##### 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 March 31, 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 March 31, 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.
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    32Item 4. Controls and Procedures.
    
    
    33PART II. OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    34Item 1A. Risk Factors.
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    36Item 3. Defaults Upon Senior Securities.
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    36Item 5. Other Information.
    
    
    36Item 6. Exhibits.
    
    
    37SIGNATURES
    
    
    38Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   ii




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Part I. Financial Information
 
 Item 1. Condensed Consolidated Financial Statements
 VERTICALNET, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
  March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,586
    
    
    $
    2,809Accounts receivable, net
    
    
    3,832
    
    
    
    3,877Prepaid expenses and other current assets
    
    
    1,022
    
    
    
    778Total current assets
    
    
    6,440
    
    
    
    7,464Property and equipment, net
    
    
    830
    
    
    
    920Goodwill
    
    
    9,706
    
    
    
    9,709Other intangible assets, net
    
    
    1,821
    
    
    
    2,184Other assets
    
    
    291
    
    
    
    416Total assets
    
    $
    19,088
    
    
    $
    20,693Liabilities and Shareholders EquityCurrent liabilities:Current portion of long-term debt, convertible notes, and other non-current
liabilities
    
    $
    1,716
    
    
    $
    2,170Accounts payable and accrued expenses
    
    
    5,954
    
    
    
    5,698Deferred revenues
    
    
    3,830
    
    
    
    3,756Total current liabilities
    
    
    11,500
    
    
    
    11,624Non-current portion of deferred revenues
    
    
    1,034
    
    
    
    857Long-term debt and other non-current liabilities
    
    
    5,284
    
    
    
    5,270Total liabilities
    
    
    17,818
    
    
    
    17,751Commitments and contingencies (see Notes 2, 5, 6, and 7)Shareholders equity:Preferred stock $.01 par value, 10,000,000 shares authorized, none issued at
March 31, 2007 and December 31, 2006
    
    
    
    
    
    
    Common stock $.01 par value, 21,428,571 shares authorized at March 31, 2007
and December 31, 2006, 10,745,462 shares issued at March 31,
2007 and 9,372,685 shares issued at December 31, 2006
    
    
    107
    
    
    
    94Additional paid-in capital
    
    
    1,231,322
    
    
    
    1,230,501Accumulated other comprehensive loss
    
    
    (30
    )
    
    
    (33
    )Accumulated deficit
    
    
    (1,229,324
    )
    
    
    (1,226,815
    )2,075
    
    
    
    3,747Treasury stock at cost, 9,377 shares at March 31, 2007 and December 31, 2006
    
    
    (805
    )
    
    
    (805
    )Total shareholders equity
    
    
    1,270
    
    
    
    2,942Total liabilities and shareholders equity
    
    $
    19,088
    
    
    $
    20,693
   1




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VERTICALNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
 Three Months EndedMarch 31,2007
    
    
    2006Revenues:Software and software related
    
    $
    1,559
    
    
    $
    1,541Services
    
    
    1,858
    
    
    
    2,375Total revenues
    
    
    3,417
    
    
    
    3,916Cost of revenues:Cost of software and software related
    
    
    357
    
    
    
    598Cost of services
    
    
    1,107
    
    
    
    1,652Amortization of acquired technology and customer contracts
    
    
    250
    
    
    
    247Total cost of revenues
    
    
    1,714
    
    
    
    2,497Gross profit
    
    
    1,703
    
    
    
    1,419Operating expenses:Research and development
    
    
    983
    
    
    
    1,475Sales and marketing
    
    
    1,340
    
    
    
    1,935General and administrative
    
    
    1,391
    
    
    
    1,650Litigation and settlement costs
    
    
    
    
    
    
    1,018Restructuring charges
    
    
    
    
    
    
    238Amortization of other intangible assets
    
    
    116
    
    
    
    258Total operating expenses
    
    
    3,830
    
    
    
    6,574Operating loss
    
    
    (2,127
    )
    
    
    (5,155
    )Interest and other expense, net
    
    
    382
    
    
    
    153Net loss
    
    $
    (2,509
    )
    
    $
    (5,308
    )Basic and diluted loss per common share
    
    $
    (0.24
    )
    
    $
    (0.74
    )Basic and diluted weighted average common shares outstanding
    
    
    10,312
    
    
    
    7,167
   2




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VERTICALNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 Three Months EndedMarch 31,2007
    
    
    2006Operating activities:Net loss
    
    $
    (2,509
    )
    
    $
    (5,308
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    476
    
    
    
    650Stock-based compensation
    
    
    79
    
    
    
    480Accretion of promissory notes and non-cash interest
    
    
    244
    
    
    
    427Change in the fair value of derivative liabilities
    
    
    (119
    )
    
    
    (507
    )Amortization of deferred financing costs
    
    
    59
    
    
    
    120Other non-cash items
    
    
    
    
    
    
    9Change in assets and liabilities, net of effect of acquisition:Restricted cash
    
    
    
    
    
    
    (211
    )Accounts receivable
    
    
    45
    
    
    
    1,906Prepaid expenses and other assets
    
    
    220
    
    
    
    205Accounts payable and accrued expenses
    
    
    416
    
    
    
    888Deferred revenues
    
    
    251
    
    
    
    8Net cash used in operating activities
    
    
    (838
    )
    
    
    (1,333
    )Investing activities:Capital expenditures
    
    
    (19
    )
    
    
    (45
    )Acquisitions related payments
    
    
    
    
    
    
    (57
    )Restricted cash
    
    
    
    
    
    
    155Net cash provided by (used in) investing activities
    
    
    (19
    )
    
    
    53Financing activities:Principal payments on long-term debt and obligations under capital
leases
    
    
    (370
    )
    
    
    (135
    )Proceeds from exercise of restricted stock and issuance of common stock
    
    
    3
    
    
    
    2Net cash used in financing activities
    
    
    (367
    )
    
    
    (133
    )Effect of exchange rate fluctuation on cash and cash equivalents
    
    
    1
    
    
    
    9Net decrease in cash and cash equivalents
    
    
    (1,223
    )
    
    
    (1,404
    )Cash and cash equivalents  beginning of period
    
    
    2,809
    
    
    
    4,576Cash and cash equivalents  end of period
    
    $
    1,586
    
    
    $
    3,172Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    35
    
    
    $
    115Supplemental schedule of non-cash investing and financing activities:Conversion of and payments on senior convertible promissory notes and
accrued interest into/with common stock
    
    $
    752
    
    
    $
    1,006Financed insurance policies
    
    
    397
    
    
    
    494Capital expenditures financed through capital lease arrangements
    
    
    
    
    
    
    44
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VERTICALNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY  (UNAUDITED)
(in thousands)
 AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Accumulated
    
    
    Treasury
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Loss
    
    
    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
    
    
    36
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Conversion of and payments on
senior convertible promissory
notes and accrued
interest into / with
common stock (Note 5)
    
    
    1,320
    
    
    
    13
    
    
    
    739
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    752Issuance of non-vested stock
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,509
    )
    
    
    
    
    
    
    (2,509
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Balance, March 31, 2007
(unaudited)
    
    
    10,745
    
    
    $
    107
    
    
    $
    1,231,322
    
    
    $
    (30
    )
    
    $
    (1,229,324
    )
    
    $
    (805
    )
    
    $
    1,270
   4




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VERTICALNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(in thousands)
 Three Months EndedMarch 31,2007
    
    
    2006Net loss
    
    $
    (2,509
    )
    
    $
    (5,308
    )Foreign currency translation adjustment
    
    
    3
    
    
    
    38Comprehensive loss
    
    $
    (2,506
    )
    
    $
    (5,270
    )
   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
   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
   7




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Concentration of Credit Risk
  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
    
    $
    202
    
    
    $
    170
    
    
    
    5.0
    %
    
    $
    624
    
    
    $
    707
    
    
    
    18.1
    %B
    
    
    110
    
    
    
    118
    
    
    
    3.5
    
    
    
    683
    
    
    
    599
    
    
    
    15.3C
    
    
    199
    
    
    
    424
    
    
    
    12.4
    
    
    
    
    
    
    
    
    
    
    
    All others, net of
allowance (b)
    
    
    3,321
    
    
    
    2,705
    
    
    
    79.1
    
    
    
    1,975
    
    
    
    2,610
    
    
    
    66.6Total
    
    $
    3,832
    
    
    $
    3,417
    
    
    
    100.0
    %
    
    $
    3,282
    
    
    $
    3,916
    
    
    
    100.0
    %
 (a)
    
    Represents both billed and unbilled amounts.(b)
    
    Accounts receivable balance includes unbilled amounts as March 31, 2007 and 2006 of $761,000 and $1.1 million, respectively.
 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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(3) Detail of Certain Balance Sheet Accounts
  March 31,
    
    
    December 31,2007
    
    
    2006Accounts Receivable, trade
    
    $
    3,069
    
    
    $
    2,889Unbilled accounts receivable
    
    
    852
    
    
    
    1,077Retainage
    
    
    8
    
    
    
    83,929
    
    
    
    3,974Less: allowance for doubtful accounts
    
    
    (97
    )
    
    
    (97
    )$
    3,832
    
    
    $
    3,877
   12




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March 31,
    
    
    December 31,2007
    
    
    2006Software
    
    $
    1,720
    
    
    $
    1,720Computer equipment
    
    
    2,020
    
    
    
    2,000Office equipment and furniture
    
    
    264
    
    
    
    264Leasehold improvements
    
    
    890
    
    
    
    8904,894
    
    
    
    4,874Less: accumulated depreciation and amortization
    
    
    (4,064
    )
    
    
    (3,954
    )$
    830
    
    
    $
    920
    March 31,
    
    
    December 31,2007
    
    
    2006Accounts payable
    
    $
    2,968
    
    
    $
    2,908Accrued taxes
    
    
    719
    
    
    
    788Compensation and related costs
    
    
    931
    
    
    
    577Commission due to sales chain partners
    
    
    277
    
    
    
    358Professional fees
    
    
    348
    
    
    
    318Derivative liabilities
    
    
    110
    
    
    
    229Convertible and discount note interest
    
    
    174
    
    
    
    176Financial printing
    
    
    220
    
    
    
    175Other
    
    
    207
    
    
    
    169$
    5,954
    
    
    $
    5,698
 (4) Goodwill and Other Intangibles
     13




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GrossCarrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    ValueMarch 31, 2007:Acquired technology
    
    $
    3,733
    
    
    
    3,569
    
    
    $
    164Customer contracts and
relationships
    
    
    6,964
    
    
    
    5,384
    
    
    
    1,580Non-compete agreements
    
    
    251
    
    
    
    174
    
    
    
    77Trademarks
    
    
    11
    
    
    
    11
    
    
    
    $
    10,959
    
    
    $
    9,138
    
    
    $
    1,821December 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
  March 31,
    
    
    December 31,2007
    
    
    2006Capital leases
    
    $
    96
    
    
    $
    111Senior secured convertible promissory notes
    
    
    1,106
    
    
    
    1,894Senior subordinated discount notes
    
    
    5,147
    
    
    
    5,069Other
long-term liabilities
    
    
    651
    
    
    
    3667,000
    
    
    
    7,440Less: current portion of long-term debt,
convertible notes, and other
non-current liabilities
    
    
    (1,716
    )
    
    
    (2,170
    )Long-term debt, convertible notes, and other
non-current liabilities
    
    $
    5,284
    
    
    $
    5,270
 Senior Secured Convertible Promissory Notes
   14




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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) Commitments and Contingencies
  Lease ObligationsOperating
    
    
    Capital
    
    
    Total2007 (a)
    
    $
    582
    
    
    $
    66
    
    
    $
    6482008
    
    
    564
    
    
    
    38
    
    
    
    6022009
    
    
    373
    
    
    
    1
    
    
    
    3742010
    
    
    365
    
    
    
    
    
    
    
    3651,884
    
    
    
    105
    
    
    
    1,989Less interest
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Total
    
    $
    1,884
    
    
    $
    96
    
    
    $
    1,980
 (a)
    
    Reflects amounts payable over the last nine months of 2007.
    (7) Litigation
    19




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(8) Capital Stock
  Stock Option Fair Value Information
     20




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Stock-based Compensation Expense
  Three Months Ended March 31,2007
    
    
    2006Cost of revenues
    
    $
    2
    
    
    $
    114Research and development
    
    
    19
    
    
    
    70Sales and marketing
    
    
    30
    
    
    
    100General and administrative
    
    
    28
    
    
    
    196$
    79
    
    
    $
    480
  (9) Restructuring
   (10) Segment Information
    Three months ended March 31,2007
    
    
    2006Revenues:United States
    
    $
    2,655
    
    
    $
    3,481International
    
    
    762
    
    
    
    435Total revenues
    
    $
    3,417
    
    
    $
    3,916
 March 31,
    
    
    December 31,2007
    
    
    2006Long-lived Assets:United States
    
    $
    1,092
    
    
    $
    1,300International
    
    
    29
    
    
    
    36$
    1,121
    
    
    $
    1,336
   21




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(11) Interest and Other Expense (Income), Net
  Three months endedMarch 31,2007
    
    
    2006Interest expense, net
    
    $
    494
    
    
    $
    640Change in fair value of derivative liabilities
    
    
    (119
    )
    
    
    (507
    )Transaction loss (gain)
    
    
    6
    
    
    
    21Other expenses (income), net
    
    
    1
    
    
    
    (1
    )$
    382
    
    
    $
    153
      22




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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 Our discussion and analysis of our financial condition and consolidated results of operations are based upon our
condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting
principles in the United States. The preparation of our condensed consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related
disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based upon historical
experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Our actual results may differ from these estimates. We believe that our critical accounting policies affect our more significant estimates and judgments used in the
preparation of our consolidated financial statements. Our Annual Report on Form 10-K for the year ended December 31,
2006 contains a discussion of these critical accounting policies. There have been no significant changes in our
critical accounting policies since December 31, 2006. See also Note 2 to our unaudited condensed consolidated financial
statements for the three month period ending March 31, 2007 as set forth herein.  23




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RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
  Three months endedMarch 31,2007
    
    
    2006Revenues:Software and software related
    
    
    45.6
    %
    
    
    39.4
    %Services
    
    
    54.4
    %
    
    
    60.6
    %Total revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues:Cost of software and software related
    
    
    10.4
    %
    
    
    15.3
    %Cost of services
    
    
    32.4
    %
    
    
    42.2
    %Amortization of acquired technology and
customer contracts
    
    
    7.3
    %
    
    
    6.3
    %Total cost of revenues
    
    
    50.2
    %
    
    
    63.8
    %Gross profit
    
    
    49.8
    %
    
    
    36.2
    %Operating expenses:Research and development
    
    
    28.8
    %
    
    
    37.7
    %Sales and marketing
    
    
    39.2
    %
    
    
    49.4
    %General and administrative
    
    
    40.7
    %
    
    
    42.1
    %Litigation and settlement costs
    
    
    
    
    
    
    26.0
    %Restructuring charges
    
    
    
    
    
    
    6.1
    %Amortization of other intangible assets
    
    
    3.4
    %
    
    
    6.6
    %Total operating expenses
    
    
    112.1
    %
    
    
    167.9
    %Operating loss
    
    
    (62.2
    %)
    
    
    (131.7
    %)Interest and other expense (income), net
    
    
    11.2
    %
    
    
    3.9
    %Net loss
    
    
    (73.4
    %)
    
    
    (135.6
    %)
 EMPLOYEE HEADCOUNT BY CLASSIFICATION
 March 31,2007
    
    
    2006Dedicated
    
    
    
    
    
    
    
    
    
    
    DedicatedOffshore
    
    
    
    
    
    
    
    
    
    
    OffshoreEmployees
    
    
    Consultants
    
    
    Total
    
    
    Employees
    
    
    Consultants
    
    
    TotalCost of revenues
    
    
    34
    
    
    
    7
    
    
    
    41
    
    
    
    49
    
    
    
    7
    
    
    
    56Research and development
    
    
    20
    
    
    
    18
    
    
    
    38
    
    
    
    28
    
    
    
    29
    
    
    
    57Sales and marketing
    
    
    24
    
    
    
    
    
    
    
    24
    
    
    
    31
    
    
    
    
    
    
    
    31General and administrative
    
    
    15
    
    
    
    1
    
    
    
    16
    
    
    
    23
    
    
    
    
    
    
    
    23Total
    
    
    93
    
    
    
    26
    
    
    
    119
    
    
    
    131
    
    
    
    36
    
    
    
    167
  24




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##### Table of Contents



Revenues
 Three months endedMarch 31,
    
    
    Difference(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Software and software
related
    
    $
    1,559
    
    
    $
    1,541
    
    
    $
    18
    
    
    
    1.2
    %Services
    
    
    1,858
    
    
    
    2,375
    
    
    
    (517
    )
    
    
    (21.8
    %)Total revenues
    
    $
    3,417
    
    
    $
    3,916
    
    
    $
    (499
    )
    
    
    (12.7
    %)
 Revenue Concentration
  2007
    
    
    2006Accounts
    
    
    
    
    
    
    
    
    
    
    AccountsReceivable
    
    
    
    
    
    
    % of Total
    
    
    Receivable
    
    
    
    
    
    
    % of TotalCustomer
    
    Balance (a)
    
    
    Revenues
    
    
    Revenues
    
    
    Balance (a)
    
    
    Revenues
    
    
    RevenuesA
    
    $
    202
    
    
    $
    170
    
    
    
    5.0
    %
    
    $
    624
    
    
    $
    707
    
    
    
    18.1
    %B
    
    
    110
    
    
    
    118
    
    
    
    3.5
    
    
    
    683
    
    
    
    599
    
    
    
    15.3C
    
    
    199
    
    
    
    424
    
    
    
    12.4
    
    
    
    
    
    
    
    
    
    
    
    All others, net of
allowance (b)
    
    
    3,321
    
    
    
    2,705
    
    
    
    79.1
    
    
    
    1,975
    
    
    
    2,610
    
    
    
    66.6Total
    
    $
    3,832
    
    
    $
    3,417
    
    
    
    100.0
    %
    
    $
    3,282
    
    
    $
    3,916
    
    
    
    100.0
    %
 (a)
    
    Represents both billed and unbilled amounts.(b)
    
    Account receivable balance includes unbilled amounts as March 31, 2007 and 2006 of $761,000 and $1.1 million, respectively.
      25




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Cost of Revenues
 Three months endedMarch 31,
    
    
    Difference(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Cost of software and software related
    
    $
    357
    
    
    $
    598
    
    
    $
    (241
    )
    
    
    (40.3
    %)Cost of services
    
    
    1,107
    
    
    
    1,652
    
    
    
    (545
    )
    
    
    (33.0
    %)Amortization of acquired technology
and customer contracts
    
    
    250
    
    
    
    247
    
    
    
    3
    
    
    
    1.2
    %Total cost of revenues
    
    $
    1,714
    
    
    $
    2,497
    
    
    $
    (783
    )
    
    
    (31.4
    %)
  Cost of Software and Software Related
   Cost of Services
   Amortization of Acquired Technology and Customer Contracts
 
  26




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Operating Expenses
 Three months endedMarch 31,
    
    
    Difference(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Research and development
    
    $
    983
    
    
    $
    1,475
    
    
    $
    (492
    )
    
    
    (33.4
    %)Sales and marketing
    
    
    1,340
    
    
    
    1,935
    
    
    
    (595
    )
    
    
    (30.7
    %)General and administrative
    
    
    1,391
    
    
    
    1,650
    
    
    
    (259
    )
    
    
    (15.7
    %)Litigation and settlement costs
    
    
    
    
    
    
    1,018
    
    
    
    (1,018
    )
    
    
    (100.0
    %)Restructuring charges
    
    
    
    
    
    
    238
    
    
    
    (238
    )
    
    
    (100.0
    %)Amortization of other
intangible assets
    
    
    116
    
    
    
    258
    
    
    
    (142
    )
    
    
    (55.0
    %)Total operating expenses
    
    $
    3,830
    
    
    $
    6,574
    
    
    $
    (2,744
    )
    
    
    (41.7
    %)
  Research and Development
    Sales and Marketing
   General and Administrative
   Litigation and Settlement Costs
    27




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Restructuring Charges
   Amortization of Other Intangible Assets
  Interest and Other Expense (Income), Net
  Three months endedMarch 31,2007
    
    
    2006Interest expense, net
    
    $
    494
    
    
    $
    640Change in fair value of derivative liabilities
    
    
    (119
    )
    
    
    (507
    )Transaction loss (gain)
    
    
    6
    
    
    
    21Other expenses (income), net
    
    
    1
    
    
    
    (1
    )$
    382
    
    
    $
    153
      28




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
  March 31,
    
    December 31,(in thousands)
    
    2007
    
    2006Cash and cash equivalents
    
    $
    1,586
    
    
    $
    2,809Accounts receivable, net
    
    $
    3,832
    
    
    $
    3,877Working capital (deficit)
    
    $
    (5,060
    )
    
    $
    (4,160
    )Current ratio
    
    
    0.56
    
    
    
    0.64Deferred revenues
    
    $
    4,864
    
    
    $
    4,613Total debt and other non-current liabilities,
including
current portion and derivative liabilities
    
    $
    7,110
    
    
    $
    7,669Three Months Ended March 31,2007
    
    2006Cash flow activities:Net cash used in operating activities
    
    $
    (838
    )
    
    $
    (1,333
    )Net cash provided by (used in) investing
activities
    
    
    (19
    )
    
    
    53Net cash used in financing activities
    
    
    (367
    )
    
    
    (133
    )
  Operating activities
  Investing activities
  Financing activities
      29




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30




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Contractual Commitments
  Expected Cash Payment by Period  (in thousands)
 2007(a)
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    TotalSenior secured convertible promissory
notes (b)
    
    $
    1,192
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,192Senior subordinated discount notes (c)
    
    
    495
    
    
    
    5,830
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,325Operating leases
    
    
    582
    
    
    
    564
    
    
    
    373
    
    
    
    365
    
    
    
    
    
    
    
    
    
    
    
    1,884Capital leases (d)
    
    
    66
    
    
    
    38
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Liability settlement (e)
    
    
    150
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300Tenant improvement loan (f)
    
    
    8
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Insurance financing (g)
    
    
    368
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    368Employment agreements (h)
    
    
    697
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    697Other obligations (i)
    
    
    152
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    164Total
    
    $
    3,710
    
    
    $
    6,601
    
    
    $
    374
    
    
    $
    365
    
    
    $
    
    
    
    $
    
    
    
    $
    11,050
 (a)
    
    Reflects amounts payable over the last nine 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 offshore development resources
commitments.
 Off-Balance Sheet Arrangements
   31




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Risk
  Interest Rate Risk
  Derivatives
     32




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##### Table of Contents



Item 4. Controls and Procedures
 (a) Evaluation of disclosure controls and procedures.
 (b) Changes in internal controls.
  33




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##### Table of Contents



Part II. Other Information
  
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  We will require additional capital to fund our operations and obligations.
        34




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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.
 Our Convertible Notes and Discount Note provide that upon the occurrence of various events of
default and change of control transactions, the holders would be entitled to require us to prepay
the notes for cash, which could leave us with little or no working capital for operations or
capital expenditures.
    35




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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.
     
 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
   36




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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.
  37




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##### Table of Contents



SIGNATURES
  VERTICALNET, INC.By:
    
    /s/ NATHANAEL V. LENTZName:
    
    Nathanael V. LentzPresident and Chief Executive OfficerDate: May 15, 2007By:
    
    /s/ JONATHAN T. COHENName:
    
    Jonathan T. CohenVice President andChief Accounting Officer(principal financial and accounting officer)Date: May 15, 2007
  38




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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.
  39