Annual Report — Small Business — Form 10-KSB Filing Table of Contents
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Securities
registered pursuant to section 12 (b) of the Act:
Title
of each class
Name
of each exchange on which registered
None
None
Securities
registered pursuant to section 12 (g) of the Act:
Common
Stock, par value $0.00001 per share
(Title
of
Class)
Check
whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months,
(or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
x No
o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the registrant’s knowledge, in the definitive proxy or
information statement incorporated by reference in Part III of this Form 10-KSB
or amendment to Form 10-KSB. Yes o
No
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
x
Issuer’s
revenues for fiscal year ended December 31, 2007: $5,895,726
Aggregate
market value of the voting and non-voting stock held by non-affiliates of the
registrant: $16,433,733 based on the closing price for the common stock of
$0.019 per share on April 15, 2008, as reported on the Over-the Counter Bulletin
Board.
As
of
April 15, 2008, the issuer had 998,235,151 shares of common stock, par value
$.00001, issued and outstanding.
Section
906 Certification by Principal Accounting
Officer
1
PART
I
Item
1. Description of Business
Forward-Looking
Statements and Associated Risks. This
Report contains forward-looking statements. Such forward-looking statements
include statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans, (e) our anticipated needs for working
capital, (f) our lack of operational experience, and (g) the benefits related
to
ownership of our common stock. Forward-looking statements, which involve
assumptions and describe our future plans, strategies, and expectations, are
generally identifiable by use of the words “may,”“will,”“should,”“expect,”“anticipate,” &l
t;/e m>“estimate,”“believe,”“intend,”
or
“project”
or
the negative of these words or other variations on these words or comparable
terminology. This information may involve known and unknown risks,
uncertainties, and other factors that may cause our actual results, performance,
or achievements to be materially different from the future results, performance,
or achievements expressed or implied by any forward-looking statements. These
statements may be found under “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”
and
“Business,”
as
well as in this Report generally. Actual events or results may differ materially
from those discussed in forward-looking statements as a result of various
factors, including, without limitation, the risks outlined under
“Risk
Factors”
and
matters described in this Report generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this report will in fact occur as projected.
Background
Vertical
Computer Systems, Inc. (“Vertical”,
the
“Company”,
or the
“Registrant”)
was
incorporated in the State of Delaware in March 1992. The Company operated as
a
non-reporting public shell company until October 1999, at which time the Company
acquired all the outstanding capital stock of Externet World, Inc., an Internet
service provider and
became an operating entity. In
April
2000, the Company acquired 100% of the outstanding common stock of Scientific
Fuel Technology, Inc. (“SFT”),
a
company with no operations. Also in April 2000, the Company merged SFT into
the
Company, as a consequence of which the outstanding shares of SFT were cancelled,
the Company became the surviving entity, and the Company assumed SFT’s reporting
obligations pursuant
to
Section
12g-3(a) under the Securities Exchange Act of 1934,
as
amended (the “Exchange
Act”).
In
February 2004, the Company purchased the minority interests in its 60% owned
subsidiary, NOW Solutions LLC “NOW Solutions”), resulting in the Company’s 100%
ownership of Now Solutions. Later in 2004, Now Solutions was converted from
an
LLC into a corporation.
In
November 2005, the Company formed Taladin, Inc. (“Taladin”),
a
Texas corporation. Also in November 2005, Taladin and NOW Solutions entered
into
a license agreement whereby Taladin received the exclusive rights to
commercially exploit emPath® for use by the United States federal, state and
local governments and agencies in exchange for a license fee and royalties.
In
January 2006, the Company opened an office in Brazil in conjunction with NOW
Solutions to provide software development and to market the Company’s software
to distributors in Brazil. In April 2006, the Company formed OptVision Research,
Inc. (“OptVision Research”), a Texas corporation.
In
April
2007, the Company formed Vertical Healthcare Solutions, Inc. (“VHS”),
a
Texas corporation.
The
Company’s software products that are presently being marketed are HRMS emPath®
6.4 (“emPath®”),
ResponseFlash™ and SiteFlash™. The Company has licensed, as a sublicensee, the
rights to market IA (formerly ImmuneApp) and StatePointPlus®, and is marketing
these products individually and collectively as a managed baseline solution
(“Managed
Baseline Solution”).
For a
description of these products, please see the section entitled “Business
Overview”. NOW Solutions is marketing emPath® in the United States and Canadian
markets. For a description of this new delivery model, please see the section
entitled “Business Overview”. The Company intends to market its other software
products internationally commencing in Canada, Italy and Brazil either
directly through the Company and its subsidiaries, or through agreements with
national and regional distributors.
Business
Overview
The
Company is a multi-national provider of Internet core technologies,
administrative software, and software services through its distribution network
with operations or sales in the United States, Canada, Japan, and Brazil and
also is in active negotiations in Italy and the UK to establish a business
presence. The Company's primary Internet core technologies include SiteFlash™,
ResponseFlash™, and the Emily® XML Scripting Language, which can be used to
build Web services. The Company's main administrative software product is
emPath®, which is designed to handle complex Payroll and Human Resources
challenges. Software services provided by the Company include emPath® —
delivered as a SaaS — and its Managed Baseline Solution.
2
The
Company attempts to acquire marketing rights for products which, in the
Company’s belief, are proven and best of breed; are profitable or on the path to
profitability; are complementary to our other software offerings; and provide
cross-product distribution channels. The Company’s business model combines
complementary, integrated software products, internet core technologies, and
a
multinational distribution system of partners, in order to create a distribution
matrix that we believe is capable of penetrating multiple sectors through cross
promotion.
The
Company’s current products address the following market segments:
MARKET
PRODUCT
OWNERSHIP/
LICENSOR
LICENSEE
Human
Resources and Payroll
emPath®
NOW
Solutions
Large
Corporations and Universities
SiteFlash™
Vertical
Computer
Government
Sector- Emergency Response
ResponseFlash™
Vertical
Computer
GIS
Publishing
Content
NewsFlash™
Vertical
Computer
Emily®
XML Scripting Language
Emily®
Vertical
Computer
Security
IA
CW
International
Vertical
Computer Systems
IT
Management and Compliance
StatePointPlus®
CW
International
Vertical
Computer Systems
Administrative
Software
The
Company’s primary administrative software technology is emPath®, a human
resources/payroll software, which is developed, marketed and maintained by
its
wholly-owned subsidiary, NOW Solutions. The Company’s administrative software is
Web-based, meaning that it can be accessed on the Internet, and is currently
being offered as a SaaS (Software as a Service).
The
Company recently released a new version of emPath® (emPath® 6.4) which
encompasses ASP.net and a new user interface which has increased customization
capabilities. These new features, when coupled with experience gained with
the
product by the Brazil-based development staff (over one year), will facilitate
substantially faster development. The
Company is also exploring opportunities to utilize emPath®’s powerful payroll
component to provide private label contracting to existing payroll providers
in
localized markets.
The
Company believes that its administrative software services provide customers
with upfront cost savings and productivity increases for everyday operations,
including competitive set-up charges and implementation times.
Internet
Core Technologies
Internet
core technologies provide the software foundation to support internet-based
platforms for the delivery of individual software products that can be sold
independently or combined with another software product for rapid deployment
of
all software products throughout the Company’s distribution system. The Company
continues to develop specialized software applications that the Company can
utilize in new products.
The
Company’s primary core internet technology is SiteFlash™. The SiteFlash™
technology utilizes XML and publishes content on the Web, enabling the user
to
build and efficiently operate Websites with the unique ability to separate
form,
function, and content. SiteFlash™ uses an advanced component-based structure to
separate, parse, and store the various components of even the most complex
Web
pages, which permits these components to be named, organized, filed and
eventually redeployed onto the Web pages of a Website. Once all of the
components of a Web page are converted into “objects,”
they
can be grouped, as required by the user, into the three main types of web page
components: content, form and function. Content
consists
of text, pictures or multimedia. Form
includes
graphics and web site colors, layout and design. Function
refers
to
the activities performed by or actions executed on the Website. In this way,
each element of a Website created using SiteFlash™ is interchangeable with any
other similar element, and these elements may be grouped together in almost
any
combination to create complex Websites. This separation of form, function,
and
content also allows for the rapid creation of affiliated Websites. This unique
ability is patented (U.S. Patent number 6,826,744) and has many applications
in
the Web arena.
3
The
Company offers SiteFlash™ as a stand-alone product and also as a technology
platform for products targeted at specific vertical markets. The SiteFlash™
technology focuses on content management, e-commerce, and workflow and has
led
to the development of two additional software application products:
ResponseFlash™ and NewsFlash™. ResponseFlash™ was installed by the Metropolitan
Emergency Communications Agency in Marion County, which includes Indianapolis,
Indiana. NewsFlash™ is used by newspapers (e.g. La Opinion and Japan’s Hochi).
SiteFlash™ architectural concepts enable integration with existing technological
components within many organizations. Additional key features that differentiate
SiteFlash™ from other products are its affiliation/syndication capability, its
multi-lingual capability and its multi-modal (any output device including
wireless devices such as PDAs and cellular phones) framework. Initially,
Government Internet Systems (“GIS”),
a
majority-owned subsidiary of the Company, will focus on marketing
ResponseFlash™, a Web-based emergency communication system, in the homeland
security area to all government sectors excluding the public education (i.e.,
schools, colleges, and universities).
Currently,
the Company is converting its SiteFlash™ product as a SaaS model with initial
marketing efforts concentrated in the affiliate, government and publishing
markets.
See
“Legal Proceedings” regarding an infringement claim that the Company has
initiated in federal court against Microsoft.
The
second core Internet technology the Company has developed is the patent-pending
Emily® XML scripting language, which is Java compatible. XML is a flexible
way to create common information formats and share both the format and the
date
on the World Wide Web, intranets, and elsewhere. The Emily® work platform, also
known as “the Emily® Framework”, consists of executable programs, files,
configuration data and documentation needed to create Web-based applications
that communicate via XML and HTTP. HTTP is the set of rules for exchanging
files
(text, graphic images, sound, video, and other multimedia files) on the Web. The
Emily® Framework was developed to be an engineering package comparable to other
Web development tools, such as Allaire Cold Fusion® or Microsoft FrontPage®. The
primary component of the Emily® Framework is Markup Language Executive, a
programming language that runs on Windows®, Linux and several UNIX platforms.
Software
Services
In
addition to its standard emPath® offering, NOW Solutions provides a new delivery
model known as software-as-a-service, also referred to as SaaS. SaaS
is a
software application delivery model where the Company both develops and
operates/hosts the application for use by its customers over the Internet.
It is
a low-cost way for businesses to obtain the same benefits of commercially
licensed, internally operated software, without the associated complexity and
high start-up costs. The term "SaaS" has become the industry adopted reference
term, generally replacing the earlier terms "On-Demand" and "ASP" (Application
Service Provider). The Company has completed months of testing its emPath® SaaS
model to ensure a robust and competitive solution.
The
Company is currently marketing IA (formerly ImmuneApp) and StatePointPlus®,
presenting these products individually or collectively as a Managed Baseline
Solution. IA is a security software program that allows a system
administrator to stop the use of unauthorized programs, including unlicensed
software, viruses, Trojans, spyware, adware and malicious code. StatePointPlus®
is an intelligent System Baseline Management patented technology that improves
information technology management by providing a highly cost-effective complete
inventory of network hardware, giving a complete picture of all existing
workstations, servers, and software on a network. The technology also provides
a
self-healing function to reverse unauthorized changes to systems, ensuring
that
IT systems are in compliance with company policies and standards as well as
government regulations, including HIPAA, Sarbanes-Oxley and ISO. The Company
currently has exclusive rights to distribute IA, StatePointPlus® and the Managed
Baseline Solution to all users in Brazil, and in the healthcare and government
sectors in the United States. The Company may distribute IA,
StatePointPlus®, and the Managed Baseline Solution to any other users on a
non-exclusive basis, subject to registration.
Business
Operations and Divisions
The
Company’s business operations are grouped into the following divisions: NOW
Solutions, GIS, Vertical Internet Solutions (“VIS”),
EnFacet, Inc. (“EnFacet”), Globalfare.com (“Globalfare”),
Pointmail.com, Inc. (“Pointmail”),
Taladin, OptVision Research, VHS, minority and other limited interests, joint
ventures, and strategic partnerships. Each of these divisions is discussed
below.
4
NOW
Solutions, Inc.
NOW
Solutions, a Delaware corporation, is a wholly-owned subsidiary.
NOW
Solutions specializes in end-to-end, fully integrated human resource and payroll
solutions to large and mid-size companies. NOW Solutions has clients ranging
from private businesses to government agencies, who typically employ 400 or
more
employees. NOW Solutions currently markets emPath®, which handles complex human
resource and payroll situations where the clients may have employees from
different unions, multiple state locations, and intricate compensation
structures. The Company believes that the competitive advantage of emPath® is
its speed of implementation through a formula-builder technology. NOW Solutions’
product suite is targeted to address the needs of management in today’s dynamic
business environment and gives organizations a user friendly, multi-lingual
(i.e., English, Canadian French, Spanish, Portuguese and Chinese) and flexible
software solution, without the multi-million dollar implementation budgets
of
the major competitors.
The
existing revenue model of NOW Solutions is based primarily upon three
components: licensing fees, professional consulting services, and renewable
maintenance fees. In addition, since the end of 2006, NOW Solutions has been
offering a new delivery model for emPath®: SaaS. This delivery model provides a
highly reliable, secure and scalable infrastructure, enabling the Company not
only to continue servicing and expanding its current market of mid to large
sized customers but also increase its market reach by offering a solution to
smaller sized customers, which
otherwise may not be able to afford an in-house solution.
Under
the SaaS delivery model, NOW Solutions collects monthly fees.
For
the
12 months ended December 31, 2007, NOW Solutions had approximately $1,206,897
of
total assets, revenues of approximately $5,895,726 and a net loss of
approximately $607,943.
Government
Internet Systems, Inc.
The
Company’s 81.5% owned subsidiary, GIS, a Nevada corporation, was formerly named
Emily® Solutions, Inc. The Company will license ResponseFlash™ to GIS to market
and distribute this technology to government entities (excluding state
universities and schools) in the United States. GIS seeks to enter into
agreements to distribute other non-Company products particularly in the homeland
security sector. The Company completed development and installation of
ResponseFlash™ for the Metropolitan Emergency Communications Agency, in Indiana.
The Company has submitted proposals to various other city, county and state
governments. The Company is currently seeking funding for GIS.
For
the
12 months ended December 31, 2007, GIS had no assets and no material revenue
or
expenses.
Vertical
Internet Solutions, Inc
VIS,
a
California corporation, is a wholly-owned subsidiary of the Company.VIS
is
responsible for marketing Emily®
Solutions web technology, which includes the XML Enabler Agent and the
Emily®
programming language.
The
United States Patent and Trademark Office (“USPTO”)
granted the Company a patent (No. 7,076,521) for an invention for a “Web-based
collaborative data collection system” on July 11, 2006. This
patent covers various aspects of the XML Enabler Agent. In addition, the
Company has filed for a patent related to the Emily® programming language. This
patent application was published in February 2003 and is still pending. The
marketing of the Emily®
Solutions web technology
has been
put on hold pending the result of the patent application.
For
the
12 months ended December 31, 2007, VIS had no material assets and no material
revenue or expenses.
EnFacet,
Inc.
EnFacet
is a software company that markets NewsFlash™. NewsFlash™ is based on
SiteFlash™, which is a patented technology (No. 6,826,744). NewsFlash™ caters to
the publishing industry and newspapers in particular.
For
the
12 months ended December 31, 2007, EnFacet had no material assets, no revenues
and a net loss of approximately $38,471.
5
Globalfare.com
In
May
2000, the Company acquired Globalfare.com, Inc. (“Globalfare”),
a
Nevada corporation. Globalfare is currently inactive and the Company currently
has no plans regarding this subsidiary.
For
the
12 months ended December 31, 2007, Globalfare.com had no assets, no revenue
and
no expenses.
Pointmail.com,
Inc.
In
June
2000, the Company acquired Pointmail.com, Inc., which owned a Web-based e-mail
software. Pointmail is currently inactive and the Company currently has no
plans
regarding this subsidiary or its technology.
For
the
12 months ended December 31, 2007, Pointmail.com had no assets, no revenues
and
no expenses.
Taladin,
Inc.
In
November 2005, the Company formed Taladin, a Texas corporation. Also in November
2005, Taladin and NOW Solutions entered into a license agreement whereby Taladin
received the exclusive rights to commercially exploit emPath® for use by the
United States federal, state and local governments and agencies in exchange
for
a license fee and royalties. Taladin has developed a module for emPath® to meet
federal payroll guidelines for law enforcement and fire departments and has
filed for a patent for the module. The Company is currently seeking funding
for
Taladin and has commenced marketing the product on a SaaS platform to sheriff’s
departments. In
September 2007, Taladin filed a patent application for its Fair Labor Standards
Act (FLSA) payroll system. This FLSA payroll system has been integrated with
Now
Solutions’ emPath HRMS Solution.
For
an
update of transactions concerning Taladin fiscal year-end, please see the notes
payable issued by Taladin in “Notes Payable” under Note 8 of the Notes to
Consolidated Financial Statements.
For
the
12 months ended December 31, 2007, Taladin had no assets, no revenue and a
net
loss of approximately $93,434.
OptVision
Research, Inc
OptVision
Research, Inc., a Texas corporation, is a wholly-owned subsidiary of the
Companyand
was
created to support the development of the company’s fiber optic patent though
either direct investment or government grants.
For
the
12 months ended December 31, 2007, OptVision had no material assets and no
material revenue or expenses.
Vertical
Healthcare Solutions, Inc
VHS,
a
Texas corporation, is a wholly-owned subsidiary of the Company.
For
the
12 months ended December 31, 2007, VIS had no material assets and no material
revenue or expenses.
Minority
Interests and Royalty Interests
MedData
Solutions, Inc.
In
February 2004, the Company purchased a 21% ownership interest in MedData from
Robert
Farias. MedData is no longer in business.
iNet
Purchasing, Inc.
In
April
2000, the Company acquired a 2.5% minority interest in iNet and is entitled
to a
royalty on all iNet transactions for up to 40 years. iNet is a developer of
Internet-based procurement services targeted at the specific needs of public
sector purchasing in the state and local government arena through PublicBuy.net.
In November 2001, the Company entered into a license agreement with iNet,
pursuant to which the Emily® software and technology were licensed for use in
connection with iNet’s e-procurement system in Texas, Maine, and Idaho in
exchange for a 20% commission on subscription fees. In April 2005, iNet
Purchasing was acquired by SicommNet. The Company is in the process of reviewing
its rights pursuant to the SicommNet ownership of iNet Purchasing, Inc.
6
As
of
December 31, 2007, all of the iNet investments and advances paid for royalties
were fully reserved. There have been no revenues or expenses in relation to
the
investments for the twelve months ended December 31, 2007.
TranStar
Systems, Inc.
TranStar
Systems, Inc. (“TranStar”),
formerly Apollo, is based in Claremont, California. TranStar is a systems
integrator and consulting firm that is establishing an e-business platform
focused on multiple-application smart card based solutions for credit, debit,
payroll debit cards and other high volume informational transactions with a
large customer base. The Company is entitled to receive 3% of any transaction
fees and any other revenues generated by TranStar in perpetuity, although no
royalties have been received from TransStar as of April 15, 2008.
Strategic
Alliances and Software Distributors
CW
International, LLC.
In
March
2006, CW International (“CWI”)
entered into a sublicense agreement with the Company, enabling the Company
to
license software, including, IA and StatePointPlus®. In addition, NOW Solutions
has the exclusive rights to offer IA on an ASP platform for its HRMS
solution.
Pursuant
to the terms of the Company’s sublicense agreement, CWI granted to the Company
the exclusive rights to distribute IA to all users in Brazil, and in the
healthcare and government sectors in the United States. Pursuant to the terms
of
an amendment entered into in March 2007, CWI granted to the Company the same
broad-ranging exclusivity rights with respect to StatePointPlus®. Also in March
2007, the Company acquired rights from CWI to distribute a security access
management (“SAM”)
software program on a partially exclusive basis. The Company may distribute
the
IA, StatePointPlus®, and SAM applications to any other users on a non-exclusive
basis.
Infotec,
Inc.In
April
2003, the Company and Infotec, a Japanese corporation, entered into a software
reseller agreement whereby Infotec agreed to market, distribute, provide
maintenance and technical support for the Company’s SiteFlash™ software in Japan
and pay the Company a fee on all sales and maintenance fees.The
Company is currently in discussion with Infotec concerning future
prospects.
LGB
& Associates, Inc..
In
November 2007, the Company and NOW Solutions entered into marketing agreements
with LGB & Associates, Inc. (“LGB”) to market their products to the Federal
government sector in the continental United States and Hawaii. LGB, a data
management and data delivery solutions provider, will market the Company’s
products.
Competition
The
Company has substantial competition from software and hardware vendors, system
integrators, and multinational corporations focused upon information technology
and security. NOW Solutions’ competitors include PeopleSoft, Oracle, Lawson,
Cyborg/Hewitt, Kronos, DLGL, Ultimate and SAP. The Company’s competitors in the
network security sector include Tripwire, McAfee, Symantec, Cisco and Computer
Associates. The Company’s competitors have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than the Company. The Company cannot guarantee
that it will be able to compete successfully against current or future
competitors or that competitive
pressures will not have a material and adverse effect on the Company’s financial
position, results of operations and cash flows.
The
Company’s ability to compete will also depend upon its ability to continually
improve its products and services, the enhancements the Company develops, the
quality of its customer service, and the ease of use, performance, price and
reliability of its products and services.
7
Strategic
Overview
The
Company believes that each of its business units has distinct marketing
advantages for the niche markets it serves. The Company plans to find national
and regional marketers and international resellers who can commercially exploit
the Company’s products in these niche markets. By utilizing the strategic
advantages each individual business unit possesses, the Company plans to
leverage its strengths and exploit the network of customers, vendors, and
support agencies that the Company has built.The
Company currently seeks to use a combination of direct marketing and strategic
partnerships to commercially exploit its products derived from SiteFlash™,
namely NewsFlash™, and AffiliateFlash™. In this way, the Company hopes to define
the best potential markets for its SiteFlash™ products, and then license the
product to one of the Company’s subsidiaries to exploit. At this time, the
Company has placed both its Emily® software and international bridge network on
hold while it concentrates on these immediate opportunities within its existing
business units.
One
of
the Company’s strategies is to enter into co-marketing agreements with other
companies, particularly those with best-of-breed products that complement its
business units. The existing strategy with potential co-marketing partners
is to
segregate the co-marketing agreements whereby each business unit will have
a
separate agreement with the co-marketing partner for its particularly target
market. Additionally, the business units will enter into agreements with each
other where the opportunity exists to cross-promote/market their products.
The
Company believes it possesses certain competitive advantages because of its
proprietary software. The Company is exploring various opportunities to exploit
its proprietary software, which includes the possibility of licensing the
software to major companies in non-competitive niche markets.
Although
the Company’s current marketing effort focuses upon several sectors, it has
recently concentrated on the United States federal, state and local government
for the following reasons: (i) affiliated companies have government clients,
which has created the potential to cross-promote/market the Company’s products
and Web services; (ii) the Company offers products which are well-suited to
the
current governmental environment, in particular, the demand for cross-agency
and
federal, state and local interface, like ResponseFlash™; and (iii) the increased
security environment caused by the terrorist attacks of September 11, 2001
necessitates improvements in secure communications and agency-to-agency contacts
that can be facilitated by ResponseFlash™
and the
Managed Baseline Solution.
Proprietary
Rights
The
Company relies upon a combination of contract provisions and patent, copyright,
trademark and trade secret laws to protect its proprietary rights in its
products and services. The Company distributes its products and services
under agreements that grant users or customers a license to use its products
and
services and relies on the protections afforded by the copyright laws to protect
against the unauthorized reproduction of its products. In addition, the
Company protects its trade secrets and other proprietary information through
agreements with employees and consultants. NOW Solutions’ emPath® software
technology is protected by copyright and trademark. The USPTO granted a
patent (No. 6,718,103) for an invention for “Transmission of Images over a
Single Filament Fiber Optic Cable” in April 2004. This patent is in a
theoretical stage only and is intended to be used for transmitting images on
fiber optics that might improve in orders of magnitude today’s capacity of fiber
optics to transmit images and data. The Company has filed for a
Continuation in Part for patent number 6,718,103 to pursue possible additional
derivative patents. The USPTO granted the Company a patent (No. 6,826,744)
for an invention for “System and Method for Generating Web Sites in an Arbitrary
Object Framework” on November 30, 2004. The Company has filed for a Continuation
in Part for this patent to pursue possible additional derivative patents.
This patent is the foundation of the Company’s product, SiteFlash™,
and
forms the basis of the ResponseFlash™, NewsFlash™ and AffiliateFlash™
products. The USPTO granted the Company a patent (No. 7,076,521) for an
invention for a “Web-based collaborative data collection system” on July 11,2006. This patent covers various aspects of the XML Enabler
Agent. In addition, the Company has also filed for a patent related to the
Emily® programming language. This patent application was published in February
2003 and is still pending. In September 2007, the Company filed a patent
application for its Fair Labor Standards Act (FLSA) payroll system. This FLSA
payroll system has been integrated with NOW Solutions’ emPath® HRMS
Solution.
Although
the Company intends to protect its rights as described above, there can be
no
assurance that these measures will be successful. Policing unauthorized use
of
the Company’s products and services is difficult and the steps taken may not
prevent the misappropriation of its technology and intellectual property rights.
In addition, effective patent, trademark, trade secret and copyright protection
may be unavailable or limited in certain foreign countries. The Company seeks
to
protect the source code of its products as a trade secret and as an unpublished
copyright work. Source code for certain products has been or will be published
in order to obtain patent protection or to register copyright in such source
code. The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. There can
be
no assurance that third parties will not assert infringement claims against
the
Company in the future with respect to current or future features or contents
of
services or products or that any such assertion may not result in litigation
or
require the Company to enter into royalty arrangements.
8
Regulatory
Environment; Public Policy
In
the
United States and most countries in which the Company conducts its operations,
the Company is generally not regulated other than pursuant to laws applicable
to
businesses in general and value-added services specifically. In some countries,
the Company is subject to specific laws regulating the availability of certain
material related to, or to the obtaining of, personal information. Adverse
developments in the legal or regulatory environment relating to the interactive
online services and Internet industry in the United States, Europe, Asia, Latin
America or elsewhere could have a material adverse effect on the Company’s
business, financial condition and operating results. A number of legislative
and
regulatory proposals from various international bodies and foreign and domestic
governments in the areas of telecommunications regulation, particularly related
to the infrastructures on which the Internet rests, access charges, encryption
standards and related export controls, content regulation, consumer protection,
advertising, intellectual property, privacy, electronic commerce, and taxation,
tariff and other trade barriers, among others, have been adopted or are now
under consideration. The Company is unable at this time to predict which, if
any, of the proposals under consideration may be adopted and, with respect
to
proposals that have been or will be adopted, whether they will have a beneficial
or an adverse effect on the Company’s business, financial condition and
operating results.
Employees
As
of
April 15, 2008, the Company has 28 full-time employees, of which 26 are employed
at NOW Solutions (17 are employed in the United States and 9 in Canada), and
16
consultants (6 in Brazil). The Company is not a party to any collective
bargaining agreements.
Item
2. Description Of Property
The
Company and NOW Solution’s headquarters are currently located at 101 West Renner
Road, Suite 300, Richardson, Texas, and comprises approximately 2,576 square
feet. In addition, NOW Solutions has offices at 201 Main Street, Suite 1175,
Fort Worth, Texas, which comprises 3,450 square feet, 6205 Airport Road,
Building A, Suite 300, Mississauga, Ontario, Canada, which
comprises 710 square feet, and
Rua
Farme de Amoedo, Rio de Janeiro,
Brazil,
which
comprises 1,200 square feet. All of these locations are leased
from
third
parties and the premises are in good condition. The Company believes that its
facilities are adequate for its present needs and near-term growth, and that
additional facilities will be available at acceptable rates as the Company
needs
them. The Company’s other subsidiaries may be reached through the Company’s
Texas headquarters.
Item
3. Legal Proceedings
The
Company is involved in the following ongoing legal matters:
In
February 2003, the Company filed a lawsuit and a derivative action in New York
Supreme Court Case against defendants Ross
Systems Inc. (“Ross”),
Arglen,
Tinley, and Gyselen. The Company filed a derivative action on behalf
of its subsidiary NOW Solutions when Arglen refused to authorize a lawsuit
against any parties who were alleged to have acted against the best interest
of
NOW Solutions. In conjunction with the Company’s claim, NOW Solutions
withheld its payments on the remaining $750,000 note that was due in February
2003 in connection with the acquisition of certain assets of Ross against the
unpaid maintenance fees and gave notice in February 2003 to Ross of NOW
Solutions’ claim of offset. NOW Solutions claimed a total amount of
approximately $3,562,000 to offset against the note, plus other
damages. The Company’s original claims sought damages and equitable
relief arising out of actions of the defendants constituting breach of contract,
fraud, conspiracy and breach of fiduciary duty in connection with certain
transactions entered into between Ross and NOW Solutions; Ross and Arglen;
Arglen and NOW Solutions; Gyselen and NOW Solutions; and the Company and Arglen.
This action concerns claims of breach of contract and indemnification for
failure to pay adjustments at the closing on the sale of assets of Ross to
NOW
Solutions for prepaid maintenance fees and for related relief. In November
2003,
the New York Supreme Court dismissed the claims against Ross and Tinley. The
portion of the lawsuit involving Arglen and Gyselen was settled in December
2003
and, pursuant to the settlement, dismissed in February 2004. The
Company appealed the decision with regard to its claim for breach of contract
for Ross’ failure to give the proper maintenance fee adjustment and related
claims for offset and attorney’s fees. On June 1, 2004, the appeal of
the dismissal of the action against Ross was submitted to the court for
decision. On appeal, the claims against Ross were reinstated pursuant to
the order of the Appellate Division, dated October 26, 2004. In November 2004,
Ross filed an answer containing affirmative defenses in the Derivative Action.
For information concerning the decision regarding this action and the trial
regarding the action between NOW Solutions and Ross, please see Ross’ action
against NOW Solutions below.
9
In
March
2003, Ross commenced an action in New York Supreme Court, Westchester County,
by
filing a motion for summary judgment in lieu of complaint against NOW Solutions
to collect the note payable in the amount of $750,000 plus 10%
interest. In August 2003, the New York Supreme Court denied the
motion and dismissed Ross’ action without prejudice. In October 2003,
the motion of Ross for re-argument was denied. Ross appealed the
August 2003 court order, but subsequently abandoned its
appeal. The time for Ross to appeal has run. Consequently, no
further action will be had on this matter.
In
March
2004, Ross commenced an action in the New York Supreme Court by filing a motion
for summary judgment in lieu of complaint against NOW Solutions to collect
the
note payable in the amount of $750,000 plus 10% interest and attorneys
fees. NOW Solutions filed its opposition to Ross’ motion, which was
submitted to the court for decision on May 20, 2004. NOW Solutions
opposed the Ross motion and, on October 7, 2004, the Court ruled in favor of
NOW
Solutions and denied the motion for summary judgment. Pursuant to New York
State
law, in the event a motion for summary judgment in lieu of complaint is denied,
the action continues and the pleadings supporting the motion are deemed to
constitute the complaint. Accordingly, NOW Solutions filed an answer containing
affirmative defenses and nine (9) counterclaims against Ross. The affirmative
defenses asserted by NOW Solutions included the same grounds which comprise
the
causes of action against Ross in the Derivative Action, namely Ross’ breach of
the Asset Purchase Agreement as a result of its failure to credit NOW Solutions
with adjustments at closing in an amount not less than $3,562,201. All of the
counterclaims asserted by NOW Solutions against Ross relate to the Asset
Purchase Agreement and Ross’ breaches thereof. The counterclaims included: (i)
breach of the covenant not to compete, whereby NOW Solutions seeks damages
in
excess of $10,000,000; (ii) breach of the covenant to deliver all assets to
NOW
Solutions at closing, whereby NOW Solutions seeks damages in an amount not
less
than $300,000; (iii) breach of a certain Transitional Services Agreement
(executed in conjunction with the Asset Purchase Agreement), whereby NOW
Solutions seeks damages in an amount not less than $73,129; and (iv) reasonable
attorney’s fees. In February 2005, Ross’s motion to dismiss two of NOW
Solutions’ nine counterclaims: one which alleges that Ross and CDC Corporation
used Ross to breach a covenant not to compete and the second which requested
that Ross be enjoined from further competition with NOW Solutions in violation
of the covenant were granted. Thereafter, NOW Solutions filed a motion to vacate
the default, which motion was denied over the objections of NOW Solutions,
which
later filed a notice of appeal of this decision. NOW Solutions’ remaining
counterclaims remain unaffected. In November 2006, the court rendered decisions
on three summary judgment motions whereby the court dismissed NOW Solutions’
sixth and seventh counterclaims in the NOW Solutions action, dismissed Ross’
affirmative defenses numbered first, second, fourth, and seventh through
thirteenth in the Vertical action, and denied all other requests for relief.
Trial commenced on both actions on March 20, 2007. On April 13, 2007, the court
rendered decisions in both actions as follows: (1) In the action of Ross
Systems, Inc. v. NOW Solutions, Inc. a directed verdict was granted (a) to
Ross
Systems on its claim for payment of the promissory note, net of certain offsets
that the court found due to NOW Solutions on its first, second and fifth
counterclaims, other than for the amount claimed due by NOW for maintenance
fee
adjustments due at the closing of the sale transaction between the parties,
in
the amount of $664,000; (b) to NOW Solutions on its first counterclaim for
maintenance fee adjustments in the amount of $1,943,482; accordingly, NOW
Solutions was awarded the net amount of $1,279,482 ($1,943,482-$664,000), plus
statutory (simple) interest at 9% per annum from the date the claim accrued;
and
(c) to Ross Systems dismissing NOW’s fourth counterclaim against Ross for
failure to deliver certain assets at closing. (2) In the action of Vertical
Computer Systems, Inc. v. Ross Systems, Inc., et. al., the court dismissed
Vertical’s claim on behalf of NOW Solutions for maintenance fee adjustments, as
moot in light of its directed verdict on this issue in the Ross Systems v.
NOW
Solutions action, and dismissed Ross’ defenses to the Vertical action and Ross’
claim for attorney fees therein. In the action of Ross Systems, Inc. v. NOW
Solutions, Inc., NOW Solutions and Ross each filed motions for attorney's fees
with the court in August 2007. In September 2007, the court awarded NOW
Solutions a judgment in the amount of $3,151,216, which consisted of $1,279,483
for NOW Solutions’ claims (after deducting $664,000 for Ross’ claim), $912,464
in attorneys’ fees and expenses, and $865,361 of accrued interest. NOW Solutions
is currently seeking to collect the amounts due under the judgment. The judgment
was entered on October 11, 2007. In November 2007, Ross gave notice of its
intention to appeal the decision and posted a bond in the amount of the
judgment. The Company is currently preparing for the appeal.
In
March
2004, Ross commenced an action in the Court of Chancery, State of Delaware
by
filing a summons and complaint against the Company, NOW Solutions and Arglen
alleging a fraudulent transfer in connection with the Company’s payment of
monies to Arglen pursuant to the settlement dated December 2003. The
Company and NOW Solutions filed a motion to stay the Delaware action pending
the
resolution of the parties’ rights in Supreme Court, New York County and
Appellate Division. Specifically, Ross seeks a judgment against the Company:
(i)
attaching the assets transferred to Arglen pursuant to the 2003 Settlement;
(ii)
enjoining the Company and NOW Solutions from making further transfers to Arglen
pursuant to the Arglen Note; (iii) avoiding the transfers to the Company and
Arglen or for judgment in the amount equivalent to the value of the asserts
transferred to them pursuant to the 2003 Settlement; and (iv) appointing a
receiver to take possession of the assets transferred to the Company and Arglen
pursuant to the 2003 Settlement. In July 2004, the Company and NOW Solutions
filed a motion to stay the Delaware Action pending the resolution of the
parties’ rights in the Derivative Action and Ross Action. In October 2004, the
motion was granted and the Delaware action has been stayed. This action is
subject to dismissal; however, this action has been further stayed since Ross
has filed notice of its intention to appeal the above decision and has posted
bond for the appeal.
10
In
August
2004, Arglen obtained a default judgment in Los Angeles court for the
outstanding principal due under a $600,000 promissory note, plus attorney’s fees
and interest at the rate of 10% per annum. In April 2005, Arglen filed a Notice
of Filing a Foreign Judgment in Tarrant County, Texas. In August 2005, the
Company entered into a Payout Agreement with Arglen allowing payout terms to
the
Company and pursuant to which the Company agreed to enter into the Agreed
Judgment. The Agreed Judgment and Payout Agreement were entered into concerning
a California judgment and Arglen's notice of Filing a Foreign Judgment in
Tarrant County, Texas, which were in connection with the terms of a 2003
settlement agreement with Arglen (the “2003 Settlement”). Pursuant to the terms
of the Agreed Judgment and the Payout Agreement, the Company agreed to pay
Arglen a total of $713,489, which includes the following amounts: (a) $600,000
in principal on the promissory note issued by the Company pursuant to the
settlement of litigation between the parties in 2003, (b) the accrued
post-judgment interest on the California judgment from September 4, 2004 through
September 15, 2005, at the rate of 10% per annum, which equals $61,989, and
(c)
attorney's fees incurred for the California and Texas judgment actions which
were approximately $51,500. Pursuant to the terms of the Payout Agreement,
the
Company began making monthly interest payments on the amounts specified above
of
$5,945, beginning on September 15, 2005, which will be replaced by monthly
payments of $25,000 or 10% of the Company's new sales, whichever is greater,
beginning on February 15, 2006 until the remainder of the $713,489 is paid.
In
accordance with the Payout Agreement, Arglen shall not execute the Agreed
Judgment so long as the Company continues to make its payments as
agreed.
The
IRS
has a claim for unpaid Employment (Form 941) taxes and Federal Unemployment
(Form 940) taxes for the period December 31, 2001 through December 31, 2005.
As
of August 27, 2006 the total tax, penalties and interest due was $313,839.
In
that matter, the Company appealed from a Notice of Intent to Levy served to
collect this tax and on February 8, 2007, following a Due Process Hearing,
the
IRS determined that its decision to seek collection of the tax by levy was
proper. On March 9, 2007, the Company filed an appeal of the IRS’s determination
to the United States Tax Court. The Company hopes that the Court will hold
that
the IRS’s refusal to consider an Installment Agreement to pay the liability over
several years was erroneous. There is no guarantee, however, that the Court
will
not sustain the IRS determination and will allow it to collect the tax,
penalties and interest by levy.
On
April18, 2007, the Company filed suit for patent infringement against Microsoft
Corp.
in the United States District Court for the Eastern District of Texas. The
Company claims that the Microsoft .Net System infringes U.S. Patent No.
6,826,744. On July 13, 2007, Microsoft filed an answer to the Company’s
complaint, alleging various defenses and counterclaims. On August 2, 2007,
the
Company filed a reply to Microsoft’s defenses and counterclaims. The court has
set trial for March 2009. The parties are in the process of discovery. The
court
has set the claim construction hearing for July 10, 2007.
In
the
opinion of management, the ultimate resolution of any pending matters may have
a
significant effect on the financial position, operations or cash flows of the
Company. Also, the Company in the future may become involved in other legal
actions that may have a significant effect on the financial position, operations
or cash flows of the Company.
Item
4. Submission Of Matters To A Vote Of Security Holders
None
11
PART
II
Item
5. Market For Common Equity And Related Stockholder Matters
The
Company’s common equity is quoted on the Over-The-Counter Bulletin Board (the
“OTCBB”)
under
the symbol “VCSY”.
The
following is the range of high and low closing bid prices of our stock, for
the
periods indicated below.
The
above
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Number
of Holders
As
of
April 15, 2008, there were approximately 1,733 holders of record of our common
stock.
Equity
Securities Under Compensation Plans
For
information concerning Equity Compensation Plans, please see “Stock Options and
Warrants” under Note 11 in the Notes to Consolidated Financial
Statements.
Dividends
The
Company has outstanding Series A and Series C 4% Convertible Cumulative
Preferred stock that accrue dividends (if such dividends are declared) at a
rate
of 4% on a semi-annual basis. The
total
dividends applicable to Series A and Series C Preferred Stock were $588,000
and
$600,000 for the years ended December 31, 2007 and
2006,
respectively. The
Company’s Board of Directors did not declare and did not pay any dividends on
its
outstanding
shares
of
Series
A
Preferred
Stock or
Series C
Preferred Stock
during
2007
or
2006
and has not declared or paid any dividends since 2001.
The
Company intends to retain future earnings, if any, to provide funds for use
in
the operation and expansion of its businesses. Accordingly, the Company does
not
anticipate paying cash dividends on any of its capital stock in the near
future.
Unregistered
Sales of Securities
During
the last two years, the Company issued the following unregistered
securities:
In
February 2006, the Company issued 5,000,000 shares of common stock of the
Company (at a fair market value of $45,000) as partial incentive for Tara
Financial to make the $450,000 loan and to refinance approximately $1.75 million
of existing debt. For details on the note payable issued in connection with
the
loan, please see “Notes Payable” under Note 8 of the Notes to Consolidated
Financial Statements.
In
February 2006, the Company issued 3,000,000 shares of the common stock of the
Company (at a fair market value of $27,000)as
partial incentive for SGP to make the $150,000 loan, the Company issued to
SGP
3,000,000 shares of common stock of the Company. For details on the note payable
issued in connection with the loan, please see “Notes Payable” under Note 8
of the Notes to Consolidated Financial Statements.
12
In
March
2006, $40,800 in liquidated damages claimed by Cornell
Capital Partners (“Cornell”)
in
connection with a $200,000 debenture issued by the Company to Cornell in April
2003 was converted into 4,387,095 shares of common stock.
In
May
2006, a third party converted 1,500 shares of Series A, 4% Convertible
Cumulative Preferred Stock into 750,000 shares of common stock of the
Company.
In
July
2006, a director of GIS sent the Company a notice of exercise to purchase a
total of 1,250,000 shares of common stock of the Company under two warrants
issued to the director in December 2002. The purchase price for the shares
was
$12,500, which was offset against outstanding interest payments due under notes
payable issued to the director and unreimbursed expenses incurred by the
director. These shares were issued in 2007.
In
July
2006, the Company issued a total of 500,000 unregistered shares of the common
stock of the Company to two third party lenders pursuant to their exercise
of
warrants to purchase the shares for a total of $3,750. The purchase price was
offset against monies owed to each lender under outstanding promissory
notes.
In
September 2006, the Company issued 1,000,000 unregistered shares of common
stock
of the Company (at a fair-market value of $18,000) to a third party lender
in
connection with a $50,000 loan to the Company made in September 2006.
In
October 2006, the Company agreed to issue 1,000,000 unregistered shares of
the
common stock of the Company (at a fair market value of $21,000) to Mr. Weber
in
connection with a $100,000 loan to Taladin. These
shares have not been issued as the Company cannot issue shares above the
authorized amount of 1,000,000,000 shares of common stock. The
Company is currently investigating its options in order to present its
shareholders, as soon as practicable, with a plan whereby the Company could
meet
all of its outstanding obligations without exceeding its authorized shares
of
common stock.
In
December 2006, the agreed to issue 3,000,000 shares of common stock of the
Company to Mr. Rosseti in connection with refinancing an outstanding $66,000
note payable issued to Mr. Rossetti and additional debt of approximately $56,000
in fees owed to Markquest, Inc.The
fair
market value of the shares to be issued is $48,000. For details on the $113,734
note payable issued in connection with the refinancing, please see “Notes
Payable” under Note 8 of the Notes to Consolidated Financial Statements.
These shares were issued in 2007. The Company is currently investigating its
options in order to present its shareholders, as soon as practicable, with
a
plan whereby the Company could meet all of its outstanding obligations without
exceeding its authorized shares of common stock.
During
the year ended December 31, 2006, the entire $190,000 of principal under a
debenture bearing no interest was converted into 24,298,094 shares of the
Company’s common stock in connection with a commitment fee pursuant to an Equity
Line of Credit agreement entered into in April 2003 between the Company and
Cornell.
During
the year ended December 31, 2006, the Company agreed to issue 12,525,000,
unregistered shares of common stock of the company to employees and consultants
of the Company and NOW Solutions pursuant to restricted stock agreements with
the Company that provide for the stock to vest over period of one year or over
three years in equal installments at the anniversary date of the agreement.
All
of these shares have been issued.
During
the year ended December 31, 2006, the Company cancelled 3,866,666 unregistered
shares of common stock of the Company. These shares were issued pursuant to
restricted stock agreements executed in 2005 and 2006.
During
the year ended December 31, 2006, 5,449,998 unregistered shares of common stock
of the Company issued to employees and a consultant of the Company and NOW
Solutions vested. These shares were issued pursuant to restricted stock
agreements executed in 2005 and 2006.
During
the year ended December 31, 2006, incentive stock options to purchase 1,500,000
shares of common stock of the Company at a price of $0.010 per share were
cancelled in connection with the issuance of unregistered shares of stock to
an
employee of NOW Solutions pursuant to a restricted stock agreement.
During
the year ended December 31, 2006, warrants to purchase 21,966,667
shares
of common stock of the Company at a price of $0.0165
to
$0.10
per
share expired or were cancelled.
13
In
March
2007, MRC and Victor Weber entered into a pledge agreement, whereby the MRC
pledged 10,000,000 shares of common stock of the Company to secure the principal
payments and interest payments on the $300,000 Note and interest payments on
the
$200,000 Note. MRC is a corporation controlled by the W5 Family Trust. Mr.
Wade,
the President and CEO of the Company, is the trustee of the W5 Family Trust.
Mr.
Weber is the President and a Director of Government Internet Systems, Inc.,
a
subsidiary of the Company, and a member of CWI.
In
April
2007, Luiz Valdetaro, on behalf of the Company, transferred 2,000,000
unrestricted shares of common stock of the Company owned by Mr. Valdetaro to
an
officer of Tara Financial in exchange for waiving the defaults and extending
the
payment terms on notes payable in the amounts of $438,795, $350,560, $955,103
and $450,000 issued to Tara Financial by the Company, NOW Solutions, and Taladin
in February 2006. Mr. Valdetaro is the Chief Technology Officer of the Company.
Also in April 2007, in connection with the transfer, the Company entered into
an
indemnity and reimbursement agreement to reimburse Mr. Valdetaro with 2,000,000
shares within one year and pay for all costs associated with the transfer of
shares to Tara Financial and the reimbursement of shares to Mr. Valdetaro.
In
April
2007, Mr. Valdetaro, on behalf of the Company, transferred 1,000,000
unrestricted shares of common stock of the Company owned by Mr. Valdetaro to
Clark Consulting Services, Inc. (“CCS”) in connection with a $40,000 loan made
by CCS to the Company. The Company is also obligated to arrange for a pledge
of
1,000,000 shares of common stock of the Company to secure the loan. Mr.
Valdetaro is the Chief Technology Officer of the Company. Also in April 2007,
in
connection with the transfer of shares to CCS, the Company entered into an
indemnity and reimbursement agreement to reimburse Mr. Valdetaro with 1,000,000
shares within one year and pay for all costs associated with the transfer of
shares to CCS and the reimbursement of shares to Mr. Valdetaro.
In
April
2007, the Company and MRC entered into an indemnity and reimbursement agreement
for transfer and pledges of shares of common stock of the Company. Pursuant
to
the agreement, MRC loaned the Company 10,000,000 shares of common stock of
the
Company in order for the Company to meet current obligations concerning stock
the Company has been obligated to issue and deliver. In connection with the
loan
of shares to the Company, the Company agreed to reimburse MRC with up to
10,000,000 shares of common stock of the Company and pay for all costs
associated with such transfer and the reimbursement of shares to MRC within
one
year. In addition, in the event that any of the shares of common stock of the
Company pledged by MRC on behalf of the Company in connection with promissory
notes issued by the Company (or its subsidiaries, as applicable) are sold to
cover a default under the respective note, the Company agreed to reimburse
MRC
with a number of shares equal to the number of shares sold to cover the default
under the respective note within 1 year, and to reimburse MRC for all costs
associated with such sales and the reimbursement of shares to MRC related to
such sales.
In
April
2007, the Company issued 4,250,000 shares of common stock of the Company in
connection with the exercise of warrants and an agreement executed in 2006.
All
of the foregoing shares were previously accounted for in the 10-KSB Report
for
the period ended December 31, 2006.
Also
in
April 2007, the Company issued 200,000 shares of common stock to employees
and
consultants of NOW Solutions in connection with restricted stock agreements
executed in 2006, of which 66,666 shares vested during the three months ended
March 31, 2007 and are therefore accounted for in this Report. In addition,
the
Company issued 2,750,000 unregistered shares of common stock of the Company
to
employees of the Company and NOW Solutions pursuant to restricted stock
agreements executed in 2007, of which no shares have vested. All remaining
unvested shares will be accounted for when these shares vest.
During
the year ended December 31, 2007, warrants to purchase 6,894,444 shares of
common stock of the Company at an exercise price of $0.010 to $0.10 per share
expired.
During
the year ended December 31, 2007, the Company granted 4,550,000 unregistered
shares of common stock of the Company to employees and a consultant of the
Company and NOW Solutions pursuant to restricted stock agreements. 500,000
of
these unrestricted shares vested immediately with the remaining shares vesting
over a period from one to three years, as provided.
During
the year ended December 31, 2007, 4,589,292 unregistered shares of common
stock
of the Company vested. These shares were issued pursuant to restricted stock
agreements with employees and consultants of the Company and NOW Solutions
executed in 2005, 2006 and 2007.
14
During
the year ended December 31, 2007, 1,369,042 unregistered shares of the common
stock of the Company were cancelled. These shares had been issued pursuant
to
restricted stock agreements with employees of NOW Solutions executed in 2005
and
2006.
During
the year ended December 31, 2007, 31,000 shares of common stock of the Company
were cancelled by a third party.
In
January 2008, the Company issued 250,000 unregistered shares of common stock
of
the Company to a third party lender in connection with extending the maturity
dates of two promissory notes issued by GIS in November 2002 in the amounts
of
$40,000 and $60,000, respectively.
In
February 2008, the Company issued 500,000 unregistered shares of common stock
of
the Company to a third party lender in connection with refinancing a $50,000
promissory note issued in June 2002 as well as accrued interest, fees, and
expenses incurred in connection with the refinancing.
In
February 2008, MRC pledged 3,000,000 shares of common
stock of the Company as collateral on a $96,946 note issued in February 2008
to
a third party lender. MRC is a corporation controlled by the W5 Family Trust.
Mr. Wade, the President and CEO of the Company, is the trustee of the W5 Family
Trust.
In
March
2008, MRC pledged 2,000,000 shares of common stock of the Company to secure
a
$75,000 promissory note payable to Parker Mills in connection with extending
the
maturity date until June 2009. MRC is a corporation controlled by the W5 Family
Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the
W5
Family Trust. Bill Mills is a Director of the Company and a partner of Parker
Mills, LLP.
In
March
2008, the Company and MRC amended the indemnity and reimbursement agreement
(entered into in April 2007) whereby the Company agreed to reimburse and
indemnify MRC for additional shares pledged as collateral in connection with
a
$96,946 and a $75,000 notes. MRC is a corporation controlled by the W5 Family
Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the
W5
Family Trust.
For
the
period from January 1, 2008 to April 15, 2008, the Company issued 250,000
unregistered shares of common stock of the Company to a director of the Company
pursuant to a restricted stock agreement that provides for the shares to vest
on
the 1-year anniversary date of the agreement.
For
the
period from January 1, 2008 to April 15, 2008, warrants to purchase 6,000,000
shares of common stock of the Company at an exercise price of $0.010 per share
expired.
For
the
period from January 1, 2008 to April 15, 2008, 1,683,332 unregistered shares
of
the common stock of the Company vested. These shares were issued pursuant to
restricted stock agreements with employees of the Company and NOW Solutions
executed in 2006 and 2007.
Unless
otherwise noted, the offers,
sales and issuances of the Company’s unregistered securities
set
forth above involved no underwriter’s discounts or commissions.
In
engaging in the transactions described above which involved the Company’s
unregistered securities, the Company relied upon the private offering exemption
provided under Section 4(2)
of
the Securities Act of 1933, as amended, in
that
the
transactions involved
private offerings of the Company’s unregistered securities,
the
Company did not make
a public
offering or
sale of
its
securities, the investors were either accredited or unaccredited but
sophisticated, and the investors represented to the Company that they were
acquiring the
securities for investment purposes and for
their
own accounts, and not with an eye toward further distribution. With regard
to
the unaccredited investors, all information required to be delivered to them
concerning the Company, including financial statements, was in fact delivered
to
them.
15
Item
6. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion is a summary of the key factors management considers
necessary or useful in reviewing the Company’s results of operations, liquidity
and capital resources. The following discussion and analysis should be read
together with the Consolidated Financial Statements and Notes of Vertical and
its subsidiaries included in Item 7 of this Report, and the cautionary
statements and risk factors included below in this item of the
Report.
Critical
Accounting Policies
Capitalized
Software Costs
Software
costs incurred internally in creating computer software products are expensed
until technological feasibility has been established upon completion of a
detailed program design. Thereafter, all software development costs are
capitalized until the point that the product is ready for sale and subsequently
reported at the lower of unamortized cost or net realizable value. The Company
considers annual amortization of capitalized software costs based on the ratio
of current year revenues by product to the total estimated revenues by the
product, subject to an annual minimum based on straight-line amortization over
the product’s estimated economic useful life, not to exceed five years. The
Company periodically reviews capitalized software costs for impairment where
the
fair value is less than the carrying value. During the year ended December31,2007 and 2006, no costs were capitalized.
Revenue
Recognition
Service
revenue generated from professional consulting and training services are
recognized as the services are performed. Maintenance revenue, including
revenues bundled with original software product license revenues, are deferred
and recognized over the related contract period, generally twelve months. The
Company’s revenue recognition policies are designed to comply with American
Institute of Certified Public Accountants Statement of Position 97-2, “Software
Revenue Recognition” (“SOP
97-2”)
and
with Emerging Issues Task Force (“EITF”)
issued
No 00-21, “Revenue Arrangement with Multiple Deliverables.”
Deferred
revenue on maintenance contracts represent cash received in advance or accounts
receivable from systems, maintenance services, and consulting sales, which
is
recognized over the life of the contract.
In
accordance with SEC Staff Accounting Bulletin No. 104 “Revenue Recognition”, the
Company recognizes revenue from license of computer software up-front provided
that a non-cancelable license agreement has been signed, the software and
related documentation have been shipped, there are no material uncertainties
regarding customer acceptance, collection of resulting receivables is deemed
probable, and no significant other vendor obligations exist.
Allowances
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If
the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. We review delinquent accounts at least quarterly to identify potential
doubtful accounts, and together with customer follow-up estimates the amounts
of
potential losses.
Deferred
Taxes
The
Company records a valuation allowance to reduce the deferred tax assets to
the
amount that management believes is more likely than not to be realized in the
foreseeable future, based on estimates of foreseeable future taxable income
and
taking into consideration historical operating information. In the event
management estimates that it will not be able to realize all or part of its
net
deferred tax assets in the foreseeable future, a valuation allowance is recorded
through a charge to income in the period such determination is made. Likewise,
should management estimate that it will be able to realize its deferred tax
assets in the future in excess of its net recorded asset, an adjustment to
reduce the valuation allowance would increase income in the period such
determination is made.
16
Stock-Based
Compensation Expense
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of
SFAS No. 123(R), using the modified prospective transition method and therefore
has not restated results for prior periods. Under this transition method, we
recognize compensation expense for all stock options granted prior to, but
not
yet vested as of January 1, 2006, based on the grant date fair value estimated
in accordance with the original provisions of SFAS No. 123. Stock-based
compensation expense for all stock-based compensation awards granted after
January 1, 2006 is based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123(R). The Company uses the Black Scholes
option valuation model to estimate the fair value of its stock options at the
date of grant. Historical data is used to estimate the expected price
volatility, the expected option life and the expected forfeiture rate. The
risk-free rate is based on the U.S. Treasury yield curve in effect at the time
of grant for the estimated life of the option. Determining the appropriate
fair
value model and calculating the fair value of share-based payment awards
requires the input of subjective assumptions. The assumptions used in
calculating the fair value of share-based payment awards represent management’s
best estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if factors change and the
Company uses different assumptions, the stock-based compensation expense could
be materially different in the future. See Note 10 to the Consolidated Financial
Statements for a further discussion of stock-based compensation.
To
determine the fair value of our embedded derivatives, management evaluates
assumptions regarding the probability of certain future events. Other factors
used to determine fair value include our period end stock price, historical
stock volatility, risk free interest rate and derivative term. The fair value
recorded for the derivative liability varies from period to period. This
variability may result in the actual derivative liability for a period either
above or below the estimates recorded on our consolidated financial statements,
resulting in significant fluctuations in other income (expense) because of
the
corresponding non-cash gain or loss recorded.
New
Accounting Pronouncements
On
July13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement 109” (“FIN 48”). FIN 48
prescribes how the Company should recognize, measure and present in the
Company’s financial statements uncertain tax positions that have been taken or
are expected to be taken in a tax return. Pursuant to FIN 48, the Company can
recognize a tax benefit only if it is “more likely than not” that a particular
tax position will be sustained upon examination or audit. To the extent the
“more likely than not” standard has been satisfied, the benefit associated with
a tax position is measured as the largest amount that is greater than 50% likely
of being realized upon settlement. The Company adopted FIN 48 on January 1,2007. The adoption of FIN 48 did not require any restatement of the Company’s
financial statements.
Total
Revenues.
The
Company had total revenues of $5,895,726 and $6,229,944 for the years ended
December 31, 2007 and 2006, respectively. The decrease in total revenue was
$334,218 for the year ended December 31, 2007 representing approximately a
5.4%
decrease compared to the total revenue for the year ended December 31, 2006.
Of
the $5,895,726 for the year ended December 31, 2007 and the $6,229,944 for
the
year ended December 31, 2006, $5,895,726 and $6,222,752, respectively, was
related to the business operations of NOW Solutions, a wholly-owned subsidiary
of the Company.
Revenues
primarily consist of fees for software licenses, and consulting and maintenance.
The revenue from license and maintenance for the year ended December 31, 2007
decreased by $86,922 from the same period in the prior year, representing
approximately a 1.7% decrease, due to selling less new or upgraded software
licenses. These sales decreases were partially offset by an increase in
maintenance fees as contractual increases in maintenance revenues and the
maintenance from the 2006 new software license fees offset most of the loss
in
maintenance revenues from customer attrition.
Consulting
revenue for the year ended December 31, 2007 decreased by $340,132 from the
same
period in the prior year, representing approximately a 37.3% decrease. This
decrease was due to fewer implementation and upgrade consulting services as
a
result of fewer software licenses being sold in 2007 as compared to 2006.
Consulting revenues traditionally lag behind software license revenues as the
implementation of new software sales takes several months. There was a slight
increase in consulting revenues in the fourth quarter as some customers
requested assistance in implementing emPath version 6.4 released the end of
July
2007.
Other
revenue, which consists primarily of reimbursable travel expenses, hosting
fees,
and fees related to user conferences for the years ended December 31, 2007
and
2006 increased by $92,836 from the prior year, which represented approximately
a
55.7% increase. This increase was the result of hosting revenues beginning
in
2007, the Now Solutions’ user conference in 2007, partially offset by reduced
reimbursable travel costs related to the lower consulting revenues in 2007
as
compared to 2006.
Selling,
General and Administrative Expenses.
The
Company had selling, general and administrative expenses of $6,637,848 and
$7,156,711 for the years ended December 31, 2007 and 2006, respectively. The
total selling, general and administrative expenses for the year ended December31, 2007 decreased by $518,863 compared to the selling, general and
administrative expenses for the year ended December 31, 2006, representing
approximately an 7.3% decrease. Of the $6,637,848 for the year ended December31, 2007 and the $7,156,711 for the year ended December 31, 2006, NOW Solutions
accounted for $5,454,204, and $6,173,446, respectively. The decrease of $518,863
was primarily attributed to the reduction in source code amortization as NOW
Solutions source code was completely amortized in the first quarter of 2006,
a
reduction in loan commitment fees from refinancing notes payable in 2006 for
Vertical and NOW Solutions, a reduction in NOW Solutions salaries related to
the
layoff of the sales department in the U.S. in March 2007, a reduction in NOW
Solutions advertising and trade show costs, a reduction in NOW Solutions travel
costs due to reduced sales staff and reduced consultant travel, and lower
contract labor costs for software development and consulting at NOW Solutions.
Operating
Loss.
The
Company had an operating loss of $985,113 and $1,140,839 for the years ended
December 31, 2007 and 2006, respectively. The operating loss decreased by
$155,726 compared to the operating loss for the year ended December 31, 2006,
representing a decrease of approximately 13.7%. The decrease was attributable
to
the combination of a reduction of $518,863 in selling, general and
administrative expenses partially offset by the $334,218 decrease in
revenues.
Interest
Expense.
The
Company had interest expense of $1,005,325 and $590,896 for the years ended
December 31, 2007 and 2006, respectively. Interest expense increased for the
year ended December 31, 2007 by $414,429, representing an increase of
approximately 70.1%, compared to the same type of expense for the year ended
December 31, 2006. The
increase was the result of additional borrowings, the recognition of default
interest rates on the debt in technical default, and the impact of higher
interest rates on new and renegotiated borrowings.
Net
Loss. The
Company had a net loss of $1,566,345 and $1,728,709 for the years ended December31, 2007 and 2006, respectively. Net loss for the year ended December 31, 2007
decreased by $162,364 representing a decrease of approximately 9.4%. The
decrease in the net loss of $162,364 was attributable to the combination of
a
decrease in revenues of $334,218 and the increase in interest expense of
$414,429 and the increase of bad debt expense of $173,529, partially offset
by
the decrease in selling, general and administrative expenses of
$518,863.
18
Dividend
Applicable to Preferred Stock.
The
Company has outstanding Series A 4% Convertible Cumulative Preferred Stock
that
accrues dividends (if such dividends are declared) at a rate of 4% on a
semi-annual basis. The Company also has outstanding Series C 4% Convertible
Cumulative Preferred Stock that accrues dividends (if such dividends are
declared) at a rate of 4% on a quarterly basis. The total dividends applicable
to Series A and Series C Preferred Stock were $588,000 and $600,000 for the
years ended December 31, 2007 and 2006, respectively. The Company did not
declare or pay any dividends in 2007 or 2006.
Net
Loss Applicable to Common Stockholders.
The
Company had a net loss attributed to common stockholders of $2,154,345 and
$2,328,709 for the years ended December 31, 2007 and 2006, respectively. Net
loss applicable to common stockholders for the year ended December 31, 2007
decreased by $174,364, representing a decrease of approximately 7.5%, compared
to the net loss applicable to common stockholders for the year ended December31, 2006. The decrease in the net loss applicable to common stockholders of
$174,364 was primarily attributable to the combination of a decrease in revenues
of $334,218 and the increase in interest expense of $414,429 and the increase
of
bad debt expense of $173,529, partially offset by the decrease in selling,
general and administrative expenses of $518,863 and a decrease in dividends
applicable to preferred stock of $12,000.
Net
Loss Per Share.
The
Company had a net loss per share of $0.00 and $0.00 for the years ended December31, 2007 and 2006, respectively.
Financial
Condition, Liquidity, Capital Resources And Recent
Developments
Net
cash
provided by operating activities for the year ended December 31, 2007 was
$131,005. This cash flow was primarily related to a net loss of $1,566,345
adjusted by non-cash operating items of $394,735 (including depreciation and
amortization of $61,962, stock compensation of $49,707, bad debt expense of
$181,029, amortization of debt discount of $96,867, common stock issued for
the
extension of debt of $45,000, loan origination fee of $11,586 and the income
effect of derivatives of $51,416), an increase in all receivables of $206,507
and a decrease in prepaid expenses of $15,853, and increases in deferred revenue
of $118,082 and in accounts payable and accrued liabilities of
$1,375,187.
Net
cash
used in investing activities for the year ended December 31, 2007 was $56,299,
which primarily consisted of the purchase of equipment and
software.
Net
cash used in financing activities for the year ended December 31, 2007
was $16,492, consisting of issuance of new notes payable of $425,400, partially
offset by repayment of $441,892 of notes payable.
The
total
change in cash and cash equivalents for the year ended December 31, 2007 when
compared to year ended December 31, 2006 was an increase of $47,938.
As
of the
date of the filing of this Report, the Company does not have sufficient funds
available to fund its operations and repay its debt obligations under their
existing terms. Therefore, the Company needs to raise additional funds through
selling securities, obtaining loans, renegotiating the terms of its existing
debt and/or increasing sales with its new products. The Company’s inability to
raise such funds or renegotiate the terms of its existing debt will
significantly jeopardize its ability to continue operations.
Contractual
Obligations and Commercial Commitments
As
of
December 31, 2007, the following contractual obligations and commercial
commitments were outstanding:
19
Balance
at
Due
in Next Five Years
Contractual
Obligations
12/31/07
2008
2009
2010
2011
2012+
Notes
payable
5,730,312
3,508,593
309,573
346,667
273,887
1,291,586
Convertible
debts
40,000
40,000
-
-
-
-
Operating
lease
132,792
87,004
45,788
-
-
-
Total
5,903,104
3,635,597
355,367
346,667
273,887
1,291,586
Of
the
above notes payable of $5,730,312, the default status is as
follows:
Notes
Payable
2007
2006
In
default
$
3,344,196
$
2,263,638
Current
2,386,116
3,464,293
Total
Notes Payable
$
5,730,312
$
5,727,931
For
an
update on the refinancing of the notes payable since fiscal year-end, please
refer to “Subsequent Events” under Note 14 of the Notes to Consolidated
Financial Statements.
Going
Concern Uncertainty
The
Company has incurred significant losses from operations for the year ended
December 31, 2007. In addition, the Company had a working capital deficit of
approximately $13.1 million at December31, 2007. The
foregoing raises substantial doubt about the Company's ability to continue
as a
going concern.
Management
of the Company is continuing its efforts to attempt to secure funds through
equity and/or debt instruments for its operations, expansion and possible
acquisitions, mergers, joint ventures, and/or other business combinations.
The
Company will require additional funds for its operations and to pay down its
liabilities, as well as finance its expansion plans consistent with the
Company’s anticipated changes in operations and infrastructure. The condensed
consolidated financial statements contain no adjustment for the outcome of
this
uncertainty.
Furthermore,
the Company is exploring certain opportunities with a number of companies to
participate in co-marketing of each other’s products. The Company is proceeding
to license its intellectual property and filed suit for patent infringement
against Microsoft (for more details, see Item 3, “Legal Proceedings”). The exact
results of these opportunities are unknown at this time.
Off-Balance
Sheet Arrangements.
None.
20
Risk
Factors Related to the Company’s Business,
Operating Results and Financial Condition
We
are
subject to various risks that may materially harm our business, financial
condition and results of operations. You should carefully consider the risks
and
uncertainties described below and the other information in this filing before
deciding to purchase our common stock. If any of these risks or uncertainties
actually occurs, our business, financial condition or operating results could
be
materially harmed. In that case, the trading price of our common stock could
decline and you could lose all or part of your investment.
We
Have Historically Incurred Losses and May Continue to Do So in the
Future
We
have
historically incurred losses. For the years
ended
December 31, 2007 and 2006, the
Company had net losses of $1,566,345
and
$1,728,709,
respectively. Future losses are likely to occur. Accordingly, we have and may
continue to experience significant liquidity and cash flow problems because
our
operations are not profitable. No assurances can be given that we will be
successful in reaching or maintaining profitable operations.
We
Have Been Subject to a Going Concern Opinion from Our Independent Auditors,
Which Means That We May Not Be Able to Continue Operations Unless We Obtain
Additional Funding
The
report of our independent registered public accounting firm included an
explanatory paragraph in connection with our financial statements for the years
ended December 31, 2007 and 2006. This paragraph states that our recurring
operating losses, negative working capital and accumulated deficit, the
substantial funds used in our operations and the need to raise additional funds
to accomplish our objectives raise substantial doubt about our ability to
continue as a going concern. Our ability to develop our business plan and to
continue as a going concern depends upon our ability to raise capital and to
achieve improved operating results. Our financial statements do not include
any
adjustments that might result from the outcome of this uncertainty.
The
Company’s Ability to Continue as a Going Concern Is Dependent on Its Ability to
Raise Additional Funds and to Establish Profitable Operations
The
accompanying consolidated financial statements for the 12 months ended December31, 2007 and 2006 have been prepared assuming that the Company will continue
as
a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The
carrying amounts of assets and liabilities presented in the financial statements
do not purport to represent realizable or settlement values. The Company has
suffered significant recurring operating losses, used substantial funds in
its
operations, and needs to raise additional funds to accomplish its objectives.
Negative shareholders’ equity at December 31, 2007 was $15.2 million.
Additionally, at December 31, 2007, the Company had negative working capital
of
approximately $13.1 million (although it includes deferred revenue of
approximately $2.8 million) and has defaulted on several of its debt
obligations. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
Our
Success Depends On Our Ability to Generate Sufficient Revenues to Pay For The
Expenses of Our Operations
We
believe that our success will depend upon our ability to generate revenues
from
our SiteFlash™ and Emily® technology products and other products for which we
have marketing rights, as well as increased revenues from NOW Solutions
products, none of which can be assured. Our ability to generate revenues is
subject to substantial uncertainty and our inability to generate sufficient
revenues to support our operations and debt repayment could require us to
curtail or suspend operations. Such an event would likely result in a decline
in
our stock price.
Our
Success Depends On Our Ability to Obtain Additional
Capital
The
Company has funding that is expected to be sufficient to fund its present
operations for three months. The Company, however, will need significant
additional funding in order to complete its business plan objectives.
Accordingly, the Company will have to rely upon additional external financing
sources to meet its cash requirements. Management will continue to seek
additional funding in the form of equity or debt to meet its cash requirements.
The Company does not have any common stock available to issue to raise money.
However, there is no guarantee the Company will raise sufficient capital to
execute its business plan. In the event that the Company is unable to raise
sufficient capital, the Company’s business plan will have to be substantially
modified and operations curtailed or ceased.
21
We
Have a Working Capital Deficit, Which Means That Our Current Assets
on
December 31, 2007 Were Not Sufficient to Satisfy Our Current Liabilities on
That
Date
We
had a
working capital deficit of approximately $13.1
million at
December31, 2007,
which
means that
our
current liabilities exceeded our current assets by approximately $13.1
million
(although
it includes deferred revenue of approximately $2.8 million).
Current
assets are assets that are expected to be converted into cash within one year
and, therefore, may be used to pay current liabilities as they become due.
Our
working capital deficit means that our current assets on December31, 2007 were not sufficient to satisfy all of our current liabilities on that
date.
Our
Operating Results May Fluctuate Because of a Number of Factors, Many of Which
Are Outside of Our Control
Our
operating results may fluctuate significantly as a result of variety of factors,
many of which are outside of our control. These factors include, among others,
the following:
·
the
demand for our SiteFlash™ and Emily®
technology;
seasonal
trends and budgeting cycles in
sponsorship;
·
incurrence
of costs relating to the development, operation and expansion of
our
Internet operations;
·
introduction
of new products and services by us and our
competitors;
·
costs
incurred with respect to
acquisitions;
·
price
competition or pricing changes in the
industry;
·
technical
difficulties or system failures;
and
·
general
economic conditions and economic conditions specific to the Internet
and
Internet media.
We
May Have Difficulty Managing Our Growth and Integrating Recently Acquired
Companies
Our
recent growth has placed a significant strain on our managerial, operational,
and financial resources. To manage our growth, we must continue to implement
and
improve our operational and financial systems and to expand, train, and manage
our employee base. Any inability to manage growth effectively could have a
material adverse effect on our business, operating results, and financial
condition. Acquisition transactions are accompanied by a number of risks,
including the following:
·
the
difficulty of assimilating the operations and personnel of the acquired
companies;
·
the
potential disruption of our ongoing business and distraction of
management;
·
the
difficulty of incorporating acquired technology or content and rights
into
our products and media properties;
·
the
correct assessment of the relative percentages of in-process research
and
development expense which needs to be immediately written off as
compared
to the amount which must be amortized over the appropriate life of
the
asset;
·
the
failure to successfully develop an acquired in-process technology
resulting in the impairment of amounts currently capitalized as intangible
assets;
·
unanticipated
expenses related to technology
integration;
·
the
maintenance of uniform standards, controls, procedures and
policies;
·
the
impairment of relationships with employees and customers as a result
of
any integration of new management personnel;
and
·
the
potential unknown liabilities associated with acquired
businesses.
We
may
not be successful in addressing these risks or any other problems encountered
in
connection with these acquisitions. Our failure to address these risks could
negatively affect our business operations through lost opportunities, revenues
or profits, any of which would likely result in a lower stock
price.
Our
Success Depends On Our Ability to Protect Our Proprietary
Technology
Our
success is dependent, in part, upon our ability to protect and leverage the
value of our original SiteFlash™ and Emily® technology products and Internet
content, as well as our trade secrets, trade names, trademarks, service marks,
domain names and other proprietary rights we either currently have or may have
in the future. Given the uncertain application of existing trademark laws to
the
Internet and copyright laws to software development, there can be no assurance
that existing laws will provide adequate protection for our technologies, sites
or domain names. Policing unauthorized use of our technologies, content and
other intellectual property rights entails significant expenses and could
otherwise be difficult or impossible to do given the global nature of the
Internet and our potential markets.
22
Our
Stock Price Has Historically Been Volatile, Which May Make It More Difficult
for
Shareholders to Resell Shares When They Choose To At Prices They Find
Attractive
The
trading price of our common stock has been and may continue to be subject to
wide fluctuations. The stock price may fluctuate in response to a number of
events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products and media properties
by us or our competitors, changes in financial estimates and recommendations
by
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable, and news reports relating to
trends in our markets. In addition, the stock market in general, and the market
prices for Internet-related and technology-related companies in particular,
have
experienced extreme volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry fluctuations
may
adversely affect the price of our stock, regardless of our operating
performance.
Our
Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult for
Investors to Sell Their Shares Due To Suitability
Requirements
Our
common stock is deemed to be “penny stock” as that term is defined in
Rule 3a51-1 promulgated under the Exchange Act. Penny stocks are
stocks:
·
With
a price of less than $5.00 per
share;
·
That
are not traded on a recognized national
exchange;
·
Whose
prices are not quoted on the NASDAQ automated quotation system (NASDAQ
listed stock must still have a price of not less than $5.00 per share);
or
·
In
issuers with net tangible assets less than $2 million (if the issuer
has
been in continuous operation for at least three years) or $5 million
(if in continuous operation for less than three years), or with average
revenues of less than $6 million for the last three
years.
Broker/dealers
dealing in penny stocks are required to provide potential investors with a
document disclosing the risks of penny stocks. Moreover, broker/dealers are
required to determine whether an investment in a penny stock is a suitable
investment for a prospective investor. These requirements may reduce the
potential market for our common stock by reducing the number of potential
investors. This may make it more difficult for investors in our common stock
to
sell shares to third parties or to otherwise dispose of them. This could cause
our stock price to decline.
The
Company
Will Likely Experience Losses for
the Foreseeable Future
Our
lack
of an extensive operating history makes prediction of future operating results
difficult. We believe that a comparison of our quarterly results is not
meaningful. As a result, you should not rely on the results for any period
as an
indication of our future performance. Accordingly, there can be no assurance
that we will generate significant revenues or that we will attain
a
level
of profitability in the future. We currently intend to expand and improve our
Internet operations, fund increased advertising and marketing efforts, expand
and improve our Internet user support capabilities and develop new internet
technologies, products and services. As a result, we may experience significant
losses on a quarterly and annual basis.
Item
7. Consolidated Financial Statements
Please
refer to the Audited Consolidated Financial Statements of the Company and its
subsidiaries for the fiscal years ended December 31, 2007 and 2006, which are
attached to this Report.
23
Item
8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
In
December 2007, Weaver & Tidwell, LLP (“Weaver
& Tidwell”)
resigned as the independent certified public accountants of the Company with
no
disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements,
if
not resolved to Weaver & Tidwell’s satisfaction, would have caused it to
make reference to the subject matter of the disagreements in connection with
its
reports for the Company’s fiscal year ended December 31, 2006. On January 16,2008, the Company engaged Malone & Bailey, P.C. (“Malone
& Bailey”)
as its
principal accountant to audit the Company’s financial statements.
Item
8A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, principally our chief financial officer and chief executive officer,
evaluated the effectiveness of our disclosure controls and procedures as of
the
end of the period covered by this report. Based on that evaluation, our
management concluded that our disclosure controls and procedures as of the
end
of the period covered by this report were not effective such that the
information required to be disclosed by us in reports filed under the Securities
Exchange Act of 1934 is (i.) recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms and (ii) accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding
disclosure. In particular, we have identified the following material weakness
of
our internal controls:
-
There
is an over-reliance upon independent financial reporting consultants
for review of critical accounting areas and disclosures and material
non-standard transactions.
-
There
is a lack of sufficient accounting staff which results in a lack
of
segregation of duties necessary for a good system of internal
control.
Management’s
Annual Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
and Exchange Act of 1934, as amended) for the company.
In
order
to ensure whether our internal control over financial reporting is effective,
management has assessed such controls for its financial reporting as of December31, 2007. This assessment was based on criteria for effective internal control
over financial reporting described in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”).
In
performing this assessment, management has identified the following material
weaknesses:
There
is
an absence of adequate segregation of duties relating to oversight and
management of our systems. This resulted primarily from the fact that certain
parts of the work of our chief financial officer are not monitored or reviewed.
The absence of adequate segregation of duties may have an effect on the systems
which we use in the evaluating and processing of certain accounts and areas
and
in the posting and recording of journal entries into certain accounts, as
described below:
o
Revenue
and deferred revenue process – There was a material weakness in the
process of recognizing revenue for the software maintenance contracts
in
effect during the year which resulted from the fact that there are
certain
calculations made by our chief financial officer which are not reviewed
or
approved by anyone else.
o
Financial
statements closing process – There was a material weakness in the
process of closing and consolidating our financial statements which
resulted from the fact that the work of our chief financial officer
in
this process (starting with processing the trial balance, through
the
evaluation and implementation of policies and accounting issues,
until the
complete production of consolidated financial statements) is not
reviewed
by anyone else.
o
Treasury
and cash process – There was a material weakness in the sub-process
of debt management which resulted from the fact that our chief financial
officer manages, evaluates, records and discloses all matters which
relate
to debts, debt issuance and renegotiation expenses, interest, etc.
whose
work is not reviewed by anyone else. Further, our chief financial
officer
relied upon financial reporting consultants as it relates to the
accounting for loan renegotiation and loan termination
costs.
o
Equity
instruments – There was a material weakness in the sub-process
related to evaluating debt and equity instruments with conversion
privileges to determine whether or not the instruments had embedded
derivative components as directed in EITF 00-19. There was a material
weakness in the sub-process related to evaluating certain equity
instrument transactions and the accounting treatment for these
non-standard transactions. Both of these resulted from the fact that
our
chief financial officer relies heavily upon financial reporting
consultants as it relates to derivative and non-standard equity
transactions.
24
As
a
result of these material weaknesses in our internal control over financial
reporting, our management concluded that our internal control over financial
reporting as of December 31, 2007, was not effective based on the criteria
set
forth by COSO in Internal Control – Integrated Framework. A material
weakness in internal control over financial reporting is a deficiency, or a
combination of deficiencies, in internal control over financial reporting,
such
that there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
Management’s
Plan for Remediation of Material Weaknesses
In
light
of the conclusion that our internal control over financial reporting was not
effective, our management is in the process of implementing a plan intended
to
remediate such ineffectiveness and to strengthen our internal controls over
financial reporting through the implementation of certain remedial measures,
which include:
o
Implementing
a new accounting system that will allow for the consolidation of
the
various entities in Vertical Computer Systems along with the translation
from local currency to reporting currency. The system will eliminate
many
of the manual steps in translation and
consolidation.
o
Improving
the control and oversight of the duties relating to the systems we
use in
the evaluation and processing of certain accounts and areas in the
posting
and recording of journal entries into certain accounts (in which
material
weaknesses have been identified as described above). This improvement
should include reviews by management of the accounting processes
as well
as a reorganization of some of the accounting
functions.
o
The
segregation of duties relating to the processing of accounts and
the
recording of journal entries into certain
accounts.
We
have
commenced implementing the new accounting system and will begin implementing
additional oversight and review of certain accounts and postings. We have also
added a degreed accountant to our staff in the first quarter of
2008.
This
annual report does not include an attestation report of our public accounting
firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by our registered public accounting firm pursuant
to temporary rules of the Securities and Exchange Commission that permit us
to
provide only management’s report in this annual report.
Item
8B. Other Information
None.
25
PART
III
Item
9. Directors, Executive Officers, Promoters And Control Persons; Compliance
With
Section 16(a)
Of The Exchange Act
The
Company’s present directors and executive officers are as follows:
Name
Age
Position
Tenure
Richard
S. Wade
64
President,
Chief Executive Officer and Director
8
years
William
K. Mills
49
Secretary
and Director
8
years
David
Braun
50
Chief
Financial Officer
1
year
Richard
S. Wade, President, Chief Executive Officer and Director, Chairman and Director
of NOW Solutions
Richard
S. Wade is President and CEO of the Company and has been a director since
October 1999. Before coming to Externet World, Inc. in mid-1999, and then
transitioning to what is now the Company in late 1999, Mr. Wade held a number
of
executive positions with companies in the Pacific Rim from 1983 through early
1999, including the position of Chief Operating Officer of Struthers Industries,
Inc., a public company in the business of wireless applications. In March 1998,
Struthers Industries, Inc. filed a petition for bankruptcy under the United
States Bankruptcy Act. Prior to these executive positions, Mr. Wade spent over
10 years with Duty Free Shoppers, Inc., culminating in his attaining the
positions
of president of their Mid-Pacific Division and then president of their U.S.
Division.
Prior
to
that, Mr. Wade was a CPA and staff auditor with Peat, Marwick &
Mitchell.
Over
the course of his career, Mr. Wade has accumulated experience in retail
operations, distribution, and financial matters. Mr. Wade earned his Bachelor
of
Science in Accounting at Brigham Young University, a Master of Science in
Business Policy from Columbia University Business School and
received a certificate of recognition from the government of Guam.
William
K. Mills, Secretary and Director
William
K. Mills has been a director since December 2000. Mr. Mills is a founding
partner of Parker Mills, LLP (formerly Parker, Mills Morin, LLP) where he
specializes in complex commercial business representations, including
transactional and litigation matters, such as legal malpractice, intellectual
property and general corporate and governmental representations since 1995.
Between 1991 and 1994, Mr. Mills was a senior attorney and partner with Lewis,
D’Amato, Brisbois & Bisgaard, prior to which he was a senior attorney with
Radcliff & West from 1989 to 1991, senior associate with Buchalter, Nemer
Fields & Younger from 1987 to 1991 and an attorney with Daniels, Baratta
& Fine from 1982 to 1987. Mr. Mills holds a J.D. from UCLA Law School and an
A.B. in American Government from Harvard College. Active in professional and
community organizations, Mr. Mills has served as General Counsel to the
California Association of Black Lawyers, a member of the Los Angeles County
Bar
Judicial Appointments Committee, and a Board Member of the John M. Langston
Bar
Association. Mr. Mills has also served on the boards of the Didi Hirsch Mental
Health Foundation, the United Way’s Los Angeles Metropolitan Region Board, the
Los Angeles City Ethics Commission, and the Los Angeles County Judicial
Procedures Commission.
David
Braun, Chief Financial Officer of VCSY and NOW Solutions
David
Braun is an accountant with over 24 years experience in a wide variety of
accounting and finance roles. His career includes public accounting, large
company internal audit, financial analysis, mergers and acquisitions, SEC
reporting, general accounting and consolidations of both domestic and
international companies. Most recently he was the Corporate Controller for
a
plastics injection molding company with plants in the United States, Mexico
and
Ireland. Prior to that, he worked for a healthcare provider where he was
responsible for managing 24 employees with accounting responsibility for over
200 clinics. Previous experience includes working for a large chemicals
manufacturing company where he assisted in implementing a worldwide version
of
SAP and created a finance shared services group for the US and Canada. He is
a
CPA and a graduate of the University of Texas at Austin.
26
Election
of Directors; Family Relationships; Legal Proceedings
Directors
are elected at the annual meeting of stockholders and serve until their
successors have been elected and qualified. Officers are appointed by and serve
at the discretion of the Board of Directors. There are no family relationships
between any of the executive officers or directors. None of the Company’s
directors have been involved in legal proceedings except as noted under the
section of this Report entitled “Legal Proceedings.”
Compliance
with Section 16(a) Of The Exchange Act
Section
16(a) of the Exchange Act requires the Company’s officers and directors, and
persons who own more than 10% of a registered class of the Company's equity
securities to file reports of ownership and changes in ownership with the SEC.
Officers, directors and greater than 10% stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
To
the
best of the Company's knowledge, based solely on review of the copies of such
forms furnished to it, or written representations that no other forms were
required, the Company believes that all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% stockholders were
complied with during 2007 with the following exceptions: Richard Wade did not
timely file Forms 5 in 2007 or 2008 and William Mills did not timely file Form
5
in 2007 or Form 4 in 2008.
Code
of Ethics
We
have
adopted a Code of Ethics that applies to our Principal Executive Officer,
Principal Accounting Officer and other persons performing similar functions,
as
well as all of our other employees and directors. This Code of Ethics was filed
as Exhibit 14.1 to the Form 10-KSB filed for the year ended December 31,2003 and was updated in January 2008 with the new address for the Company’s
corporate headquarters. This updated Code of Ethics is filed as
Exhibit 14.1 to this Report. and is available at the its Internet website
located at http://www.vcsy.com.
Luiz
Valdetaro, Chief Technology Officer, Director of NOW
Solutions
Prior
to
joining the Company, Mr. Valdetaro was previously a consultant (1993-1997)
and
Chief Technology Officer (1997-1999) of Diversified Data Resources, a software
company. Prior to that, Mr. Valdetaro was a Senior Systems Engineer for
System/One and EDS, after System/One was acquired by EDS. Prior to that, Mr.
Valdetaro was a senior systems engineer for Bank of America. Mr. Valdetaro
is a
graduate of Pontific Catholic University, Rio de Janeiro, Brazil with a B.S.
in
Electronic Engineering and a M.S. in Systems Engineering.
Significant
Employees of NOW Solutions, Inc.
Marianne
M. Franklin, President and Chief Executive Officer
Marianne
M. Franklin is President and Chief Executive Officer of NOW Solutions. Ms.
Franklin brings her experience in the payroll and human resources industry,
which included over eight years working at Ross Systems, most recently as Vice
President of North American sales. Prior to this function, Ms. Franklin was
Director of Ross’ HR/Payroll Canadian Sales. Ms. Franklin’s background also
includes two years with ADP and 13 years in the banking industry, working with
payroll products.
Pete
Ashey, Executive Vice President of Business Development
Mr.
Ashey
joined the NOW Solutions' leadership team in January 2007 to support NOW
Solutions' HR initiative. Mr. Ashey brings more than 15 years of sales and
process improvement experience from both the software market and HR outsourcing
services industry. His prior positions include sales and solution roles at
IBM.
During his career, Mr. Ashey has made significant contributions to the
development and success of leading solutions targeting the Fortune 1000
marketplace. Mr. Ashey's responsibilities will include the expansion of NOW
Solutions' business development effort and support of the global offering.
His
earlier professional experience has included VP of Sales of Pilat North America,
and running his own Employee Assessment Practice. His consulting work has
encompassed the United States, Canada, Venezuela and Europe, and organizations
such as Nike, Philip Morris, Kraft, AT&T, Goodyear Tire and Rubber, Toyota
and Bombardier.
27
Dorothy
Spotts, Vice President of Services and Support
Ms.
Spotts joined Ross Systems in April 1991 as a Support Analyst in the Customer
Support Department progressing to Operations Manager. Subsequently, she attained
the position of Manager of Integration Services in September 1997. In March
1999, she was promoted to Director of Integration Services and then became
Director of Professional Services in July 2000. Ms. Spotts’ responsibilities
include the overall management of Application Consulting, Integration Services
and Customer Support. Ms. Spotts graduated with a BBA from the University of
Texas at Austin.
Carmelina
Uggenti, Vice President of Customer Development
Prior
to
her current position, Ms. Uggenti joined Ross Systems, Inc. in January 1994
as a
Senior Consultant/Project Manager in the Human Resources/Payroll Professional
Services Department. In 1998, Ms. Uggenti became responsible for the pre-sales
organization. Ms. Uggenti has overall responsibility for NOW Solutions' global
sales, pre-sales, professional services pre-sales and marketing.
Laurent
Tetard, Executive Vice President of International
Operations
Mr.
Tetard joined the Company in 1999, where he oversaw business development,
managed software design projects and handled daily operations. His
responsibilities included working with clients and strategic partners to develop
business plans, implement strategies and methodologies to support software
development. Combining his education and experience, Mr. Tetard has specialized
in managing design, implementation, documentation and installation of Internet
compatible applications. From 1994 to 1996, Mr. Tetard was a Public Relations
Officer with the French Air Force, in Toulouse, France. Earlier in his career,
he completed a thesis in collaboration with the French Aeronautics and Space
Research Center (“ONERA”)
and
served engineering internships at Aerospatiale, France. Mr. Tetard is an honor’s
graduate of the noted French Ecole Nationale Superieure D’arts et Metiers
(“ENSAM”),
with
a BS in Engineering and a MS in Multidisciplinary Engineering.
Robert
Sterpin, Vice President of Sales, Canada & U.S.
Midwest
Mr.
Sterpin joined NOW Solutions in 2003. He has a varied background in sales and
sales management starting his career with DEC (HP) and working for several
major
corporations such as IBM and Cincom Systems. Mr. Sterpin spent almost 5 years
at
Ross Systems where he was Vice President Canada and the U.S. Mid West for their
ERP software product suite. Prior to joining NOW Solutions, he was Vice
President Sales & Marketing for a systems integration/ consulting firm. Mr.
Sterpin majored in Science at the University of Toronto.
Item
10. Executive Compensation
The
following table shows all the cash compensation paid by the Company, as well
as
certain other compensation paid or accrued, during the fiscal years ended
December 31, 2007 and 2006 to the Company’s highest paid executive officers and
employees, who were employed by the Company during 2007. No restricted stock
awards, long-term incentive plan payouts or other types of compensation, other
than the compensation identified in the chart below, were paid to these
executive officers during these fiscal years. Except as set forth below, no
other executive officer earned a total annual salary and bonus for any of these
years in excess of $100,000.
28
SUMMARY
COMPENSATION TABLE
The
below
table shows information of compensation of the named officers for the last
two
fiscal years:
Annual
Compensation
Long-Term
Compensation
Awards
Payouts
Name
and
Principal
Position
Year
Salary
Bonus
Other
Annual
Compensation
Restricted
Stock
Award(s)
Options/
SARs
LTIP
Payouts
All
Other
Compensation
($)
($)
($)
($)
(#)
($)
($)
Richard
Wade,(1)
2007
$
300,000
(1)
-
-
-
-
-
-
President
and Chief
2006
$
300,000
-
-
-
-
-
-
Executive
Officer
Luiz
Valdetaro, (2)
2007
$
150,000
-
-
-
-
-
-
Chief
Technology
2006
$
150,000
-
-
-
-
-
-
Officer
James
Salz (3)
2007
$
100,000
-
-
-
-
-
-
Corporate
Counsel
2006
$
100,000
-
-
9,000
-
-
-
_____________
No
stock
options were exercised by the named executive officers during the fiscal year
ended December 31, 2007 or 2006.
(1)
Mr.
Wade deferred $150,000, $150,000, $154,097, $47,218, $155,270 and
$300,000
of his salary in 2007, 2006, 2005, 2004, 2003 and 2002, respectively.
Pursuant to his employment agreement, dated December 1, 2001, Mr.
Wade, as
President and CEO, was entitled to purchase up to 20,600,000 shares
of
common stock for three years at a strike price of $0.10, vesting
in equal
monthly amounts over a 36-month period. All of these warrants had
expired
at December31, 2007.
(2)
Mr.
Valdetaro deferred $23,750, $25,000, $50,269, $86,766 and $150,000
of his
salary in 2007, 2006, 2005, 2004 and 2003, respectively.
(3)
Mr.
Salz deferred $48,345, $55,000 and $58,333 of his salary in 2004,
2003,
and 2002 respectively. In January 2006, Mr. Salz was issued 1,500,000
unregistered shares of common stock of the Company (at a fair market
value
of $9,000) pursuant to a restricted stock agreement with the Company
which
provides for the stock to vest over one year in three equal installments
at four month intervals, of which all shares had vested at December31,2007.
The
below
table shows information of outstanding equity awards of the named officers
at
the end of 2007:
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END (2007)
Option
Awards
Stock
Awards
Name
Number of
Securities Underlying Unexercised Options (#)
Exercisable
Number of
Securities Underlying Unexercised Options (#)
non-exercisable
Equity
Incentive Plan Awards: Number of Securities
Underlying Unexercised Unearned Options (#)
Option
Exercise Price ($)
Option
Expiration Date
Number of
Shares or Units of Stock That Have
Not Vested
(#)
Market
Value of Shares or Units of
Stock That
Have Not
Vested ($)
Equity
Incentive Plan Awards: Number of Unearned
Shares, Units or Other Rights That
Have Not Vested (#)
Equity
Incentive Plan Awards: Market or Payout Value of
Unearned Shares, Units or Other
Rights That Have Not Vested ($)
David
Braun
Chief
Financial Officer (1)
—
—
—
—
800,000
—
800,000
—
(1)
Pursuant
to a restricted stock agreement with the Company, Mr. Braun, the
CFO of
the Company, was issued 800,000 unregistered shares of common stock
of the
Company (at a fair market value of $16,800 in March 2007, which provides
for the stock to vest over three years in three equal installments,
of
which 0 shares had vested at December 31, 2007. As of April 15, 2008,
266,666 shares have vested. In addition, 200,000 unregistered shares
of
common stock of the Company (at a fair market value of $1,400), which
had
been issued to Mr. Braun pursuant to a prior restricted stock agreement
executed in 2006, had vested at December 31,2007.
29
Stock
Option Plan.
In
December 1999, the Company established a stock option plan (the “Plan”)
whereby the Company may grant both Incentive Stock Options (within the meaning
of Section 422 and the Internal Revenue Code of 1986, as amended) and
non-statutory options. Under the Plan, the Company may issue up to 50,000,000
shares (adjusted post stock split). Most options issued are non-assignable,
non-transferable, vest on the date of grant, and expire between three and five
years from the date of grant.
Director
Compensation
The
below
table provides compensation for all non-employee directors in 2007:
DIRECTOR
COMPENSATION
Name
Fees Earned
or Paid in
Cash
Stock
Awards
Option
Awards
Non-Equity
Incentive Plan
Compensation
Nonqualified
Deferred
Compensation
Earnings
All Other
Compensation
Total
($)
($)
($)
($)
($)
(#)
($)
William
Mills
30,000
—
—
—
—
—
30,000
No
options or warrants were granted as director compensation during the fiscal
years ended 2007 or 2006. Non-employee directors are entitled to receive $3,500
per meeting in 2006 and $2,500 per month in 2007.
Employment
Agreements
In
December 2001, the Company executed a 3-year employment agreementwith
Richard Wade pursuant to which Mr. Wade serves as Chief Executive Officer and
President of the Company, under which Mr. Wade will receive an annual base
salary of $300,000, and the issuance of 5-year warrants to purchase 20,000,000
shares of the Company’s common stock at an exercise price of $0.10 per share and
5-year warrants to purchase 600,000 shares of the Company’s common stock at an
exercise price of $0.10 per share. The warrants vested over a 36-month period
in
equal amounts on a monthly basis from the date of issuance. Of the warrants
to
purchase 20,600,000 shares of common stock of the Company, all had expired
at
December 1, 2007. Mr. Wade is also entitled to an annual bonus from a bonus
pool
for executives equal to 5% of the Company’s taxable income (without deduction
for depreciation). Mr. Wade’s share of the bonus pool is equal to the percentage
of his annual base compensation to the total of the combined annual base
compensation of all executives in the pool. In the event the agreement is
terminated by Mr. Wade’s death, his estate shall be entitled to compensation
accrued to the time of death plus the lesser of one year’s base compensation or
the compensation due through the remainder of the employment term. In the event
of termination by the Company without cause, Mr. Wade would receive base
compensation for the remainder of the employment term. Mr. Wade deferred
$150,000 and $150,000 of his salary in 2007 and 2006.
Item
11. Security Ownership Of Certain Beneficial Owners And
Management
Security
Ownership By Named Executive Officers, Directors And Beneficial Owners
The
following table sets forth certain information regarding the beneficial
ownership of the shares of common stock as of April 10, 2008, by each of our
directors and executive officers and any person or entity, known by us to be
the
beneficial owner of more than 5% of the outstanding shares of common stock.
The
table also shows the beneficial ownership of our stock by all directors and
executive officers as a group. The table includes the number of shares subject
to outstanding options and warrants to purchase shares of common stock. The
percentages are based on 998,235,151shares of common stock outstanding as of
April 10, 2008, together with options, warrants or other securities convertible
or exchangeable by the beneficial owners into shares of common stock within
60
days of April 10, 2008.
30
Title
of
Class
Name
and Address of Beneficial Owner(1)
Shares
of Common Stock Beneficially
Owned
Percent
of
Class
Common
Richard
Wade
98,590,206
(2)
9.89
%
Common
William
K. Mills
283,333
(3)
*
Common
All
Directors and Executive Officers as a group (2 persons)
98,873,539
9.91
%
__________________________________
*
Less
than 1%.
(1)
Unless
otherwise indicated, the address of each director and officer is
c/o
Vertical Computer Systems, Inc., 101 West Renner Road, Suite 300,
Richardson, TX75082.
(2)
Includes
90,370,050 shares owned by Mountain Reservoir Corporation (“MRC”), a
corporation controlled by the W5 Family Trust, of which Richard W.
Wade is
a trustee. MRC pledged 10,000,000 shares of common stock of the Company
as
collateral on a $25,000 note issued in August 2002. MRC pledged 4,000,000
and 3,000,000 shares of common stock of the Company as collateral
on a
$60,000 note and a $40,000 note, respectively, that were issued by
the
Company in November 2003. MRC pledged 5,000,000 shares of common
stock of
the Company as collateral on a $200,000 note issued in October 2006
to Mr.
Weber. Also in October 2006, MRC pledged 5,000,000 shares of common
stock
of the Company as collateral on a $215,000 note issued by NOW Solutions
to
the Company and assigned to Mr. Weber in October 2005. MRC pledged
10,000,000 shares of common stock of the Company as collateral on
a
$300,000 note issued in March 2007 to Mr. Weber and as collateral
on the
interest payments due under the $200,000 note issued in October 2006.
MRC
pledged 3,000,000 shares of common stock of the Company as collateral
on a
$96,946 note issued in February 2008 to a third party lender. MRC
pledged
2,000,000 shares of common stock of the Company as collateral on
a $75,000
note issued to Parker Mills LLP in October 2005. In addition, the
Company
is obligated to reimburse MRC for 10,000,000 shares of common stock
of the
Company pursuant to an indemnity and reimbursement agreement for
the
10,000,000 shares loaned by MRC to the Company in April
2007.
(3)
Includes
250,000 shares of common stock of the Company issued in February
2008 by
the Company to Mr. Mills pursuant to a restricted stock agreement
in
connection with services as a director and officer of the
Company.
Item
12. Certain Relationships And Related Transactions
Mr.
Victor Weber is a Director and President of GIS and an equity owner of CWI.
Mr. Sean Chumura is an equity owner of CWI and an employee of the
Company. In March 2006, CWI licensed certain software, including IA (formerly
ImmuneApp) and StatePointPlus® to us
on a
partially exclusive basis to sell and support.
In
October 2006, NOW Solutions amended a consulting agreement with Markquest,
Inc.
Mr. Rossetti is Executive Vice-President of Government Affairs, Chairman, CEO
and Director of GIS, Director of NOW Solutions and an officer of
Markquest.
We
are in
default in paying a $215,000 promissory note collateralized by a portion of
certain revenues and owed to Victor Weber. In 2006, MRC (a company affiliated
with Mr. Richard Wade) pledged 5,000,000 common shares to secure the note.
MRC
is a corporation controlled by the W5 Family Trust. Mr. Wade, our President
and
CEO, is the trustee of the W5 Family Trust. For additional details on the
amendment to this note, please see "Notes Payable" under Note 8 in the Notes
to
Consolidated Financial Statements.
In
October 2006, we borrowed $200,000 under a promissory note, bearing interest
at
10% per annum, due in September 2007 and collateralized by a portion of
certain revenues, from Mr. Weber. The note is in default.
In
October 2006, Taladin issued to Mr. Weber a $100,000 promissory note, bearing
interest at 12% per annum and due in October 2011. The note was issued in
connection with a refinancing whereby Taladin acquired the indebtedness of
NOW
Solutions to Wamco. The note is secured by Taladin’s first lien position on the
assets of NOW Solutions. Tara Financial, SGP, and Weber share the first lien
position, senior to all other security interests in the assets of NOW Solutions.
The note is payable as follows: principal and interest payments of $1,556,
beginning on January 1, 2007 and continuing through February 1, 2008
and monthly principal and interest payments of $2,822, beginning on March1, 2008 and continuing until March 1, 2011. The $100,000 note payable by Taladin
contains provisions requiring additional principal reductions in the event
sales
by NOW Solutions exceed certain financial thresholds or if there is a judgment
in favor of the Company with respect to the pending Ross litigation. For
additional details on the Ross litigation, please see “Litigation” under Note 15
in
the
Notes to Consolidated Financial Statements.
As
incentives to make the $100,000 loan, the Company agreed to issue 1,000,000
unregistered shares of the common stock of the Company (which were booked in
2006 at a fair market value of $21,000) to Mr. Weber, and NOW Solutions agreed
to pay Mr. Weber a 0.5% royalty from its gross revenues in excess of $6.5
million, up to a cap of $100,000. The common shares of the Company have not
been
issued as the Company cannot issue shares above the authorized amount of
1,000,000,000 shares of common stock. The Company is currently investigating
its
options in order to present its shareholders, as soon as practicable, with
a
plan whereby the Company could meet all of its outstanding obligations without
exceeding its authorized shares of common stock. For
additional details on this note, please see “Notes Payable”
under
Note 10 in the Notes to Consolidated Financial Statements.
31
In
April
2007, we paid Mr. Rossetti 3,000,000 common shares (at a fair market value
of
$48,000) in connection with an agreement entered into concerning loans and
monies owed to Mr. Rossetti and Markquest. Mr. Rossetti is Executive
Vice-President of Government Affairs, Chairman, CEO and Director of GIS,
Director of NOW Solutions and an officer of Markquest, Inc.
In
March
2007, the Company borrowed $300,000 under a promissory note, bearing interest
at
12% per annum and due in September 2007, from Mr. Weber. In connection with
the
note, MRC pledged 10,000,000 shares of common stock of the Company. The note
is
in default.
In
April
2007, Luiz Valdetaro, on behalf of the Company, transferred 2,000,000 common
shares owned by him to Tara Financial in exchange for waiving the defaults
and
extending the payment terms on notes payable to Tara of $438,795, $350,560,
$955,103 and $450,000. Mr. Valdetaro is our Chief Technology Officer. We
agreed
to reimburse Mr. Valdetaro with 2,000,000 shares within one year and pay
for any
related costs. This obligation is currently owed to Mr.
Valdetaro.
In
April
2007, Mr. Valdetaro, on behalf of the Company, transferred 1,000,000 common
shares owned by him to CCS in connection with a $40,000 loan from CCS. Also
in April 2007, in connection with the transfer of shares to CCS, the Company
entered into an indemnity and reimbursement agreement to reimburse Mr. Valdetaro
with 1,000,000 shares within one year and pay for all costs associated with
the
transfer of shares to CCS. This obligation is currently owed to Mr.
Valdetaro.
In
April
2007, the Company and MRC entered into an indemnity and reimbursement agreement
for transfer and pledges of shares of common stock of the Company. Pursuant
to
the agreement, MRC loaned the Company 10,000,000 shares of common stock of
the
Company in order for the Company to meet current obligations concerning stock
the Company has been obligated to issue and deliver to various parties.
In
connection with a loan of 10,000,000 shares by MRC to the Company, we agreed
to
reimburse MRC with up to 10,000,000 shares of common stock of the Company
within
one year and pay for all costs associated with such transfer.
In
July
2007, the Company borrowed $46,586 from Stephen Rossetti with interest of
10%
per annum and due on demand. In December 2007, the Company reached an agreement
with Markquest and Stephen Rossetti related to the $113,734 note issued in
December 2006, the $46,586 loan by Mr. Rossetti in July 2007, and $36,000
in
fees owed to Markquest. The agreement canceled the $113,734 note and the
Company
issued a $213,139 promissory note to Markquest, bearing interest at 10% per
annum which incorporated all of the amounts plus accrued interest. The note
is
to be paid in monthly interest payments of accrued interest beginning in
February 2008 and monthly accrued interest and principal payments of $4,500
beginning in August 2008. Mr. Rossetti is Executive Vice-President of Government
Affairs, Chairman, CEO and Director of GIS, Director of NOW Solutions and
an
officer of Markquest. For additional details on this note, please see “Notes
Payable” under Note 8 in
the
Notes to Consolidated Financial Statements.
In
August
2007, the Company borrowed $30,400 from Victor Weber with interest of 12%
per
annum and principal and interest due on demand. Mr. Weber is the President
and a
Director of GIS and a member of CWI.
For
additional related transactions with certain parties, please see “Subsequent
Events” under Note 14 in the Notes to Consolidated Financial
Statements.
32
Item
13. Exhibits And Reports On Form 8-K
The
following documents are filed as part of this report:
(a)
Exhibits:
Exhibit
No.
Description
Location
2.1
Certificate
of Ownership and Merger Merging Scientific Fuel Technology, Inc.
into
Vertical Computer Systems, Inc.
Agreement
dated as of February 13, 2006 among Tara Financial Services, Inc., as
lender, NOW Solutions, the Company, Robert Farias, and Robert
Mokhtarian
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated April 18, 2008
Provided
herewith
31.2
Certification
of Chief
Financial OfficerPursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 18,2008
Provided
herewith
32.1
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated April18, 2008
Provided
herewith
32.2
Certification
of Chief
Financial OfficerPursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 18,2008
Provided
herewith
(b)Reports
on Form 8-K:
On
March5, 2007, the Company closed two series of transactions having the effect of
amending the sublicense agreement between the Company and its subsidiaries
and
CWI and obtaining financing from Mr. Weber to secure exclusive rights for the
Company and CWI to distribute StatePointPlus® (a software product owned by
TrueBaseline) to government agencies and the healthcare industry in the United
States and Canada and to all users in Brazil.
In
order
to obtain the exclusive rights for StatePointPlus®, Mr. Weber made payments of
$500,000 to TrueBaseline on behalf of the Company and CWI. In order to maintain
the exclusive rights, CWI and the Company must make certain additional payments
by July 31, 2008. Thereafter, the Company must make certain average monthly
minimum payments to TrueBaseline, which increase on a yearly basis, in order
to
retain the partial exclusivity rights during the term of the Sublicense
Agreement.
For
the
territory of Italy, the Company also obtained the rights to distribute IA to
all
users in the health care industry and all users in any federal, state and local
government agencies or their equivalents in Italy. In addition, the Company
acquired from CWI partial exclusivity rights for a security access management
software program that functions as an ID verification system. The Company has
the exclusive rights to distribute SAM to all users in government agencies
and
the healthcare and casino industries in the United States and Canada. In order
to retain these exclusivity rights for SAM and for IA in Italy, the Company
must
achieve minimum monthly gross revenues (for SAM and IA in Italy, as applicable),
which increase on a yearly basis during the term of the Sublicense Agreement.
In
connection with the $500,000 payment of fees by Mr. Weber to obtain the partial
exclusivity rights for StatePointPlus®, the Company issued an additional note
payable in the amount of $300,000 (the “$300,000 Note”) to Mr. Weber. In
addition, the payment terms of the $200,000 Note payable (the “$200,000 Note”)
issued on October 24, 2006 by the Company to Mr. Weber were extended for an
additional 60 days. Both the $200,000 Note and the $300,000 Note may be paid
from certain revenues derived from StatePointPlus® by CWI and the Company if and
to the extent such funds are available. Accrued interest shall be paid on a
monthly basis by the Company, or from revenues derived from StatePointPlus® if
such funds are available. To secure the principal payments and interest payments
on the $300,000 Note and interest payments on the $200,000 Note, MRC pledged
10,000,000 shares of common stock of the Company. MRC is a corporation
controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the
Company, is the trustee of the W5 Family Trust. Mr. Weber is the President
and a
Director of Government Internet Systems, Inc., a subsidiary of the Company,
and
a
member of CWI.
On
September 11, 2007, the New York Supreme Court awarded attorney's fees in the
amount of $912,464 to NOW Solutions (the wholly owned subsidiary of the Company)
in the action of Ross Systems, Inc. v. NOW Solutions, Inc. The award was made
pursuant to motions for attorneys' fees filed in August 2007 by NOW Solutions
and Ross Systems, Inc.
36
NOW
Solutions is in the process of entering the judgment in the total amount of
$2,191,946, plus statutory (simple) interest at 9% per annum from the date
the
claim accrued. (Subsequent to the filing of the foregoing 8-K, the judgment
was
entered on October 11, 2007 for a total amount of $3,151,215, which includes
interest fees through the date of the award of the judgment).
On
December 7, 2007, Weaver & Tidwell, LLP resigned as the
independent registered public accountants of the Company.
(i)
Weaver
& Tidwell’s report on the Company’s financial statements for either of
the two fiscal years ended December 31, 2006 and 2005 did not contain
an
adverse opinion or a disclaimer of opinion, and was not qualified
as to
audit scope or accounting principles. However, Weaver & Tidwell’s
report did include a paragraph regarding the Company's ability to
continue
as a going concern for either of these two fiscal
years.
(ii)
The
decision to change accountants was not recommended or approved by
the
board of directors of the Company or the audit committee of the board
of
directors of the Company, as Weaver & Tidwell resigned. The Company’s
board of directors will continue to recommend and approve the engagement
of any new accountant.
(iii)
During
the Company’s two most recent fiscal years (the years ended December 31,2006 and 2005) and subsequent interim periods (from January 1, 2007
through the date of Weaver & Tidwell’s resignation), there were no
disagreements on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures,
which
disagreements, if not resolved to Weaver & Tidwell’s satisfaction,
would have caused it to make reference to the subject matter of the
disagreements in connection with its reports. During the Company’s two
most recent fiscal years (the years ended December 31, 2006 and 2005)
and
subsequent interim periods (from January 1, 2007 through the date
of
Weaver & Tidwell’s resignation), Weaver & Tidwell did not advise
the Company of any of the matters identified in paragraph (a)(1)(iv)
of Item 304 of Regulation S-B.
On
January 16, 2008, Vertical Computer Systems, Inc. engaged Malone & Bailey,
P.C. as its principal accountant to audit its financial statements. The
Company did not consult Malone & Bailey on any matters described in
paragraph (a)(2)(i) or (ii) of Item 304 of Regulation S-B during the
Company’s two most recent fiscal years or any subsequent interim period prior to
engaging Malone & Bailey.
Also
in
January 2008, the Company relocated its corporate headquarters to 101 W. Renner
Road, Suite 300, Richardson, Texas75082. The Company and its subsidiary, NOW
Solutions, Inc., will continue to utilize the office located at 201 Main Street,
Suite 1175, Fort Worth, TX76102.
Item
14. Principal Accountant Fees and Services
Audit
Fees. The
aggregate fees billed for professional services rendered by the Company’s
principal accounting firms of Malone & Bailey, PC and Weaver and
Tidwell, L.L.P., were $99,500 and $94,850 for the audit of the Company’s annual
financial statements for 2007 and 2006, which included the reviews of the
financial statements in the Company’s Forms 10-QSB for the applicable
fiscal year.
Tax
Fees.
The
principal accounting firms of Malone and Bailey, PC and Weaver and Tidwell,
L.L.P. did not provide any tax services in 2007 and 2006. The aggregate fees
billed in the fiscal years ended 2007 and 2006 for professional services
rendered by Hartman, Leito, and Bolt, LLP for tax advice, tax planning and
tax
return preparation were $12,500 and $18,016. In addition, BDO Dunwoody LLP
in
Toronto billed $8,758 and $8,757 in Canadian dollars for tax advice, tax
planning and tax return preparation for the years ended 2007 and 2006,
respectively. Dickstein Shapiro Moran & Oshinsky LLP billed $11,955 and
$16,376 and for tax advice and tax planning for the years ended 2007 and 2006,
respectively.
All
Other Fees. Other
than the services described above, the aggregate fees billed for services
rendered by the either principal accountant was $0 and $0, respectively, for
the
fiscal years ended 2007 and 2006.
37
SIGNATURES
In
accordance with the requirements of the Exchange Act, as amended, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
In
accordance with the Exchange Act, this Report has been signed below by the
following persons or on behalf of the Registrant and in the capacities on the
dates indicated.
Report
of Independent Registered Public Accounting Firm
Board
of
Directors
Vertical
Computer Systems, Inc.
Richardson,
Texas
We
have
audited the accompanying consolidated balance sheet of Vertical Computer
Systems, Inc. as of December 31, 2007 and the related consolidated statements
of
operations, stockholders’ deficit, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Vertical Computer Systems, Inc.
as
of December 31, 2007 and the results of operations and cash flows for the year
then ended, in conformity with accounting principles generally accepted in
the
United States of America.
The
accompanying financial statements have been prepared assuming that Vertical
Computer Systems, Inc. will continue as a going concern. As discussed in Note
2
to the financial statements, Vertical Computer Systems, Inc. suffered losses
from operations and has a working capital deficiency, which raises substantial
doubt about its ability to continue as a going concern. Management’s plans
regarding those matters also are described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
We
also
have audited the adjustments described in Note 3 that were applied to restate
the 2006 financial statements to correct an error. In our opinion, such
adjustments are appropriate and have been properly applied. We were not engaged
to audit, review, or apply any procedures to the 2006 financial statements
of
Vertical Computer Systems, Inc. other than with respect to the adjustments
and,
accordingly, we do not express an opinion or any other form of assurance on
the
2006 financial statements taken as a whole.
We
have
audited, before the effects of the adjustments for the correction for the error
described in Note 3, the accompanying consolidated statements of operations,
stockholders' deficit and cash flows of Vertical Computer Systems, Inc. and
Subsidiaries for the year ended December 31, 2006 (the 2006 financial statements
before the effects of the adjustments discussed in Note 3 are not presented
herein). These consolidated financial statements are the responsibility of
the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have nor were we engaged to perform, audits of their internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In
our
opinion, except for the error described in Note 3, the consolidated financial
statements referred to above present fairly, in all material respects, the
results of their operations and cash flows of Vertical Computer Systems, Inc.
and Subsidiaries for the year ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of
America.
We
were
not engaged to audit, review, or apply any procedures to the adjustments for
the
correction of the error described in Note 3 and, accordingly, we do not express
an opinion or any other form of assurance about whether such adjustments are
appropriate and have been properly applied. Those adjustments were audited
by
Malone & Bailey, PC.
The
accompanying consolidated financial statements have been prepared assuming
the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring
significant operating losses and at December 31, 2006, the Company had negative
working capital of approximately $10.3 million, a stockholders’ deficit of $16.9
million, and had defaulted on several of its debt obligations. These conditions
raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Adjustments
to reconcile net loss to net cash provided by operating
activities:
Depreciation
and amortization
61,962
206,572
Amortization
of debt discount
96,867
—
Stock
compensation
49,707
295,809
Shares
issued for extension of debt
45,000
—
Gain
on derivatives
(51,416
)
—
Bad
debt expense
181,029
7,500
Loan
origination costs included in notes payable
11,586
—
Changes
in operating assets and liabilities:
Accounts
receivable
(292,517
)
140,399
Receivable
from officers and employees
86,010
(38,462
)
Prepaid
expense and other assets
15,853
41,710
Accounts
payable and accrued liabilities
1,375,187
1,029,560
Deferred
revenue
118,082
99,990
Net
cash provided by operating activities
131,005
54,370
Cash
flows from investing activities:
Proceeds
from sale of investment
2,760
—
Purchase
of equipment
(59,059
)
(39,765
)
Net
cash used in investing activities
(56,299
)
(39,765
)
Cash
flows from financing activities:
Payment
of notes payable
(441,892
)
(1,222,606
)
Proceeds
from issuance of notes payable
425,400
1,017,000
Net
cash used in financing activities
(16,492
)
(205,606
)
Effect
of changes in exchange rates on cash
(10,276
)
(10,882
)
Net
increase (decrease) in cash and cash equivalents,
47,938
(201,882
)
Cash
and cash equivalents,beginning
of period
83,482
285,366
Cash
and cash equivalents, end of period
$
131,420
$
83,484
See
accompanying notes to consolidated financial statements
F-8
VERTICAL
COMPUTER SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1. Organization, Basis of Presentation and Significant Accounting Policies
Nature
of Business
Vertical
Computer Systems, Inc. was incorporated in Delaware in March 1992. The
Company is a multinational provider of administrative software services,
Internet core technologies, and derivative software application products through
its distribution network. The Company’s business model combines complementary,
integrated software products, internet core technologies, and a multinational
distribution system of partners, in order to create a distribution matrix that
is capable of penetrating multiple sectors through cross selling its products
and services. The Company is operating one business segment.
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and its
wholly subsidiaries, EnFacet, Inc. (“ENF”),Globalfare.com,
Inc. (“GFI”),
Pointmail.com, Inc. (“PMI”),
Vertical Internet Solutions (“VIS”),
and
Vertical Healthcare Solutions (“VHS”),
all
of which are inactive; NOW Solutions, Inc. (“NOW
Solutions”);
OptVision Research, Inc. (“OVR”),
which
is a newly established entity with minor activities; Taladin, Inc.
(“Taladin”),
a
newly established entity with minor activities; and Government Internet Systems,
Inc. (“GIS”),
a
entity with minor activities. To date, the Company has generated revenues
primarily from software license, consulting fees and maintenance agreements
from
NOW Solutions, its 100% owned subsidiary.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Equity investments in which we exercise significant influence,
but
do not control and are not the primary beneficiary, are accounted for using
the
equity method of accounting. Investments in which we do not exercise significant
influence over the investee are accounted for using the cost method of
accounting. All intercompany accounts and transactions have been
eliminated.
Cash
and Cash Equivalents
Cash
equivalents are highly liquid investments with an original maturity of three
months or less.
Revenue
Recognition
Service
revenue generated from professional consulting and training services are
recognized as the services are performed. Maintenance revenue, including
revenues bundled with original software product license revenues, are deferred
and recognized over the related contract period, generally twelve months. The
Company’s revenue recognition policies are designed to comply with American
Institute of Certified Public Accountants Statement of Position 97-2, “Software
Revenue Recognition” and with Emerging Issues Task Force No 00-21, “Revenue
Arrangement with Multiple Deliverables.”
Amounts
billed or collected in advance of the period in which the related product or
service qualifies for revenue recognition are recorded as deferred revenue
on
the Consolidated Balance Sheets.
In
accordance with SEC Staff Accounting Bulletin No. 104 “Revenue Recognition”, the
Company recognizes revenue from license of computer software up-front, provided
that a non-cancelable license agreement has been signed, the software and
related documentation have been shipped, there are no material uncertainties
regarding customer acceptance, collection of resulting receivable is deemed
probable, and no significant other vendor obligation exists.
Other
revenue consists of hosting fees, reimbursement for out of pocket expenses
in
accordance with EITF No. 01-14 and fees related to user conferences.
To
determine the fair value of our embedded derivatives, management evaluates
assumptions regarding the probability of certain future events. Other factors
used to determine fair value include our period end stock price, historical
stock volatility, risk free interest rate and derivative term. The fair value
recorded for the derivative liability varies from period to period. This
variability may result in the actual derivative liability for a period either
above or below the estimates recorded on our consolidated financial statements,
resulting in significant fluctuations in other income (expense) because of
the
corresponding non-cash gain or loss recorded.
Concentration
of Credit Risk
The
Company maintains its cash in bank deposit accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any such losses in
these accounts. Substantially all of our revenue was derived from recurring
maintenance fees related to our payroll processing software.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is computed primarily utilizing
the straight-line method over the estimated economic life of three to five
years. Maintenance, repairs and minor renewals are charged directly to expenses
as incurred. Additions and betterment to property and equipment are capitalized.
When assets are disposed of, the related cost and accumulated depreciation
thereon are removed from the accounts and any resulting gain or loss is included
in the statement of operations.
Impairment
of Long-Lived Assets
Effective
January 1, 2002, the Company began applying the provisions of Statement of
Financial Accounting Standard No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” SFAS No. 144 requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable through
the
estimated undiscounted cash flows expected to result from the use and eventual
disposition of the assets. Whenever any such impairment exists, an impairment
loss will be recognized for the amount by which the carrying value exceeds
the
fair value. During 2007 and 2006, there was no impairment of long-lived assets
due to the minimal value of such assets.
Stock-based
Compensation
Effective
January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective
method, which requires measurement of compensation cost for all stock-based
awards at fair value on date of grant and recognition of compensation over
the
service period for awards expected to vest. The fair value of restricted stock
and restricted stock units is determined based on the number of shares granted
and the quoted price of our common stock, and the fair value of stock options
is
determined using the Black-Scholes valuation model, which is consistent with
our
valuation techniques previously utilized for options in footnote disclosures
required under SFAS 123, Accounting for Stock Based Compensation, as amended
by
SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure.
The estimation of stock awards that will ultimately vest requires judgment,
and
to the extent actual results or updated estimates differ from the Company’s
current estimates, such amounts will be recorded as a cumulative adjustment
in
the period estimates are revised.
Because
the fair value recognition provisions of SFAS No. 123, Stock-Based
Compensation, and SFAS No. 123(R) were materially consistent under the
Company’s equity plans, the adoption of SFAS No. 123(R) did not have a
significant impact on the Company’s financial position or the Company’s results
of operations.
F-10
VERTICAL
COMPUTER SYSTEMS, INC.
Allowance
for Doubtful Accounts
We
establish an allowance for bad debts through a review of several factors
including historical collection experience, current aging status of the customer
accounts, and financial condition of our customers. We do not generally require
collateral for our accounts receivable. Our allowance for doubtful accounts
was
$349,009 as of December 31, 2007.
Included
in our allowance for doubtful accounts, we have fully reserved for a $110,085
receivable related to an amount due from Ross (see Note 13).
Income
Taxes
The
Company provides for income taxes in accordance with Statements of Financial
Accounting Standards No. 109, “Accounting for Income Taxes.” SFAS 109
requires a company to use the asset and liability method of accounting for
income taxes.
Under
the
asset and liability method, deferred income taxes are recognized for the tax
consequences of “temporary differences” by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. A
valuation allowance is provided when management cannot determine whether it
is
more likely than not the deferred tax asset will be realized. Under SFAS 109,
the effect on deferred income taxes of a change in tax rates is recognized
in
income in the period that includes the enactment date.
On
July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes—an Interpretation of FASB Statement 109.” FIN 48
prescribes how the Company should recognize, measure and present in the
Company’s financial statements uncertain tax positions that have been taken or
are expected to be taken in a tax return. Pursuant to FIN 48, the Company can
recognize a tax benefit only if it is “more likely than not” that a particular
tax position will be sustained upon examination or audit. To the extent the
“more likely than not” standard has been satisfied, the benefit associated with
a tax position is measured as the largest amount that is greater than 50% likely
of being realized upon settlement. The Company adopted FIN 48 on January 1,2007. The adoption of FIN 48 did not require any restatement of the Company’s
financial statements.
Earnings
Per Share
Statement
of Financial Accounting Standards FASB No. 128, “Earnings per Share”, which
replaces the calculation of primary and fully diluted earnings (loss) per share
with basic and diluted earnings (loss) per share, is used to calculate earnings
per share. Basic earnings (loss) per share includes no dilution and is computed
by dividing income (loss) available to common stockholders by the weighted
average number of shares outstanding during the period. Diluted earnings (loss)
per share reflect the potential dilution of securities that could share in
the
earnings of an entity, similar to fully diluted earnings (loss) per share.
As of
December 31, 2007, all outstanding convertible debts and warrants and options
outstanding were excluded in the calculation of diluted loss per share because
they were anti-dilutive.
Fair
Value of Financial Instruments
For
certain of the Company’s instruments, including cash and cash equivalents,
accounts receivable and accrued expenses, the carrying amounts approximate
fair
value due to the short maturity of these instruments. The carrying value of
the
Company’s long-term debt approximates its fair value based on the quoted market
prices for the same or similar issues or the current rates offered to the
Company for debt of the same remaining maturities. The fair value of the note
payable to stockholder cannot be estimated due to its related party nature.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
financial statements and the reported amounts of revenue and expenses during
the
reporting period. Among the more significant estimates included in these
financial statements are the estimated allowance for doubtful accounts
receivable, valuation allowance for deferred tax assets, impairment of
long-lived assets and intangible and the valuation of warrants and restricted
stock grants. Actual results could materially differ from those estimates.
F-11
VERTICAL
COMPUTER SYSTEMS, INC.
Cash
Reimbursements
The
Company records reimbursement by its customers for out-of-pocket expense as
part
of consulting and other services revenue in accordance with the Emerging Issues
Task Force Issue No.
01-14“Income
Statement Characterization of Reimbursements Received for Out of Pocket Expense
Incurred.”
Reclassifications
Certain
reclassifications have been made to the prior periods to conform to the current
period presentation.
Note
2. Going Concern Uncertainty
The
accompanying consolidated financial statements for 2007 and 2006 have been
prepared assuming that the Company will continue as a going concern which
contemplates the realization of assets and the satisfaction of liabilities
in
the normal course of business.
The
carrying amounts of assets and liabilities presented in the financial statements
do not purport to represent realizable or settlement values. The Company has
suffered significant recurring operating losses, used substantial funds in
its
operations, and needs to raise additional funds to accomplish its objectives.
Negative
stockholders’ equity at December 31, 2007 was $15.2 million. Additionally,
at December 31, 2007, the Company had negative working capital of approximately
$13.1 million (although it includes deferred revenue of approximately $2.8
million) and has defaulted on several of its debt obligations. These conditions
raise substantial doubt about the Company’s ability to continue as a going
concern.
Management
of the Company is continuing its efforts to attempt to secure funds through
equity and/or debt instruments for its operations, expansion and possible
acquisitions, mergers, joint ventures, and/or other business combinations.
The
Company will require additional funds for its operations and to pay down its
liabilities, as well as finance its expansion plans consistent with the
Company’s anticipated changes in operations and infrastructure. The consolidated
financial statements contain no adjustment for the outcome of this
uncertainty.
Note
3. Restatement
During
the preparation process for our annual report on Form 10-KSB for 2007, we
concluded that the Company dividends on our cumulative preferred shares were
never officially declared and, as a result, should not have been recorded as
a
liability in our previous balance sheets. The impact on each balance sheet
was
approximately $600,000 per year. The schedule below accurately reflects the
restated balance sheet as of December 31, 2006. Under FAS No. 128, earnings
per
share available to common shareholders is adjusted to reflect cumulative
preferred stock dividends. As a result, there is no restatement related to
previously reported income statements.
Mr.
Victor Weber is a Director and President of GIS and an equity owner of CWI.
Mr.
Sean Chumura is an equity owner of CWI and an employee of the Company. In March
2006, CWI licensed certain software, including IA (formerly ImmuneApp) and
StatePointPlus® to us on a partially exclusive basis to sell and support.
In
October 2006, NOW Solutions amended a consulting agreement with Markquest,
Inc.
Mr. Rossetti is Executive Vice-President of Government Affairs, Chairman, CEO
and Director of GIS, Director of NOW Solutions and an officer of Markquest.
We
are in
default in paying a $215,000 promissory note collateralized by a portion of
certain revenues and owed to Victor Weber. In 2006, MRC (a company affiliated
with Mr. Richard Wade) pledged 5,000,000 common shares to secure the note.
MRC
is a corporation controlled by the W5 Family Trust. Mr. Wade, our President
and
CEO, is the trustee of the W5 Family Trust. For
additional details on the amendment to this note, please see “Notes Payable”
under Note 8.
In
October 2006, we borrowed $200,000 under a promissory note, bearing interest
at
10% per annum, due in September 2007 and collateralized by a portion of certain
revenues, from Mr. Weber.
The
note
is in default.
In
October 2006, Taladin issued to Mr. Weber a $100,000 promissory note, bearing
interest at 12% per annum and due in October 2011. The note was issued in
connection with a refinancing whereby Taladin acquired the indebtedness of
NOW
Solutions to Wamco. The note is secured by Taladin’s first lien position on the
assets of NOW Solutions. Tara Financial, SGP, and Weber share the first lien
position, senior to all other security interests in the assets of NOW Solutions.
The note is payable as follows: principal and interest payments of $1,556,
beginning on January 1, 2007 and continuing through February 1, 2008 and monthly
principal and interest payments of $2,822, beginning on March 1, 2008 and
continuing until March 1, 2011. The $100,000 note payable by Taladin contains
provisions requiring additional principal reductions in the event sales by
NOW
Solutions exceed certain financial thresholds or if there is a judgment in
favor
of the Company with respect to the pending Ross litigation. For additional
details on the Ross litigation, please see “Litigation” under Note 13
in
the
Notes to Consolidated Financial Statements.
As
incentives to make the $100,000 loan, the Company agreed to issue 1,000,000
unregistered shares of the common stock of the Company (which was recorded
as a
discount to the debt) to Mr. Weber, and NOW Solutions agreed to pay Mr. Weber
a
0.5% royalty from its gross revenues in excess of $6.5 million, up to a cap
of
$100,000. The common shares of the Company have not been issued as the Company
cannot issue shares above the authorized amount of 1,000,000,000 shares of
common stock. For
additional details on this note, please see “Notes Payable”
under
Note 8.
In
April
2007, we issued Mr. Rossetti 3,000,000 common shares (at a fair market value
of
$48,000) in connection with an agreement entered into concerning loans and
monies owed to Mr. Rossetti and Markquest. Mr. Rossetti is Executive
Vice-President of Government Affairs, Chairman, CEO and Director of GIS,
Director of NOW Solutions and an officer of Markquest, Inc.
In
March
2007, the Company borrowed $300,000 under a promissory note, bearing interest
at
12% per annum and due in September 2007, from Mr. Weber. In connection with
the
note, MRC pledged 10,000,000 shares of common stock of the Company. The note
is
in default.
In
April
2007, Luiz Valdetaro, on behalf of the Company, transferred 2,000,000 common
shares owned by him to Tara Financial in exchange for waiving the defaults
and
extending the payment terms on notes payable to Tara of $438,795, $350,560,
$955,103 and $450,000. Mr. Valdetaro is our Chief Technology Officer. We agreed
to reimburse Mr. Valdetaro with 2,000,000 shares within one year and pay for
any
related costs. This obligation is currently owed to Mr. Valdetaro.
In
April
2007, Mr. Valdetaro, on behalf of the Company, transferred 1,000,000 common
shares owned by him to CCS in connection with a $40,000 loan from CCS. Also
in April 2007, in connection with the transfer of shares to CCS, the Company
entered into an indemnity and reimbursement agreement to reimburse Mr. Valdetaro
with 1,000,000 shares within one year and pay for all costs associated with
the
transfer of shares to CCS. This obligation is currently owed to Mr.
Valdetaro.
In
April
2007, the Company and MRC entered into an indemnity and reimbursement agreement
for transfer and pledges of shares of common stock of the Company. Pursuant
to
the agreement, MRC loaned the Company 10,000,000 shares of common stock of
the
Company in order for the Company to meet current obligations concerning stock
the Company has been obligated to issue and deliver to various
parties.
In
connection with a loan of 10,000,000 shares by MRC to the Company, we agreed
to
reimburse MRC with up to 10,000,000 shares of common stock of the Company within
one year and pay for all costs associated with such transfer.
F-13
VERTICAL
COMPUTER SYSTEMS, INC.
In
July
2007, the Company borrowed $46,586 from Stephen Rossetti with interest of 10%
per annum and due on demand. In December 2007, the Company reached an agreement
with Markquest and Stephen Rossetti related to the $113,734 note issued in
December 2006, the $46,586 loan by Mr. Rossetti in July 2007, and $36,000 in
fees owed to Markquest. The agreement canceled the $113,734 note and the Company
issued a $213,139 promissory note to Markquest, bearing interest at 10% per
annum which incorporated all of the amounts plus accrued interest. The note
is
to be paid in monthly interest payments of accrued interest beginning in
February 2008 and monthly accrued interest and principal payments of $4,500
beginning in August 2008. Mr. Rossetti is Executive Vice-President of Government
Affairs, Chairman, CEO and Director of GIS, Director of NOW Solutions and an
officer of Markquest. For additional details on this note, please see “Notes
Payable” under Note 8.
In
August
2007, the Company borrowed $30,400 from Victor Weber with interest of 12% per
annum and principal and interest due on demand. Mr. Weber is the President
and a
Director of GIS and a member of CWI.
For
additional related party transactions subsequent to December 31, 2007,
please
see “Subsequent Events” under Note 14.
Note
5. Derivative liabilities
During
2007, two officers of the Company loaned a total of 13 million shares of
unrestricted stock to the Company (see Note 4). This stock was used to satisfy
certain obligations of the Company. In connection with the loans, the Company
signed an agreement to replace the shares within one year. These loans were
evaluated under FAS 133 and EITF 00-19 and were determined under EITF 00-19
to
have characteristics of a liability and therefore derivative liabilities under
FAS 133. Each reporting period, this derivative liability is marked-to-market
with the non-cash gain or loss recorded in the period as a gain or loss on
derivatives. At December 31, 2007, the aggregate derivative liability was
$169,000.
During
2002 and 2003, the Company issued convertible debentures with a conversion
features based on the market value of the stock at the date of conversion.
The
conversion features were evaluated under FAS 133 and EITF 00-19 and were
determined under EITF 00-19 to have characteristics of a liability and therefore
a derivative liability under FAS 133. The conversion prices were variable which
caused the Company to conclude it was possible at some point in the future
to
not have available the number of common shares required to share settle all
common stock equivalent instruments. This caused warrants not subject to FAS
123
and all other convertible debt to also be classified as derivative liabilities
under FAS 133. Each reporting period, this derivative liability is
marked-to-market with the non-cash gain or loss recorded in the period as a
gain
or loss on derivatives. At December 31, 2007, the aggregate derivative liability
was $122,584.
The
valuation of our embedded derivatives and warrant derivatives are determined
primarily by the Black-Scholes option pricing model and the Lattice
model.
Note
6. Property and Equipment
Property
and equipment consist of the following:
2007
Equipment
(3-5 year life)
$
923,060
Leasehold
improvements (5 year life)
87,712
Furniture
and fixtures (3-5 year life)
40,803
Total
1,051,575
Accumulated
depreciation
(970,867
)
$
80,708
Depreciation
expense for 2007 and 2006 was $61,962 and $52,856, respectively.
Note
7. Accounts Payable and Accrued Expenses
Accounts
payable and accrued liabilities consist of the following:
F-14
VERTICAL
COMPUTER SYSTEMS, INC.
2007
Accounts
payable
$
2,441,543
Accrued
payroll
2,179,853
Accrued
payroll tax and penalties
769,374
Accrued
Interest
1,294,281
Accrued
liabilities - Other
919,937
$
7,604,988
Accrued
payroll primarily consists of deferred compensation for several executives
who
agreed to defer a portion of their salaries due to cash flow constraints.
Accrued liabilities - other primarily consists of accrued sales and other taxes,
and other accrued expenses. Accrued payroll tax and penalties related to unpaid
payroll taxes, interest and penalties for prior years.
Note
8. Notes Payable and Convertible Debts
December
31
2007
Note
payable to Ross,
unsecured and bearing interest at 10%. In September 2007, the court
awarded a judgment against Ross that exceeds this amount. Refer to
“Litigation” under Note 13.
$
750,000
Note
payable of $31,859 to a third-party lender, unsecured, bearing interest
at
10%, principal and interest due on demand.
31,859
Notes
payable of $27,000 to a third-party, unsecured and non-interest
bearing.
27,000
Note
payable bearing interest at 13% per annum and unsecured.
The note is in default.
161,504
Note
payable of $50,000 to a third-party lender, bearing interest at 12%
per
annum. The note was in default. After December 31, 2007, MRC agreed
to
pledge 3,000,000 common shares to secure the note. Please see “Subsequent
Events” under Note 14 for subsequent events concerning this
note.
35,568
Note
payable of $50,000 to a third-party lender, bearing interest at 12%
per
annum. The note has been in default since April 1, 2003.
50,000
Note
payable of $25,000 to a third-party lender, bearing interest at 12%
per
annum, secured by 10,000,000 common shares owned by MRC due in December
2002. MRC is a corporation controlled by the W5 Family Trust. Mr.
Wade,
the President and CEO of the Company, is the trustee of the W5 Family
Trust. The note has been in default since April 1, 2003.
12,583
Note
payable of $215,000 owed Victor Weber. The note bears interest at
12%. In
connection with the note, MRC pledged 5,000,000 common shares. MRC
is a
corporation controlled by the W5 Family Trust. Mr. Wade, the President
and
CEO of the Company, is the trustee of the W5 Family Trust. Mr. Weber
is
the President and a Director of GIS, a subsidiary of the Company,
and
a member of CWI.
The note is in default.
215,000
Note
payable of $25,000, bearing interest at 10% per annum, dated April
2003.
The note is in default.
25,000
Note
payable of $17,500, bearing
interest at 10%.
This
note is in default.
11,000
Note
payable of $17,500, bearing interest at 10%. This note is in default.
11,000
F-15
VERTICAL
COMPUTER SYSTEMS, INC.
Note
payable of $10,000 bearing interest at 8% per annum, unsecured, and
due on
June 1, 2002. This note is in default.
10,000
Note
payable of $10,365 dated January 17, 2003 bearing
interest at 10% per annum, due on December 5, 2003. This note is
in
default.
7,365
Note
payable of $23,030 dated March 21, 2003 bearing
interest at 12% per annum, due on April 21, 2004. The note is in
default.
23,030
Note
payable of $60,000 dated November 5, 2003, bearing interest at 10%
per
annum, due on November 5, 2004. The note is secured by 4,000,000
common
shares owned by MRC. MRC is a corporation controlled by the W5 Family
Trust. Mr. Wade, the President and CEO of the Company, is the trustee
of
the W5 Family Trust. This note was in default. Please
see “Subsequent Events” under Note 14 for subsequent events concerning
this note.
60,006
Note
payable of $40,000 dated November 19, 2003, bearing interest at 10%
per
annum, and due on November 19, 2004. The note is secured by 3,000,000
common shares of the Company owned by MRC. MRC is a corporation controlled
by the W5 Family Trust. Mr. Wade, the President and CEO of the Company,
is
the trustee of the W5 Family Trust. This note was in default. Please
see “Subsequent Events” under Note 14 for subsequent events concerning
this note.
40,000
Note
payable of $5,000 to Mr. James Salz, unsecured, bearing interest
at 10%
per annum and due on demand. Mr. Salz is the Company’s corporate
counsel.
5,000
Note
payable of $10,000 to Mr. James Salz, unsecured, bearing interest
at 10%
per annum. Mr. Salz is the Company’s corporate counsel. The note is in
default.
10,000
Note
payable originally for $600,000 issued to Arglen Acquisitions,
LLC.
In August 2005, the Company agreed to pay Arglen a total of $713,489,
which includes unpaid interest and various fees. Pursuant to the
terms of
the Payout Agreement, the Company is currently obligated to make
monthly
payments on the amount specified above of $25,000 or 10% of the Company's
new sales, whichever is greater, until the remainder of the $713,489
is
paid. For
additional details, see Note 13, “Litigation”.
148,489
Note
payable of $75,000 bearing interest at 6% to the law firm Parker
Mills
dated October 2005. The note was due January 31, 2008 and shall be
paid in
equal monthly installments of $3,125, beginning February 1, 2006
for a
period of 24 months. Bill Mills is a company director and also a
partner
of Parker Mills. After December 31, 2007, MRC agreed to pledge 2,000,000
common shares to secure the note. The note was in default. Please
see
“Subsequent Events” under Note 14 for subsequent events concerning this
note.
58,318
Note
payable of $992,723 to Wolman Blair, PLLC dated November 30, 2005.
The
note is secured with the assets of NOW Solutions and bears a default
interest rate of 18%. The note is payable as follows: equal monthly
installments of $40,000, each, commencing March 1, 2006, and continuing
on
the first day of each month thereafter, until March 1, 2008, upon
which
date all outstanding principal and interest shall be due. In April
2007,
the Company prevailed in a lawsuit against Ross and the Company is
entitled to collect attorney fees from Ross, which will be applied
to a
portion of this note. For more details on legal proceedings between
the
Company, NOW Solutions and Ross, please refer to “Litigation” under Note
13. The note is in default.
992,723
F-16
VERTICAL
COMPUTER SYSTEMS, INC.
Note
payable of $450,000 to Tara Financial, dated February 13, 2006. The
note
bears interest at 12% per annum. The note is currently payable as
follows:
(a) unpaid principal balance and interest payments of $7,000, beginning
on
January 1, 2007 and continuing through February 1, 2008; and (b)
monthly
payments increased to $12,700, beginning on March 1, 2008 and continuing
until February 1, 2011. The $450,000 note payable by Taladin contains
provisions requiring additional principal reductions in the event
sales by
NOW Solutions exceed certain financial thresholds or from net proceeds
collected from any judgment, settlement, or decree in favor of the
Company
with respect to the pending Ross litigation. For additional details
on the
Ross litigation, please see “Litigation” under Note 13. The $450,000 note
also contains a conversion option pursuant to which all or any portion
of
the unpaid principal, plus interest, may be converted at the option
of
Tara Financial, into shares of common stock of Taladin equal to a
maximum
of 2.5% of Taladin’s outstanding common stock at the time of
conversion.
384,914
Note
payable of $150,000 owed to SGP, dated February 13, 2006. The note
bears
interest at 12% per annum. The note is payable as follows: (a) unpaid
principal balance and interest payments of $2,334, beginning on January1,2007 and continuing through February 1, 2008; and (b) monthly payments
increased $4,233, beginning on March 1, 2008 and continuing until
March 1,2011. The $150,000 note payable by Taladin contains provisions requiring
additional principal reductions in the event sales by NOW Solutions
exceed
certain financial thresholds or from net proceeds collected from
any
judgment, settlement, or decree in favor of the Company with respect
to
the pending Ross litigation. For additional details on the Ross
litigation, please see “Litigation” under Note 13. The note is in
default.
121,062
`
Note
payable of $438,795 to Tara Financial, dated February 13, 2006. The
note
bears interest at 12% per annum. The note is payable as follows:
unpaid
principal balance and interest payments of $5,763, beginning on January1,2007 and continuing until February 1, 2018. The new note is secured
by an
interest in certain technology developed by Adhesive Software and
owned by
the Company, commonly known as “SiteFlash™”.
404,360
Note
payable of $359,560 to Tara Financial, dated February 13, 2006. The
note
bears interest at 12% per annum And is payable as follows: unpaid
principal balance and interest of $4,723, beginning on January 1,2007 and
continuing until February 1, 2018 (the maturity date). The note is
secured
by all of the assets of NOW Solutions. This note payable also contains
provisions requiring additional principal reductions in the event
sales by
NOW Solutions exceed certain financial thresholds.
335,666
Note
payable of $955,103 to Tara Financial, dated February 13, 2006. The
note
bears interest at 12% per annum, due in 2018 and payable in monthly
installments. of $12,544, beginning on January 1, 2007, and continuing
until February 1, 2018 (the maturity date). The note is secured by
all of
the assets of NOW Solutions. This note payable also contains provisions
requiring additional principal reductions in the event sales by NOW
Solutions exceed certain financial thresholds.
890,543
Note
payable of $51,000 dated September 2006 to a third party lender,
bearing
interest at 10% per annum. In connection with the loan, the Company
issued
1,000,000 common shares (at a fair-market value of $18,000). The
note is
in default.
28,357
Note
payable of $200,000 issued to Mr. Weber, dated October 24, 2006.
The note
bears interest at 12% per annum. The Company shall pay accrued interest
from the previous month on a monthly basis and make minimum payments
on
the balance of the note as follows: (a) $60,000 is due 6 months from
the
date of the note, (b) $30,000 is due 7 months from the date of the
note,
(c) $30,000 is due 8 months from the date of the note; (d) $30,000
is due
9 months from the date of the note; and (e) all outstanding principal
and
interest then outstanding is due 11 months from the date of the note.
In
March 2007, the payment dates for this note were extended by sixty
(60)
days. The note may be paid from gross revenues derived from
StatePointPlus® after the payment of license and exclusivity fees to
TrueBaseline for StatePoinPlus® to the extent such funds become available.
In connection with the note, MRC pledged 5,000,000 shares of common
stock
of the Company to secure the note to the Company. In addition, to
secure
the principal payments and interest payments on a $300,000 note issued
to
Mr. Weber and the interest payments on this note payable, MRC pledged
10,000,000 shares of common stock of the Company. MRC is a corporation
controlled by the W5 Family Trust. Mr. Wade, the President and CEO
of the
Company, is the trustee of the W5 Family Trust. Mr. Weber is the
President
and a Director of GIS and a member of CWI. The note is in
default.
200,000
F-17
VERTICAL
COMPUTER SYSTEMS, INC.
Note
payable of $100,000 issued by Taladin to Mr. Weber, dated October27,2006. The note bears interest at 12% per annum. The note is secured
by
Taladin’s first lien position on the assets of NOW Solutions. Tara
Financial, SGP and Mr. Weber share the first lien position, senior
to all
other security interests in the assets of NOW Solutions. The $100,000
note
payable is currently payable as follows: (a) unpaid principal balance
and
interest payments of $1,556, beginning on January 1, 2007 and continuing
through February 1, 2008; and (b) monthly payments increased $2,822,
beginning on March 1, 2008 and continuing until March 1, 2011 (the
“Maturity
Date”).
The $100,000 note payable by Taladin contains provisions requiring
additional principal reductions in the event sales by NOW Solutions
exceed
certain financial thresholds or from net proceeds collected from
any
judgment, settlement, or decree in favor of the Company with respect
to
the pending Ross litigation. For additional details on the Ross
litigation, please see “Litigation” under Note 13. Mr. Weber is the
President and a Director of GIS and a member of CWI.
76,426
Note
payable of $300,000 due to Mr. Weber, bearing interest at 12% per
annum
and due in March 2008. The note may be paid from gross revenues derived
from StatePointPlus® after the payment of license and exclusivity fees to
TrueBaseline for StatePointPlus® to the extent such funds become
available. In addition, to secure the principal payments and interest
payments on this note and the interest payments on the $200,000 note
issued to Mr. Weber, MRC pledged 10,000,000 shares of common stock
of the
Company. MRC is a corporation controlled by the W5 Family Trust.
Mr. Wade,
the President and CEO of the Company, is the trustee of the W5 Family
Trust. Mr. Weber is the President and a Director of GIS and a member
of
CWI.
300,000
Note
payable of $40,000 due to CCS, bearing interest at 12% per annum,
and due
in July 2007. The Company or an individual acting on the Company’s behalf
is also obligated to arrange for a pledge of 1,000,000 shares of
common
stock of the Company to secure the loan. The note is in default.
Please
see “Subsequent Events” under Note 14 for subsequent events concerning
this note.
40,000
Note
payable, dated August 2007, for $20,000 to a third party lender,
unsecured, bearing interest at 12% per annum, due on
demand.
20,000
Note
payable, dated August 2007, for $30,400 to Victor Weber, bearing
interest
at 12% per annum, due on demand. . Mr. Weber is the President and
a
Director of GIS and a member of CWI.
30,400
Note
payable, dated December 2008, for $213,139, issued to Markquest,
bearing
interest at 10% per annum, payable with accrued interest beginning
in
February 2008 and monthly accrued interest and principal payments
of
$4,500 beginning in August 2008. This note was consists of amounts
due
under a $113,734 note issued to Stephen Rossetti in December 2006,
which
was cancelled, and $46,586 owed under a loan by Mr. Rossetti in July
2007
and $36,000 in fees owed to Markquest, plus accrued interest. Mr.
Rossetti
is Executive Vice-President of Government Affairs, Chairman, CEO
and
Director of GIS, Director of NOW Solutions and an officer of
Markquest.
213,139
Total
notes payable
5,730,312
Current
maturities
(3,508,593
)
Long-Term
portion of notes payable
$
2,221,719
F-18
VERTICAL
COMPUTER SYSTEMS, INC.
Future
minimum payments for the next five years are as follows:
Year
Amount
2008
$
3,508,593
2009
309,579
2010
346,667
2011
273,887
2012
186,597
2013+
1,104,989
Total
notes payable
$
5,730,312
Convertible
Debentures
Convertible
debentures dated March 29, 2002, bearing interest at 5%, convertible
into
shares of the Company’s common stock at the debt holder’s choice of either
120% of the closing bid price on the date of agreement or 80% of
the
lowest closing bid price five days prior to the conversion. The debenture
is convertible at the option of the holder at any time after purchase.
Principal and interest were due at maturity on March 28, 2004. This
debenture was originally issued in the principal amount of
$100,000.
$
10,000
In
December 2003, the Company issued a debenture in the amount of $30,000
to
a third party. The Company received net proceeds of $26,000 for the
debenture. The debt accrues interest at 5% per annum and was due
December
2005. The holder may convert the debenture into shares of common
stock at
100% of the closing price for the preceding trading day after the
Company
receives notice of conversion.
30,000
Total
convertible debentures
40,000
Current
maturities
40,000
Long-term
portion of convertible debentures
$
—
Note
9. Income Taxes
We
account for income taxes in accordance with Statement of Financial Standards
No.
109, “Accounting for Income Taxes,” which uses the asset and liability method of
accounting for income taxes. Deferred income taxes are recognized for the
tax
consequences of “temporary differences” by applying enacted statutory tax rate
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities and
result
primarily form differences in methods used to amortize intangible assets.
A
valuation allowance is provided when management cannot determine whether
it is
more likely than not that the deferred tax asset will be realized. The effect
on
deferred income taxes of the change in tax rates is recognized in income
in the
period that includes the enactment date. The difference between the statutory
tax rate and the effective tax rate is the valuation allowance.
Temporary
difference between the financial statement carrying amount and tax bases of
assets and liabilities that give rise to deferred tax assets relate to the
following:
At
December 31, 2007, the Company had available net operating loss carry-forwards
of approximately $21.6 million for federal tax purposes and $15.6 million for
state tax purposes, which expire in varying amounts through 2027 and 2012,
respectively.
Note
10. Stockholders’ Equity
2006
Common
Stock
In
February 2006, the Company issued 5,000,000 common shares (at a fair market
value of $45,000) as partial incentive for Tara Financial to make the $450,000
loan and to refinance approximately $1.75 million of existing debt. For details
on the note payable issued in connection with the loan, please see “Notes
Payable” under Note 8.
In
February 2006, the Company issued 3,000,000 common shares (at a fair market
value of $27,000)as
partial incentive for SGP to make the $150,000 loan. For details on the note
payable issued in connection with the loan, please see “Notes Payable” under
Note 8.
In
May
2006, a third party converted 1,500 shares of Series A, 4% Convertible
Cumulative Preferred Stock into 750,000 shares of common stock.
In
July
2006, the Company issued a total of 500,000 common shares to two third party
lenders pursuant to their exercise of warrants to purchase the shares for a
total of $3,750, which was offset against prior monies owed to each
lender.
In
July
2006, a director of GIS exercised warrants to purchase 1,250,000 common shares
for $12,500, which was offset against prior monies owed to the director. These
shares were issued in 2007.
In
September 2006, the Company issued 1,000,000 common shares (at a fair-market
value of $18,000) to a third party lender in connection with a $50,000 loan
made
at that time.
In
October 2006, the Company agreed to issue 1,000,000 common shares (at a fair
market value of $21,000) to Mr. Weber in connection with a $100,000 loan. These
shares have not been issued.
In
2007,
the Company issued 3,000,000 common shares to Mr. Rossetti for refinancing
an
outstanding $66,000 note payable and other obligations for a new loan of
$113,734.The
fair
market value of the shares to be issued is $48,000.
During
2006, a $190,000 debenture was converted into 24,298,094 common
shares.
During
2006, $40,800 in liquidated damages claimed by Cornell in connection with a
$200,000 debenture issued by the Company to Cornell in April 2003 was converted
into 4,387,095 common shares.
During
2006, the Company agreed to issue 12,525,000 common shares to employees and
consultants for services. The stock will vest over one to three years. Of these
shares, all shares were issued during 2006 except for 200,000 issued in 2007.
During
2006, 3,866,666 common shares held by employees were cancelled.
During
2006, 5,449,998 common shares issued to employees and consultants under vesting
agreements in 2005 and 2006 vested in 2006.
Preferred
Stock
Since
inception, the Company has paid no cash dividends to the stockholders of Series
A and Series C preferred stock.
During
2006, one employee resigned. Consequently, NOW Solutions cancelled 1.5%
ownership interest of “phantom stock”.
During
2006, a third party converted 1,500 shares of Series A, 4% Convertible
Cumulative Preferred Stock into 750,000 common shares.
F-20
VERTICAL
COMPUTER SYSTEMS, INC.
2007
Common
Stock
In
April
2007, Luiz Valdetaro, on behalf of the Company, transferred 2,000,000
unrestricted shares of common stock of the Company owned by Mr. Valdetaro to
an
officer of Tara Financial in exchange for waiving the defaults and extending
the
payment terms on several notes payable in the amounts of $438,795, $350,560,
$955,103 and $450,000 issued to Tara Financial by the Company, NOW Solutions,
and Taladin in February 2006. Also in April 2007, in connection with the
transfer, the Company entered into an indemnity and reimbursement agreement
to
reimburse Mr. Valdetaro with 2,000,000 shares within one year and pay for all
costs associated with the transfer of shares to Tara Financial and the
reimbursement of shares to Mr. Valdetaro. Mr. Valdetaro is the Chief Technology
Officer of the Company. This transaction was evaluated under FAS 133 and EITF
00-19 and was determined under EITF 00-19 to have characteristics of a liability
and therefore a derivative liability under FAS 133.
Also
in
April 2007, Mr. Valdetaro, on behalf of the Company, transferred 1,000,000
unrestricted shares of common stock of the Company owned by Mr. Valdetaro to
CCS
in connection with a $40,000 loan made by CCS to the Company. The Company is
also obligated to arrange for a pledge of 1,000,000 shares of common stock
of
the Company to secure the loan. Also in April 2007, in connection with the
transfer of shares to CCS, the Company entered into an indemnity and
reimbursement agreement to reimburse Mr. Valdetaro with 1,000,000 shares within
one year and pay for all costs associated with the transfer of shares to CCS
and
the reimbursement of shares to Mr. Valdetaro. Mr. Valdetaro is the Chief
Technology Officer of the Company. This transaction was evaluated under FAS
133
and EITF 00-19 and was determined under EITF 00-19 to have characteristics
of a
liability and therefore a derivative liability under FAS 133.
In
April
2007, the Company and MRC entered into an indemnity and reimbursement agreement
for transfer and pledges of shares of common stock of the Company. Pursuant
to
the agreement, MRC loaned the Company 10,000,000 shares of common stock of
the
Company in order for the Company to meet current obligations concerning stock
the Company has been obligated to issue and deliver. In connection with the
loan
of shares to the Company, the Company agreed to reimburse MRC with up to
10,000,000 shares of common stock of the Company and pay for all costs
associated with such transfer and the reimbursement of shares to MRC within
one
year. In addition, in the event that any of the shares of common stock of the
Company pledged by MRC on behalf of the Company in connection with promissory
notes issued by the Company (or its subsidiaries, as applicable) are sold to
cover a default under the respective note, the Company agreed to reimburse
MRC
with a number of shares equal to the number of shares sold to cover the default
under the respective note within 1 year, and to reimburse MRC for all costs
associated with such sales and the reimbursement of shares to MRC related to
such sales. This transaction was evaluated under FAS 133 and EITF 00-19 and
was
determined under EITF 00-19 to have characteristics of a liability and therefore
a derivative liability under FAS 133.
During
2007, the Company granted 4,550,000 unregistered shares of common stock of
the
company to employees and consultants of the Company and NOW Solutions pursuant
to restricted stock agreements. 500,000 of these unrestricted shares vested
immediately with the remaining shares vesting over a period from one to three
years, as provided.
During
2007, 1,369,042 unregistered shares of common stock of the Company were
cancelled pursuant to restricted stock agreements between the Company and
employees of NOW Solutions. These shares were not vested at the date of
cancellation and had never been issued.
During
2007, 4,589,292 unregistered shares of common stock issued to employees and
consultants of the Company and NOW Solutions vested. These shares were issued
pursuant to restricted stock agreements executed in 2005-2007.
Preferred
Stock
Although
no dividends have been declared, the cumulative total of preferred stock
dividends due to these shareholders upon declaration is $4,101,712.
Note
11. Stock Options and Warrants
In
December 1999, the Company established a stock option plan allowing grants
of
both Incentive Stock Options (within the meaning of Section 422 and the Internal
Revenue Code of 1986, as amended) and non-statutory options. The Company can
issue up to 50,000,000 shares. Most options issued are non-assignable,
non-transferable, vested on the date of grant, and expire three to five years
from the date of grant. The plan expires in December 15, 2009.
F-21
VERTICAL
COMPUTER SYSTEMS, INC.
2006
There
were no non-statutory stock options, incentive stock options or warrants granted
in 2006.
During
2006, incentive stock options to purchase 1,500,000 common shares at $0.01
per
share were cancelled in connection with the issuance of common shares to an
employee.
During
2006, warrants to purchase 21,966,667 common shares at $0.0165 to $0.10 per
share expired or were cancelled.
2007
There
were no non-statutory stock options, incentive stock options or warrants granted
in 2007.
During
2007, warrants to purchase 6,894,444 common shares at $0.01 to $0.10 per share
expired.
Option
and warrant activities in 2006 and 2007 are summarized as follows:
Incentive Stock
Options
Non-Statutory
Stock Options
Warrants
Weighted
Average Exercise
Price
Outstanding
at 12/31/05
4,000,000
—
52,111,111
0.039
Options/Warrants
granted
—
—
—
—
Options/Warrants
exercised
—
—
1,750,000
0.009
Options/Warrants
expired/cancelled
1,500,000
—
21,966,667
0.045
Outstanding
at 12/31/06
2,500,000
—
28,394,444
0.034
Options/Warrants
granted
—
—
—
—
Options/Warrants
exercised
—
—
—
—
Options/Warrants
expired/cancelled
—
—
6,894,444
0.092
Outstanding
at 12/31/07
2,500,000
—
21,500,000
0.017
Information
relating to stock options/warrants at December 31, 2007, summarized by exercise
price, is as follows:
Warrants/Options
Outstanding
Exercisable
Weighted
Average
Weighted
Weighted
Remaining
Average
Average
Number
Contractual
Exercise
Number
Exercise
Exercise
Price Per Share
Outstanding
Life (Months)
Price
Exercisable
Price
Incentive
Stock Options
$0.01
- $0.09
2,500,000
14.17
$
0.014
2,500,000
$
0.014
2,500,000
14.17
$
0.014
2,500,000
$
0.014
Warrants
$0.003
- $0.100
21,500,000
10.63
$
0.017
21,500,000
$
0.017
21,500,000
10.63
$
0.017
21,500,000
$
0.017
Grand
total
24,000,000
11.00
$
0.0168
24,000,000
$
0.0168
F-22
VERTICAL
COMPUTER SYSTEMS, INC.
Note
12. Supplemental Disclosure of Cash Flow Information
Supplemental
cash flow information for the years ended December 31, 2007 and 2006 are as
follows:
Issuance
of 1,750,000 shares of common stock for debt forgiveness
—
16,250
395,811
$
1,088,280
Note
13. Commitments and Contingencies
Commitments
The
Company leases various office spaces which leases run from February 2004 through
September 2009. The Company had future minimum rental payments are as
follows:
Years ending December 31,
Amount
2008
87,004
2009
45,748
Total
$
132,792
Rental
expense for the years ended December 31, 2007 and 2006 was $211,564 and
$151,145, respectively.
Commitments
Related to NOW Solutions
Effective
on October 1, 2005, NOW Solutions began paying the Company a monthly management
fee of $20,000, plus all direct costs associated with the NOW Solutions’
management and operations incurred by the Company.
F-23
VERTICAL
COMPUTER SYSTEMS, INC.
Royalties
On
December 16, 1999, the Company acquired the software rights to Emily, an
XML computer language, for $5,000. As part of the agreement, the Company agreed
to pay royalties every six months, based on the net sales of products sold
that were developed using the Emily computer language. Royalties range from
1%
to 5% of net sales. There were no sales for the years ended December 31, 2007
and 2006, respectively.
Payroll
Taxes
The
Company has filed all payroll tax returns but has not made all related tax
payments since 2003. The Company has accrued the payroll tax payments and
approximately $125,000 for any related penalties and interest that may be
assessed by the Internal Revenue Service. Management believes that the $125,000
is sufficient to cover the penalties and interest that may be assessed. NOW
Solutions has filed all payroll tax returns and made all payroll tax payments.
For additional details, please see “Litigation” below.
Litigation
The
Company is involved in the following ongoing legal matters:
In
February 2003, we sued Ross
Systems Inc. (“Ross”),
Arglen,
Tinley, and Gyselen. We then stopped payments on the remaining $750,000 note
that was due in February 2003 in connection with the acquisition of certain
assets of Ross. The actions against Tinley, Arglen and Gyselen were dismissed
or
settled in December 2003. In September 2007, the court awarded us a judgment
of
$3,151,216, which we are seeking to collect. In November 2007, Ross gave notice
of its intention to appeal the decision and posted a bond in the amount of
the
judgment. The $750,000 note payable and accrued interest are still shown on
our
books until Ross’s appeal is settled.
In
August
2004, Arglen obtained a default judgment in a court for a past due $600,000
promissory note, plus fees and interest. We agreed to pay Arglen $713,489 and
we
began making monthly interest payments on the amounts specified above of $5,945,
beginning on September 15, 2005, which will be replaced by monthly payments
of
$25,000 or 10% of the Company's new sales, whichever is greater, beginning
on
February 15, 2006 until the remainder of the $713,489 is paid.
The
IRS
has a claim for unpaid payroll taxes of $313,839 from 2001 - 2005. On March9,2007, we filed an appeal with the United States Tax Court, seeking an
installment payout agreement. This action is still pending.
On
April18, 2007, we sued Microsoft Corp. for patent infringement and trial is set
for
March 2009.
In
the
opinion of management, the ultimate resolution of any pending matters may have
a
significant effect on our financial position, operations or cash
flows.
Note
14. Subsequent Events
In
January 2008, the Company and TranStar amended the terms of a $250,000 note
issued in April 2003, whereby accrued interest of $118,219 was added to the
principal amount and the maturity date was extended to September 2009. Also
in
January 2008, the Company and TranStar amended the terms of a $24,000 note
issued in May 2001, whereby accrued interest of $15,564 was added to the
principal amount and the maturity date was extended until June
2009.
In
January 2008, we issued 250,000 common shares to a third party lender as payment
the extension of the maturity dates of two promissory notes for $60,000 and
$40,000 until June 2008.
In
February 2008, we refinanced a $50,000 note issued in June 2002 by issuing
500,000 common shares and replacing that old note with a new $96,946 promissory
note, bearing interest at 12% per annum and due in September 2008. In connection
with the refinancing, MRC pledged 3,000,000 Company common shares as collateral.
MRC is a corporation controlled by the W5 Family Trust. Mr. Wade, the President
and CEO of the Company, is the trustee of the W5 Family Trust.
In
February 2008, the Company issued 250,000 common shares to William Mills for
his
services as a director and secretary. The shares vest in February 2009.
In
March
2008, Parker Mills and the Company amended the payment terms of a $75,000 note
issued in October 2005 by extending the maturity date to June 2009. In
connection with the amendment, MRC
pledged 2,000,000 shares of common
stock of the Company as collateral on the note. MRC is a corporation controlled
by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is
the
trustee of the W5 Family Trust. Bill Mills is a Director of the Company and
a
partner of Parker Mills.
F-24
VERTICAL
COMPUTER SYSTEMS, INC.
In
March
2008, the Company and MRC amended their indemnity and reimbursement agreement
whereby the Company agreed to reimburse and indemnify MRC for additional shares
pledged as collateral in connection with the $96,946 and $75,000
notes.
MRC is
a corporation controlled by the W5 Family Trust. Mr. Wade, the President and
CEO
of the Company, is the trustee of the W5 Family Trust.
For
the
period from January 1, 2008 to April 13, 2008, warrants to purchase 6,000,000
shares of common stock of the Company at an exercise price of $0.010 per share
expired.
For
the
period from January 1, 2008 to April 13, 2008, 1,683,332 unregistered shares
of
the common stock of the Company vested. These shares were issued pursuant to
restricted stock agreements with employees of the Company and NOW Solutions
executed in 2006 and 2007.
As
of the
Date of this Report for the year ended December 31, 2007, the Company has also
determined that it currently has (i) the following shares of common stock
issued, and (ii) outstanding instruments which are convertible into the shares
of common stock indicated below in connection with stock options, warrants,
and
preferred shares previously issued by the Company or agreements with the
Company:
998,235,151
Common
Stock Issued
15,500,000
Common
Shares that may be purchased from outstanding Warrants
2,500,000
Common
Shares convertible from Outstanding Options
24,250,000
Common
Shares convertible from Preferred Series A stock (48,500 shares
outstanding)
27,274
Common
Shares convertible from Preferred Series B stock (7,200 shares
outstanding)
20,000,000
Common
Shares convertible from Preferred Series C (50,000 shares
outstanding)
94,700
Common
Shares convertible from Preferred Series D (25,000 shares
outstanding)
1,000,000
Common
Shares that the Company has agreed to issue pursuant to agreements
13,000,000
Common
Shares that the Company has agreed to issue within 1 year to an employee
of the Company and an entity beneficially owned by an Executive of
the
Company pursuant to agreements
1,074,607,125
Total
Common Shares Outstanding and Accounted
For/Reserved
In
addition, the Company has $40,000 in outstanding debentures that it has issued
to third parties.
Accordingly,
given the fact that the Company currently has 1,000,000,000 shares of common
stock authorized, the Company could exceed its authorized shares of common
stock
by approximately 75,000,000 shares if all of the financial instruments described
in the table above were exercised or converted into shares of common stock
(excluding the $40,000 of outstanding debentures noted above).
F-25
Dates Referenced Herein and Documents Incorporated by Reference
