HorizontalNet??

Add comment June 15th, 2006 Todd Epple - Iasta

Yahoo Finance is a great site… and it has been since I started using it during the grand old days of 1997 (almost 10 years ago!). One of the things it lets you do is create watchlists of different investments you may own or just track. I know there are many flashy sites that exist now which let you do the same thing but Yahoo Finance “just works” and hey, it’s good enough for me.

Anyway, I found one of the stocks I track mysteriously missing data in the watchlist this week. It took a little bit of research to find out that it’s not really gone at this point but simply had its stock symbol changed. I’m not sure anyone would be surprised to learn the stock I am talking about is the famous VERT (now temporarily VERTD located at Yahoo here), who appears to be on the emergency room table with the doors closed.

It seems Verticalnet finally got its 1:7 reverse stock split effectuated this Monday morning in order to avoid the NASDAQ delisting which has been hanging over its head for more than a year since the dreaded initial delisting warning letter arrived last April 27th. At that time the stock was trading at a lofty 80 cents per share. Management started considering proposing the reverse split to the shareholders to stay off the OTCBB or Pink Sheets soon thereafter. Unfortunately, from that point until last Friday the shares dropped about 74% to 21 cents per share (or $1.47 split-adjusted) giving the stock precious little breathing room to stave off another delisting attempt. Even worse is that in the three trading days of this week it has dropped another 23% to $1.13 with some shares traded yesterday at $1.01 before rallying at the end of the day. The 3 month direction of vertical tells the whole story.

To be fair, it is a relatively thinly traded security and surely anything can happen but if this trend continues it will have a very short lived stay above the required $1.00 before receiving another dreaded letter.

Looking at the latest first quarter financial statements which Nate conceded represent a “low point from which we grow revenue” we find revenues of $3.9M (compared with $5.3M from the year before) giving a whopping net loss of $5.3M (compared to a net loss of $3.2M the year before). Indeed services revenue was down $1.4M for the quarter as the top two customers (representing 33% of total revenue in 1Q06 or 41% in 1Q05) drastically cut services.

These results were sufficient for Debbie Wilson to give VERTD the first “F” grade for financial performance awarded by her in the past three years.

Also not entirely surprising given the earlier post by David Bush regarding companies who no longer consider ISM to be a worthwhile endeavor…

Recently, a new debt investor has come to the table sinking $4M (netting VERTD $3.7M after costs) in subordinated debt and depending on whether consent is granted by this Friday by the senior debtholders who came to the table last August the annual rate will be either 6% (12% if no consent) with principal of $5.3M due in 18 months (January ‘07 if no consent!). I haven’t imputed the effective interest rate of this note but it’s safe to say it’s very healthy and I sincerely hope the senior debtholders provide that consent (I’m sure they already have).

There are a lot of other factoids which can be learned by reading the SEC filings or press releases (including this one issued yesterday which basically says that their clients are running more e-Sourcing events than ever but does not allude to a dime of additional revenues for these on-demand events. I’m sure every single e-Sourcing vendor can say exactly the same thing especially considering the unbelievably rapid growth rate the entire SaaS e-Sourcing industry is currently experiencing.

I could bore you all day with these gory details and I really think the few people I do know at VerticalNet are great people who are doing the best work they can given the circumstances. I do feel for them having to put a positive spin on these results as they make what must be extremely difficult decisions to cut costs drastically to be more inline with the actual revenues and the historical concentration of revenue in two accounts. They (like all vendors) are seeing increased software licensing and have signed some good agreements but unless the volume is turned up very quickly it may be too little too late. The status quo is not sustainable and I agree with Jason Busch that it won’t be long before the consolidation wolves are at the door salivating over the IP and customers.

Entry Filed under: General, Technology / SaaS, e-Sourcing Marketplace