##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 000-25269
 
 VERTICALNET, INC.
 (Exact name of registrant as specified in its charter)
 
 Pennsylvania
    
    23-2815834(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)400 CHESTER FIELD PARKWAYMALVERN, PENNSYLVANIA
    
    19355(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (610) 240-0600
 
 þ o
  o o þ
 o þ




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##### 



VERTICALNET, INC.
 FORM 10-Q
 For the Quarterly Period Ended June 30, 2007
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements.
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    37Item 4. Controls and Procedures.
    
    
    38PART II. OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    38Item 1A. Risk Factors.
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    42Item 3. Defaults Upon Senior Securities.
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    42Item 5. Other Information.
    
    
    42Item 6. Exhibits.
    
    
    43SIGNATURES
    
    
    44Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  ii




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Condensed Consolidated Financial Statements
 VERTICALNET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2007
    
    
    2006(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,238
    
    
    $
    2,809Accounts receivable, net
    
    
    4,386
    
    
    
    3,877Prepaid expenses and other current assets
    
    
    1,291
    
    
    
    778Total current assets
    
    
    6,915
    
    
    
    7,464Property and equipment, net
    
    
    738
    
    
    
    920Goodwill
    
    
    9,743
    
    
    
    9,709Other intangible assets, net
    
    
    1,495
    
    
    
    2,184Other assets
    
    
    242
    
    
    
    416Total assets
    
    $
    19,133
    
    
    $
    20,693Liabilities and Shareholders EquityCurrent liabilities:Current portion of long-term debt, convertible notes, and other
non-current liabilities
    
    $
    6,196
    
    
    $
    2,170Accounts payable and accrued expenses
    
    
    5,641
    
    
    
    5,698Deferred revenues
    
    
    3,735
    
    
    
    3,756Total current liabilities
    
    
    15,572
    
    
    
    11,624Warrant liabilities
    
    
    3,500
    
    
    
    Non-current portion of deferred revenues
    
    
    875
    
    
    
    857Long-term debt and other non-current liabilities
    
    
    82
    
    
    
    5,270Total liabilities
    
    
    20,029
    
    
    
    17,751Redeemable Series B convertible preferred stock
    
    
    90
    
    
    
    Commitments and contingencies (see Notes 2, 5, 6, 7 and 8)Shareholders equity (deficit):Preferred stock $.01 par value, 10,000,000 shares authorized, 8,700,000 designated as Series B shares
issued at June 30, 2007 and none issued at December 31, 2006
    
    
    
    
    
    
    Common stock $.01 par value, 21,428,571 shares authorized at June 30, 2007
and December 31, 2006, 12,408,515 shares issued at June 30, 2007 and
9,372,685 shares issued at December 31, 2006
    
    
    124
    
    
    
    94Additional paid-in capital
    
    
    1,231,905
    
    
    
    1,230,501Accumulated other comprehensive (loss) income
    
    
    12
    
    
    
    (33
    )Accumulated deficit
    
    
    (1,232,222
    )
    
    
    (1,226,815
    )(181
    )
    
    
    3,747Treasury stock at cost, 9,377 shares at June 30, 2007 and December 31, 2006
    
    
    (805
    )
    
    
    (805
    )Total shareholders equity
    
    
    (986
    )
    
    
    2,942Total liabilities and shareholders equity
    
    $
    19,133
    
    
    $
    20,693
   1




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VERTICALNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Software and software related
    
    $
    1,660
    
    
    $
    1,890
    
    
    $
    3,219
    
    
    $
    3,431Services
    
    
    1,756
    
    
    
    2,295
    
    
    
    3,614
    
    
    
    4,670Total revenues
    
    
    3,416
    
    
    
    4,185
    
    
    
    6,833
    
    
    
    8,101Cost of revenues:Cost of software and software related
    
    
    351
    
    
    
    575
    
    
    
    708
    
    
    
    1,173Cost of services
    
    
    1,167
    
    
    
    1,432
    
    
    
    2,274
    
    
    
    3,084Amortization of acquired technology and
customer contracts
    
    
    250
    
    
    
    249
    
    
    
    500
    
    
    
    496Total cost of revenues
    
    
    1,768
    
    
    
    2,256
    
    
    
    3,482
    
    
    
    4,753Gross profit
    
    
    1,648
    
    
    
    1,929
    
    
    
    3,351
    
    
    
    3,348Operating expenses:Research and development
    
    
    1,004
    
    
    
    1,398
    
    
    
    1,987
    
    
    
    2,873Sales and marketing
    
    
    1,292
    
    
    
    1,899
    
    
    
    2,632
    
    
    
    3,834General and administrative
    
    
    978
    
    
    
    1,688
    
    
    
    2,369
    
    
    
    3,338Litigation and settlement costs
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    1,026Restructuring charges (reversals)
    
    
    
    
    
    
    (22
    )
    
    
    
    
    
    
    216Impairment charge for goodwill
    
    
    
    
    
    
    9,877
    
    
    
    
    
    
    
    9,877Amortization of other intangible assets
    
    
    86
    
    
    
    201
    
    
    
    202
    
    
    
    459Total operating expenses
    
    
    3,360
    
    
    
    15,049
    
    
    
    7,190
    
    
    
    21,623Operating loss
    
    
    (1,712
    )
    
    
    (13,120
    )
    
    
    (3,839
    )
    
    
    (18,275
    )Interest and other expense, net
    
    
    1,149
    
    
    
    191
    
    
    
    1,531
    
    
    
    344Net loss
    
    
    (2,861
    )
    
    
    (13,311
    )
    
    
    5,370
    )
    
    
    (18,619
    )Preferred stock dividends
    
    
    37
    
    
    
    
    
    
    
    37
    
    
    
    Net loss applicable to common shareholders
    
    $
    (2,898
    )
    
    $
    (13,311
    )
    
    $
    (5,407
    )
    
    $
    (18,619
    )Basic and diluted loss per common share
    
    $
    (0.24
    )
    
    $
    (1.75
    )
    
    $
    (0.48
    )
    
    $
    (2.52
    )Basic and diluted weighted average common shares
outstanding
    
    
    12,083
    
    
    
    7,597
    
    
    
    11,202
    
    
    
    7,389
   2




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VERTICALNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 Six Months EndedJune 30,2007
    
    
    2006Operating activities:Net loss
    
    $
    (5,407
    )
    
    $
    (18,619
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    914
    
    
    
    1,232Stock-based compensation
    
    
    124
    
    
    
    1,064Impairment of goodwill
    
    
    
    
    
    
    9,877Accretion of promissory notes and non-cash interest
    
    
    402
    
    
    
    1,043Change in the fair value of derivative liabilities
    
    
    (159
    )
    
    
    (1,201
    )Change in
fair value of warrant liabilities
    
    
    1,590
    
    
    
    Amortization of deferred financing costs
    
    
    99
    
    
    
    256Preferred
stock dividends
    
    
    37
    
    
    
    Other non-cash items
    
    
    
    
    
    
    9Change in assets and liabilities, net:Accounts receivable
    
    
    (509
    )
    
    
    (189
    )Prepaid expenses and other assets
    
    
    141
    
    
    
    317Accounts payable and accrued expenses
    
    
    194
    
    
    
    1,738Deferred revenues
    
    
    (3
    )
    
    
    675Net cash used in operating activities
    
    
    (2,577
    )
    
    
    (3,798
    )Investing activities:Capital expenditures
    
    
    (29
    )
    
    
    (66
    )Acquisitions related payments
    
    
    
    
    
    
    (57
    )Restricted cash
    
    
    
    
    
    
    155Net cash provided by (used in) investing activities
    
    
    (29
    )
    
    
    32Financing activities:Principal payments on long-term debt and obligations under capital leases
    
    
    (919
    )
    
    
    (342
    )Proceeds from issuance of senior subordinated discount note, net
    
    
    
    
    
    
    3,677Proceeds from issuance of preferred stock, net
    
    
    1,954
    
    
    
    Proceeds
from exercise of restricted stock units
    
    
    3
    
    
    
    8Net cash provided by financing activities
    
    
    1,038
    
    
    
    3,343Effect of exchange rate fluctuation on cash and cash equivalents
    
    
    (3
    )
    
    
    20Net decrease in cash and cash equivalents
    
    
    (1,571
    )
    
    
    (403
    )Cash and cash equivalents  beginning of period
    
    
    2,809
    
    
    
    4,576Cash and cash equivalents  end of period
    
    $
    1,238
    
    
    $
    4,173Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    393
    
    
    $
    129Supplemental schedule of non-cash investing and financing activities:Conversion of and payments on senior convertible promissory notes and
accrued interest into/with common stock
    
    $
    1,307
    
    
    $
    2,063Financed insurance policies
    
    
    570
    
    
    
    663Capital expenditures financed through capital lease arrangements
    
    
    
    
    
    
    42
   3




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VERTICALNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
DEFICIT (UNAUDITED)
(in thousands)
 AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Accumulated
    
    
    Treasury
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    (Loss) Income
    
    
    Deficit
    
    
    Stock
    
    
    EquityBalance,
December 31, 2006
    
    
    9,373
    
    
    $
    94
    
    
    $
    1,230,501
    
    
    $
    (33
    )
    
    $
    (1,226,815
    )
    
    $
    (805
    )
    
    $
    2,942Exercise of stock
options, non-vested
stock, and
restricted units
    
    
    33
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Conversion of and
payments on senior
convertible
promissory
notes and accrued
interest into /
with common stock
(Note 5)
    
    
    2,987
    
    
    
    30
    
    
    
    1,277
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,307Issuance of
non-vested stock
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based
compensation
expense
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,407
    )
    
    
    
    
    
    
    (5,407
    )Other comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    45Balance, June 30,
2007 (unaudited)
    
    
    12,409
    
    
    $
    124
    
    
    $
    1,231,905
    
    
    $
    12
    
    
    $
    (1,232,222
    )
    
    $
    (805
    )
    
    $
    (986
    )
   4




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VERTICALNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(in thousands)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (2,898
    )
    
    $
    (13,311
    )
    
    $
    (5,407
    )
    
    $
    (18,619
    )Foreign currency translation adjustment
    
    
    42
    
    
    
    165
    
    
    
    45
    
    
    
    203Comprehensive loss
    
    $
    (2,856
    )
    
    $
    (13,146
    )
    
    $
    (5,362
    )
    
    $
    (18,416
    )
   5




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VERTICALNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (1) Summary of Significant Accounting Policies
 Description of the Company
   Basis of Presentation
  (see Note 2).
 Reverse Stock Split
     Use of Estimates
   6




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Cash and Cash Equivalents
  Restricted Cash
  Intangible Assets and Other Long-Lived Assets
 
    Deferred Revenue
  Financial Instruments
  Concentration of Credit Risk
   7




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Revenue Recognition
 Software and software related revenues
          8




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Services revenues
    2007
    
    
    2006Accounts
    
    
    
    
    
    
    
    
    
    
    AccountsReceivable
    
    
    
    
    
    
    % of Total
    
    
    Receivable
    
    
    
    
    
    
    % of TotalCustomer
    
    Balance (a)
    
    
    Revenues
    
    
    Revenues
    
    
    Balance (a)
    
    
    Revenues
    
    
    RevenuesA
    
    $
    177
    
    
    $
    345
    
    
    
    5.0
    %
    
    $
    365
    
    
    $
    1,220
    
    
    
    15.1
    %B
    
    
    108
    
    
    
    429
    
    
    
    6.3
    
    
    
    274
    
    
    
    1,036
    
    
    
    12.8All others, net of
allowance (b)
    
    
    4,101
    
    
    
    6,059
    
    
    
    88.7
    
    
    
    4,738
    
    
    
    5,845
    
    
    
    72.2Total
    
    $
    4,386
    
    
    $
    6,833
    
    
    
    100.0
    %
    
    $
    5,377
    
    
    $
    8,101
    
    
    
    100.0
    %
 
 (a)
    
    Represents both billed and unbilled amounts.(b)
    
    Total includes unbilled amounts as of June 30, 2007 and
2006 of $809,000 and $481,000, respectively.  2007
    
    
    2006% of Total
    
    
    
    
    
    
    % of TotalCustomer
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    RevenuesA
    
    $
    175
    
    
    
    5.1
    %
    
    $
    513
    
    
    
    12.3
    %B
    
    
    311
    
    
    
    9.1
    
    
    
    437
    
    
    
    10.4All others
    
    
    2,930
    
    
    
    85.8
    
    
    
    3,235
    
    
    
    77.3Total
    
    $
    3,416
    
    
    
    100.0
    %
    
    $
    4,185
    
    
    
    100.0
    %
 Stock-Based Compensation
   9




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Foreign Currency Translation
  Contingencies
  Accounting for Derivatives
  Computation of Historical Income (Loss) Per Common Share
    Adoption of Recent Accounting Pronouncements
   10




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(2) Liquidity
     11




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12




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(3) Detail of Certain Balance Sheet Accounts
  June 30,
    
    
    December 31,2007
    
    
    2006Accounts Receivable, trade
    
    $
    3,674
    
    
    $
    2,889Unbilled accounts receivable
    
    
    809
    
    
    
    1,077Retainage
    
    
    
    
    
    
    84,483
    
    
    
    3,974Less: allowance for doubtful accounts
    
    
    (97
    )
    
    
    (97
    )$
    4,386
    
    
    $
    3,877
   June 30,
    
    
    December 31,2007
    
    
    2006Software
    
    $
    1,720
    
    
    $
    1,720Computer equipment
    
    
    2,032
    
    
    
    2,000Office equipment and furniture
    
    
    264
    
    
    
    264Leasehold improvements
    
    
    890
    
    
    
    8904,906
    
    
    
    4,874Less: accumulated depreciation and amortization
    
    
    (4,168
    )
    
    
    (3,954
    )$
    738
    
    
    $
    920
   13




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June 30,
    
    
    December 31,2007
    
    
    2006Accounts payable
    
    $
    3,449
    
    
    $
    2,908Accrued taxes
    
    
    677
    
    
    
    788Compensation and related costs
    
    
    394
    
    
    
    577Professional fees
    
    
    308
    
    
    
    318Financial printing
    
    
    255
    
    
    
    175Convertible and discount note interest
    
    
    188
    
    
    
    176Commission due to sales chain partners
    
    
    143
    
    
    
    358Derivative liabilities
    
    
    70
    
    
    
    229Other
    
    
    179
    
    
    
    169$
    5,663
    
    
    $
    5,698
 (4) Goodwill and Other Intangibles
       14




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GrossCarrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    ValueJune 30, 2007:Acquired technology
    
    $
    3,736
    
    
    
    3,709
    
    
    $
    27Customer contracts and relationships
    
    
    6,983
    
    
    
    5,580
    
    
    
    1,403Non-compete agreements
    
    
    252
    
    
    
    187
    
    
    
    65Trademarks
    
    
    12
    
    
    
    12
    
    
    
    $
    10,983
    
    
    $
    9,488
    
    
    $
    1,495December 31, 2006:Acquired technology
    
    $
    3,733
    
    
    $
    3,431
    
    
    $
    302Customer contracts and relationships
    
    
    6,958
    
    
    
    5,162
    
    
    
    1,796Non-compete agreements
    
    
    251
    
    
    
    165
    
    
    
    86Trademarks
    
    
    11
    
    
    
    11
    
    
    
    $
    10,953
    
    
    $
    8,769
    
    
    $
    2,184
   (5) Long-term Debt, Convertible Notes, and Other Non-Current Liabilities
  June 30,
    
    
    December 31,2007
    
    
    2006Capital leases
    
    $
    78
    
    
    $
    111Senior secured convertible promissory notes
    
    
    293
    
    
    
    1,894Senior subordinated discount notes
    
    
    5,229
    
    
    
    5,069Other long-term liabilites
    
    
    678
    
    
    
    3666,278
    
    
    
    7,440Less: current portion of long-term debt, convertible notes, and other
non-current liabilities
    
    
    (6,196
    )
    
    
    (2,170
    )Long-term debt, convertible notes, and other non-current liabilities
    
    $
    82
    
    
    $
    5,270
 Senior Secured Convertible Promissory Notes
    15




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.
   16




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Senior Subordinated Discount Note
      17




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18




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(6) Series B Preferred Stock
       In connection with the Series B
Preferred Stock issuance, the Company will issue a minimum of 8,700,000
warrants. These warrants were valued at the date of issuance at $1,735,650.
These warrants are accounted for as a liability due to the existence of certain
provisions in this instrument. Changes in the fair value of this derivative
liability are recorded in the consolidated statement of operations. As of
June 30, 2007, the fair value of these warrants was $3,182,132, resulting
in other expense of $1,446,482 during the three months ended June 30,
2007. The warrants have the following terms: 4,350,000 warrants are exercisable
at an exercise price of $.33 per share, and 4,350,000 warrants are exercisable
at an exercise price of $.70 per share. The warrants are exercisable after
August 16, 2007 and have a 5 year term. The Company incurred costs of $386,824,
consisting of cash and warrants issued to the placement agent. The placement
agent received 870,000 warrants with 435,000 of the warrants exercisable at
$.33 per share and 435,000 of the warrants exercisable at $.70 per share. These
warrants are accounted for as a derivative liability due to the existence of
certain provisions in this instrument. Changes in the fair value of this
derivative liability are recorded in the consolidated statement of operations.
As of June 30, 2007 the fair value of these warrants was $317,550,
resulting in other expense of $143,984 during the three months ended
June 30, 2007. The Company recorded dividends at 12%
for the three months ended June 30, 2007 in the amount of $20,737, and
accretion of issuance costs of $16,118.  19




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##### Table of Contents



(7) Commitments and Contingencies
  Lease ObligationsOperating
    
    
    Capital
    
    
    Total2007 (a)
    
    $
    385
    
    
    $
    45
    
    
    $
    4302008
    
    
    564
    
    
    
    38
    
    
    
    6022009
    
    
    373
    
    
    
    1
    
    
    
    3742010
    
    
    365
    
    
    
    
    
    
    
    3651,687
    
    
    
    84
    
    
    
    1,771Less interest
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Total
    
    $
    1,687
    
    
    $
    78
    
    
    $
    1,765
 
 (a)
    
    Reflects amounts payable over the last six months of 2007.          20




---



##### Table of Contents



(8) Litigation
       21




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##### Table of Contents



(9) Capital Stock
  Stock Option Fair Value Information
   Stock-based Compensation Expense
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of revenues
    
    $
    8
    
    
    $
    100
    
    
    $
    10
    
    
    $
    214Research and development
    
    
    11
    
    
    
    68
    
    
    
    30
    
    
    
    138Sales and marketing
    
    
    17
    
    
    
    142
    
    
    
    47
    
    
    
    242General and administrative
    
    
    9
    
    
    
    274
    
    
    
    37
    
    
    
    470$
    45
    
    
    $
    584
    
    
    $
    124
    
    
    $
    1,064
  (10) Restructuring
    22




---



##### Table of Contents



(11) Segment Information
    Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:United States
    
    $
    2,756
    
    
    $
    3,403
    
    
    $
    5,412
    
    
    $
    6,884International
    
    
    660
    
    
    
    782
    
    
    
    1,421
    
    
    
    1,217Total revenues
    
    $
    3,416
    
    
    $
    4,185
    
    
    $
    6,833
    
    
    $
    8,101
 June 30,
    
    
    December 31,2007
    
    
    2006Long-lived Assets:United States
    
    $
    1,177
    
    
    $
    1,300International
    
    
    17
    
    
    
    36$
    1,194
    
    
    $
    1,336
  (12) Interest and Other Expense, Net
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest expense, net
    
    $
    375
    
    
    $
    868
    
    
    $
    869
    
    
    $
    1,508Perpetual licensing transaction
    
    
    (777
    )
    
    
    
    
    
    
    (777
    )
    
    
    Change in fair value of derivative liabilities
    
    
    (40
    )
    
    
    (694
    )
    
    
    (159
    )
    
    
    (1,201
    )Change in
fair value of warrant liabilities
    
    
    1,590
    
    
    
    
    
    
    
    1,590
    
    
    
    Transaction loss
    
    
    1
    
    
    
    17
    
    
    
    7
    
    
    
    38Other expenses (income), net
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )$
    1,149
    
    
    $
    191
    
    
    $
    1,531
    
    
    $
    344
   23




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##### Table of Contents



As a result of certain features
contained in our Series B Preferred Stock and related warrants, we were
required under U.S. generally accepted accounting principles to record warrant
liabilities, which have an aggregate fair value of $3.5 million as of
June 30, 2007, and are recorded as part of warrant liabilities within non-
current liabilities on the accompanying condensed consolidated balance sheet.
Each quarter, we are required to revalue the warrants and the change from the
prior period will be recorded as a non-cash charge or benefit in the condensed
consolidated statement of operations. During the three and six months ended
June 30, 2007, we recorded non-cash charge of $1.6 million. Changes
in the fair value of the warrant liabilities are primarily measured using the
Black-Scholes valuation model and are recorded as a change in fair value of
warrant liabilities in the condensed consolidated statement of operations. The
fair value of the warrant liabilities are directly affected by the change in
the market value of our stock.     (13) Subsequent Event
     24




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 The information in this report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Any statements contained in this report that are
not statements of historical fact may be deemed forward-looking statements. Words such as may,
might, will, would, should, could, project, estimate, pro forma, predict,
potential, strategy, anticipate, plan to, believe, continue, intend, expect, and
words of similar expression (including the negative of any of the foregoing) are intended to
identify forward-looking statements. Additionally, forward-looking statements in this report
include statements relating to the design, development, and implementation of our products; the
strategies underlying our business objectives; the benefits to our customers, and their trading
partners, of our products; our liquidity and capital resources; and the impact of our acquisitions
and investments on our business, financial condition, and operating results.
 Our forward-looking statements are not meant to predict future events or circumstances and may not
be realized because they are based upon current expectations that involve risks and uncertainties.
Actual results and the timing of certain events may differ materially from those currently expected
as a result of these risks and uncertainties. Factors that may cause or contribute to a difference
between the expected or desired results and actual results include, but are not limited to, the
availability of and terms of equity and debt financing to fund our business; our reliance on the
development of our enterprise software business; our ability to continue to remain listed on the
Nasdaq Capital Market; competition in our target markets; economic conditions in general and in our
specific target markets; our ability to use and protect our intellectual property; and our ability
to attract and retain qualified personnel, as well as the risks discussed in Part II , Item 1A of
this report entitled Risk Factors. Given these uncertainties, investors are cautioned not to
place undue reliance on our forward-looking statements. We disclaim any obligation to update these
factors or to announce publicly the results of any revisions to any of the forward-looking
statements contained in this report to reflect future events or developments.
 Company Overview
     Critical Accounting Policies and Estimates
   25




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##### Table of Contents



26




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##### Table of Contents



RESULTS OF CONTINUING OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Software and software related
    
    
    48.6
    %
    
    
    45.2
    %
    
    
    47.1
    %
    
    
    42.4
    %Services
    
    
    51.4
    %
    
    
    54.8
    %
    
    
    52.9
    %
    
    
    57.6
    %Total revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues:Cost of software and software related
    
    
    10.3
    %
    
    
    13.7
    %
    
    
    10.4
    %
    
    
    14.5
    %Cost of services
    
    
    34.2
    %
    
    
    34.2
    %
    
    
    33.3
    %
    
    
    38.1
    %Amortization of acquired technology and customer contracts
    
    
    7.3
    %
    
    
    5.9
    %
    
    
    7.3
    %
    
    
    6.1
    %Total cost of revenues
    
    
    51.8
    %
    
    
    53.9
    %
    
    
    51.0
    %
    
    
    58.7
    %Gross profit
    
    
    48.2
    %
    
    
    46.1
    %
    
    
    49.0
    %
    
    
    41.3
    %Operating expenses:Research and development
    
    
    29.4
    %
    
    
    33.4
    %
    
    
    29.1
    %
    
    
    35.5
    %Sales and marketing
    
    
    37.8
    %
    
    
    45.4
    %
    
    
    38.5
    %
    
    
    47.3
    %General and administrative
    
    
    28.6
    %
    
    
    40.3
    %
    
    
    34.7
    %
    
    
    41.2
    %Litigation and settlement costs
    
    
    
    
    
    
    0.2
    %
    
    
    
    
    
    
    12.7
    %Restructuring charges (reversals)
    
    
    
    
    
    
    (0.5
    %)
    
    
    
    
    
    
    2.7
    %Impairment charge for goodwill
    
    
    
    
    
    
    236.0
    %
    
    
    
    
    
    
    121.9
    %Amortization of other intangible assets
    
    
    2.5
    %
    
    
    4.8
    %
    
    
    3.0
    %
    
    
    5.7
    %Total operating expenses
    
    
    98.4
    %
    
    
    359.6
    %
    
    
    105.2
    %
    
    
    266.9
    %Operating loss
    
    
    (50.1
    %)
    
    
    (313.5
    %)
    
    
    (56.2
    %)
    
    
    (225.6
    %)Interest and other expense, net
    
    
    33.6
    %
    
    
    4.6
    %
    
    
    22.4
    %
    
    
    4.2
    %Net loss
    
    
    (83.6
    %)
    
    
    (318.1
    %)
    
    
    (78.6
    %)
    
    
    (229.8
    %)Preferred
stock dividends
    
    
    1.1
    %
    
    
    
    
    
    
    0.6
    %
    
    
    Net loss
applicable to common shareholders
    
    
    (84.8
    %)
    
    
    (318.1
    %)
    
    
    (79.1
    %)
    
    
    (229.8
    %)
 EMPLOYEE HEADCOUNT BY CLASSIFICATION
 June 30,2007
    
    
    2006Dedicated
    
    
    
    
    
    
    
    
    
    
    DedicatedOffshore
    
    
    
    
    
    
    
    
    
    
    OffshoreEmployees
    
    
    Consultants
    
    
    Total
    
    
    Employees
    
    
    Consultants
    
    
    TotalCost of revenues
    
    
    29
    
    
    
    9
    
    
    
    38
    
    
    
    38
    
    
    
    5
    
    
    
    43Research and development
    
    
    18
    
    
    
    15
    
    
    
    33
    
    
    
    25
    
    
    
    22
    
    
    
    47Sales and marketing
    
    
    22
    
    
    
    
    
    
    
    22
    
    
    
    26
    
    
    
    
    
    
    
    26General and administrative
    
    
    15
    
    
    
    
    
    
    
    15
    
    
    
    20
    
    
    
    
    
    
    
    20Total
    
    
    84
    
    
    
    24
    
    
    
    108
    
    
    
    109
    
    
    
    27
    
    
    
    136
  27




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##### Table of Contents



Revenues
 Three months ended
    
    
    
    
    
    
    
    
    
    
    Six months endedJune 30,
    
    
    Difference
    
    
    June 30,
    
    
    Difference(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %Software and software related
    
    $
    1,660
    
    
    $
    1,890
    
    
    $
    (230
    )
    
    
    (12.2
    %)
    
    $
    3,219
    
    
    $
    3,431
    
    
    $
    (212
    )
    
    
    (6.2
    %)Services
    
    
    1,756
    
    
    
    2,295
    
    
    
    (539
    )
    
    
    (23.5
    %)
    
    
    3,614
    
    
    
    4,670
    
    
    
    (1,056
    )
    
    
    (22.6
    %)Total revenues
    
    $
    3,416
    
    
    $
    4,185
    
    
    $
    (769
    )
    
    
    (18.4
    %)
    
    $
    6,833
    
    
    $
    8,101
    
    
    $
    (1,268
    )
    
    
    (15.7
    %)
 Revenue Concentration
  2007
    
    
    2006Accounts
    
    
    
    
    
    
    
    
    
    
    AccountsReceivable
    
    
    
    
    
    
    % of Total
    
    
    Receivable
    
    
    
    
    
    
    % of TotalCustomer
    
    Balance (a)
    
    
    Revenues
    
    
    Revenues
    
    
    Balance (a)
    
    
    Revenues
    
    
    RevenuesA
    
    $
    177
    
    
    $
    345
    
    
    
    5.0
    %
    
    $
    365
    
    
    $
    1,220
    
    
    
    15.1
    %B
    
    
    108
    
    
    
    429
    
    
    
    6.3
    
    
    
    274
    
    
    
    1,036
    
    
    
    12.8All others, net of
allowance (b)
    
    
    4,101
    
    
    
    6,059
    
    
    
    88.7
    
    
    
    4,738
    
    
    
    5,845
    
    
    
    72.2Total
    
    $
    4,386
    
    
    $
    6,833
    
    
    
    100.0
    %
    
    $
    5,377
    
    
    $
    8,101
    
    
    
    100.0
    %
 
 (a)
    
    Represents both billed and unbilled amounts.(b)
    
    Total includes unbilled amounts as of June 30, 2007 and 2006 of $809,000 and $467,000, respectively.  2007
    
    
    2006% of Total
    
    
    
    
    
    
    % of TotalCustomer
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    RevenuesA
    
    $
    175
    
    
    
    5.1
    %
    
    $
    513
    
    
    
    12.3
    %B
    
    
    311
    
    
    
    9.1
    
    
    
    437
    
    
    
    10.4All others, net of
allowance (b)
    
    
    2,930
    
    
    
    85.8
    
    
    
    3,235
    
    
    
    77.3Total
    
    $
    3,416
    
    
    
    100.0
    %
    
    $
    4,185
    
    
    
    100.0
    %
     28




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##### Table of Contents



Cost of Revenues
 Three months ended
    
    
    
    
    
    
    
    
    
    
    Six months endedJune 30,
    
    
    Difference
    
    
    June 30,
    
    
    Difference(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %Cost of software and software related
    
    $
    351
    
    
    $
    575
    
    
    $
    (224
    )
    
    
    (39.0
    %)
    
    $
    708
    
    
    $
    1,173
    
    
    $
    (465
    )
    
    
    (39.6
    %)Cost of services
    
    
    1,167
    
    
    
    1,432
    
    
    
    (265
    )
    
    
    (18.5
    %)
    
    
    2,274
    
    
    
    3,084
    
    
    
    (810
    )
    
    
    (26.3
    %)Amortization of acquired technology and customer contracts
    
    
    250
    
    
    
    249
    
    
    
    1
    
    
    
    0.4
    %
    
    
    500
    
    
    
    496
    
    
    
    4
    
    
    
    0.8
    %Total cost of revenues
    
    $
    1,768
    
    
    $
    2,256
    
    
    $
    (488
    )
    
    
    (21.6
    %)
    
    $
    3,482
    
    
    $
    4,753
    
    
    $
    (1,271
    )
    
    
    (26.7
    %)
  Cost of Software and Software Related
     29




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##### Table of Contents



Cost of Services
    Amortization of Acquired Technology and Customer Contracts
  Operating Expenses
 Three months ended
    
    
    
    
    
    
    
    
    
    
    Six months endedJune 30,
    
    
    Difference
    
    
    June 30,
    
    
    Difference(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %Research and development
    
    $
    1,004
    
    
    $
    1,398
    
    
    $
    (394
    )
    
    
    (28.2
    %)
    
    $
    1,987
    
    
    $
    2,873
    
    
    $
    (886
    )
    
    
    (30.8
    %)Sales and marketing
    
    
    1,292
    
    
    
    1,899
    
    
    
    (607
    )
    
    
    (32.0
    %)
    
    
    2,632
    
    
    
    3,834
    
    
    
    (1,202
    )
    
    
    (31.4
    %)General and administrative
    
    
    978
    
    
    
    1,688
    
    
    
    (710
    )
    
    
    (42.1
    %)
    
    
    2,369
    
    
    
    3,338
    
    
    
    (969
    )
    
    
    (29.0
    %)Litigation and settlement costs
    
    
    
    
    
    
    8
    
    
    
    (8
    )
    
    
    (100.0
    %)
    
    
    
    
    
    
    1,026
    
    
    
    (1,026
    )
    
    
    (100.0
    %)Restructuring charges (reversals)
    
    
    
    
    
    
    (22
    )
    
    
    22
    
    
    
    (100.0
    %)
    
    
    
    
    
    
    216
    
    
    
    (216
    )
    
    
    (100.0
    %)Impairment charges for goodwill and other intangible assets
    
    
    
    
    
    
    9,877
    
    
    
    (9,877
    )
    
    
    (100.0
    %)
    
    
    
    
    
    
    9,877
    
    
    
    (9,877
    )
    
    
    (100.0
    %)Amortization of other intangible assets
    
    
    86
    
    
    
    201
    
    
    
    (115
    )
    
    
    (57.2
    %)
    
    
    202
    
    
    
    459
    
    
    
    (257
    )
    
    
    (56.0
    %)Total operating expenses
    
    $
    3,360
    
    
    $
    15,049
    
    
    $
    (11,689
    )
    
    
    (77.7
    %)
    
    $
    7,190
    
    
    $
    21,623
    
    
    $
    (14,433
    )
    
    
    (66.7
    %)
   Research and Development
      30




---



##### Table of Contents



Sales and Marketing
    General and Administrative
    Litigation and Settlement Costs
   Restructuring Charges
    31




---



##### Table of Contents



Impairment Charge for Goodwill
   Amortization of Other Intangible Assets
  Interest and Other Expense, Net
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest expense, net
    
    $
    375
    
    
    $
    868
    
    
    $
    869
    
    
    $
    1,508Perpetual licensing transaction
    
    
    (777
    )
    
    
    
    
    
    
    (777
    )
    
    
    Change in fair value of derivative liabilities
    
    
    (40
    )
    
    
    (694
    )
    
    
    (159
    )
    
    
    (1,201
    )Change in
fair value of warrant liabilities
    
    
    1,590
    
    
    
    
    
    
    
    1,590Transaction loss
    
    
    1
    
    
    
    17
    
    
    
    7
    
    
    
    38Other expenses (income), net
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )$
    1,149
    
    
    $
    191
    
    
    $
    1,531
    
    
    $
    344
    32




---



##### Table of Contents



As a result of certain features
contained in our Series B Preferred Stock and related warrants, we were
required under U.S. generally accepted accounting principles to record warrant
liabilities, which have an aggregate fair value of $3.5 million as of
June 30, 2007, and are recorded as part of warrant liabilities within non-
current liabilities on the accompanying condensed consolidated balance sheet.
Each quarter, we are required to revalue the warrants and the change from the
prior period will be recorded as a non-cash charge or benefit in the condensed
consolidated statement of operations. During the three and six months ended
June 30, 2007, we recorded non-cash charge of $1.6 million. Changes
in the fair value of the warrant liabilities are primarily measured using the
Black-Scholes valuation model and are recorded as a change in fair value of
warrant liabilities in the condensed consolidated statement of operations. The
fair value of the warrant liabilities are directly affected by the change in
the market value of our stock.      33




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
  June 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Cash and cash equivalents
    
    $
    1,238
    
    
    $
    2,809Accounts receivable, net
    
    $
    4,386
    
    
    $
    3,877Working capital (deficit)
    
    $
    (8,657
    )
    
    $
    (4,160
    )Current ratio
    
    
    0.44
    
    
    
    0.64Deferred revenues
    
    $
    4,610
    
    
    $
    4,613Total debt and other non-current liabilities, including
current portion and derivative liabilities
    
    $
    6,348
    
    
    $
    7,669
 Six Months Ended June 30,2007
    
    
    2006Cash flow activities:Net cash used in operating activities
    
    $
    (2,577
    )
    
    $
    (3,798
    )Net cash provided by (used in) investing activities
    
    
    (29
    )
    
    
    32Net cash provided by financing activities
    
    
    1,038
    
    
    
    3,343
  Operating activities
  Investing activities
  Financing activities
    34




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##### Table of Contents



35




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##### Table of Contents



Contractual Commitments
  Expected Cash Payment by Period  (in thousands)
 2007(a)
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    TotalSenior secured convertible promissory notes (b)
    
    $
    295
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    295Senior subordinated discount notes (c)
    
    
    330
    
    
    
    5,830
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,160Operating leases
    
    
    385
    
    
    
    564
    
    
    
    373
    
    
    
    365
    
    
    
    
    
    
    
    
    
    
    
    1,687Capital leases (d)
    
    
    45
    
    
    
    38
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84Liability settlement (e)
    
    
    100
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250Tenant improvement loan (f)
    
    
    6
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Insurance financing (g)
    
    
    352
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    388Employment agreements (h)
    
    
    490
    
    
    
    385
    
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,035Other obligations (i)
    
    
    83
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95Total
    
    $
    2,086
    
    
    $
    7,022
    
    
    $
    534
    
    
    $
    365
    
    
    $
    
    
    
    $
    
    
    
    $
    10,007
 
 (a)
    
    Reflects amounts payable over the last six months of 2007.(b)
    
    Senior secured convertible promissory notes include future interest obligations.(c)
    
    Senior subordinated discount note include future interest obligations.(d)
    
    Capital lease balances include future interest obligations.(e)
    
    Liability settlement balances include future interest obligations.(f)
    
    Tenant improvement loan balances include future interest obligations.(g)
    
    Relates to insurance policy financing in 2007.(h)
    
    Represents minimum salaries due to certain executives based on existing employment agreements. In
addition, these agreements provide for additional payments upon employee separation of
approximately $904,000.(i)
    
    Relates to third-party hosting facilities and minimum off-shore development resources commitments. Off-Balance Sheet Arrangements
   36




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Risk
  Interest Rate Risk
  Derivatives
     37




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##### Table of Contents



Item 4. Controls and Procedures
 (a) Evaluation of disclosure controls and procedures.
 (b) Changes in internal controls.
 
 Part II. Other Information
  
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  We will require additional capital to fund our operations and obligations.
   38




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##### Table of Contents



39




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##### Table of Contents



Our indebtedness and debt service obligations may adversely affect our cash flows.
  
    
    requiring the dedication of a substantial portion of our expected cash flow from
operations to service the indebtedness, thereby reducing the amount of expected
cash flow available for other purposes, including capital expenditures;
    
    increasing our vulnerability to general adverse economic and industry conditions;
    
    limiting our ability to obtain additional financing;
    
    limiting our flexibility to plan for, or react to, changes in our business and
the industry in which we compete; and
    
    placing us at a possible competitive disadvantage to competitors with less debt
obligations and competitors that have better access to capital resources.
  40




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##### Table of Contents



Our Discount Note provides that upon the occurrence of various events of default and change of
control transactions, the holder would be entitled to require us to prepay the Discount Note, which
could leave us with little or no working capital for operations or capital expenditures.
   We generate a significant portion of our revenues and accounts receivable from certain customers.
   We may be unable to maintain our listing on The Nasdaq Capital Market, which could cause our stock
price to fall and decrease the liquidity of our common stock.
       41




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##### Table of Contents



Issuance of shares of common stock upon conversion of our Series B Preferred Stock and exercise of
warrants will dilute the ownership interests of existing shareholders and could adversely affect
the market price of our common stock.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
 Item 3. Defaults Upon Senior Securities
   
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
   42




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    Description31.1
    
    Chief Executive Officers Rule 13a-14(a)/15d-14(a) Certification.*31.2
    
    Chief Accounting Officers Rule 13a-14(a)/15d-14(a) Certification.*32.1
    
    Chief Executive Officers Certification Pursuant to 18 U.S.C. Section 1350.32.2
    
    Chief Accounting Officers Certification Pursuant to 18 U.S.C. Section 1350.
 *
    
    Filed herewith.
    
    Furnished herewith.  43




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##### Table of Contents



SIGNATURES
  VERTICALNET, INC.By:
    
    /s/ NATHANAEL V. LENTZName:
    
    Nathanael V. LentzPresident and Chief Executive OfficerDate: August 14, 2007By:
    
    /s/ JONATHAN T. COHENName:
    
    Jonathan T. CohenVice President andChief Accounting Officer(principal financial and accounting officer)Date: August 14, 2007
  44




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description31.1
    
    Chief Executive Officers Rule 13a-14(a)/15d-14(a) Certification.*31.2
    
    Chief Accounting Officers Rule 13a-14(a)/15d-14(a) Certification.*32.1
    
    Chief Executive Officers Certification Pursuant to 18 U.S.C. Section 1350.32.2
    
    Chief Accounting Officers Certification Pursuant to 18 U.S.C. Section 1350.
 *
    
    Filed herewith.
    
    Furnished herewith.  45