Attached files
file | filename |
---|---|
EX-31.1 - VERTICAL COMPUTER SYSTEMS INC | v194859_ex31-1.htm |
EX-31.2 - VERTICAL COMPUTER SYSTEMS INC | v194859_ex31-2.htm |
EX-32.1 - VERTICAL COMPUTER SYSTEMS INC | v194859_ex32-1.htm |
EX-32.2 - VERTICAL COMPUTER SYSTEMS INC | v194859_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended June 30, 2010
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
For the
transition period from _____ to _____
Commission
file number 0-28685
VERTICAL COMPUTER SYSTEMS,
INC.
(Exact
Name of Small Business Issuer as Specified in its Charter)
Delaware
|
65-0393635
|
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification No)
|
101
West Renner Road, Suite 300
Richardson,
TX 75082
(Address
of Principal Executive Offices) (Zip Code)
(972)
437-5200
(Issuer’s
Telephone Number)
________________
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
||
Non-accelerated
filer ¨
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes ¨ No x
As of
August 20, 2010, the issuer had 998,935,151 shares of common stock, par value
$.00001, issued and outstanding.
PART
I
FINANCIAL
INFORMATION
Item
1. Condensed Consolidated Financial Statements
Vertical
Computer Systems, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
(Unaudited)
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
|
$ | 122,646 | $ | 229,738 | ||||
Accounts
receivable, net of allowance for bad debts of $26,848 and
$30,594
|
288,399 | 783,219 | ||||||
Employee
receivables, net of allowance for doubtful accounts of
$13,820
|
18,033 | 7,380 | ||||||
Prepaid
expenses and other current assets
|
61,973 | 67,830 | ||||||
Total
current assets
|
491,051 | 1,088,167 | ||||||
Property
and equipment, net of accumulated depreciation of $976,139 and
$967,520
|
37,794 | 30,973 | ||||||
Intangible
assets, net of accumulated amortization of $1,007,356 and
$1,004,271
|
481,763 | 109,731 | ||||||
Deposits
and other
|
13,827 | 12,533 | ||||||
Total
assets
|
$ | 1,024,435 | $ | 1,241,404 | ||||
Liabilities
and Stockholder's Deficit
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 6,446,459 | $ | 6,397,575 | ||||
Deferred
revenue
|
2,372,967 | 2,404,680 | ||||||
Derivative
liabilities
|
51,295 | 484,859 | ||||||
Convertible
debenture
|
40,000 | 40,000 | ||||||
Current
portion - notes payable
|
1,543,095 | 1,596,853 | ||||||
Current
portion - notes payable to related parties
|
320,092 | 359,903 | ||||||
Total
current liabilities
|
10,773,908 | 11,283,870 | ||||||
Non-current
portion - notes payable
|
1,435,654 | 1,405,302 | ||||||
Non-current
portion - notes payable to related parties
|
33,064 | 59,783 | ||||||
Total
liabilities
|
12,242,626 | 12,748,955 |
See
accompanying notes to the condensed consolidated financial
statements
(Continued
on next page)
2
Vertical
Computer Systems, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
(Unaudited)
(Continued
from previous page)
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Series
A 4% Convertible Cumulative Preferred stock; $0.001 par value;
250,000 shares authorized; 48,500 shares issued and
outstanding
|
9,700,000 | 9,700,000 | ||||||
Series
B 10% Convertible Cumulative Preferred stock; $0.001 Par Value; 375,000
shares authorized; 7,200 shares issued and outstanding
|
246 | 246 | ||||||
Series
C 4% Convertible Cumulative Preferred stock; $100.00 par value; 200,000
shares authorized; 50,000 shares issued and outstanding
|
200,926 | 350,000 | ||||||
Series
D 15% Convertible Cumulative Preferred stock; $0.001 Par Value; 300,000
shares authorized; 25,000 shares issued and outstanding
|
852 | 852 | ||||||
9,902,024 | 10,051,098 | |||||||
Stockholders'
Deficit
|
||||||||
Common
Stock; $.00001 par value; 1,000,000,000 shares authorized 998,668,484 and
998,251,818 issued and
outstanding
|
9,987 | 9,983 | ||||||
Additional
paid-in-capital
|
19,244,092 | 18,630,472 | ||||||
Accumulated
deficit
|
(40,276,058 | ) | (40,155,719 | ) | ||||
Accumulated
other comprehensive income – foreign currency translation
|
(61,236 | ) | (40,537 | ) | ||||
Total
Vertical Computer Systems, Inc. stockholders’
deficit
|
(21,083,215 | ) | (21,555,801 | ) | ||||
Noncontrolling
interest
|
(37,000 | ) | (2,848 | ) | ||||
Total
stockholders’ deficit
|
(21,120,215 | ) | (21,558,649 | ) | ||||
Total
liabilities and stockholders' deficit
|
$ | 1,024,435 | $ | 1,241,404 |
See
accompanying notes to the condensed consolidated financial
statements
3
Vertical
Computer Systems, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
(Unaudited)
Three months ended June 30,
|
Six Months ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
||||||||||||||||
Licensing
and maintenance
|
$ | 11,036 | $ | 25,967 | $ | 173,097 | $ | 181,413 | ||||||||
Software
maintenance
|
1,137,375 | 1,137,538 | 2,218,528 | 2,229,161 | ||||||||||||
Software-as-a-Service
|
50,856 | 39,528 | 91,587 | 79,972 | ||||||||||||
Consulting
Services
|
132,450 | 79,960 | 266,161 | 195,507 | ||||||||||||
Other
|
31,452 | 66,094 | 55,387 | 95,006 | ||||||||||||
Total
Revenues
|
1,363,169 | 1,349,087 | 2,804,760 | 2,781,059 | ||||||||||||
Cost
of Revenues
|
376,366 | 421,181 | 755,179 | 780,109 | ||||||||||||
Gross
Margin
|
986,803 | 927,906 | 2,049,581 | 2,000,950 | ||||||||||||
Selling
, general and administrative expenses
|
(1,031,158 | ) | (1,238,595 | ) | (2,055,458 | ) | (2,512,386 | ) | ||||||||
Operating
loss
|
(44,355 | ) | (310,689 | ) | (5,877 | ) | (511,436 | ) | ||||||||
Interest
income
|
7 | 59 | 20 | 133,572 | ||||||||||||
Interest
expense
|
(122,663 | ) | (113,454 | ) | (225,198 | ) | (297,183 | ) | ||||||||
Gain on
derivative liability
|
7,860 | 225,548 | 76,564 | 39,980 | ||||||||||||
Gain
on settlement of litigation
|
- | - | - | 4,264,093 | ||||||||||||
Net
income (loss)
|
(159,151 | ) | (198,536 | ) | (154,491 | ) | 3,629,026 | |||||||||
Net
loss attributable to noncontrolling interest
|
30,044 | - | 34,152 | - | ||||||||||||
Net
loss attributable to Vertical Computer Systems, Inc.
|
(129,107 | ) | (198,536 | ) | (120,339 | ) | 3,629,026 | |||||||||
Dividend
applicable to preferred stock
|
(147,000 | ) | (147,000 | ) | (294,000 | ) | (294,000 | ) | ||||||||
Net
income (loss) applicable to common stockholders'
|
$ | (276,107 | ) | $ | (345,536 | ) | $ | (414,339 | ) | $ | 3,335,026 | |||||
Basic
and diluted income (loss) per share
|
$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | 0.00 | |||||
Basic
weighted average
|
998,668,484 | 997,489,180 | 998,546,108 | 997,043,161 | ||||||||||||
of
common shares outstanding
|
||||||||||||||||
Diluted
weighted average of common shares outstanding
|
- | - | - | 1,028,931,923 | ||||||||||||
Statements
of Comprehensive income (loss)
|
||||||||||||||||
Net
income (loss)
|
$ | (129,107 | ) | $ | (198,536 | ) | $ | (120,339 | ) | $ | 3,629,026 | |||||
Translation
adjustments
|
39,007 | (136,112 | ) | (20,699 | ) | (112,524 | ) | |||||||||
Comprehensive
income (loss)
|
$ | (90,100 | ) | $ | (334,648 | ) | $ | (141,038 | ) | $ | 3,516,502 |
See
accompanying notes to the unaudited condensed consolidated financial
statements
4
Vertical
Computer Systems, Inc. and Subsidiaries
Statements
of Consolidated Stockholders’ Deficit
(Unaudited)
Additional
|
Other
|
Non-controlling
|
||||||||||||||||||||||||||
Common Stock
|
Paid-in
|
Accumulated
|
Comprehensive
|
Controlling
|
||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Interest
|
Interest
|
Total
|
||||||||||||||||||||||
Balances
at December 31, 2009
|
998,251,818 | $ | 9,983 | $ | 18,630,472 | $ | (40,155,719 | ) | $ | (40,537 | ) | $ | (2,848 | ) | $ | (21,558,649 | ) | |||||||||||
Issuance
of restricted stock for services
|
416,666 | 4 | 7,546 | - | - | - | 7,550 | |||||||||||||||||||||
Cancellation
of warrants and obligation to deliver common stock to related
party
|
- | - | 357,000 | - | - | - | 357,000 | |||||||||||||||||||||
Forgiveness
of related party liability charged to additional paid in
capital
|
- | - | 100,000 | - | - | - | 100,000 | |||||||||||||||||||||
Cancellation
of conversion option in Series C preferred stock
|
- | - | 149,074 | - | - | - | 149,074 | |||||||||||||||||||||
Other
comprehensive income translation adjustment
|
- | - | - | - | (20,699 | ) | - | (20,699 | ) | |||||||||||||||||||
Net loss
|
- | - | - | (120,339 | ) | - | (34,152 | ) | (154,491 | ) | ||||||||||||||||||
Balances
at June 30, 2010
|
998,668,484 | $ | 9,987 | $ | 19,244,092 | $ | (40,276,058 | ) | $ | (61,236 | ) | $ | (37,000 | ) | $ | (21,120,215 | ) |
See
accompanying notes to the condensed consolidated financial
statements
5
Vertical
Computer Systems, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
income (loss)
|
$ | (154,491 | ) | $ | 3,629,026 | |||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
14,096 | 22,474 | ||||||
Amortization
of debt discount
|
- | 11,208 | ||||||
Stock
compensation
|
7,550 | 59,019 | ||||||
Non-cash
portion of gain on settlement of litigation
|
- | (1,112,877 | ) | |||||
Gain on
derivative
|
(76,564 | ) | (39,980 | ) | ||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
494,820 | 128,849 | ||||||
Receivable
from officers and employees
|
(10,653 | ) | (19,511 | ) | ||||
Prepaid
expenses and other assets
|
4,563 | (21,922 | ) | |||||
Accounts
payable and accrued liabilities
|
(25,627 | ) | (1,074,026 | ) | ||||
Deferred
revenue
|
(99,565 | ) | (153,679 | ) | ||||
Net
cash provided by operating activities
|
154,129 | 1,428,581 | ||||||
Cash
flow from investing activities:
|
||||||||
Acquisition
of SnAPPnet in 2010 and Priority Time Systems, Inc. in
2009, net of cash received
|
(5,335 | ) | (24,999 | ) | ||||
Purchase
of equipment
|
(78,591 | ) | (12,461 | ) | ||||
Cash
used in investing activities
|
(83,926 | ) | (37,460 | ) | ||||
Cash
flow from financing activities:
|
||||||||
Payment
of notes payable
|
(156,596 | ) | (1,529,024 | ) | ||||
Proceeds
from issuance of notes payable
|
- | 104,000 | ||||||
Net
cash used in financing activities
|
(156,596 | ) | (1,425,024 | ) | ||||
Effect
of changes in exchange rates on cash
|
(20,699 | ) | (112,524 | ) | ||||
Net
change in cash
|
(107,092 | ) | (146,427 | ) | ||||
Cash,
beginning of period
|
229,738 | 255,774 | ||||||
Cash,
end of period
|
$ | 122,646 | $ | 109,347 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid during the period:
|
||||||||
Interest
|
$ | 146,882 | $ | 871,558 | ||||
Noncash
supplemental cash flow disclosures:
|
||||||||
Issuance
of note for acquisition of Priority Time Systems, Inc.
|
- | 38,000 | ||||||
Notes
payable assumed from acquisition of Priority Time Systems,
Inc
|
- | 17,600 | ||||||
Noncash
consideration for acquisition of SnAPPnet
|
75,825 | - | ||||||
Cancellation
of derivative liability and warrants
|
357,000 | - | ||||||
Forgiveness
of related party liability charged to additional paid in
capital
|
100,000 | - | ||||||
Cancellation
of conversion option in Series C preferred stock
|
149,074 | - |
See
accompanying notes to condensed consolidated financial
statements
6
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note
1. Organization, Basis of Presentation and Significant Accounting
Policies
The
accompanying unaudited interim consolidated financial statements of Vertical
Computer Systems, Inc. (the “Company” or “Vertical”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America and rules of the Securities and Exchange Commission, and should be
read in conjunction with the audited consolidated financial statements and notes
thereto contained in Vertical’s annual report on Form 10-K for the year ended
December 31, 2009. The consolidated financial statements include the accounts of
the Company and its wholly subsidiaries, EnFacet, Inc., Globalfare.com, Inc.,
Pointmail.com, Inc. and Vertical Internet Solutions, all of which are inactive;
Vertical Healthcare Solutions, OptVision Research, Inc., Taladin, Inc.,
Government Internet Systems, Inc., Priority Time Systems, Inc., a 90% owned
subsidiary, SnAPPnet, Inc., all entities with minor activities and NOW
Solutions, Inc. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position and the results of operations for the interim periods
presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. Notes to the consolidated financial statements which
would substantially duplicate the disclosure contained in the audited financial
statements as reported in the 2009 annual report on Form 10-K have been
omitted.
Earnings
per share
Basic earnings per share is calculated
by dividing net income available to common stockholders by the weighted average
number of shares of the Company’s common stock outstanding during the period.
Diluted earnings per share reflect the potential dilution that could occur if
our share-based awards and convertible securities were exercised or converted
into common stock. The dilutive effect of our share-based awards is
computed using the treasury stock method, which assumes all share-based awards
are exercised and the hypothetical proceeds from exercise are used to purchase
common stock at the average market price during the period. The
incremental shares (difference between shares assumed to be issued versus
purchased), to the extent they would have been dilutive, are included in the
denominator of the diluted EPS calculation. The dilutive effect
of our convertible preferred stock and convertible debentures is computed using
the if-converted method, which assumes conversion at the beginning of the
year.
The
following represents a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
Six Months ended June 30, 2010
|
Six Months ended June 30, 2009
|
|||||||||||||||||||||||
Net Loss
(Numerator)
|
Shares
(Denominator)
|
Per Share
Amount
|
Net Income
(Numerator)
|
Shares
(Denominator)
|
Per
Share
Amount
|
|||||||||||||||||||
Basic
EPS
|
$ | (414,339 | ) | 998,546,108 | $ | (0.00 | ) | $ | 3,335,026 | 997,043,161 | $ | 0.00 | ||||||||||||
Effect
of dilutive securities Warrants, convertible debt and convertible
preferred stock
|
- | - | 0.00 | 31,888,762 | - | |||||||||||||||||||
Diluted
EPS
|
$ | (414,339 | ) | 998,546,108 | $ | (0.00 | ) | $ | 3,335,026 | 1,028,931,923 | $ | 0.00 |
As of June 30, 2010, common stock
equivalents related to the convertible debentures, convertible debt and
preferred stock and stock derivative liability totaling 33,857,681 were not
included in the denominators of the diluted earnings per share as their effect
would be anti-dilutive.
New
Accounting Pronouncements
In
January 2010, the FASB issued authoritative guidance that requires reporting
entities to make new disclosures about recurring or nonrecurring fair-value
measurements including significant transfers into and out of Level 1 and Level 2
fair value measurements, and information on purchases, sales, issuances, and
settlements on a gross basis in the reconciliation of Level 3 fair value
measurements. The guidance is effective for annual reporting periods beginning
after December 15, 2009, except for Level 3 reconciliation disclosures, which
are effective for annual periods beginning after December 15, 2010. The adoption
of the above guidance did not impact the Company’s financial position, results
of operations or cash flows.
7
In October 2009, the FASB issued
amendments to the guidance on software revenue recognition altering the scope of
revenue recognition guidance for software deliverables to exclude items sold
that include hardware with software that is essential to the hardware’s
functionality. This authoritative guidance will be effective prospectively for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is permitted. The Company is
still assessing the potential impact of adopting the new authoritative
guidance.
No other
new accounting pronouncement issued or effective has had, or is expected to
have, a material impact on the Company’s consolidated financial
statements.
Note
2. Going Concern
The
accompanying condensed consolidated financial statements for the six months
ended June 30, 2010 and 2009 have been prepared assuming that we will continue
as a going concern, and accordingly realize our assets and satisfy our
liabilities in the normal course of business.
While we
have been profitable for the years ended December 31, 2009 and 2008, we have
suffered significant recurring operating losses prior to those periods, used
substantial funds in developing our present and new operations, and we need to
raise additional funds to accomplish our objectives. Negative stockholders’
equity at June 30, 2010 was $21.1 million. Additionally, at June 30, 2010, we
had negative working capital of approximately $10.3 million (although this
figure includes deferred revenue of approximately $2.4 million) and have
defaulted on several of our debt obligations. These conditions raise substantial
doubt about our ability to continue as a going concern. The carrying amounts of
assets and liabilities presented in the financial statements do not purport to
represent realizable or settlement values.
Our management is continuing its
efforts to secure funds through equity and/or debt instruments for our
operations, expansion and possible acquisitions, mergers, joint ventures, and/or
other business combinations. We will require additional funds to pay
down our liabilities, as well as finance our expansion plans consistent with our
anticipated changes in operations and infrastructure. However, there can be no
assurance that we will be able to secure additional funds and that if such
funds are available, whether the terms or conditions would be acceptable to us,
or whether we will be able to turn into a profitable position and generate
positive operating cash flow. The consolidated financial statements contain no
adjustment for the outcome of this uncertainty.
Note
3. Common and Preferred Stock Transactions
In March
2010, the Company transferred 610,000 shares of Series A Convertible Preferred
Stock of VHS to Mr. Robert Farias in exchange for the following: (a)
an irrevocable waiver by Mr. Farias of the conversion rights in respect of
37,500 shares of the Company’s Series “C” 4% Cumulative Convertible Preferred
Stock owned by Mr. Farias; (b) cancellation by Mr. Farias of $100,000 of debt
owed by the Company to Mr. Farias; and (c) cancellation by Mr. Farias of three
separate common stock purchase warrants held by Mr. Farias, exercisable for an
aggregate of 15,000,000 shares of common stock of the Company. As a
consequence of the waiver of conversion rights and the cancellation of warrants,
the Company is no longer obligated to issue up to 30,000,000 shares of its
common stock. Mr. Farias is an employee of VHS, a Director of NOW
Solutions, Inc. (“NOW Solutions”), and a Director of Priority Time Systems, Inc
(“PTS”).
In March
2010, the Company further amended the Transfer and Indemnity Agreement
(amendment originally entered into in January 2010) with Mountain Reservoir
Corporation (“MRC”). Pursuant to this amendment, MRC received 300,000 shares of
the Series A Convertible Preferred Stock of Vertical Healthcare Solutions, Inc.
(“VHS”) in exchange for the cancellation of the Company’s obligation to issue
10,000,000 shares of common stock of the Company to MRC. MRC is a
corporation controlled by the W5 Family Trust. Mr. Wade, our President and CEO,
is the trustee of the W5 Family Trust.
In March
2010, the Company and Luiz Valdetaro entered into an amendment of two indemnity
and reimbursement agreements whereby the obligation to reimburse Mr. Valdetaro
an aggregate 3,000,000 common shares of Vertical was cancelled. These shares
were initially transferred by Mr. Valdetaro to third parties on behalf of the
Company (in connection with certain extensions of loans of the Company in April
2008). In return, Mr. Valdetaro received 90,000 shares of VHS Series
A Preferred Stock. Mr. Valdetaro is our Chief Technology
Officer.
The above
transactions were determined to be a forgiveness of debt and accordingly, the
value of the conversion option given up of $149,074, the cancellation of related
party liability of $100,000 and the cancellation of warrants and the obligation
to deliver common stock to the related parties totaling $357,000 were credited
to additional paid in capital.
VHS is a
wholly-owned company with minimal assets, liabilities and
operations. VHS has two classes of preferred stock:
8
|
(a)
|
The
Series A Convertible Preferred Stock is convertible into VHS common shares
at a ratio of three common shares for one preferred share, has voting
rights, and has a cumulative annual dividend of $0.60 per
share.
|
|
(b)
|
The
Series B Convertible Preferred Stock is convertible into VHS common shares
at a ratio of one common share for one preferred share, is non-voting, and
has a cumulative annual dividend of $0.60 per share.
|
On May
21, 2010, VHS granted 100,000 shares of Series B Convertible Preferred Stock to
members of Pelican Applications, LLC (“Pelican”), a California limited liability
company, in connection with the purchase of the business and substantially all
the assets of Pelican (see Note 5).
On June
1, 2010, VHS granted 50,000 shares of Series B Convertible Preferred Stock to a
consultant acting as its Chief Operating Officer in consideration for services
to be rendered on behalf of VHS and SnAPPnet, Inc., a newly formed Texas
subsidiary of the Company. SnAPPnet was formed to hold the assets
acquired from Pelican (see Note 5, Acquisition of SnAPPnet) and is wholly-owned
by and consolidated into the parent company.
VHS has
authorized 10,000,000 common shares, of which 5,100,000 shares have been issued
to the Company and 4,000,000 shares have been reserved for conversions of the
VHS Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock.
During
the six months ended June 30, 2010, 416,666 shares of the Company’s common stock
valued at $7,550 vested.
As of the Date of this Report (for the
six months ended June 30, 2010), we have determined that we currently have (i)
the following shares of common stock issued, and (ii) outstanding shares of
preferred stock which are convertible into the shares of common stock indicated
below and a contractual commitment to issue the shares of common stock indicated
below:
998,935,151
|
Common
Stock Issued
|
|
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)
|
|
5,000,000
|
Common
Shares convertible from Preferred Series C (50,000 shares outstanding of
which 12,500 shares are convertible)
|
|
94,700
|
Common
Shares convertible from Preferred Series D (25,000 shares
outstanding)
|
|
1,309,983
|
Common
Shares Company Is Obligated to Reimburse to officer of Company within 1
year for Pledged Shares
|
|
1,029,617,108
|
Total
Common Shares Outstanding and Accounted
For/Reserved
|
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
30,000,000 shares if all of the shares of preferred stock described in the table
above were converted into shares of common stock and the Company met its
contractual obligation to issue additional shares of common stock.
Note
4. Notes Payable
The
following table reflects our debt activity, including our convertible debt, for
the six months ended June 30, 2010:
December
31, 2009
|
$ | 3,461,841 | ||
Repayment
|
(156,596 | ) | ||
Notes
assumed in SnAPPnet acquisition
|
66,660 | |||
June
30, 2010
|
$ | 3,371,905 |
In November 2009, MRC pledged
16,976,296 shares of Company common stock owned by MRC as collateral in
connection with a $150,000 note payable by the Company. In January
2010, the Company entered into an amendment of the Transfer and Indemnity
Agreement with MRC. Pursuant to this amendment, and in consideration
of the pledge by MRC, the Company agreed to pay MRC a fee as
follows: (i) $3,000 for the first year of the term of the note and
(ii) 2% of the unpaid principal balance of the note for each succeeding year
during the term of the note.
During the six months ended June 30,
2010, the Company made interest payments of $146,882.
9
Note
5. Acquisition of SnaPPnet
On May
21, 2010, our newly formed subsidiary, SnAPPnet, Inc., a Texas corporation,
purchased substantially all the assets of Pelican in exchange for 5,335 of cash,
100,000 shares of Series B Convertible Preferred Stock and other contingent
consideration. The assets acquired included a software
application product known as SnAPPnet which is currently used for physician
credentialing, as well as Pelican’s entire customer base. With this
acquisition, the Company intends to utilize the SnAPPnet software to expand its
offering to physicians, but to also adapt the software to meet the needs of our
wholly-owned subsidiary, NOW Solutions, Inc.’s hospital clients who may need a
credentialing product for nurses.
The fair
value of consideration transferred in the acquisition, the assets acquired and
the liabilities assumed are set forth in the following table:
Consideration:
|
||||
Cash
|
$ | 5,335 | ||
Series
B Convertible Preferred Stock (1)
|
- | |||
Contingent
consideration (2)
(3)
|
75,825 | |||
Total
consideration
|
$ | 81,160 | ||
Recognized
amount of identifiable assets acquired and liabilities assumed
(3):
|
||||
Software
|
$ | 38,421 | ||
Property
and equipment
|
7,604 | |||
Intangibles
|
22,200 | |||
Goodwill
|
246,133 | |||
Accounts
payable
|
(9,274 | ) | ||
Notes
payable
|
(66,660 | ) | ||
Deferred
revenue
|
(119,352 | ) | ||
Royalty
payable
|
(37,912 | ) | ||
$ | 81,160 |
|
(1)
|
No
value has been assigned to the Series B Convertible Preferred Stock since
VHS is deemed a development stage
company.
|
|
(2)
|
The
contingent consideration represents a 5% royalty payment on sales of the
SnAPPnet software application, to members of Pelican, prorated to their
respective ownership of the membership interests in Pelican, which will
expire on the first to occur of 10 years following closing or the payment
of $2.5 million.
|
The fair
value of the contingent consideration was determined based on SnAPPnet’s
projected revenues for the next 10 years and the application of a discount rate
to the future royalty payments to be made. A probability factor was
also applied to the different revenue assumptions used. At the end of
each reporting period, after the acquisition date, the contingent payment will
be measured again to its fair value, with changes in fair value recorded in
earnings.
|
(3)
|
Fair
values assigned to the contingent consideration as well as the assets
acquired and liabilities assumed are provisional pending receipt of a
final valuation of the acquisition.
|
Unaudited
pro forma operation results for the six months ended June 30, 2010, as though
the Company had acquired SnAPPnet on the first day of fiscal year 2009 and 2010,
are set forth below. The unaudited pro forma operating results are not
necessarily indicative of what would have occurred had the transaction take
place on the first day of fiscal year 2009 and 2010.
Unaudited Pro Forma Combined
For the Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
$ | 2,828,937 | $ | 2,797,199 | ||||
Net
Income (Loss)
|
(157,720 | ) | 3,616,608 | |||||
Earnings
(Loss) per share - Basic
|
$ | - | $ | - | ||||
Basic
weighted average of common shares outstanding
|
998,546,108 | 997,043,161 | ||||||
Dilute
weighted average of common shares outstanding
|
998,546,108 | 1,028,931,923 |
10
Note
6. Derivative liabilities and fair value measurements
Derivative liabilities
During 2008, one of our officers
pledged 3,000,000 shares of common stock (through a company he controls) to
secure the debt owed to a third party lender. In connection with the
pledge of stock, we signed an agreement to replace all of the pledged shares
within one year. Subsequent to this agreement, 1,309,983 shares of
this pledged common stock were sold to satisfy the debt owed to the
lender. This contractual commitment was evaluated under FASB ASC
815-40, Derivatives and Hedging, and was determined to have characteristics of a
liability and therefore derivative liabilities under the above
guidance. 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 June 30, 2010 and December 31, 2009, the aggregate
derivative liability was $35,370 and $31,440.
During 2007, two of our officers loaned
a total of 13 million shares of unrestricted stock to the Company. This stock
was used to satisfy certain obligations of the Company. In connection with the
loans, the Company signed agreements to replace the shares within one year.
These contractual commitments were evaluated under FASB ASC 815-40, Derivatives
and Hedging and were determined to have characteristics of a liability and
therefore derivative liabilities under the above guidance. 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,
2009, the aggregate derivative liability was $312,000. In March 2010, this
derivative liability was eliminated through the issuance of preferred stock in
VHS as described above in Note 3.
During 2002 and 2003, we issued
convertible debentures with conversion features based on the market value of the
Company’s common stock at the date of conversion. The conversion features were
evaluated under FASB ASC 815-40, Derivatives and Hedging and were determined to
have characteristics of a liability and therefore a derivative liability under
the above guidance. 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 and all other
convertible debt to also be classified as derivative liabilities. 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. In
March 2010, the derivative liability associated with the outstanding warrants
was eliminated through the issuance of preferred stock in VHS as described in
Note 3 above. At June 30, 2010 and December 31, 2009, the aggregate
derivative liability was $15,925 and $141,419, respectively.
The valuation of our embedded
derivatives is determined primarily by the Black-Scholes option pricing model
and the Lattice model. To determine the fair value of our derivatives,
management evaluates assumptions regarding the probability of certain future
events. Other factors used to determine fair value include our period end stock
price ($0.027), historical stock volatility (123%), risk free interest rate
(1.70%) and derivative term (generally 2.0 years).
Fair value measurements
FASB ASC
820, Fair Value Measurements and Disclosures defines fair value as the exchange
price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. FASB ASC 820 also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. FASB ASC 820 describes three
levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in
active markets for identical assets or liabilities.
Level 2 – Observable inputs
other than Level 1 prices, such as quoted prices for similar assets or
liabilities; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities. Our derivative liabilities are classified as Level 2.
Level 3 – Unobservable inputs
that are supported by little or no market activity and that are financial
instruments whose values are determined using pricing models, discounted cash
flow methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant judgment or
estimation.
If the
inputs used to measure the financial assets and liabilities fall within more
than one level described above, the categorization is based on the lowest level
input that is significant to the fair value measurement of the
instrument.
11
The
following table provides a summary of the fair value of our derivative
liabilities measured on a recurring basis:
|
Fair value measurements on a recurring basis
June 30, 2010
|
|
||||||||||
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
||||
Liabilities
|
||||||||||||
Convertible
debentures
|
$
|
-
|
$
|
15,925
|
$
|
-
|
||||||
Stock
derivative – 1,309,983 shares
|
-
|
35,370
|
-
|
The
estimated fair value of short-term financial instruments, including cash,
accounts receivable, accounts payable and accrued liabilities and deferred
revenue approximates their carrying value due to their short-term nature. The
estimated fair value of our long-term borrowings approximates carrying value
since the related rates of interest approximates current market
rates.
Note
7. Legal Proceedings
We have been or are involved in the
following ongoing legal matters:
On
November 18, 2009, we sued InfiniTek Corporation (“InfiniTek”) in the Texas
State District Court in Fort Worth, Texas for breach of contract and other
claims (the “Texas Action’) seeking equitable relief and unspecified damages
when a dispute between the Company and InfiniTek was not
resolved. All agreements were cancelled in 2009 except for the
distribution agreement. On January 15, 2010, InfiniTek filed a counter-claim for
non-payment of amounts billed. InfiniTek claims it is owed $195,000,
and has incurred alleged lost opportunity cost of not less than $220,000. We
attempted unsuccessfully to resolve our dispute with InfiniTek via mediation.
Our lawsuit was amended on March 30, 2010 and the distribution agreement has
been cancelled. Discovery is ongoing.
On April
7, 2010, we were served with a lawsuit filed by InfiniTek in the California
Superior Court in Riverside, California seeking damages in excess of $76,303 for
breach of contract and lost profit. On May 7, 2010, we filed a motion
to dismiss this action. On July 14, 2010, the court denied our
motion. On August 13, 2010, we filed an answer to InfiniTek’s
complaint which contained a denial and affirmative defenses. We
continue to litigate the claims made by InfiniTek in this action as well as our
other claims against InfiniTek in the Texas case. The amounts in
dispute are included in our accounts payable and accrued liabilities pending the
outcome of this litigation.
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. Also,
in the future, we may become involved in other legal actions that may have a
significant effect on our financial position, operations or cash
flows.
Note
8. Stock Options, Warrants and Restricted Stock Awards
Stock
options and Warrants
There are
currently no outstanding employee stock options or warrants. The
warrants for 15,000,000 shares of our common stock that were outstanding at
December 31, 2009 have been cancelled (see Notes 3 and 6).
Restricted
Stock
A summary
of the activity of the restricted stock through June 30, 2010 is shown
below.
Shares
|
Weighted
Average
Grant-Date
Fair Value
|
||||||||
Non
Vested Balance at December 31, 2009
|
683,333 | $ | 0.018 | ||||||
Granted
|
- | - | |||||||
Vested
|
416,667 | 0.018 | |||||||
Forfeited/Cancelled
|
- | - | |||||||
Non
Vested Balance at June 30, 2010
|
266,666 | $ | 0.017 |
12
As of
June 30, 2010, there was $1,155 of total unrecognized compensation costs related
to stock awards. These costs are expected to be recognized over a weighted
average period of less than 1 year.
Note
9. Subsequent Events
In
July2010, we issued a $100,000 promissory note to a third party, bearing
interest at 10% per annum and due in July 2011. As an incentive to
make the loan, our wholly-owned subsidiary SnAPPnet, Inc. agreed to pay a 5%
royalty on gross revenues up to $50,000.
On July 23, 2010, we entered into an
agreement with former and current employees of the Company concerning the
deferral of payroll claims of approximately $1,950,000. The claims
are for salary earned from 2001 to 2008, which remains unpaid and is reflected
as a current liability on our consolidated financial statements.
Pursuant
to the terms of the agreement, each current and former employee who is a party
to the agreement (the “Employee”) agreed to continue the deferral of salary
(“Salary Deferral”) for a period of one year following the date of the
agreement. In consideration for the Salary Deferral, the Company
agreed to pay each Employee a sum equal to the amount of unpaid salary at
December 31, 2003 plus the amount of unpaid salary at the end of any calendar
year after 2003 in which such salary was earned, plus nine percent interest,
compounded annually until such time as the unpaid salary has been paid in
full. The Company and the Employees have agreed that the deferred
salary plus interest will be paid from amounts anticipated to be paid to the
Company in respect of specified intellectual property assets of the
Company.
In order
to effect the payments due under the agreement, the Company assigned to the
Employees a twenty percent interest in any net proceeds (gross proceeds less
attorney’s fees and direct costs) derived from infringement claims filed on
certain patents owned by the Company.
13
Item 2.
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 accompanying Condensed Consolidated Financial
Statements, and the cautionary statements and risk factors included below in
Item 3 of Part II of this 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 are 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 six months ended June 30, 2010, $63,924 of
internal costs was capitalized. During the six months ended June 30,
2009, no costs were capitalized.
Revenue
Recognition
Our revenue recognition policies are in
accordance with standards on software revenue recognition, which includes
guidance on revenue arrangements with multiple deliverables and arrangements
that include the right to use of software stored on another entity’s
hardware.
In the case of non-software
arrangements, we apply the guidance on revenue arrangements with multiple
deliverables and wherein multiple elements are allocated to each element based
on the element’s relative fair value. Revenue allocated to separate elements is
recognized for each element in accordance with our accounting policies described
below. If we cannot account for items included in a multiple-element arrangement
as separate units of accounting, they are combined and accounted for as a single
unit of accounting and generally recognized as the undelivered items or services
are provided to the customer.
Consulting. We provide
consulting services to our clients, primarily implementation and training
services, using a time and materials pricing methodology. The Company prices its
delivery of consulting services on a time and materials basis where the customer
is either charged an agreed-upon daily rate plus out-of-pocket expenses or an
hourly rate plus out-of-pocket expenses. In this case, the Company is paid fees
and other amounts generally on a monthly basis or upon the completion of the
deliverable service and recognizes revenue as the services are
performed.
Software
License. We sell concurrent perpetual software licenses to our
customers. The license gives the customer the right to use the software without
regard to a specific term. We recognize the license revenue upon
execution of a contract and delivery of the software, provided the license fee
is fixed and determinable, no significant production, modification or
customization of the software is required and collection is considered probable
by management. When the software license arrangement requires the Company to
provide consulting services that are essential to the functionality of the
software, the product license revenue is recognized upon the acceptance by the
customer and the consulting fees are recognized as consulting services are
performed.
Software
licenses are generally sold as part of a multiple-element arrangement that may
include maintenance and, under a separate agreement, consulting services. The
consulting services are generally performed by the Company, but the customer may
use a third-party to perform the consulting services. We consider these separate
agreements as having been negotiated as a package. The Company determines
whether there is vendor specific objective evidence of fair value (‘‘VSOEFV’’)
for each element identified in the arrangement, to determine whether the total
arrangement fees can be allocated to each element. If VSOEFV exists for each
element, the total arrangement fee is allocated based on the relative fair value
of each element. In cases where there is not VSOEFV for each element, or if it
is determined that services are essential to the functionality of the software
being delivered, we initially defer revenue recognition of the software license
fees until VSOEFV is established or the services are performed. However, if
VSOEFV is determinable for all of the undelivered elements, and assuming the
undelivered elements are not essential to the delivered elements, we will defer
recognition of the full fair value related to the undelivered elements and
recognize the remaining portion of the arrangement’s revenue through application
of the residual method. Where VSOEFV has not been established for certain
undelivered elements, revenue for all elements is deferred until those elements
have been delivered or their fair values have been determined. Evidence of
VSOEFV is determined for software products based on actual sales prices for the
product sold to a similar class of customer and based on pricing strategies set
forth in the Company’s standard pricing list. Evidence of VSOEFV for consulting
services is based upon standard billing rates and the estimated level of effort
for individuals expected to perform the related services. The Company
establishes VSOEFV for maintenance agreements using the percentage method such
that VSOEFV for maintenance is a percentage of the license fee charged annually
for a specific software product, which in most instances is 18% of the portion
of arrangement fees allocated to the software license element.
14
Maintenance Revenue. In
connection with the sale of a software license, a customer may elect to purchase
software maintenance services. Most of the customers that purchase software
licenses from us also purchase software maintenance services. These maintenance
services are typically renewed on an annual basis. We charge an annual
maintenance fee, which is typically a percentage of the initial software license
fee and may be increased from the prior year amount based on inflation or other
agreed upon percentage. The annual maintenance fee generally is paid to the
Company at the beginning of the maintenance period, and we recognize these
revenues ratably over the term of the related contract.
While
most of our customers pay for their annual maintenance at the beginning of the
maintenance period, a few customers have payment terms that allow them to pay
for their annual maintenance on a quarterly or monthly basis. If the annual
maintenance fee is not paid at the beginning of the maintenance period (or at
the beginning of the quarter or month for those few maintenance customers), we
will ratably recognize the maintenance revenue if management believes the
collection of the maintenance fee is imminent. Otherwise, we will defer revenue
recognition until the time that the maintenance fee is paid by the customer. We
normally continue to provide maintenance service while awaiting payment from
customers. When the payment is received, revenue is recognized for the period
that revenue was previously deferred. This may result in volatility in software
maintenance revenue from period to period.
Software as a Service
(“SaaS”). We have contracted with a third party to provide new and
existing customers with a hosting facility providing all infrastructure and
allowing us to offer our currently sold software, emPath®, on a service basis.
However, a contractual right to take possession of the software license or run
it on another party’s hardware is not granted to the customer. We refer to the
delivery method to give functionality to new customers utilizing this service as
SaaS. Since the customer is not given contractual right to take possession of
the software, the scope of ASC 350-40 does not apply. A customer using SaaS can
enter into an agreement to purchase a software license at any time. We generate
revenue from SaaS as the customer utilizes the software over the Internet.
Customers utilizing their own computers to access SaaS functionality are charged
a monthly subscription fee equal to the number of employees or transactions
multiplied by an agreed-upon rate. The revenue is recognized as the SaaS
services are rendered each month.
We will
provide consulting services to customers in conjunction with SaaS. The rate for
such consulting services is based on standard hourly or daily billing rates. The
consulting revenue is recognized as services are performed.
Allowances
for Doubtful Accounts
The Company maintains allowances for
doubtful accounts, for estimated losses resulting from the inability of our
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, estimate 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 the Company 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 the Company will be able to realize its deferred
tax assets in the future in excess of its net recorded assets, an adjustment to
reduce the valuation allowance would increase income in the period such
determination is made.
Stock-Based Compensation
Expense
We account for share-based compensation
in accordance with accounting provisions governing share-based payments, which
require 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. 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.
15
Valuation
of the Embedded and Warrant Derivatives
The valuation of our embedded
derivatives and warrant derivatives are determined primarily by the
Black-Scholes option pricing model and the Lattice model. An embedded derivative
is a derivative instrument that is embedded within another contract, which under
a convertible note (the host contract) includes the right to convert the note by
the holder, certain default redemption right premiums and a change of control
premium (payable in cash if a fundamental change occurs). In accordance with the
guidance on derivative instruments, embedded derivatives are marked-to-market
each reporting period, with a corresponding non-cash gain or loss charged to the
current period. A warrant derivative liability is determined in accordance with
the guidance on derivative financial instruments indexed to, and potentially
settled in, a company’s own stock. Based on this guidance, warrants
which are determined to be classified as derivative liabilities are
marked-to-market each reporting period, with a corresponding non-cash gain or
loss charged to the current period. The practical effect of this has been that
when our stock price increases so does our derivative liability, resulting in a
non-cash loss that reduces our earnings and earnings per share. When our stock
price declines, we record a non-cash gain, increasing our earnings and earnings
per share.
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.
Results
of Operations
Three
And Six Month Periods Ended June 30, 2010 Compared To The Three And Six Months
Ended June 30, 2009
Total
Revenues. We had total revenues of $1,363,169 and $1,349,087
in the three months ended June 30, 2010 and 2009, respectively. The
increase in total revenues was $14,082 for the three months ended June 30, 2010
representing a 1.0% increase compared to the total revenues for the three months
ended June 30, 2009. Almost all the revenues for the three months
ended June 30, 2010 and all the revenue from June 30, 2009 were related to the
business operations of NOW Solutions.
The total
revenues consist of software licenses, consulting, software maintenance,
Software as a Service fees and other revenues. The revenue from
software licenses decreased $14,931or 57.5% compared to the three months ended
June 30, 2009 due to lower sales of additional modules to existing customers in
both periods. There were no new customer sales in the three month
periods ending June 30, 2010 and 2009. Software maintenance in the
three months ended June 30, 2010 decreased by $163 from the same period in the
prior year. The revenue decline in software maintenance is due to
selectively reducing maintenance fees to certain customers due to their
workforce reductions and the impact of the exchange rate of the Canadian dollar
to the US dollar, offset by the impact of maintenance revenue from
SnAPPnet. Consulting revenue in the three months ended June 30, 2010
increased by $52,490 from the same period in the prior year, which
represents a 65.6% increase. Most of the consulting revenue for the
three months ended June 30, 2010 is due to implementation work on new software
sold early in 2010, professional services related to changing two existing
customers from a software license to Software as a Service, and additional
training performed for existing customers. Software as a Service
(“SaaS”) revenues increased $11,328 or 28.7% for the period compared to
2009. This was due to adding two new customers and the start-up fees
associated with these new clients. Other revenue in the three months
ended June 30, 2010 decreased by $34,642 from the same period in the prior
year. The significant decrease is due to attendance fees of $53,582
charged for a NOW Solutions user conference in May 2009 held approximately every
other year. Offsetting part of the decline is an increase in reimbursable
travel costs associated with the increased consulting
services. Additional other revenue consists primarily of reimbursable
travel expenses, currency gains and losses, and other miscellaneous
revenues.
We had
total revenues of $2,804,760 and $2,781,059 in the six months ended June 30,
2010 and 2009, respectively. The slight increase in total revenue was
$23,701 for the six months ended June 30, 2010 representing a 0.8% increase
compared to the same period in 2009. Almost all the revenue for the
six months ended June 30, 2010 and all the revenue from June 30, 2009 were
related to the business operations of NOW Solutions, a wholly-owned
subsidiary.
The total
revenues consist of software licenses, consulting, software maintenance, SaaS
fees and other revenues. The revenue from licensing fees for the six
months ended June 30, 2010 decreased $8,316 or 4.6% over the same period in
2009. The decrease was due to a slightly smaller sale to a new
customer early in 2010. There were no new customer sales for the same
period in 2009, but there were multiple sales of additional modules to existing
customers. Software maintenance fees for the six months ended June
30, 2010 decreased $10,633, representing a 0.5% decline. The revenue
decline in software maintenance is due to selectively reducing maintenance fees
to certain customers due to their workforce reductions and the impact of the
exchange rate of the Canadian dollar to the US dollar, partially offset by the
impact of maintenance revenue from SnAPPnet. Consulting fees
increased $70,654 or 36.1% for the six months ended June 30, 2010 compared to
the six months ended June 30, 2009. The increase in consulting fees
in 2010 is due to the implementation services related to the new customer sale
in early 2010 and consulting services related to changing two existing customers
from a software license to software as a service. SaaS revenues for
the six months ended June 30, 2010 were $11,615 higher than for the six months
ended June 30, 2009, a 14.5% increase. This increase is due to adding
a new hosting customer in 2009 and the additional setup fees associated with new
customers. There was a $39,619 decrease in other revenue for the
six months ended June 30, 2010 compared to the same period of
2009. The decline is mainly attributed to attendance fees of $53,582
charged for a NOW Solutions user conference in May 2009 which is held
approximately every other year. Offsetting part of the decline is an
increase in reimbursable travel costs associated with the increased consulting
services. Additional other revenue consists primarily of reimbursable
travel expenses, currency gains and losses, and other miscellaneous
revenues.
16
Cost of
Revenues. We had direct costs associated with our revenues of
$376,366 for the three months ended June 30, 2010 compared to $421,181 for the
three months ended June 30, 2009. The decrease in cost of revenues of
$44,815 represents a 10.6% decrease. Our costs have decreased due to
the costs associated with the NOW Solutions user conference held in May 2009
partially offset by higher customer support costs due to higher salaries, fringe
benefits and travel.
For the
six months ended June 30, 2010, direct costs of revenues were $755,179 compared
to $780,109 for the same period in 2009 resulting in a decrease of $24,930 or
3.2%. Part of the decrease was due to the costs associated with the
NOW Solutions user conference held in May 2009, partially offset by higher
customer support costs due to an increase in salaries, fringe benefits and
travel.
Selling, General
and Administrative Expenses. We had selling, general and
administrative expenses of $1,031,158 and $1,238,595 in the three months ended
June 30, 2010 and 2009, respectively. The $207,437 or 16.7%
decline was due to lower professional fees for attorneys, audit and tax work,
primarily as a result of the Ross litigation settlement in 2009, as well as
lower salaries and fringe benefits as a result of eliminating one highly
compensated sales position, offset by adding an additional customer support
person and higher costs for travel and entertainment.
For the
six months ended June 30, 2010 we had $2,055,458 compared to $2,512,386 for the
six months ended June 30, 2009. The $456,928 or
18.2% decrease is due to lower stock compensation costs, accounting fees,
legal fees (as a result of settling the Ross litigation), consulting fees, and
the charges related to obtaining the proceeds from the litigation settlement of
$63,024.
Gain on
Derivative Liability. We have existing
derivative liabilities related to common stock loaned to the company by an
entity controlled by an executive and embedded derivative liabilities on
convertible debt. This liability is adjusted each quarter for changes
in the market value of the company stock and other items that impact the
valuation of the derivatives. The gain on derivative liability was
$7,860 for the three month period ended June 30, 2010 compared to $225,548 for
the same period in 2009. For the six months ended June 30, 2010, the
gain on derivative liability was $76,564 compared to $39,980 for the same period
ended June 30, 2009.
Interest
Expense. We had interest
expense of $122,663 and $113,454 for the three months ended June 30, 2010 and
2009, respectively. Interest expense increased for the period in 2010
by $9,209, representing an increase of 8.1% compared to the same expense in
the three months ended June 30, 2009. This increase was mainly due to
default interest on several notes and the impact of new notes we incurred in
November 2009.
For the
six months ended June 30, 2010, we had interest expense of $225,198 compared to
$297,183 for the same period in 2009, representing a $71,985 or 24.2% reduction
for the period. The decrease was due to the principal payments made
on notes payable and the payoff of a note as a result of proceeds of the Ross
litigation, partially offset by the impact of new notes incurred in November
2009.
Gain on
Settlement of Litigation. On March 24, 2009, NOW Solutions applied
for and received the cash deposit of Ross Systems, Inc. that was held by the New
York City Department of Finance. These funds had been deposited by
Ross to stay enforcement of the judgment awarded to NOW Solutions in the action
of Ross Systems, Inc. v. NOW Solutions. The stay was vacated by
operation of law after the judgment was affirmed by the New York, Appellate
Division on February 11, 2009. The gain is the total of the gross
proceeds from the judgment (excluding interest income) plus the note payable to
Ross and interest that had been accrued on the note. We also had a
receivable from Ross for certain funds due us after the acquisition was
completed that was also written off. However, that receivable had
been fully reserved, so there was no income impact of the
receivable. There was no litigation settlement in 2010.
Interest
Income. As a result of the receipt of the judgment from Ross
which resulted in the gain described above, we also received $133,424 of
interest income on the funds deposited by Ross with the New York Appellate Court
system, which shows as interest income for the six months ended June 30,
2009. There were no other significant sources of interest income in
the same period of 2010.
Net Income
(Loss). We had net loss of $159,151 and $198,536 for the three
months ended June 30, 2010 and 2009, respectively. The net loss for
the three months ended June 30, 2010 and 2009 are due to the factors discussed
above.
We had a
net loss of $154,491 and net income of $3,629,026 for the six month periods
ended June 30, 2010 and 2009, respectively. The net loss for the six
month period ended June 30, 2010 was due to the factors discussed
above. The net income for the six months ended June 30, 2009 was
primarily driven by the gain on settlement of the Ross litigation discussed
above. Without the gain on the settlement and the specific fees and
interest income associated with the settlement, we would have had a net loss of
$635,067 for the comparable period in 2009.
17
Dividends
Applicable to Preferred Stock. We have outstanding Series A 4%
convertible cumulative preferred stock that accrues dividends 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 at a rate of 4% on
a quarterly basis. The total dividends applicable to Series A and
Series C preferred stock were $147,000 for each of the three months ended June
30, 2010 and 2009 and $294,000 for each the six months ended June 30, 2010 and
2009.
Net Income (Loss)
Available to Common Stockholders. We had net loss available to
common stockholders of $276,107 and $345,536 for the three months ended June 30,
2010 and 2009, respectively.
We had a
net loss available to common stockholders of $414,339 and net income available
to common stockholders of $3,335,026 for the six months ended June 30, 2010 and
2009, respectively. Net income (loss) available to common
stockholders was due to the factors discussed above.
Net Loss Per
Share. Due to the large number of shares outstanding, we had
net income or loss per share of $0.00 for the three and six month periods ended
June 30, 2010 and 2009.
Liquidity
And Capital Resources
At June
30, 2010, we had non-restricted cash-on-hand of $122,646 compared to $229,738 at
December 31, 2009.
Net cash provided by operating
activities for the six months ended June 30, 2010 was $154,129 compared to
$1,428,581 for the six months ended June 30, 2009. For the six months
ended June 30, 2010, we collected cash from our customers of $3,204,592 and
other miscellaneous receipts of $7,704. We used the cash to pay for
salaries, benefits, payroll taxes and payroll fees of $1,855,102, attorney fees
of $67,128, professional fees and consultants of $347,671, interest expense of
$146,882, taxes (including sales tax and VAT) of $173,804, and other regular
trade payables of $467,580. For the six months ended June 30, 2009,
we collected cash from our customers of $2,669,400 and cash from litigation
settlement of $3,284,640 (including interest income of $133,424). We
used the cash to pay for salaries, benefits, payroll taxes and payroll fees of
$1,811,073, attorney fees of $754,949, professional fees and consultants of
$347,100, interest expense of $871,558, taxes (including sales tax and VAT) of
$194,043, and other regular trade payables of $546,736.
A large portion of our cash (and
revenue) comes from software maintenance. When we bill and collect
for software maintenance, we record a liability in deferred revenue and
recognize income ratably over the maintenance period. At the end of
fiscal 2009, we had a slight decline in deferred revenue due to selective
adjustments to maintenance agreements to clients who had experienced a workforce
reduction, resulting in deferred revenue declining from $2,404,680 at December
31, 2009 to $2,312,166 at June 30, 2010, excluding the impact of the deferred
revenue associated with the SnAPPnet acquisition.
The decline in the deferred maintenance
revenue also contributes to the reduction in our accounts receivable
trade. Accounts receivable trade dropped from $783,219 to $288,399
(net of allowances for bad debt). The most significant cause of the receivable
drop is due to the timing of when we bill for software
maintenance. Most of these billings are annual billings and
maintenance billings in June of 2010 were approximately $200k less than they
were in December 2009. Also, due to our cash position, we have also
placed greater emphasis on collecting our receivables as quickly as possible,
which also contributes to the lower balance.
The accounts payable and accrued
liabilities went from $6,397,575 at December 31, 2009 to $6,446,459 at June 30,
2010. The increase in accounts payable and accrued liabilities is the
result of delaying payments on accounts payable, interest on certain notes
payable and taxes to various government entities. Included in the
accounts payable and accrued liabilities balance at June 30, 2010 and December
31, 2009 is $1.9 million of payroll liabilities due to past and present
employees. An agreement has been put in place to defer any claim on
the amount until July 1, 2011. The resulting balance at June 30,
2010, excluding the impact of deferred payroll claims from current and prior
employees (which has been deferred until July 1, 2011), is almost 16 times more
than the balance in accounts receivable. This is one of the reasons
why we do not have sufficient funds available to fund our operations and repay
our debt obligations under their existing terms, as described
below.
We used cash to invest in equipment for
the six months ended June 30, 2010 and June 30, 2009 of $78,591 and $12,461,
respectively. We also used cash of $5,335 and assumed certain debt
and contingent liabilities to acquire substantially all of the business and
assets of Pelican Application, LLC’s businesses (the SnAPPnet acquisition) in
May 2010 and used cash of $24,999 and issued a note payable to acquire a 90%
interest in PTS for $63,000 at the end of June 2009.
For the
six months ended June 30, 2010, we paid $156,596 of principal on notes payable
and had no new debt funding in the same period. For the six months
ended June 30, 2009, we received $104,000 of proceeds from new notes payable and
paid $1,529,024 of principal on outstanding notes.
18
The total change in cash for the six
months ended June 30, 2010 when compared to the six months ended June 30, 2009
was a decrease of $39,335.
As of the
date of the filing of this Report, we do not have sufficient funds available to
fund our operations and repay our debt obligations under their existing
terms. Therefore, we need to raise additional funds through selling
securities, obtaining loans, renegotiating the terms of our existing debt and/or
increasing sales with our new products. Our inability to raise such
funds or renegotiate the terms of our existing debt will significantly
jeopardize our ability to continue operations.
Balance
at
|
Due
in Next Five Years
|
|||||||||||||||||||||||
Contractual
Obligations
|
06/30/10
|
2010
|
2011
|
2012
|
2013
|
2014+ | ||||||||||||||||||
Notes
payable
|
$ | 3,331,905 | $ | 1,863,187 | $ | 156,293 | $ | 122,965 | $ | 139,261 | $ | 1,050,199 | ||||||||||||
Convertible
debts
|
40,000 | 40,000 | - | - | - | - | ||||||||||||||||||
Total
|
$ | 3,371,905 | $ | 1,903,187 | $ | 156,293 | $ | 122,965 | $ | 139,261 | $ | 1,050,199 |
Of the
notes payable of $3,331,905, the default situation is as follows:
06/30/10
|
12/31/09
|
|||||||
In
default
|
$ | 2,698,895 | $ | 2,670,051 | ||||
Current
|
633,010 | 751,790 | ||||||
Total
Notes Payable
|
$ | 3,331,905 | $ | 3,421,841 |
The
carrying amounts of assets and liabilities presented in the financial statements
do not purport to represent realizable or settlement values. We have suffered
significant recurring operating losses, used substantial funds in our
operations, and we need to raise additional funds to accomplish our objectives.
Negative stockholders’ equity at June 30, 2010 was $21.1 million. Additionally,
at June 30, 2010, we had negative working capital of approximately $10.3 million
(although it includes deferred revenue of approximately $2.4 million) and
defaulted on several of our debt obligations. These conditions raise substantial
doubt about our ability to continue as a going concern.
Our
management is continuing its efforts to attempt to secure funds through equity
and/or debt instruments for our operations, expansion and possible acquisitions,
mergers, joint ventures, and/or other business combinations. We will
require additional funds to pay down our liabilities, as well as finance our
expansion plans consistent with our anticipated changes in operations and
infrastructure. However, there can be no assurance that we will be able to
secure additional funds and if such funds are available, whether the terms or
conditions would be acceptable to us and whether we will be able to turn into a
profitable position and generate positive operating cash flow. The
consolidated financial statements contain no adjustment for the outcome of this
uncertainty.
Related
Party Transactions
In November 2009, MRC pledged
16,976,296 shares of Company common stock owned by MRC as collateral in
connection with a $150,000 note payable by the Company. MRC is
controlled by the W5 Family Trust, and Mr. Richard Wade, the President and CEO
of the Company, is the trustee of the W5 Family Trust. In January 2010,
the Company entered into an amendment of the Transfer and Indemnity Agreement
with MRC. Pursuant to this amendment, and in consideration of the
pledge by MRC, the Company agreed to pay MRC a fee as follows: (i)
$3,000 for the first year of the term of the note and (ii) 2% of the unpaid
principal balance of the note for each succeeding year during the term of the
note.
In March
2010, the Company further amended the Transfer and Indemnity Agreement
(amendment originally entered into in January 2010) with MRC. Pursuant to this
amendment, MRC received 300,000 shares of the Series A Convertible Preferred
Stock of VHS in exchange for the cancellation of the Company’s obligation to
issue 10,000,000 shares of common stock of the Company to MRC.
In March
2010, the Company transferred 610,000 shares of Series A Convertible Preferred
Stock of VHS to Mr. Robert Farias in exchange for the following: (a)
an irrevocable waiver by Mr. Farias of the conversion rights in respect of
37,500 shares of the Company’s Series “C” 4% Cumulative Convertible Preferred
Stock owned by Mr. Farias; (b) cancellation by Mr. Farias of $100,000 of debt
owed by the Company to Mr. Farias; and (c) cancellation by Mr. Farias of three
separate common stock purchase warrants held by Mr. Farias, exercisable for an
aggregate of 15,000,000 shares of common stock of the Company. As a
consequence of the waiver of conversion rights and the cancellation of warrants,
the Company is no longer obligated to issue up to 30,000,000 shares of its
common stock. Mr. Farias is an employee of VHS, a Director of NOW
Solutions, and a Director of PTS.
19
In March
2010, the Company and Luiz Valdetaro entered into an amendment of two indemnity
and reimbursement agreements whereby the obligation to reimburse Mr. Valdetaro
in respect of an aggregate 3,000,000 common shares that were transferred to
third parties on behalf of the Company (in connection with certain extensions of
loans of the Company in April 2008) was cancelled in exchange for the Company’s
transfer of 90,000 shares of VHS Series A Preferred Stock owned by the
Company. Mr. Valdetaro is our Chief Technology
Officer. For more details, please refer to “Common and Preferred
Stock Transactions” in Note 4 of the Notes to the Consolidated Financial
Statements.
On July
23, 2010, we entered into an agreement with certain former and current employees
of the Company, concerning the deferral of payroll claims of approximately
$1,950,000. The claims are for salary earned from 2001 to 2008, which
remains unpaid and is reflected as a current liability on the Company’s audited
financial statements.
Pursuant
to the terms of the agreement, each current and former employee who is a party
to the agreement (the “Employee”) agreed to continue the deferral of salary
(“Salary Deferral”) for a period of one year following the date of the
agreement. In consideration for the Salary Deferral, the Company
agreed to pay each Employee a sum equal to the amount of unpaid salary at
December 31, 2003 plus the amount of unpaid salary at the end of any calendar
year after 2003 in which such salary was earned, plus nine percent interest,
compounded annually until such time as the unpaid salary has been paid in
full. The Company and the Employees have agreed that the deferred
salary plus interest will be paid from amounts anticipated to be paid to the
Company in respect of specified intellectual property assets of the
Company.
In order
to effect the payments due under the agreement, the Company assigned to the
Employees a twenty percent interest in any net proceeds (gross proceeds less
attorney’s fees and direct costs) derived from infringement claims regarding (a)
U.S. patent #6,826,744 and U.S. patent #7,716,629 (plus any continuation
patents) on Adhesive Software’s SiteFlash™ Technology, (b) U.S. patent
#7,076,521 in respect of “Web-Based Collaborative Data Collection System”, and
U.S. patent application #09/888,329 in respect of “Method and System for
Providing a Framework for Processing Markup Language Documents.”
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4T.
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 associated with our
business is set forth on Form 10-K for the year ended December 31, 2009 filed on
April 14, 2010.
There
have been no material changes in our internal control over financial reporting
since our reporting on Form 10-K for the year ended December 31,
2009.
20
PART
II
OTHER
INFORMATION
Item
1. Legal Proceedings
We have been or are involved in the
following ongoing legal matters:
On
November 18, 2009, we sued InfiniTek in the Texas State District Court in Fort
Worth, Texas for breach of contract and other claims (the “Texas Action’)
seeking equitable relief and unspecified damages when a dispute between the
Company and InfiniTek was not resolved. All agreements were cancelled
in 2009 except for the distribution agreement. On January 15, 2010, InfiniTek
filed a counter-claim for non-payment of amounts billed. InfiniTek
claims it is owed $195,000, and has incurred alleged lost opportunity cost of
not less than $220,000. We attempted unsuccessfully to resolve our dispute with
InfiniTek via mediation. Our lawsuit was amended on March 30, 2010 and the
distribution agreement has been cancelled. Discovery is
ongoing.
On April
7, 2010, we were served with a lawsuit filed by InfiniTek in the California
Superior Court in Riverside, California seeking damages in excess of $76,303 for
breach of contract and lost profit. On May 7, 2010, we filed a motion
to dismiss this action. On July 14, 2010, the court denied our
motion. On August 13, 2010, we filed an answer to InfiniTek’s
complaint which contained a denial and affirmative defenses. We
continue to litigate the claims made by InfiniTek in this action as well as our
other claims against InfiniTek in the Texas case.
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. Also,
in the future, we may become involved in other legal actions that may have a
significant effect on our financial position, operations or cash
flows.
Item
1A. Risk Factors
A
description of the risks associated with our business, financial condition, and
results of operations is set forth on Form 10-K for the year ended December 31,
2009, as filed on April 14, 2010.
Item
2. Unregistered Sale of Equity Securities and Use of Proceeds
In March
2010, the Company further amended the Transfer and Indemnity Agreement
(amendment originally entered into in January 2010) with MRC. Pursuant to this
amendment, MRC received 300,000 shares of the Series A Convertible Preferred
Stock of VHS in exchange for the cancellation of the Company’s obligation to
issue 10,000,000 shares of common stock of the Company to MRC.
In March
2010, the Company transferred 610,000 shares of Series A Convertible Preferred
Stock of VHS to Mr. Robert Farias in exchange for the following: (a)
an irrevocable waiver by Mr. Farias of the conversion rights in respect of
37,500 shares of the Company’s Series “C” 4% Cumulative Convertible Preferred
Stock owned by Mr. Farias; (b) cancellation by Mr. Farias of $100,000 of debt
owed by the Company to Mr. Farias; and (c) cancellation by Mr. Farias of three
separate common stock purchase warrants held by Mr. Farias, exercisable for an
aggregate of 15,000,000 shares of common stock of the Company. As a
consequence of the waiver of conversion rights and the cancellation of warrants,
the Company is no longer obligated to issue up to 30,000,000 shares of its
common stock. Mr. Farias is an employee of VHS, a Director of NOW
Solutions, and a Director of PTS.
In March
2010, the Company and Luiz Valdetaro entered into an amendment of two indemnity
and reimbursement agreements whereby the obligation to reimburse Mr. Valdetaro
in respect of an aggregate 3,000,000 common shares that were transferred to
third parties on behalf of the Company (in connection with certain extensions of
loans of the Company in April 2008) was cancelled in exchange for the Company’s
transfer to Mr. Valdetaro of 90,000 shares of VHS Series A Preferred Stock owned
by the Company. Mr. Valdetaro is our Chief Technology
Officer. For more details, please refer to “Common and Preferred Stock
Transactions” in Note 4 of the Notes to the Consolidated Financial
Statements.
During
the six months ended June 30, 2010, 416,666 unregistered shares of our common
stock valued at $7,550 vested. These shares were issued pursuant to restricted
stock agreements with employees of the Company and NOW Solutions executed in
2007.
Item
3. Defaults Upon Senior Securities
None
21
Item
4. Reserved
Item
5. Other Information
None
Item
6. Exhibits
The
following documents are filed as part of this report:
Exhibit No.
|
Description
|
Location
|
||
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated August 20, 2010
|
Provided herewith
|
||
31.2
|
Certification
of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated August 20,
2010
|
Provided
herewith
|
||
32.1
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated August 20, 2010
|
Provided
herewith
|
||
32.2
|
|
Certification
of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated August 20,
2010
|
|
Provided
herewith
|
22
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
VERTICAL
COMPUTER SYSTEMS, INC.
|
|||
August
20, 2010
|
By:
|
/s/ Richard
Wade
|
|
Richard
Wade
|
|||
President
and Chief Executive Officer
|
|||
August
20, 2010
|
By:
|
/s/ David
Braun
|
|
David
Braun
|
|||
Chief
Financial Officer
|
23