10-Q 1 d10q.txt FORM 10-Q =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------------- FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 ------------------------------------- or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934. For the transition period from to ---------- ----------- Commission File Number: 0-26245 ------- Liquent, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 23-2762324 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1300 Virginia Drive, Suite 125, Ft. Washington, PA 19034 --------------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 619-6000 --------------- ESPS, Inc. --------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of November 9, 2001, 17,988,695 shares of the registrant's Common Stock, par value $0.001 per share, were outstanding. ================================================================================ Liquent, INC. FORM 10-Q QUARTERLY REPORT INDEX Page No. -------- Facing Sheet Index PART I - FINANCIAL INFORMATION ------------------------------- Item 1. Financial Statements 1 Consolidated Balance Sheets (Unaudited) 1 Consolidated Statements of Operations (Unaudited) 2 Consolidated Statements of Cash Flows (Unaudited) 3 Notes to Financial Statements (Unaudited) 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantitative and Qualitative Disclosure About Market Risk 16 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Liquent, Inc. CONSOLIDATED BALANCE SHEETS (In thousands)

See accompanying notes to unaudited financial statements. 1 Liquent, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)

See accompanying notes to unaudited financial statements. 2 Liquent, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

See accompanying notes to unaudited financial statements. 3 Item 1. FINANCIAL STATEMENTS (Continued) Liquent, Inc. NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Description of Business and Basis of Presentation -------------------------------------------------- Liquent, Inc. is a leading developer of publishing software solutions for document-intensive industries. Liquent's software and consulting solutions are utilized by a majority of the world's top 20 pharmaceutical manufacturers and serve a growing and diversified customer base requiring a robust publishing initiative. Liquent' software solutions are recognized as best-of-breed and have become the most widely used software solutions for regulatory and pre-market approval initiatives. The Company was incorporated in Delaware under the name Electronic Submission Publishing Systems, Inc. in April 1994. On April 30, 2001, we announced that we adopted a new name, Liquent. Effective July 30, 2001, we began using the ticker symbol "LQNT". On October 26, 2001 we received shareholder approval to change our name to "Liquent, Inc." The name "Liquent" is derived from "liquid content" - the notion of transforming information assets into a fluid format that can flow from one format, consumer, and purpose to another. Liquent technology unlocks information from proprietary file formats and disparate repositories, to make it more accessible, more dynamic, and more valuable for our customers. Our name, then, embodies our goal to provide comprehensive solutions that truly extend the value of any content type. The Liquent product suite currently consists of a variety of publishing products, including CoreDossierX(TM), kPublisher(TM), kportal(TM), and Liquent xTent(TM). These products offer customers flexible, scalable options for applying our proven technology to their specific publishing needs. Our products integrate seamlessly with each other and with most content management systems, enabling customers to maximize the value of all their software investments. In addition to advanced technology, we provide our customers with in-depth industry-specific compliance expertise that allows us to better understand their publishing needs and requirements through our consulting and software support services. Interim Financial Information The accompanying unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, the statements include all adjustments necessary (which are of a normal and recurring nature except for the write- off of a note receivable and the Xerox transaction described in the notes) for the fair presentation of the results of the interim periods presented. In the quarter ended March 31, 2001, as described in our Annual Report on Form 10-K for the year ended March 31, 2001, the Company restated prior 2001 and 2000 quarterly and annual financial statements. The financial information in this Form 10-Q for the quarter and six months ended September 30, 2000 reflects those restated amounts. The financial statements and footnotes included in this Form 10-Q should be read in conjunction with our audited financial statements for the fiscal year ended March 31, 2001, included in our Annual Report on Form 10-K for the year ended March 31, 2001, filed with the Securities and Exchange Commission. Our results of operations for any interim period are not necessarily indicative of the results of operations for any future interim period or for the full fiscal year. 4 2. Accounting Policies ------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. Net Income Per Common Share ---------------------------- Basic net income per common share is calculated by dividing the net income by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the incremental common shares issuable upon the exercise of stock options using the treasury stock method. Common equivalent shares are not included in the calculations because the effect would be antidilutive. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

4. Write-off of Note Receivable ---------------------------- On November 7, 2000, we entered into a convertible note agreement with a technology company partially owned by an employee and shareholder of the Company, who is a related party but is no longer an employee. Under the terms of the agreement, we committed to loan the borrower $1,000,000 in two equal installments. The first installment was paid upon execution of the agreement. The remaining commitment of $500,000 was paid on February 8, 2001, upon the borrower achieving certain milestones related to development of its technology. The debenture is convertible in whole or in part, into stock of the borrower either upon the borrower securing $3 million in additional financing, or upon a change of control of the borrower. The note is due on July 31, 2002, and bears interest at the rate of 7% annually. As a result of general economic deterioration, the borrower has been unable to generate revenue and earnings, or to raise additional resources sufficient to repay the amounts outstanding under the convertible note agreement, nor has it achieved revenue, earnings, or capital raising goals originally established by the borrower for the second half of calendar year 2001. As a result, the Company has determined that the recovery of amounts owed under the note agreement does not appear probable, and accordingly, the Company's other expense during the quarter ended September 30, 2001 reflects an impairment in the value of amounts outstanding under the convertible note in the amount of $1,027,000. 5. Restructuring ------------- In March 2001, we adopted a restructuring plan that resulted in the termination of 33 employees. In connection with the restructuring, involuntarily terminated employees were entitled to severance benefits including cash compensation, continued benefits and outplacement assistance. The total amount of severance benefits accrued and charged to expense amounted to $489,000 and was reflected in general and administrative expenses in our Statement of Operations for the fiscal year ended March 31, 2001. $476,000 of these benefits were paid through September 30, 2001. The remaining portion of these severance benefits were paid in October 2001. 5 In August 2001, as a result of current economic factors as well as our outlook and strategy for the fiscal year ending March 31, 2002 and beyond, the Company's executive management team and the Board of Directors approved our second restructuring plan to further reduce its fixed operating costs in light of these current market conditions. The restructuring plan was driven by the fact that the Company's headcount and operating expenses grew at a faster rate than revenue, resulting in increased operating losses and a decrease in available cash balances. Management adopted the second restructuring plan in August 2001 by eliminating 32 employees. In connection with the restructuring, involuntarily terminated employees were entitled to severance benefits including cash compensation, continued benefits and outplacement assistance. The total amount of severance benefits accrued and charged to expense amounted to $897,000 and is reflected in general and administrative expenses in our Statement of Operations for the quarter ended September 30, 2001. Approximately $500,000 of these severance benefits were paid during the quarter ended September 30, 2001. We anticipate paying approximately $335,000 of the severance benefits in the quarter ending December 31, 2001. The remaining restructuring payments will continue until September 30, 2002. All employee terminations occurred in August 2001, although three employees continued to provide transitional services to the Company (generally 30 to 45 days from the termination date). Salary and benefits earned during the transition period were not included in the restructuring charge. 6. Acquisition of Software ----------------------- On March 2, 2000, the Company acquired the XDP software product from Xerox Corporation in exchange for 175,824 shares of common stock valued at $1.1 million plus acquisition costs of $100,000. Components of the software were used by the Company to develop additional software products to add to the Company's suite of products. The Company introduced the latest version of its technology that reflected features and functionalities based on the purchased technology during September 2000, and accordingly, commenced amortization of the purchased software at that time. These costs are being amortized on a straight-line basis over an estimated economic life of three years. Additionally, the Company entered into a reseller agreement, whereby Xerox would act as a non-exclusive reseller for all of the Company's products. Under the terms of the agreement, Xerox was entitled to receive discounts off of the list price of the products sold based on sales volume. As of March 31, 2000 (restated), the Company deferred the recognition of $773,000 in revenues under the reseller agreement for products sold to Xerox that were not distributed to end users. In June 2001, the Company renegotiated the terms of a development and reseller arrangement with Xerox Corporation. In connection with the renegotiations, the Company obtained the exclusive right to sell certain of its products to a group of customers and granted Xerox the right to utilize certain software purchased from the Company under the original reseller agreement for Xerox's internal use. The Company agreed to pay Xerox Corporation a fee of approximately $672,000 in four equal quarterly installments with the first installment due in July 2001. Under the terms of the new arrangement, Xerox is no longer permitted to resell the Company's products, including the $773,000 previously purchased by Xerox from the Company that was classified as deferred revenue in the Company's March 31, 2001 balance sheet. As a result, the Company reclassified an amount equal to the future payment obligation to Xerox under the terms of the new agreement from deferred revenue to installment obligation payable in its June 30, 2001 balance sheet, and recorded the remaining amount of deferred revenue as other income during the quarter ended June 30, 2001. The remaining unpaid balance of this installment obligation amounted to $506,000 as of September 30, 2001. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------- --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Certain statements in this Form 10-Q contain "forward-looking" information (as defined in Section 27A of the Securities Act of 1933, as amended) that involves risks and uncertainties that may cause actual results to differ materially from those predicted in the forward-looking statements. If any of our assumptions on which the statements are based prove incorrect or should unanticipated circumstances arise, our actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or a combination of factors, including, but not limited to, those listed under the caption "Factors Affecting Operating Results" described herein and the Risk Factors set forth in our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended March 31, 2001. 6 Overview -------- Liquent, Inc. is a leading developer of publishing software solutions for document-intensive industries. Liquent software and consulting solutions are utilized by a majority of the world's top 20 pharmaceutical manufacturers and serve a growing and diversified customer base requiring a robust publishing initiative. Liquent' software solutions are recognized as best-of-breed and have become the most widely used software solutions for regulatory and pre-market approval initiatives. Founded in 1994, Liquent is a leading provider of content assembly and publishing solutions for the Life Sciences industry. Our proven, world-class rendering technology transforms proprietary content into open formats such as XML and PDF. Liquent's corporate headquarters is located at 1300 Virginia Drive, Fort Washington, Pennsylvania, 19034 Telephone: (215) 619-6000. The Company was incorporated in Delaware in April 1994 under the name Electronic Submission Publishing Systems, Inc. The Company also maintains offices in the United Kingdom, La Jolla, California, Latham, New York and Research Triangle Park, North Carolina. Results of Operations --------------------- The following table presents statement of operations data as a percentage of total revenues:

Comparison of Three Months Ended September 30, 2001 and 2000 ------------------------------------------------------------ For the three months ended September 30, 2001, revenues were $6.6 million, representing an increase of 5% from the $6.3 million for the comparable period in 2000. Net loss for the three months ended September 30, 2001, was $2.8 million, or $0.16 per diluted share, compared to a net loss of $375,000, or $0.02 per diluted share for the same period in 2000. Weighted average shares used in computing diluted earnings per share in the second quarter of fiscal year 2002 were 17.6 million versus 16.8 million in the same period in the prior year. 7 Revenues Total revenues consist of revenues from software licenses and professional services and support. Professional services and support revenues include professional consulting, training and customer support services. Software licenses revenues decreased 43% to $1.9 million for the three months ended September 30, 2001, from $3.4 million for the quarter ended September 30, 2000. This decrease was attributable to lengthening sales cycles, a general economic slowdown and price sensitivity within our customer base. Professional services and support revenues increased 61% to $4.7 million for the three months ended September 30, 2001, from $2.9 million for the quarter ended September 30, 2000. This increase resulted primarily from an increase in customer support revenues and an increase in consulting and training services revenue. These increases were driven by an increase in our customer base as well as a general increase in the number of installed licenses for which we currently provide support. We expect the proportion of professional services and support revenues to total revenues to fluctuate in the future, depending in part on our customers' direct use of third-party consulting and implementation service providers. Revenues derived from international customers were $1.3 million for the quarter ended September 30, 2001, and $1.0 million for the quarter ended September 30, 2000. The increase was attributable to increased professional services and support revenues. International revenues accounted for 20% of total revenues in the quarter ended September 30, 2001, and 17% in the quarter ended September 30, 2000. In order to expand international sales, we have made significant investments in our European operations including the hiring of new personnel and the relocation of our European office. To the extent that we are unable to achieve expected international revenue growth in a timely manner, our business, operating results and financial condition could be seriously harmed. We cannot guarantee that we will be able to maintain or increase international market demand for our products. In some markets, localization of our products is essential to achieve market penetration. We may incur substantial costs and experience delays in localizing our products, and we cannot guarantee that any localized product will ever generate significant revenue. For the three months ended September 30, 2001 and September 30, 2000, one customer accounted for 17% of total revenues. Cost of Revenues Cost of software licenses revenues consists primarily of royalties we pay to third parties for the use of their technology incorporated into our CoreDossier products and amortization of capitalized software costs. Cost of software licenses revenues increased to $158,000 for the quarter ended September 30, 2001 from $99,000 for the quarter ended September 30, 2000. Cost of software licenses revenues as a percentage of software licenses revenues were 8.2% for the quarter ended September 30, 2001 and 2.9% for the quarter ended September 30, 2000. The increase in cost of software license revenues resulted primarily from the amortization of purchased and capitalized software costs that commenced in September 2000. During March 2000, we purchased third-party software that was used as the basis for the design of features and functions in the latest version of CoreDossier, which was released in September 2000. In September 2000, we commenced amortization of this purchased software over an estimated economic life of three years. We currently have a license agreement with Versant Object Technology Corporation for the use of technology that is embedded in CoreDossier. Under the terms of the license agreement, we have the right to use and copy Versant's software to develop and combine Versant's technology with our software products to create applications in exchange for royalties ranging from 1.7% to 2.5% of the sales of certain products. The royalties are recorded as a cost of software license revenue in the same period as the related software license revenue. Our license is non-exclusive, non-transferable and non-assignable. In September 1999, we prepaid royalty fees to Versant of $500,000. As of September 30, 2001, we have a remaining prepayment of approximately $150,000. We have no contractual obligation for additional purchases from Versant. Cost of professional services and support revenues consists primarily of personnel costs related to professional services and customer support. Cost of professional services and support revenues increased 35% to $2.4 million for the quarter ended September 30, 2001, from $1.7 million for the quarter ended September 30, 2000. This increase resulted primarily from increases in third-party subcontractor fees as well as increases in out-of-pocket expenses due to increases in volume. The number of our professional services and customer support personnel decreased to 48 at September 30, 2001, from 54 at September 30, 2000. Our professional services and support margin increased to 50% 8 for the quarter ended September 30, 2001 from 40% for quarter ended June 30, 2000. The cost of professional services and support revenues as a percentage of professional services and support revenues may vary among periods because of changes in the mix of services we provide which have different revenue margins. The increase in professional services and support margins resulted primarily from increases in utilization rates of our professional services staff. In order to attain profitability, we believe that we need to maintain high utilization rates of our professional services personnel. In order to maintain these utilization rates, we must continue to increase the amount of services provided to our customers. We derive a significant portion of our professional service revenue from the implementation of software licensed by our customers. In the event that we are unable to achieve increases in software license revenues, the growth, if any, in our professional service revenues may be limited, and as a result, we may experience increased operating losses. In addition, to the extent that we are unable to modify current personnel levels rapidly in response to changes in demand for our services, our operating results and financial condition could be seriously harmed. Operating Expenses Research and development. Research and development expenses consist primarily of salaries, benefits and depreciation of equipment for: software developers; quality assurance personnel; and program managers and technical writers. Research and development expenses increased 4% for the quarter ended September 30, 2001 over the same quarter in the prior year. Research and development expenses represented 20% of our total revenues for both quarters presented. We believe that our future revenue growth is dependent upon our ability to introduce new products that meet the evolving needs of our customers. Sales and marketing. Sales and marketing expenses consist primarily of: salaries, commissions and bonuses earned by sales and marketing personnel; travel and promotional expenses; and communication costs related to direct sales efforts. Sales and marketing expenses decreased 11% to $2.6 million for the quarter ended September 30, 2001 from $2.9 million for the quarter ended September 30, 2000. This decrease resulted primarily from our cost containment efforts and restructuring efforts which occurred in March 2001 and August 2001. Sales and marketing expenses represented 39% of our total revenues for the quarter ended September 30, 2001 and 47% for the comparable quarter of 2000. General and administrative. General and administrative generally consist primarily of salaries, benefits and related costs for executive, finance, administrative and information services personnel. These expenses also include fees for legal, accounting, insurance and other administrative expenses. General and administrative expenses increased 127% to $2.1 million for the three months ended September 30, 2001, from $929,000 for the quarter ended September 30, 2000. General and administrative expenses represented 32% of our total revenues for the quarter ended September 30, 2001 and 15% for the quarter ended September 30, 2000. In August 2001, as a result of current economic factors as well as our outlook and strategy for the fiscal year ending March 31, 2002, and beyond, we adopted our second restructuring plan that resulted in the termination of 32 employees. In connection with the restructuring, involuntarily terminated employees were entitled to severance benefits including cash compensation, continued benefits and outplacement assistance. The total amount of severance benefits accrued and charged to expense amounted to $897,000 and is reflected in general and administrative expenses in our Statement of Operations for the quarter ended September 30, 2001. Approximately $500,000 of these severance benefits were paid during the quarter ended September 30, 2001. We anticipate paying approximately $335,000 of restructuring in the quarter ending December 31, 2001. Restructuring payments will continue until September 30, 2002. Excluding the restructuring charge, general and administrative expenses increased 30% or $283,000. The increase in general and administrative expenses excluding restructuring charges were primarily due to increases in directors' and officers' liability insurance premiums, as well as increased legal and accounting fees. The purpose of the restructuring plan was to reduce the Company's fixed costs based on our current outlook. We estimate that the reduction in annual operating expenses related to our August 2001 restructuring will be approximately $3.5 million, however, the actual realized savings may be less as we continue to adapt to rapidly evolving market trends. Deferred stock compensation expense was $2,000 for the quarter ended September 30, 2001 and $8,000 for the quarter ended September 30, 2000. 9 Other expense, net. On November 7, 2000, we entered into a convertible note agreement with a technology company partially owned by an employee and shareholder of the Company, who is a related party but is no longer an employee. Under the terms of the agreement, we committed to loan the borrower $1,000,000 in two equal installments. The first installment was paid upon execution of the agreement. The remaining commitment of $500,000 was paid on February 8, 2001, upon the borrower achieving certain milestones related to development of its technology. The debenture is convertible in whole or in part, into stock of the borrower either upon the borrower securing $3 million in additional financing, or upon a change of control of the borrower. The note is due on July 31, 2002, and bears interest at the rate of 7% annually. As a result of general economic deterioration, the borrower has been unable to generate revenue and earnings, or to raise additional resources sufficient to repay the amounts outstanding under the convertible note agreement, nor has it achieved revenue, earnings, or capital raising goals originally established by the borrower for the second half of calendar year 2001. As a result, the Company has determined that the recovery of amounts owed under the note agreement does not appear probable, and accordingly, the Company's other expense during the quarter ended September 30, 2001 reflects an impairment in the value of amounts outstanding under the convertible note the amount of $1,027,000. Interest, net. Interest, net is derived from interest income earned on our cash and cash equivalents. Interest income decreased 64% to $122,000 for the quarter ended September 30, 2001 from $341,000 for the quarter ended September 30, 2000. This decrease was primarily attributable to the decreases in interest bearing cash and cash equivalent balances and a decline in interest rates. Income taxes. We had no income tax expense during either the quarter ended September 30, 2001 or September 30, 2000. As a result of the uncertainty regarding the recoverability of historical net operating loss carryforwards, we have recorded a 100% valuation allowance against our net deferred tax asset arising from potential future tax benefits attributable to current and prior-year operating losses. Comparison of Six Months Ended September 30, 2001 and 2000 ---------------------------------------------------------- For the six months ended September 30, 2001, revenues were $11.2 million, a decrease of 11% from the $12.6 million for the comparable period in 2000. Net loss for the six months ended September 30, 2001 was $6.0 million, or $.34 per diluted share, compared to net loss of $75,000, or $.00 per diluted share for the same period in 2000. Weighted average shares used in computing diluted earnings per share in the six months ended September 30, 2001 were 17.6 million versus 16.6 million in the same period in the prior year. Revenues License revenues. License revenues decreased 61% to $2.8 million for the six months ended September 30, 2001, from $7.2 million for the six months ended September 30, 2000. This decrease was attributable to lengthening sales cycles, a general economic slowdown and price sensitivity within our customer base. Professional services and support revenues. Professional services and support revenues increased 57% to $8.3 million for the six months ended September 30, 2001 from $5.3 million for the six months ended September 30, 2000. The increase reflects an increase in the number and type of service engagements and increased maintenance revenues from a larger customer base. Revenues derived from international customers were $2.1 million for the six months ended September 30, 2001, and $1.9 million for the six months ended September 30, 2000. The increase was attributable to increased professional services and support revenues. International revenues accounted for 19% of total revenues during the first six months ended September 30, 2001, and 15% of total revenues during the first six months ended September 30, 2000. In order to expand international sales, we have made significant investments in our European operations including the hiring of new personnel and the relocation of our European office. To the extent that we are unable to achieve expected international revenue growth in a timely manner, our business, operating results and financial condition could be seriously harmed. We cannot guarantee that we will be able to maintain or increase international market demand for our products. In some markets, localization of our products is essential to achieve market penetration. We may incur substantial costs and experience delays in localizing our products, and we cannot guarantee that any localized product will ever generate significant revenue. 10 For the six months ended September 30, 2001, one customer accounted for 13% of revenues and for the six months ended September 30, 2000, one customer accounted for 12% of revenues. Cost of Revenues Cost of software licenses revenues. Cost of software licenses revenues increased 67% to $316,000 for the six months ended September 30, 2001 from $189,000 for the six months ended September 30, 2000. The increase in cost of software license revenues resulted primarily from the amortization of purchased and capitalized software costs that commenced in September 2000. During March 2000, we purchased third-party software that was used as the basis for the design of features and functions in the latest version of CoreDossier, which was released in September 2000. In September 2000, we commenced amortization of this purchased software over an estimated economic life of three years. During the fiscal year ended March 31, 2001, we also capitalized internal costs related to the development of software to be licensed to third parties amounting to approximately $200,000. Amortization of these capitalized costs occurs generally on a straight-line basis over an estimated economic life of three years. Cost of professional services and support revenues. Cost of professional services and support revenues increased 28% to $4.4 million for the six months ended September 30, 2001 from $3.4 million for the six months ended September 30, 2000. This increase resulted primarily from the hiring and training of professional services and customer support personnel to support our increased customer base, as well as additional costs associated with third-party subcontractors and out-of-pocket expenses. Our professional services and support margins increased to 47% for the six months ended September 30, 2001 from 36% for six months ended September 30, 2000. The cost of professional services and support revenues as a percentage of professional services and support revenues may vary among periods because of changes in the mix of services we provide which have different revenue margins. The increase in professional services and support margins resulted primarily from increased utilization of our professional service personnel. In order to attain profitability, we believe that we need to maintain high utilization rates of our professional services personnel. In order to maintain these utilization rates, we must continue to increase the amount of services provided to our customers. We derive a significant portion of our professional service revenue from the implementation of software licensed by our customers. In the event that we are unable to achieve increases in software license revenues, the growth, if any, in our professional service revenues may be limited, and as a result, we may experience increased operating losses. In addition, to the extent that we are unable to modify current personnel levels rapidly in response to changes in demand for our services, our operating results and financial condition could be seriously harmed Operating Expenses Research and development. Research and development expenses increased 4% to $2.7 million for the six months ended September 30, 2001 from $2.6 million the six months ended September 30, 2000. This increase resulted from an increase in depreciation of equipment used in research and development efforts as well as outside consulting fees associated with the development of an international regulatory publishing product. Research and development expenses represented 24% of our total revenues for the six months ended September 30, 2001 and 21% for the six months ended September 30, 2000. Sales and marketing. Sales and marketing expenses increased 11% to $5.7 million in the six months ended September 30, 2001 from $5.2 million for the six months ended September 30, 2000. This increase resulted primarily from our increased investment in sales and marketing infrastructure. The increased investments included recruiting, payroll, and related office costs. Sales and marketing expenses represented 51% of our total revenues for the six months ended September 30, 2001 and 41% for the six months ended September 30, 2000. General and administrative. General and administrative expenses increased 77% to $3.4 million for the six months ended September 30, 2001 from $1.9 million for the six months ended September 30, 2000. This increase resulted from a restructuring charge of $897,000 as well as increased insurance, legal and accounting costs. The number of our executive, finance and administrative personnel was 14 at September 30, 2001 and 21 as of September 30, 2000. General and administrative expenses, including restructuring, represented 30% of our total revenues for the six months ended September 30, 2001 and 15% of total revenues for the six months ended September 30, 2000. Excluding restructuring, general and administrative expenses represented 22% of total revenues for the six months ended September 30, 2001. 11 Interest, net. Net interest income decreased 54% to $314,000 for the six months ended September 30, 2001 from $677,000 for the six months ended September 30, 2000. This decrease was primarily attributable to the decreases in interest bearing cash and cash equivalent balances and a decline in interest rates. Income taxes. We had no income tax expense during either the quarter ended September 30, 2001 or September 30, 2000. As a result of the uncertainty regarding the recoverability of historical net operating loss carryforwards, we have recorded a 100% valuation allowance against our net deferred tax asset arising from potential future tax benefits attributable to current and prior-year operating losses. Liquidity and Capital Resources ------------------------------- As of September 30, 2001, we had cash and cash equivalents of $12.6 million, a decrease of $6.9 million from cash and cash equivalents held at March 31, 2001. Our working capital at September 30, 2001 was $11.5 million, compared to $15.9 million at March 31, 2001. Net cash (used in) provided by operating activities was $(6.3 million) for the six months ended September 30, 2001, compared to $375,000 for the six months ended September 30, 2000. This decrease resulted primarily from our net loss for the six months ended September 30, 2001. During the six months ended September 30, 2001, we experienced a loss from operations of approximately $6.0 million, with the loss being fueled in part by a reduction in software license revenues. As a result of this decrease in software license revenue, we estimate that we will experience an additional reduction in our available cash balances of approximately $1.0 million to $2.0 million during the quarter ended December 31, 2001. While we believe that this slowdown in customer spending is temporary, in the event that customer demand for our software products does not increase in the latter half of our fiscal year ending March 31, 2002, our financial position and liquidity could be materially affected. Investing activities used cash of $605,000 for the six months ended September 30, 2001, and $766,000 for the six months ended September 30, 2000, primarily due to the purchase of property and equipment as well as leasehold improvements. During the six months ended September 30, 2001, we capitalized $126,000 of internally developed software. There was no capitalization of internally developed software during the six months ended September 30, 2000. In June 2001, we renegotiated the terms of a development and reseller arrangement with Xerox Corporation. In connection with the renegotiation, we obtained the exclusive right to sell certain of our products to a group of customers, and granted Xerox the right to utilize certain software purchased from us under the original reseller agreement for Xerox's internal use. Under the terms of the agreement, we also agreed to pay Xerox Corporation a fee of approximately $672,000 in four equal quarterly installments with the first installment paid in July 2001. In connection with a restatement of historical results reported in our Annual Report on Form 10-K for the year ended March 31, 2001, we reversed revenue in the amount of approximately $773,000 related to software previously sold to Xerox but not delivered by Xerox to end users. Under the terms of the new arrangement, Xerox is no longer permitted to resell the Company's products, including the $773,000 previously purchased by Xerox from the Company that was classified as deferred revenue in the Company's March 31, 2001 balance sheet. As a result, the Company reclassified an amount equal to the future payment obligation to Xerox under the terms of the new agreement from deferred revenue to installment obligations payable in its June 30, 2001 balance sheet, and recorded the remaining amount of deferred revenue as other income during the quarter ended June 30, 2001. Payments to Xerox under the new arrangement will be reflected in future periods as reductions of the installment obligation payable. The remaining unpaid balance on this installment obligation amounted to $506,000 as of September 30, 2001. Financing activities used cash of $3,000 during the six months ended September 30, 2001, and generated cash of $232,000 for the six months ended September 30, 2000. The decrease was attributable to a decrease in the number of stock options exercised during the six months ended September 30, 2001. On March 30, 2001, we entered into a $5 million revolving credit agreement with Mellon Bank, N.A. The initial term of the credit agreement extends until February 28, 2003. Borrowings under this credit agreement accrue interest at a rate of, at our option, either (1) 100 basis points below the prime rate charged by Mellon Bank, N.A., or (2) the rate at which U.S. Dollar deposits are offered to major banks in the London interbank Eurodollar market (as adjusted 12 to satisfy the reserve requirements of the Federal Reserve System) plus 100 basis points. The credit agreement also contains representations, warranties, covenants and other terms and conditions typical of credit facilities of such size, including financial reporting requirements. Amounts outstanding under the agreement are secured by certain cash balances and investments. We have the option of converting amounts borrowed under the revolving facility into a term loan payable over a five-year period. There were no amounts outstanding under the agreement as of September 30, 2001. We expect that our recent losses will result in a decrease in our cash balances during the third quarter of the fiscal year ending March 31, 2002. However we expect that our recent restructuring efforts will result in decreases to our operating expenses in the remainder of our fiscal year ending March 31, 2002. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. Factors Affecting Operating Results ----------------------------------- This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, the following: Significant Revenues from the Pharmaceutical and Biotechnology Industries We have historically sold most of our products and services to businesses in the pharmaceutical and biotechnology industries. Our business strategy includes targeting smaller pharmaceutical and biotech companies as well as other FDA regulated markets. Our financial performance and future growth will depend upon our ability to continue to market our products successfully in the pharmaceutical and biotechnology industries and to enhance and market technologies for distribution through indirect sales channels to other industries. We have made and will continue to make substantial product development and distribution channel investments. We may not be able to continue marketing our products successfully in the pharmaceutical and biotechnology industries or successfully introduce new or existing products through direct and indirect channels into other industries. Technological Change The software market in which we compete is characterized by rapid technological change. Existing products become obsolete and unmarketable when products using new technologies are introduced and new industry standards emerge. For example, we may need to modify our products when third parties change software that we integrate into our products. As a result, the lifecycles of our products are difficult to estimate. To be successful, we must continue to enhance our current product line and develop new products that successfully respond to such developments. Our business, financial condition and operating results would be materially adversely affected if we delay release of our products and product enhancements or if these products and product enhancements fail to achieve market acceptance when released. Attraction and Retention of Technical Employees We believe that our future success will depend in large part upon our ability to attract, retain, and motivate highly skilled technical employees. The employees that are in highest demand are software programmers, software developers, application integrators and information technology consultants. These employees are likely to remain a limited resource for the foreseeable future. We may not be able to attract and retain sufficient numbers of highly skilled technical employees. The loss of a significant number of our technical employees could have a material adverse effect on the Company. Attraction and Retention of Sales Personnel To date, we have sold our products primarily through our direct sales force. Our future revenue growth will depend in large part on recruiting and training additional direct sales personnel. We have not experienced difficulty in recruiting qualified sales personnel. We may not be able to successfully maintain or expand our direct sales force or other distribution channels and any such expansion may not result in increased revenues. 13 Revenue Outlook for the Fiscal Year Ending March 31, 2002 We have made substantial recent investments in sales and marketing personnel in an effort to accelerate our revenue growth in the latter half of the fiscal year ending March 31, 2002. There can be no assurance that these investments will result in increases in revenue. If we are unable to achieve increases, the additional sales and marketing expenses will result in material losses. Limited Operating History We commenced operations on April 29, 1994, and commercially released the initial version of CoreDossier in November 1995. Accordingly, we have a limited operating history, and we face all of the risks and uncertainties encountered by early-stage companies. Our limited operating history makes it difficult to forecast our future operating results. The new and evolving nature of the electronic compliance market increases these risks and uncertainties. We expect to continue to devote substantial resources to our product development, sales and marketing, and customer support. As a result, we will need to generate significant quarterly revenues to achieve and maintain profitability. Our business strategies may not be successful, and we may not be profitable in any future period. Fluctuations in Operating Results Our results fluctuate from quarter to quarter. In the past, the software industry has experienced significant downturns, particularly when general economic conditions decline and spending on management information systems decreases. Our business, financial condition and operating results may fluctuate substantially from quarter to quarter. It is particularly difficult to predict our operating results because: o Our sales cycles are lengthy and variable, typically ranging between six to nine months from our initial contact with a potential customer to the signing of a license agreement, although occasionally sales require substantially more time. o The amount of unfulfilled orders for our products at the beginning of a quarter is small because our products are typically shipped shortly after orders are received. o We recognize a substantial portion of our license revenues in the last month of a quarter, and often in the last weeks or days of a quarter. o Changes in the global economic environment may have an unanticipated impact on the spending patterns of our global pharmaceutical customers. o Fiscal or quarterly budget cycles of our customers can cause our revenues to fluctuate from quarter to quarter. Nevertheless, we base our decisions regarding our operating expenses on anticipated revenue trends. Because many of our expenses are relatively fixed, a delay in recognizing revenue from a limited number of license transactions could cause our operating results to vary significantly from quarter to quarter and could result in operating losses. To the extent these expenses are not followed by increased revenues, our operating results will suffer. As a result of all of these factors, we believe that period-to-period comparisons of our operating results are difficlt to interpret and you should not rely on such comparisons to predict our future performance. Fluctuations in our operating results, particularly compared to the expectations of market analysts or investors, could cause volatility in the price of our common stock. Competition We may experience competition in markets for new products. We recently expanded our products to include a new suite of XML-based solutions. There are a large number of private and publicly held companies actively involved in the development and sale of XML-based technologies. In addition, the pace of technological change in this area is extremely rapid; and as a result, we may be unsuccessful in developing new products or enhancing our existing products as quickly as some of the competitors in this sector. 14 We may experience price erosion in markets for our existing products. There are a small number of privately held competitors that have introduced streamlined versions of regulatory publishing technologies. These products have been introduced at lower prices than our current products, although these products generally do not have the broad range of functionality of our products. While we have not seen a significant loss of market share within the pharmaceutical industry, these competitive offerings could result in the loss of customer accounts or erosion in our pricing. If we are unable to compete successfully against these new competitors, our business and results of operations would be harmed. Risk of Liability Complex software products such as those offered by us can contain undetected errors or performance problems. Such defects are most frequently found during the period immediately following introduction of new products or enhancements to existing products. Our products have from time to time contained software errors that were discovered after commercial introduction. We may not discover performance problems or errors in our products in the future. Any future software defects discovered after shipment of our products, if material, could result in loss of revenues or potential product liability. In addition, we provide outsourcing services that are critical to our clients' businesses. Any delays or difficulties in connection with these assignments or failure to meet clients' expectations could result in: o delayed or lost client revenues; o rendering additional services to a client at no charge; o negative publicity regarding us and our services; and o claims for substantial damages against us, regardless of fault. The successful assertion of a large claim against us could seriously harm our business, financial condition and operating results. Our contracts generally limit our damages arising from negligent acts, errors, mistakes or omissions in rendering services to our clients. However, these contractual provisions may not protect us from liability for damages in the event we are sued. Our general liability insurance coverage may not cover one or more large claims, or the insurer may disclaim coverage as to any future claim. In addition, our general liability insurance coverage may not continue to be available on reasonable terms or at all. Limited Protection of Intellectual Property Rights We rely on a combination of copyright and trademark laws, employee and third-party nondisclosure agreements, and other methods to protect our proprietary rights. Despite these precautions, it may be possible for unauthorized third-parties to copy certain portions of our products or to obtain and use information that we regard as proprietary. There can be no assurance that our efforts will provide meaningful protection for our proprietary technology against others who independently develop or otherwise acquire substantially equivalent techniques or gain access to, misappropriate, or disclose our proprietary technology. Dependence on Key Employees We depend on certain key employees. Our future performance will also largely depend on the efforts and abilities of our key technical, customer support, sales and managerial personnel and on our ability to retain them. Our success will depend on our ability to attract and retain such personnel in the future. In addition, the loss of any of our executive officers could materially adversely affect our business, financial condition and operating results. International Expansion We face risks from expansion of our international operations. We intend to expand our international operations and may enter new international markets. This expansion will require significant management attention and financial resources. We may not be able to maintain or increase international market demand for CoreDossier. We do not 15 currently engage in currency hedging activities, but we may do so in the future. Increases in the value of the U.S. dollar relative to foreign currencies could materially adversely affect our operating results. Dependence on Service Revenues We depend on service revenues. Professional services and support revenues represented 75% of our total revenues for the first six months of fiscal 2002 and 42% of our total revenues for first six months of fiscal 2001. We anticipate that service revenues will continue to represent a significant percentage of total revenues. Because service revenues have lower gross margin percentages than license revenues, a continued increase in the percentage of total revenues represented by service revenues resulting from increased professional services and support revenues or a decrease in license revenues could have a detrimental impact on overall gross margin percentages. Credit Risk We assume a certain level of credit risk with our clients in order to do business. Conditions affecting any of our clients could cause them to become unable or unwilling to pay us in a timely manner, or at all, for services we have already provided them. If one or more of our clients fails or refuses to pay us in a timely manner or at all, or if we are unable to collect a number of large accounts receivable, it could have a material adverse effect on business, operating results, and financial condition. Utilization of Employee Resources We generally establish our consulting and support personnel levels based on our expectations of client demand. If we hire more employees than our engagements require, or if we are unable to effectively deploy our employees from project to project, our operating margins may decline and we may suffer losses. Personnel costs and expenses constitute the substantial portion of our operating expenses. Fixed Price Contracts We occasionally enter into contracts with our clients on a fixed-fee, fixed-timeframe basis. A miscalculation of the resources or time needed to complete fixed-fee engagements could substantially reduce our profitability. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ------- --------------------------------------------------------- We are exposed to financial market risks, including changes in interest rates. We typically do not attempt to reduce or eliminate our market exposures on our investment securities because the majority of our investments are short-term. We do not have any derivative instruments. The fair value of our investment portfolio or related income would not be significantly impacted by either a 100 basis point increase or decrease in interest rates. All of the potential changes noted above are based on sensitivity analysis performed on our balances as of September 30, 2001. The Company is exposed to foreign currency exchange rate differences and the income statement would be impacted by rate changes on its intercompany balances. PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ------- ----------------- From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is not involved in any legal proceedings, which would, in management's opinion, have a material adverse effect on the Company's business or results of operations. Item 2. Changes in Securities and Use of Proceeds ------- ----------------------------------------- none Item 3. Defaults Upon Senior Securities ------- ------------------------------- None 16 Item 4. Submission of Matters to a Vote of Security Holders ------- --------------------------------------------------- The following matters were voted upon at the Annual Meeting of Stockholders held on October 26, 2001, and received the votes set forth below: 1. All of the following persons nominated were elected to serve as directors and received the number of votes set opposite their respective names: For Abstain --- ------- R. Richard Dool 14,804,202 334,190 Eric Haskell 15,039,516 98,876 Charles O. Heller 14,740,197 398,195 Christopher B. Hollenbeck 15,049,447 88,945 Kenneth R. Kaisen 15,039,516 98,876 William J. Miller 15,039,516 98,876 Michael Sorkin 15,039,516 98,876 2. A stockholder proposal to approve the change of the Company's name to "Liquent, Inc." under the Company's Certificate of incorporation received 15,098,798 votes FOR and 27,204 votes AGAINST, with 12,390 abstentions. Item 5. Other Information ------- ----------------- On November 14, 2001, the Company announced that it had entered into an Agreement and Plan of Merger with Information Holdings Inc. ("IHI") pursuant to which IHI will acquire the Company for $2.27 per share through a cash tender offer, subject to certain conditions. The Company filed the press release announcing the transaction under the cover of Schedule 14D-9 During the quarter ended September 30, 2001, the Company entered into separation agreements with certain former executives of the Company. Frances Moscoe. As part of Ms. Moscoe's severance agreement, she will receive severance of ten months, benefits through March 15, 2002, a pro-rated bonus up to a maximum of 46% of her annual salary based on Company performance during the fiscal year ending March 31, 2002, and reimbursement for outplacement expenses of up to $10,000. John Rosso. As part of Mr. Rosso's severance agreement, he will receive severance and benefits for seven months, a pro-rated bonus up to a maximum of 50% of his annual salary based on Company performance during the fiscal year ending March 31, 2002, and reimbursement for outplacement expenses of up to $10,000. Item 6. Exhibits and Reports on Form 8-K ------- -------------------------------- (A) Exhibits none (B) Reports on Form 8-K No reports on Form 8-K were filed during the quarter covered by this Form 10-Q. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 14th day of November 2001. Liquent, Inc. By: /s/ R. Richard Dool ------------------- R. Richard Dool President and Chief Executive Officer (Principal Executive Officer) By: /s/ Christopher Meshginpoosh ---------------------------- Christopher Meshginpoosh Chief Financial Officer (Principal Financial and Accounting Officer) 18

LIQUENT INC 10-Q