based compensation expense in the accompanying consolidated statements of operations. As of December 31, 2021, the Company recognized $ 2.2 million as a component of stock based compensation expense. Note 12. Commitments and Contingencies Employee Benefit Plans The Company has a 401(k) defined contribution plan covering all eligible employees. The Company’s 401(k) policy is a Safe Harbor Plan, whereby the Company matches 100 % of the first 3 % of eligible compensation and 50 % of the next 2 % of eligible compensation. Furthermore, the match is immediately vested. Total Company matching contributions were $ 5.4 million, $ 3.7 million, and $ 3.1 million for the years ended December 31, 2022, 2021, and 2020, respectively. Letters of Credit As of December 31, 2022, the Company had letters of credit totaling $ 0.7 million outstanding as a security deposit for the due performance by the Company of the terms and conditions of a supply contract. 104 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Indemnifications The Company enters into service and license agreements in its ordinary course of business. Pursuant to some of these agreements, the Company agrees to indemnify certain customers from and against certain types of claims and losses suffered or incurred by them as a result of using the Company’s products. The Company also has agreements whereby its executive officers and directors are indemnified for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a directors and officers insurance policy that reduces its exposure and enables the Company to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of December 31, 2022 and 2021. Non-Income Related Taxes The Company is in the process of finalizing its sales tax liability analysis for states in which it has economic nexus. During the first quarter of 2020, the Company determined it was probable the Company would be subject to sales tax liabilities plus applicable interest in these states and has estimated the potential exposure to range between $ 2.5 million to $ 6.3 million. The Company determined that its best estimate of what would be reasonably expected for the Company to settle the potential exposure was $ 2.5 million and accordingly, the Company accrued this amount with a corresponding charge to earnings as of March 31, 2020. As of December 31, 2022, there is a $ 1.1 million accrual balance for sales tax liabilities. The decrease in the balance of this accrual is primarily due to payments made for the sales tax liabilities. Note 13. Stockholders’ Equity Common Stock As December 31, 2022, there were 200,000,000 shares of common stock authorized, and 78,350,984 and 75,584,911 shares issued and outstanding, respectively. As of December 31, 2021, there were 200,000,000 shares of common stock authorized, and 74,980,546 and 72,234,303 shares issued and outstanding, respectively. The par value for the common stock is $ 0.001 per share. Preferred Stock As of December 31, 2022 and 2021, there were 5,000,000 shares of preferred stock authorized, and zero shares issued and outstanding. The par value for the preferred stock is $ 0.001 per share. 105 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-Based Compensation The Company’s stock-based compensation generally includes stock options, restricted stock units (“RSUs”), performance-vesting restricted stock units (“PRSUs”), and purchases under the Company’s 2019 Employee Stock Purchase Plan. Stock-based compensation expense related to RSUs is based on the market value of the underlying stock on the date of grant and the related expense is recognized ratably over the requisite service period. The stock-based compensation expense related to PRSUs is estimated at the grant date based on the expectation that performance goals will be achieved at the stated target level. The amount of compensation cost recognized depends on the relative satisfaction of the performance condition based on performance to date. Stock Option Plans The Company’s 2019 Stock Incentive Plan, as amended and restated (the “2019 Plan”), became effective on April 11, 2019. The 2019 Plan allows the Company to grant incentive stock options and RSUs to its employees and directors to participate in the Company’s future performance through stock-based awards at the discretion of the board of directors. On April 19, 2021, the Company’s board of directors amended the plan and authorized 5,000,000 new shares for issuance. The number of shares authorized for issuance is 40,067,744 shares in the aggregate. Options to acquire common stock granted thereunder have ten -year terms. As of December 31, 2022, approximately 1.2 million shares of common stock remained available for issuance (taking into account all option exercises and other equity award settlements through December 31, 2022). Employee Stock Purchase Plan There are 1,000,000 shares authorized and reserved for issuance under the 2019 Employee Stock Purchase Plan. As of December 31, 2022, approximately 0.4 million shares of common stock remained available for issuance under the 2019 Employee Stock Purchase Plan (taking into account all share purchases through December 31, 2022). Inducement Plan There are 6,159,009 shares of common stock authorized and reserved for issuance under the Inducement Plan. On February 9, 2022, the Company’s board of directors amended the plan and authorized 2,790,961 new shares for issuance. As of December 31, 2022, 0.9 million shares of common stock remained available for issuance under the Inducement Plan (taking into account all option exercises and other equity award settlements through December 31, 2022). 106 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Option Activity A summary of the Company’s stock option activity and weighted average exercise prices follows: Stock Option Activity Options (In thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Term (In years) Aggregate Intrinsic Value (In thousands) Balance outstanding at December 31, 2019 5,799 $ 16.57 Granted 737 31.21 Exercised ( 1,683 ) 12.69 Cancelled or expired ( 521 ) 23.27 Balance outstanding at December 31, 2020 4,332 $ 19.78 7.04 $ 183,825 Options vested and expected to vest 1,470 $ 23.88 8.44 $ 56,382 Options exercisable at December 31, 2020 2,280 $ 14.80 5.65 $ 108,128 Balance outstanding at December 31, 2020 4,332 $ 19.78 Granted 1,705 48.24 Exercised ( 863 ) 13.55 Cancelled or expired ( 392 ) 32.94 Balance outstanding at December 31, 2021 4,782 $ 27.52 6.77 $ 62,300 Options vested and expected to vest 1,419 $ 36.41 8.61 $ 11,387 Options exercisable at December 31, 2021 2,564 $ 17.87 5.05 $ 46,932 Balance outstanding at December 31, 2021 4,782 $ 27.52 Granted 993 20.34 Exercised ( 264 ) 5.07 Cancelled or expired ( 1,052 ) 41.56 Balance outstanding at December 31, 2022 4,459 $ 24.25 6.08 $ 1,327 Options vested and expected to vest 1,047 $ 29.80 8.06 $ 242 Options exercisable at December 31, 2022 2,758 $ 21.26 4.94 $ 986 The total fair value of stock options exercised during the years ended December 31, 2022 and 2021 was approximately $ 11.3 million and $ 6.6 million, respectively. As of December 31, 2022, there was approximately $ 18.3 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of approximately 2.5 years. The per share weighted average fair value of stock options granted during the years ended December 31, 2022, 2021 and 2020 was $ 10.20 , $ 28.68 , and $ 13.84 , respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the periods presented: Year Ended December 31, 2022 2021 2020 Dividend yield — % — % — % Risk-free interest rate 1.62 % – 4.20 % 0.46 % – 1.33 % 0.26 % – 0.66 % Expected life (in years) 5 5 5 Historical volatility 53.87 % – 64.13 % 53.51 % – 54.55 % 46.50 % – 53.91 % 107 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A description of the methods used in the significant assumptions used to estimate the fair value of stock-based-based compensation awards follows: • Dividend yield – The Company uses 0 % as it has never issued dividends and does not anticipate issuing dividends in the near term. • Risk-free interest rate – The Company uses the market yield on U.S. Treasury securities at five years with constant maturity, representing the current expected life of stock options in years. • Expected life – The Company uses historical data to estimate the expected life of a stock option. • Historical volatility – The Company uses a trailing five year from grant date to determine volatility. Restricted Stock Unit and Performance-Vesting Restricted Stock Unit Activity A summary of the Company’s RSUs and PRSUs activity and weighted average exercise prices follows: Restricted Stock Unit Activity Number of Shares (In thousands) Weighted Average Grant Date Fair Value (Per Share) Aggregate Fair Value (In thousands) Balance outstanding at December 31, 2019 3,049 $ 24.73 $ 112,848 Awarded 2,530 26.51 Released ( 1,906 ) 23.40 Forfeited ( 723 ) 25.19 Non-vested and outstanding at December 31, 2020 2,950 $ 27.00 $ 183,781 Balance outstanding at December 31, 2020 2,950 $ 27.00 $ 183,781 Awarded 3,066 Released ( 1,596 ) Forfeited ( 688 ) Non-vested and outstanding at December 31, 2021 3,732 $ 43.63 $ 133,308 Balance outstanding at December 31, 2021 3,732 $ 43.63 $ 133,308 Awarded 4,927 Released ( 1,938 ) Forfeited ( 1,486 ) Non-vested and outstanding at December 31, 2022 5,235 $ 25.42 $ 53,080 Expected to vest 3,280 $ 25.87 $ 33,260 RSUs granted to employees generally vest over a three to four -year period, or upon achievement of certain performance conditions. As of December 31, 2022, total unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested RSUs and PRSUs was approximately $ 109.1 million and the weighted-average remaining vesting period was 2.7 years. For the year ended December 31, 2022, the Company opted to settle cash awards related to the bonus entirely in cash. The Company accrued approximately $ 10.4 million for cash awards related to bonus, and recorded a corresponding expense which is included as a component of operating expenses in the accompanying consolidated financial statements. For the year ended December 31, 2021, the Company accrued approximately $ 18.4 million for cash awards related to bonuses to be settled in shares of the Company’s stock and recorded a corresponding expense, which is included as a component of stock-based compensation expense in the accompanying consolidated financial statements. Stock-based compensation expense recognized in the Company’s consolidated statements of operations and cash flows was $ 109.6 million, $ 69.7 million, and $ 65.9 million for the years ended December 31, 2022, 2021, and 2020, respectively. 108 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14. Restructuring During the second quarter of 2022, LivePerson began a restructuring initiative to realign the Company’s cost structure to better reflect significant product and business model innovation and changes over the past year due to acquisitions and factors outside the control of the Company. As part of the restructuring initiative, the Company reoriented its global product and engineering organization for greater efficiency and focus, and reallocated some spending to increase its investment in customer success and go-to-market initiatives. The Company believes these initiatives will better align resources to provide further operating flexibility and position the business for long-term success. In connection with the restructuring initiatives, the Company recognized restructuring costs of $ 19.5 million during the year ended December 31, 2022, which is included in restructuring costs in the accompanying consolidated statements of operations. The majority of these costs relate to the Company’s Business segment. Such costs primarily include severance and other compensation costs. In 2020, the Company went through a re-evaluation of its real estate needs. Following this re-evaluation, commencing in July 2020, the Company significantly reduced the real estate space it leases, resulting in the removal of the associated right-of-use assets. Furthermore, this resulted in various one-time expenses in connection with the abandonment of the majority of the Company’s leased facilities. The lease restructuring costs noted below are a result of this transition to an employee-centric model. The following table presents the detail of the liability for the Company’s restructuring charges, which is included within accrued expenses and other current liabilities within the accompanying consolidated balance sheet, for the periods presented : December 31, 2022 2021 (In thousands) Balance at January 1 $ 1,694 $ 4,732 Lease restructuring costs 442 724 Severance and other associated costs 19,525 2,673 Cash payments ( 20,858 ) ( 6,435 ) Balance at December 31 $ 803 $ 1,694 The following table presents the detail of expenses for the Company’s restructuring charges for the periods presented: Year Ended December 31, 2022 2021 2020 (In thousands) Lease restructuring costs: ROU assets write down $ — $ — $ 13,938 Abandonment of property and equipment — — 5,147 Other lease restructuring costs 442 724 5,245 Total lease restructuring costs 442 724 24,330 Severance and other associated costs 19,525 2,673 5,090 Total restructuring costs $ 19,967 $ 3,397 $ 29,420 Note 15. Legal Matters 109 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [24]7 Litigation The Company filed an intellectual property suit (the “Company IP Suit”) against [24]7 Customer, Inc. (“[24]7”) on March 6, 2014 seeking damages on the grounds that [24]7 reverse engineered and misappropriated the Company’s technology and misused the Company’s business information. On June 22, 2015 and December 7, 2015, [24]7 filed separate countersuits (together, the “Countersuits”) against the Company in the Northern District of California (the “Court”) alleging patent infringement. Trial with respect to the Company IP Suit occurred on May 24, 2021 and the jury awarded approximately $30.3 million in favor of the Company. The Company and [24]7 subsequently reached agreement on the terms of a permanent injunction, and that additional costs were owed to the Company in the amount of $0.4 million. On July 28, 2022, the Court granted the Company’s motion for interest, awarding an additional approximately $4.3 million. 24[7] appealed the judgment in favor of the Company with respect to the Company IP Suit in August 2022. In addition, further litigation between the parties to adjudicate the Counter suits had been set for late 2023, and another trial with respect to the Company’s remaining trade secret claims against [24]7 was set for early 2024. On February 20, 2023, the Company and [24]7 entered into a binding Memorandum of Understanding (“MOU”) detailing the terms for settlement and resolution of all litigation matters between the parties. The terms of the resolution are confidential, and provide for an up front settlement as well as entry into a commercial agreement between the parties. All litigation matters between the parties are stayed pending final documentation of the resolution as set forth in the binding MOU, following dismissal of all litigation matters between the parties with prejudice is expected. COVID-Related Matters As has been widely reported, there is heightened scrutiny by the federal government across many programs related to COVID-19 that were introduced during the COVID-19 pandemic. The Company and its wholly-owned subsidiary WildHealth were each previously engaged in the delivery of products and services related to COVID-19 testing, and have been subsequently subject to governmental inquiries with respect to those COVID-19 related products and services, including inquires by Medicare, the Department of Justice and the U.S. Food and Drug Administration (“governmental agencies”). In November 2022, a professional corporation managed by WildHealth received notice that Medicare reimbursements for its services rendered under a Medicare demonstration program related to COVID-19 testing (the “Program”) were suspended pending further review. Subsequently, WildHealth has received and is responding to inquiries from additional governmental agencies with respect to its participation in the Program. The Company previously provided other products and services related to COVID-19 testing and accompanying software. Those COVID-19 related products and services have also been the subject of inquiry and pending review by governmental agencies. The Company and WildHealth have discontinued all products and services related to COVID-19, and have responded to and intend to continue to cooperate with governmental inquiries related to their previous engagement in COVID-19 related product and service offerings. General From time to time, the Company is involved in or subject to legal, administrative and regulatory proceedings, claims, demands, and investigations arising in the ordinary course of business, including direct claims brought by or against the Company with respect to intellectual property, contracts, employment and other matters, as well as claims brought against the Company’s customers for whom the Company has a contractual indemnification obligation. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matter as appropriate and in compliance with ASC 450. The accruals or estimates, if any, resulting from the foregoing analysis, are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, as applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be 110 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS reasonably estimated, disclose that an estimate cannot be made. From time to time, third parties assert claims against the Company regarding intellectual property rights, privacy issues, and other matters arising in the ordinary course of business. Note 16. 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. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company includes interest accrued on the underpayment of income taxes in interest expense and penalties, if any, related to unrecognized tax benefits in general and administrative expenses. The Company recorded a valuation allowance against its U.S. and Germany deferred tax assets as it considered its cumulative loss in recent years as a significant piece of negative evidence. Since valuation allowances are evaluated on a jurisdiction basis, the Company believes that the deferred tax assets related to LivePerson Australia Holdings Pty. Ltd., LivePerson (UK) Limited, Kasamba Inc., LivePerson Japan and LivePerson Ltd. are more likely than not to be realized as these jurisdictions have positive cumulative pre-tax book income after adjusting for permanent and one-time items. During the year ended December 31, 2022, there was an increase in the valuation allowance recorded of $ 80.5 million. The Company had a valuation allowance on certain deferred tax assets for the years ended December 31, 2022, 2021, and 2020 of $ 187.5 million, $ 107.1 million, and $ 55.4 million, respectively. For the year ended December 31, 2022, an increase in the valuation allowance in the amount of $ 38.8 million was recorded as an expense, an additional increase of $ 0.5 million was recorded to goodwill against acquired federal and state net operating losses and due to the adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, the Company recorded an increase of the valuation allowance to other comprehensive income of $ 41.2 million. For the year ended December 31, 2021, an increase in the valuation allowance in the amount of $ 34.3 million was recorded as an expense and an additional increase of $ 17.4 million was recorded to goodwill against acquired federal and state net operating losses. Under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the Company’s use of its federal net operating loss (“NOL”) carryforwards may be limited if the Company experiences an ownership change, as defined in Section 382 of the Code. The use of NOLs from acquired businesses may also be limited under Section 382. Such an annual limitation could result in the expiration of the NOL carryforwards before utilization. Corresponding provisions of state law may limit the Company’s ability to utilize NOL carryforwards for state tax purposes. As of December 31, 2022, the Company had approximately $ 532.6 million of federal NOL carryforwards available to offset future taxable income. Included in this amount is $ 0.8 million of federal NOL carryovers from the Company’s acquisition of Proficient in 2006, $ 49.4 million of federal NOL carryovers from the Company’s acquisition of Tenfold in 2021, $ 64.9 million of federal NOL carryovers from the Company’s acquisition of VoiceBase in 2021 and $ 2.0 million of federal NOL carryovers from the Company’s acquisition of WildHealth in 2022. Approximately $ 58.2 million of these federal NOL carryforwards were generated in taxable years ending on or before December 31, 2017 and will expire in various years through 2037. Federal NOL carryforwards generated in taxable years ending after December 31, 2017, do not expire, but generally may only offset up to 80% of federal taxable income earned in a taxable year. 111 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The domestic and foreign components of income (loss) before provision for (benefit from) income taxes consist of the following: Year Ended December 31, 2022 2021 2020 (In thousands) United States $ ( 220,060 ) $ ( 128,210 ) $ ( 113,689 ) Israel 1,464 1,414 2,214 United Kingdom 1,428 1,145 536 Netherlands 2,514 3,629 3,398 Australia 533 755 1,663 Germany ( 10,400 ) ( 6,450 ) 243 Other (1) 501 339 507 $ ( 224,020 ) $ ( 127,378 ) $ ( 105,128 ) —————————————— (1) Includes Bulgaria, Canada, France, India, Italy, Japan, Mexico, Singapore, and Spain No additional provision has been made for U.S. income taxes on the undistributed earnings of its wholly-owned Israeli subsidiary, LivePerson Ltd., as such earnings have been taxed in the U.S. and accumulated earnings of the Company’s other foreign subsidiaries are immaterial through December 31, 2022. The provision for (benefit from) income taxes consists of the following: Year Ended December 31, 2022 2021 2020 (In thousands) Current income taxes: U.S. Federal $ — $ ( 22 ) $ ( 581 ) State and local 431 159 59 Foreign 2,458 3,698 2,408 Total current income taxes 2,889 3,835 1,886 Deferred income taxes: U.S. Federal ( 1,153 ) ( 2,908 ) ( 151 ) State and local 79 20 459 Foreign ( 88 ) ( 3,351 ) 272 Total deferred income taxes ( 1,162 ) ( 6,239 ) 580 Total provision for (benefit from) income taxes $ 1,727 $ ( 2,404 ) $ 2,466 112 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The difference between the total income taxes computed at the federal statutory rate and the provision for income taxes consists of the following: Year Ended December 31, 2022 2021 2020 Federal statutory rate 21.00 % 21.00 % 21.00 % State taxes, net of federal benefit 2.89 % 4.83 % 4.82 % Non-deductible expenses – stock based compensation ( 1.30 ) % ( 1.73 ) % ( 1.21 ) % Non-deductible expenses – earn-out ( 3.96 ) % — % — % Non-deductible excess compensation ( 0.14 ) % ( 2.30 ) % ( 5.52 ) % Foreign taxes ( 0.15 ) % ( 0.86 ) % ( 3.98 ) % Valuation allowance ( 17.33 ) % ( 26.92 ) % ( 30.87 ) % Stock based compensation – excess tax benefit / (tax deficiency) ( 2.12 ) % 6.58 % 9.93 % Other 0.33 % 1.29 % 3.48 % Total provision ( 0.78 ) % 1.89 % ( 2.35 ) % The effects of temporary differences and federal NOL carryforwards that give rise to significant portions of federal deferred tax assets and deferred tax liabilities as of the dates presented: Year Ended December 31, 2022 2021 (In thousands) Deferred tax assets: Net operating loss carryforwards $ 141,011 $ 141,930 Foreign tax credit 1,222 1,222 R&D tax credit 1,761 1,761 Original issue discount 9,515 13,530 Interest 2,665 4,188 Operating lease liability 760 3,145 Accounts payable and accrued expenses 7,270 7,010 Non-cash compensation 17,271 13,591 R&D capitalization 39,182 — Allowance for doubtful accounts 5,091 1,280 Total deferred tax assets 225,748 187,657 Less valuation allowance ( 187,525 ) ( 107,061 ) Deferred tax assets, net of valuation allowance 38,223 80,596 Deferred tax liabilities: Property and equipment ( 15,105 ) ( 12,586 ) Intangibles amortization ( 13,142 ) ( 15,361 ) Goodwill amortization and contingent earn-out adjustments ( 7,012 ) ( 6,165 ) Convertible notes issuance — ( 41,666 ) Outside basis difference in subsidiary stock ( 567 ) — Operating lease right-of-use asset ( 524 ) ( 1,833 ) Total deferred tax liabilities ( 36,350 ) ( 77,611 ) Net deferred tax assets $ 1,873 $ 2,985 We have income tax NOL carryforwards related to federal, Australian, and German income tax carryforwards of $ 532.6 million, $ 1.9 million, and $ 19.3 million, respectively. The Australian and German NOLs can be carried forward indefinitely. For the federal NOLs, $ 474.5 million can be carried forward indefinitely, $ 0.8 million will expire between 2023 113 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and 2026, and $ 57.3 million will expire between 2030 and 2037. We have $ 380.5 million of state NOLs, of which $ 78.4 million can be carried forward indefinitely and $ 302.1 million expire between 2023 and 2042. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with other provisions contained within this guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate audit settlement. The Company had unrecognized tax benefits of $ 2.7 million as of December 31, 2022 and $ 2.9 million as of December 31, 2021, respectively. Accrued interest and penalties included in the Company’s liability related to unrecognized tax benefits and recorded in accrued expenses and other current liabilities were immaterial at December 31, 2022 and 2021. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Year Ended December 31, 2022 2021 2020 (In thousands) Unrecognized tax benefits balance at January 1 $ 2,917 $ 3,615 $ 2,053 Increase due to business combinations — 488 — Gross decrease for tax positions of prior years — — ( 438 ) Gross increase for tax positions of current years 205 376 2,984 Decrease due to settlement — ( 1,562 ) ( 984 ) Uncertain tax basis classified as held-for-sale liabilities ( 401 ) — — Gross unrecognized tax benefits at December 31 $ 2,721 $ 2,917 $ 3,615 The tax years subject to examination by major tax jurisdictions include the years 2016 and forward for U.S. states and New York City, the years 2017 and forward for U.S. Federal, and the years 2015 and forward for certain foreign jurisdictions. Tax Legislation On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA imposes a number of significant changes, including, among other things, a 15% minimum tax on the book income of certain corporations and a 1% excise tax on stock buybacks by U.S. public companies. Only limited guidance has been issued to date with respect to these changes. The Company does not currently expect the tax-related provisions of the IRA to have a material impact on its financial results. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law making several changes to the Code. The changes include, but are not limited to: increasing the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income. As a result of the CARES Act, the Company filed refund claims relating to prior years totaling $ 0.6 million. A statutory rate change in the United Kingdom was enacted as of the balance sheet date ending December 31, 2021. Effective April 1, 2023, the tax rate will increase from 19% to 25%. The Company assessed and concluded the impact of the rate change is immaterial to its deferred taxes. Note 17 . Equity Method Investment On February 13, 2022, the Company and Pasaca Capital Inc. (“Pasaca”) entered into a joint venture agreement (the “JV Agreement”) to form Claire, a joint venture to build, create, and administer a marketplace for health and well-being diagnostic testing. Claire is intended to operate an app store-like platform to make medical testing and accessing results easier and more informative. Claire is being developed with the goal of creating a single place to shop for testing services from numerous testing providers, including Claire-branded tests and at-home tests. Pursuant to the terms of the JV Agreement, the Company agreed to contribute a total of $ 19.0 million over a five-year period in exchange for a 19.2 % ownership interest in Claire. Pasaca agreed to contribute $ 80.0 million to Claire over a five-year period in exchange for an 80.8 % ownership interest 114 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in Claire. As of December 31, 2022 , $ 9.1 million remained to be contributed to Claire by the Company under the terms of the JV Agreement. The Company accounts for its 19.2 % interest in Claire using the equity method of accounting. The Company recorded its ownership percentage of losses of Claire in Other (expense) income, net for $ 7.7 million for the year ended December 31, 2022. As of December 31, 2022, the Company’s equity method investment was $ 2.3 million and was included in Investment in joint venture on the consolidated balance sheet. Note 18 . Variable Interest Entities The Company prepares its consolidated financial statements in accordance with ASC 810, which provides for the consolidation of variable interest entities (“VIEs”) of which the Company is the primary beneficiary. In February 2022, the Company acquired WildHealth as well as certain variable interests that WildHealth has in four Professional Corporations (“PCs”). The PCs are owned by a medical practitioner in accordance with certain state laws which restrict the corporate practice of medicine and require medical practitioners to own such entities. WildHealth provides management and other services to the PCs in exchange for a management fee and provides financial support to the PCs through a revolving credit arrangement. WildHealth also has separate agreements with the equity holder of the PCs where it may acquire and assign such equity interests for certain PCs. The agreement entitles WildHealth to control rights sufficient to require the Company to consolidate the balance sheet and results of operations of the PCs as VIEs. The Company determined that the PCs are VIEs as WildHealth is the primary beneficiary of the PCs. The assets, liabilities, revenues, and operating results of the VIEs after elimination of intercompany transactions were not material as of and for the year ended December 31, 2022. Note 19. Related Parties Related parties are defined as entities related to the Company’s directors or main shareholders as well as equity method affiliates. The Company provides services to Claire, an equity method affiliate (refer to Note 17 – Equity Method Investment for additional information on the equity method affiliate), in exchange for fees through certain transition service agreements and commercial arrangements. In accordance with the agreement between the Company and Claire, the Company will be developing the Claire platform, host the platform in LivePerson’s cloud and perform professional services to support the development and hosting of the Claire platform. These services and the stated prices are set forth in the agreement. These agreements facilitate the operations of the newly formed company by allowing Claire to operate independently prior to establishing stand-alone back-office systems across its organization. In connection with the JV Agreement, the Company entered into a transition services agreement with Claire, under which, the Company agreed to provide custom software development and managed services (Professional Services) in exchange for fees governed by the terms and conditions set forth in the Build-Out Services Agreement (the “Build-Out Services Agreement). The related fees are based on a percentage of completion of work as of January 1, 2022 through December 31, 2023. The Company also entered into commercial arrangements with Claire, which provide access to the Company’s Conversational Cloud Platform as hosting services and professional services in exchange for fees governed by the terms and conditions set forth in the Master Service Agreement (the “MSA”). In accordance with guidance under ASC 606, Claire is considered a customer of the Company and is expected to utilize its Conversational Cloud software and services in a manner similar to that of the Company’s customer base. Usage-based fees are invoiced in the aggregate in equal upfront quarterly installments beginning on January 1, 2023 and continuing through December 31, 2026. Contract terms may be extended by mutual written agreement of the parties but cannot be terminated earlier except as set forth in the Build-Out Services Agreement or MSA, as applicable. Revenues for the services provided to related parties included in the Company’s Consolidated Statements of Operations were $ 38.7 million for the year ended December 31, 2022. Total unbilled invoices and account receivables were $ 4.8 million and $ 1.4 million as of December 31, 2022, respectively, and were included in the Company’s Consolidated Balance Sheet. 115 LIVEPERSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20. Assets Held for Sale In the fourth quarter of 2022, the Company entered into a non-binding Letter of Intent with a strategic buyer to sell Kasamba, Inc. (“Kasamba”). The transaction is expected to close in the first quarter of 2023. The business and its associated net assets and liabilities, which represent the Company’s entire Consumer segment, met the criteria for classification as held for sale in accordance with ASC Subtopic 360-10. As such, the net assets and liabilities associated with the transaction were measured at the lower of fair value less costs to sell or the carrying value, and are separately presented in current assets and current liabilities as held for sale in the Consolidated Balance Sheet as of December 31, 2022 and depreciation of long-lived assets ceased. Pursuant to ASC 205-20, the planned divestiture did not meet the criteria for presentation as a discontinued operation. The major classes of assets and liabilities held for sale as of December 31, 2022, were as follows: December 31, 2022 Assets Cash and cash equivalents $ 10,011 Accounts receivable, net 180 Prepaid expenses and other current assets 825 Property and equipment, net 11,223 Goodwill 8,024 Deferred tax assets 721 Total assets held for sale $ 30,984 Liabilities Accounts payable $ 4,463 Accrued expenses and other current liabilities 5,122 Deferred revenue 772 Total liabilities related to assets held for sale $ 10,357 116 Note 21. Subsequent Events On February 20, 2023, the Company and [24]7 entered into a binding Memorandum of Understanding (“MOU”) detailing the terms for settlement and resolution of all litigation matters between the parties. The terms of the resolution are confidential, and provide for an up front settlement as well as entry into a commercial agreement between the parties. All litigation matters between the parties are stayed pending final documentation of the resolution as set forth in the binding MOU, following dismissal of all litigation matters between the parties with prejudice is expected. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable.