VERTICAL COMPUTER SYSTEMS INC (Form: 10-K, Received: 04/14/2016 17:40:08)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:

For the fiscal year ended December 31, 2015

¨ 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 registrant 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)

Registrant’s telephone number: (972) 437-5200

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)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 file. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained in this form, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or amendment to this Form 10-K. Yes x 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 Act). Yes ¨ No x

Issuer’s revenues for fiscal year ended December 31, 2015: $ 4,263,635

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the registrant’s most recently completed second fiscal quarter: $37,896,769.

As of April 14, 2016, the issuer had 1,129,367,529 shares of common stock, par value $0.00001, issued and outstanding.

Documents incorporated by reference: None

VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015

TABLE OF CONTENTS

PART I	2
Item 1. Business	2
Item 1A. Risk Factors	13
Item 2. Properties	18
Item 3. Legal Proceedings	18
Item 4. Mine Safety Disclosures	18
PART II	19
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	19
Item 6. Selected Financial Data	22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	28
Item 8. Financial Statements and Supplementary Data	28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	28
Item 9A. Controls and Procedures	28
Item 9B. Other Information	29
PART III	30
Item 10. Directors, Executive Officers and Corporate Governance	30
Item 11. Executive Compensation	32
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	35
Item 13. Certain Relationships and Related Transactions, and Director Independence	35
Item 14. Principal Accountant Fees and Services	37
PART IV	38
Item 15. Exhibits and Financial Statement Schedules	38
SIGNATURES	40

PART I

Item 1. 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, and (f) 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,” “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 ”, “ VCSY ”, the “ Company ”, the “ Registrant ”, “ we ”, “ our ”, or “ us ”) was incorporated in the State of Delaware in March 1992. We operated as a non-reporting public shell company until October 1999, at which time we acquired all the outstanding capital stock of Externet World, Inc., an Internet service provider and became an operating entity. In April 2000, we acquired 100% of the outstanding common stock of Scientific Fuel Technology, Inc. (“ SFT ”), a company with no operations. Also in April 2000, we merged SFT into our company, as a consequence of which the outstanding shares of SFT were cancelled, Vertical became the surviving entity, and we assumed SFT’s reporting obligations pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”).

Business Overview

We are a global provider of application software, cloud-based and software services, Internet core technologies, and intellectual property assets through our distribution network with operations or sales in the United States, Canada and Brazil.

We attempt to acquire marketing or licensing rights for products which, in our belief, are best-of-breed, are profitable or on the path to profitability, are complementary to our other software offerings, and provide cross-product distribution channels. Our business model combines complementary and 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.

We developed a private communication platform based upon our patented technologies that we believe will change the nature of communication on the Internet by providing individuals with a true private communication channel as well as personal cloud capabilities.

VCSY’s platform eliminates the central server component in communications over the Internet and is based on the user having a web server on their mobile device, which may be synchronized with their tablet, PC or other hardware components (i.e. storage disks). VCSY’s platform is not a social media product, but rather a platform for users wanting to protect their data and information flow.

VCSY’s first application to be built upon that platform is Ploinks™, a personal private communication channel. Ploinks™ provides users with the ability to protect their data such as images, messages or videos, that protection being from both unwanted data transmissions and from third parties gaining ownership rights to their data. While users may still use all social media applications currently available, Ploinks™ provides a means to preserve and protect the part of the data they want to keep control of. Ploinks™ is currently in the beta-testing stage and we anticipate launching this product within the next few months.

Administrative Software

Our main administrative application software, emPath®, which is designed to handle complex payroll and human resources challenges, is developed, marketed and maintained by NOW Solutions. emPath® is natively Web-based, which means that the application can easily be accessed with a web browser. NOW Solutions, a 75% owned subsidiary, is selling emPath® in the United States and Canadian markets both as a software solution and a Software-as-a-Service (“ SaaS ”) offering, also known as Cloud-based offering. For a description of our cloud computing model for emPath®, please see the section entitled “Cloud-based services” below.

In 2010, we completed the workflow engine for emPath® and continued improvements for its cloud computing model. We also implemented our new strategy of developing certain HR/payroll related modules that can be sold separately from emPath® or bundled with emPath® as a comprehensive solution. These new features, when coupled with experience gained with the product by the Brazil-based development staff (over the past eight years), have substantially facilitated faster product development. In addition, we have significantly improved the scalability of emPath® to meet the needs of small businesses as well as very large enterprise clients.

Our continuous effort to improve our emPath® product and its cloud-based offering has allowed us to finalize and launch our new module-based initiative under which certain payroll/human resource modules can be marketed independently from emPath® or bundled into a comprehensive solution. A key objective of the module development initiative has been to enable new modules to be sold to a smaller customer base (companies with 25 to 500 employees) in a simple standardized version. This version will have full functionality and all the benefits of a total enterprise solution, while maintaining scalability in order to meet the needs of and to compete for the largest corporate customers and government entities, which often have complex payroll rules. We also have a global payroll initiative to launch emPath® internationally.

Our time and attendance software, PTS™, has been designed with the flexibility to meet the needs of a simple small business requirements as well as the most complex union-intensive clients through a rule-based time policy system coupled with a dashboardlet™ feature for presentations of information supporting numerous databases including Oracle, DB2 and SQL. For a description of this feature, please see the section entitled “Internet Core Technologies” below.

PTS™ will be marketed as a stand-alone best-of-breed solution through Priority Time Systems, Inc. (“ Priority Time ”) as well as an integrated module within emPath®, which we are marketing to emPath®’s existing customer base. Our initial marketing efforts are focused on the United States and Canadian markets.

SnAPPnet™ is currently marketed as a best-of-breed standalone solution through SnAPPnet, Inc. We are in the process of integrating this product with emPath® so it can also be sold to NOW Solutions’ customers as an emPath® module.

We have other administrative software in various stages of development which will be marketed through our subsidiaries including Priority Time, Vertical Healthcare Solutions, Inc. (“ VHS ”), and Taladin, Inc., (“ Taladin ”).

We believe that our administrative software solutions, which offer lower set-up fees and faster implementation times compared to competing products, provide customers with significant upfront cost savings and substantial increases in productivity for administration of everyday operations.

Cloud-based services

In addition to our standard software licensing model, where the software is deployed, hosted and maintained internally by the customer, we are offering customers with an alternate delivery method: software-as-a-service, or simply “cloud-based.” Cloud-based is a software delivery model where the company develops, operates, and hosts the application in data centers for use by its customers over the Internet.

A cloud-based service is a cost-effective, reliable and secure way for businesses to obtain the same benefits of commercially licensed, internally operated software, without the associated complexity and high start-up costs of deploying the software in-house or the need to dedicate IT people on staff to monitor and upgrade such a system.

After completing the testing of its emPath® cloud-based model to ensure a robust and competitive solution, NOW Solutions began selling that offering to existing and new clients. This delivery model provides a highly reliable, secure and scalable infrastructure, enabling us not only to continue servicing and expanding our current market of mid to large sized customers but also to increase our market reach by offering a solution to smaller sized customers, which otherwise may not be able to afford an in-house solution.

As an expanded product and as a result of our initial sales to customers with complex payroll, NOW Solutions has created a tailored cloud-based offering which provides these types of customers the cost benefits of a cloud computing model while meeting their complex requirements. We are also continuing to upgrade emPath® for our cloud computing offering utilizing emPath®’s powerful payroll component to provide private label contracting as well as distribution opportunities through existing payroll providers in their local markets.

PTS™, our time and attendance software, will also be offered as a cloud-based solution, as both a standalone product (through Priority Time and VHS) and an integrated module with emPath® (through NOW Solutions).

SnAPPnet™, a physician credentialing application, is currently offered as a cloud-based solution. We are in the process of developing a registered nurse module of SnAPPnet™. In addition, we are adding some key new features to the software application as well as doing a design review to meet other potential markets for credentialing and markets in need of automated fillable forms. We are marketing SnAPPnet™ directly to hospitals and plan to offer it through VHS to physicians in the United States and to NOW Solutions’ existing customer base.

In addition, we have converted our SiteFlash™ product to offer it in a cloud-based configuration. We intend to concentrate our initial marketing efforts for internal development projects connected with our private communication platform and its applications. For a description of SiteFlash™, please see the section entitled “Internet Core Technologies” below.

Software Services

In addition to the application software and cloud-based services, we offer a full range of software services that include professional services, maintenance, custom maintenance and managed services.

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 other software products for rapid deployment of all software products throughout our distribution system. We continue to develop specialized software applications that can be utilized in new products.

Our first patented internet core 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, permitting 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 includes text, pictures or multimedia. Form includes graphics and website colors, layout and design. Function includes 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. SiteFlash™ architectural concepts enable integration with existing technological components within many organizations. Additional key features of SiteFlash™’s are its affiliation/syndication capability, its multi-lingual capability, and its multi-modal framework (enabling use on any output device, including wireless devices such as smart phones, as well as cellular phones and other devices with Internet capability).

SiteFlash™ can be offered 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 three additional software application products: ResponseFlash™, NewsFlash™ and AffiliateFlash™. In addition to a cloud-based offering, we are in the process of using SiteFlash™ as an internal component, along with some other company technology, in a new application which will be called the Physicians Bridge, and be marketed through VHS.

The second patented Internet core technology we have developed is the Emily™ XML scripting language, a Markup Language Executive (MLE), which is Java compatible. XML is a flexible way to create common information formats and share both the format and the data on the World Wide Web, intranets, and elsewhere. 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 the Emily XML scripting language, a programming language that runs on Windows™, Linux and several UNIX platforms. The Emily™ Framework is used 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 third patented Internet core technology we have developed is the combination of three components: the Emily™ XML Broker, the Emily™ XML Agent and the Emily™ XML Portal. This technology has been featured as an alternative to Web Services in the 4 ^th Edition of the XML Handbook, by Dr. Charles Goldfarb, considered the father of XML and inventor of all markup languages. We are upgrading this technology for use in a new application we are developing simultaneously.

The fourth Internet core technology is based on a web server technology that was licensed to the Company. This technology was acquired with the intent to modify it and use it, along with the Emily™ technology, five other patent-pending applications and our SiteFlash™ patents, as a basis to create a core private communication platform. In 2016, using this communication platform, we plan to launch, through our subsidiary, Ploinks, Inc, a personal private mobile communications channel, known as Ploinks™. Ploinks™, version 1.7 is currently in the process of beta testing.

In addition, in the summer of 2010, we elected to utilize a new software development platform which we used for PTS™ and also created “dashboardlets ^TM ” (a proprietary tool for business intelligence) allowing the scalability to meet large and/or complex customer requirements. In addition, this development platform will be used to develop other modules for our software solutions and to support SnAPPnet™ and certain portions of emPath®.

Intellectual Property Assets

Our SiteFlash technology is a System and Method for Generating Web sites in an Arbitrary Object Framework. This unique ability is patented under U.S. Patent No. 6,826,744 and continuation patent U.S. Patent No. 7,716,629 as well as a continuation patent (U.S. Patent No. 8,949,780) of U.S. Patent No. 7,716,629.

Our Emily™ core technology is the basis for a “Web-based collaborative data collection system”, which allows a disparate and distributed database to be viewed and updated as if it was a single large database. This unique ability is patented under U.S. Patent No. 7,076,521.

Our Emily™ XML scripting language, coupled with other Company technology, is the basis for development of mobile applications. This unique ability is patented under U.S. Patent No. 8,578,266.

Our patent for a “System and Method Running a Web Server on a Mobile Internet Device,” which is part of our Mobile Framework (the “MLE Framework") and covers the Tiny Web Server, which is also a component of our MLE Framework. This unique ability is patented under U.S. Patent No. 9,112,832.

Our fiber optic patent is an invention for “Transmission of Images Over a Single Filament of Fiber Optic Cable” under U.S Patent No. 6718103.

Finally, we have other mobile technologies, which are patent-pending.

Market Segments

Our current products address the following market segments:

MARKET	PRODUCT	OWNERSHIP/LICENSOR	LICENSEE
Human Resources and Payroll	emPath®	NOW Solutions	VHS ^(a) , Taladin ^(b)
Government Sector- Emergency Response	ResponseFlash™	Vertical	GIS ^(b)
Software development units	Emily™	Vertical	VHS ^(a)
Content Management Framework	SiteFlash™	Vertical	Unifocus ^(c)
Time and Attendance	PTS™	Priority Time	VHS ^(a) , NOW Solutions ^(d)
Healthcare Credentialing	SnAPPnet™	SnAPPnet, Inc.	VHS ^(a) , NOW Solutions ^(d)
Private communication	Ploinks™	Vertical	Ploinks, Inc. ^(e)

^(a)

Physician market (including medical clinics but not including hospitals)

^(b)

Government market

^(c)

Hospitality market (including hotels, fast food chains, theme parks, restaurant chains, but not including casinos)

^(d)

Clients of NOW Solutions

^(e)

Personal private communications channel for individual consumers

Business Operations and Units

Our business operations are grouped into the following units: NOW Solutions, Ploinks, Inc., Taladin, VHS, Priority Time Systems, SnAPPnet, Inc., GIS, Vertical do Brasil, and other subsidiaries with minimal or no activity and other limited interests. Each of these divisions is discussed below.

NOW Solutions, Inc.

NOW Solutions, a Delaware corporation, is a 75% owned subsidiary of the Company. NOW Solutions specializes in end-to-end, fully integrated human resources and payroll solutions. NOW Solutions has clients in the United States and Canada ranging from private businesses to government agencies, who typically employ 500 or more employees. NOW Solutions currently markets emPath®, a payroll and human resources and payroll solution. emPath® meets the needs for clients who have complex payroll where they may have employees from different unions, multiple locations in different states (U.S.) and provinces (Canada), and intricate compensation structures. We believe that the competitive advantage of emPath® is its speed of implementation through a formula-builder technology, which provides customers with rapid customization of payroll rules and calculations without the need for any programming expertise. NOW Solutions’ product suite is targeted to address the needs of management in today’s dynamic business environment and gives organizations a user-friendly, flexible, multi-lingual (i.e., English, Canadian French, Spanish, Portuguese, and Chinese) software solution, without the multi-million dollar implementation and support budgets typically required to use the payroll and HR products of major competitors.

NOW Solutions has converted some of its existing customers to its cloud-based model and is in the process of developing methods to introduce its cloud-based offering (supporting MS SQL, Oracle and DB2 databases) through distributors in the United States. During the conversion of one of our large complex customers and in discussions with other similar complex customers, we determined that there was a critical need and opportunity in providing a solution we are labeling “tailored cloud-based”, which can fulfill our customers’ unique requirements while giving them the benefits of a cloud-based offering.

Additionally, NOW Solutions has embarked on a strategy of developing and licensing HR products complementary to its existing suite of products that can be sold separately or integrated as emPath® modules, which has been greatly facilitated by emPath®’s Web Services integration. PTS™ is the first product to be integrated within the emPath® solution. NOW Solutions is currently finalizing the integration of PTS™ with emPath®. The second product is SnAPPnet™, which is in the in the process of being upgraded to expand the utility of the product beyond traditional credentialing software so that it can be used by HR departments of NOW Solutions’ existing customer to create and administer fillable forms routinely used for employees.

NOW Solutions has also finalized its business plan to expand into the global payroll market, utilizing its existing expertise gained from offering a comprehensive payroll/HR solution to customers with employees throughout the United States and Canada.

The revenue model of NOW Solutions is based upon five components: licensing and renewable annual maintenance fees, cloud-based fees, professional consulting services, and managed services. Under the cloud-based delivery model, NOW Solutions typically collects monthly fees.

For the 12 months ended December 31, 2015, NOW Solutions had approximately $415,456 of total assets, revenues of approximately $4,186,363 and net income of approximately $857,120.

Taladin, Inc.

Taladin, a Texas corporation, is a wholly-owned subsidiary of the Company. Taladin is being positioned to be the parent company for NOW Solutions, Priority Time and SnAPPnet in order to coordinate the Company’s business administrative software product lines as well as its marketing efforts.

For the 12 months ended December 31, 2015, Taladin had no material assets, no revenues and a net loss of approximately $15,649.

Ploinks, Inc.

Ploinks, Inc., a Texas corporation (formerly OptVision Research, Inc.), is a 93% owned subsidiary of the Company.

Vertical has licensed its private communication platform to Ploinks, Inc., for use by consumers as a personal private communication channel. The Ploinks™ application is currently in beta-testing and we anticipate launching this product within the next few months.

For the 12 months ended December 31, 2015, Ploinks, Inc. had no material assets, no revenues and no expenses.

Vertical Healthcare Solutions, Inc.

VHS, a Texas corporation, is a wholly-owned subsidiary of the Company. VHS will market a new platform called the “Physicians Bridge”, which will be the basis for marketing applications to physicians utilizing other Vertical technologies and products which were licensed for the physician market by Vertical to VHS in 2010. Vertical will license its communication platform to VHS to be utilized as a communication channel between physicians as well as a communication channel between physicians and patients.

For the 12 months ended December 31, 2015, VHS had no material assets, no material revenues, and a net loss of approximately $141,031.

Priority Time Systems, Inc.

Priority Time, a Nevada corporation, is an 80% owned subsidiary of the Company. On June 15, 2009, we purchased 90% of the common stock of Priority Time from a shareholder of Priority Time. In addition, we entered into a shareholder agreement with the selling shareholder of Priority Time whereby we have the option to purchase the remaining 10% of the common shares of Priority Time stock at any time after 3 years from the date of our purchase of our 90% interest. The shareholder agreement also provides for the licensing terms of Priority Time products to our other subsidiaries.

Priority Time has been developing PTS™, a time and attendance product that will be offered as both a standalone product and as an integrated module within emPath®. In late spring 2010, we elected to stop development of PTS™ in its then-current form and switched to a new development platform. That new platform allowed us to create a cloud-based solution that utilizes a rule-based system, which will better meet the needs of NOW Solutions’ most complex customers and more easily create a time and attendance product for vertical markets (i.e. medical, government, casinos, and hospitality).

PTS™ was developed to meet the unique and complex requirements of NOW Solutions’ customers, particularly for the medical and government markets, who provided us with specifications for an ideal time and attendance program. The most critical need of complex customers was robust flexibility which led to the creation, from the ground up, of a rule-based time and attendance application, allowing users to make for immediate changes within the application while also providing a state-of-the-art reporting ability to senior executives. The result also led to a new development platform as well as another application called “dashboardlets ^TM .” PTS™ will be commercially available once a major emPath® update is completed and its integration with emPath® finalized.

For the 12 months ended December 31, 2015, Priority Time had no material assets, no material revenues and a net loss of approximately $3,153.

SnAPPnet, Inc.

SnAPPnet, Inc., a Texas corporation, is an 80% owned subsidiary of the Company. On May 21, 2010, SnAPPnet, Inc. purchased substantially all the assets of Pelican Applications, LLC (“ Pelican ”) in exchange for $5,335 cash, 100,000 shares of Series B Convertible Preferred Stock of VHS, 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. We intend to utilize the SnAPPnet™ software to expand its offering to physicians, and to adapt the software to meet the needs of NOW Solutions’ hospital clients who may need a credentialing product for nurses.

Specifications are being finalized to rewrite SnAPPnet™ core application to utilize our new administrative development platform, including our proprietary dashboardlets™.

For the 12 months ended December 31, 2015, SnAPPnet, Inc. had assets of approximately $8,626, revenues of approximately $77,272 and a net loss of approximately $32,319.

Government Internet Systems, Inc.

GIS, a Nevada corporation is our 84.5% owned subsidiary. Vertical licensed ResponseFlash™ to GIS in order to market and distribute this technology to government entities (excluding state universities and schools) in the United States. We are in the process of reviewing the marketing objectives and products for GIS.

For the 12 months ended December 31, 2015, GIS had no assets, no material revenue and net loss of approximately $ 10,209.

Vertical do Brasil

Our 100% owned subsidiary, Vertical do Brasil, a Brasilian company, houses a software development team that performs services on behalf of the Company and its subsidiaries.

For the 12 months ended December 31, 2015, Vertical do Brasil had assets of approximately $3,057, no revenues and net loss of approximately $80,143.

The following corporations are inactive:

Vertical Internet Solutions, Inc.

VIS, a California corporation, is a wholly-owned subsidiary of the Company. VIS is inactive and we currently have no plans regarding this subsidiary.

For the 12 months ended December 31, 2015, VIS had no material assets, no material revenue and no expenses.

EnFacet, Inc.

EnFacet, a Texas corporation, is a wholly-owned subsidiary of the Company. EnFacet is inactive and we currently have no plans regarding this subsidiary.

For the 12 months ended December 31, 2015, EnFacet had no material assets, no material revenue and no expenses.

Globalfare.com

Globalfare, a Nevada corporation, is a wholly-owned subsidiary of the Company. Globalfare is inactive and we currently have no plans regarding this subsidiary.

For the 12 months ended December 31, 2015, Globalfare had no assets, no material revenue and no expenses.

Pointmail.com, Inc.

Pointmail, a California corporation, is a wholly-owned subsidiary of the Company. Pointmail is inactive and we currently have no plans regarding this subsidiary.

For the 12 months ended December 31, 2015, Pointmail had no assets, no revenues and no expenses.

Competition

We face substantial competition from software and hardware vendors, system integrators, and multinational corporations focused upon information technology and security.

In the realm of application software, NOW Solutions’ competitors include Oracle, Lawson, Cyborg /Hewitt, Kronos, DLGL, Ultimate and SAP. Our cloud-based emPath® competes with ADP, Ceridian, Ultimate Software and Quicken. However, while NOW Solutions competes with these companies, our payroll product is utilized by our many of our customers in conjunction with many of these companies’ other modules.

Priority Time’s competitors include Kronos, NOVAtime Technology, Asure Software, Insperity (formerly known as Administaff), and Qqest Software Systems.

SnAPPnet, Inc. competes with several small and mid-sized competitors in the healthcare credentialing business sector. SnAPPnet’s competitors include EchoApps (Heathline Systems), Win/Staff PRO-FILE (Win/Staff), Medkinetics Pro (Medkinetics), IntelliAppsSE (Intellisoft Group, Inc.), OneAPP (Sy.Med) and CACTUS Software.

Our primary competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. However, we have a number of large complex clients including cities and counties in the United States that have been users of our Payroll/HRMS software for many years (10 -25 years) and are highly referenceable. We cannot guarantee that we will be able to compete successfully against current or future competitors or that competitive pressure will not have a material and adverse effect on our financial position, results of operations and cash flows.

Our ability to compete will also depend upon our ability to continually improve our products and services, the enhancements we develop, the quality of our customer service, and the ease of use, performance, price and reliability of our products and services.

We believe, however, that we possess certain competitive advantages for the following reasons:

We have a number of proprietary patented technologies that can be utilized in our offerings.

NOW Solutions has an outstanding customer support department that has supported large complex entities for a number of years, and many of these large entities are leaders in their respective industries.

emPath®’s inherent strengths include its formula builder, the use of one single database (where competing products may use two or more), and a strong, highly identifiable customer base it can reference.

emPath® is built on a state-of-the-art Microsoft.net platform, allowing for rapid software development and interoperability with other software packages.

Our new development platform, including the dashboardlet™ feature; will provide a consistent business intelligence tool across our products’ line.

We can cross-promote applications between companies.

emPath® supports a global platform with one database for both payroll and HR and an international clients’ base beyond the U.S. and Canada.

Our new private communication platform coupled with our specialized Emily™ scripting language, offers a structure for the development of applications geared towards the mobile market.

Strategic Overview

The Company’s product portfolio reflects a number of unique characteristics and advantages that have been developed or acquired over time. At present, we are actively pursuing the strategy of (a) further developing the technologies owned by the Company and our subsidiaries and (b) combining all the technologies owned by the Company and our subsidiaries into viable product offerings.

The key components of our strategy are to:

Leverage our strong, profitable subsidiary, NOW Solutions, that has a highly-referenceable client base, including companies that are leaders in their industries and have been users of emPath® and its predecessor product for over 25 years for their payroll and human resource needs.

Develop a portfolio of patented technologies that can be licensed to third parties or utilized internally to strengthen our existing and projected product offerings.

Build a network of compatible partners and acquisition or licensing of products that complement our existing offerings.

Maximize the unique features of our new software development platform to launch our new PTS™ and SnAPPnet™ products as well as other products to NOW Solutions’ customer base and, at the same time, have those customers assist us in development of product specifications for their own vertical markets.

Build and integrate new commercially viable products utilizing our patented technology and other administration software.

Expand the reach of emPath® internationally beyond the U.S. and Canada utilizing non-competitive local distributors in foreign countries.

Develop proprietary applications on our private communication platform and, with licensing agreements, provide a structure whereby third-party applications can be developed upon that platform to be then distributed.

The software development leg of our strategy is two-fold. The first is to further enhance our existing solutions and develop new products in order to better compete with the large ERP providers like SAP and Oracle by providing complex best-of-breed alternative offerings that are more cost effective solutions. The second is to continue developing our intellectual property internally for mass market, best-of-breed solutions offered as cloud-based solutions that incorporate the advantages of our complex solutions. In each such instance, the software development leg of our strategy will be augmented by exploring solutions that can be linked to federal and state government programs for cost savings.

Our new mobile strategy is intended to make us a dominant player in the mobile space for the private communication sector that also serves as a complement to the social media market, as well as providing solutions in the healthcare and corporate markets. The goal is to become a provider with an all-in-one solution incorporating technology between a mobile device and different data storage units.

One key to the success of our strategies is to leverage our core capabilities, by entering into co-marketing agreements with other companies, particularly those who offer best-of-breed products that complement our product offerings. Our objective is to enter into distinct co-marketing agreements whereby each business unit will have a separate agreement with the co-marketing partner for its particular target market. To supplement this approach, our business units will enter into agreements with each other where they can more successfully cross-promote and market their respective products. We are also identifying complementary products from third parties which we can private label and sell as part of our existing product offering or separately.

Proprietary Rights

We rely upon a combination of patent, copyright, trademark, trade secret laws, and contract provisions and to protect our proprietary rights in our technologies, products and services. We distribute our products and services under agreements that grant users or customers a license to use our products and services and rely upon the protections afforded by the copyright laws to protect against the unauthorized reproduction of our products. In addition, we protect our trade secrets and other proprietary information through confidentiality agreements with employees, consultants and other business partners. emPath®, PTS™, SnAPPnet™, and PASS™ are protected by copyright and trademark.

Our patent portfolio consists of the following technologies and related products:

The USPTO granted us 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 USPTO granted us 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. On May 11, 2010, we were granted a continuation patent (U.S. Patent No. 7,716,629) of U.S. Patent No. 6,826,744 by the USPTO. All pending new claims were granted in the continuation patent for U.S. Patent No. 7,716,629, which has increased the scope of the original patent by adding 32 new claims to the original 53 claims. On February 3, 2015, we were granted a continuation patent (U.S. Patent No. 8,949,780) of U.S. Patent No. 7,716,629. All pending new claims were granted in the continuation patent for U.S. Patent No. 8,949,780, which has increased the scope of the continuation patent and the original patent by adding 24 new claims.

Together, these patents are the foundation of our SiteFlash™ platform, and form the basis of the ResponseFlash™, NewsFlash™ and AffiliateFlash™ products.

The USPTO granted us 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 Emily™ XML Enabler Agent and the Emily™ XML Broker.

The USPTO granted us a patent (No. 8,578,266) for a “Method and Systems for automatically downloading and storing markup language documents into a folder based data structure” (formerly, a “Method and System for Providing a Framework for Processing Markup Language Documents”) on November 5, 2013. In March 2016, we received a Notice of Allowance for a continuation patent on this technology which provided notice that Claims 1-19 and 21 were allowed and which also amended claims 1, 14, and 21 as well as the title of the patent (to a “Method and Systems for automatically downloading and storing markup language documents into a folder based data structure”). This patent covers the Emily™ scripting language.

THE USPTO granted us a patent (No. 9,112,832) for a “System and Method Running a Web Server on a Mobile Internet Device.” This patent is incorporated into our Mobile Framework (the “MLE Framework") and covers the Tiny Web Server, which is also a component of our MLE Framework.

We also have several patent-pending software technologies and licensed software:

In 2011, we filed two provisional applications for patents relating to our patent application filed in 2010 and these have been replaced with non-provisional patent applications which were filed in 2012, which are still pending.

In 2013, we filed six patent applications (including provisional patent applications).

In 2014, we filed two provisional patent applications, which have been replaced with non-provisional patent applications and filed in 2015. These patent applications are still pending.

The Company acquired rights for U.S. Patent No. 8,903,371 (cellular telephone system and method), which was issued on December 2, 2014 under an assignment from Luiz Valdetaro, a co-inventor who is also an employee and the Chief Technology Officer of the Company.

Although we intend to protect our intellectual property rights as described above, there can be no assurance that these measures will be successful. Policing unauthorized use of our products and services is difficult and the steps taken may not prevent the misappropriation of our technology intellectual property rights. In addition, effective patent, trademark, trade secret and copyright protection may be unavailable or limited in certain foreign countries. We seek to protect the source code of some of our products as trade secrets and as unpublished copyright works. 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. We believe that our 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 us in the future with respect to current or future features or content of services or products or, if so asserted that any such claims will not result in litigation or require us to enter into royalty arrangements.

Regulatory Environment; Public Policy

In the United States and most countries in which we conduct our operations, we are generally not regulated other than pursuant to laws applicable to businesses in general and value-added services specifically. In some countries, we are 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, Canada, Europe, Asia, Latin America or elsewhere could have a material adverse effect on our 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. We are 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 our business, financial condition and operating results.

Employees

As of April 14, 2016, we had 21 full-time and 5 part-time employees (21 are employed in the United States and 5 in Canada), and 2 full time consultants. We are not a party to any collective bargaining agreements.

Item 1A. Risk Factors

Risk Factors Related to Our 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 had a net loss of $2,495,612 and $1,450,822 for the years ended December 31, 2015 and 2014, respectively, and have historically incurred losses. 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, 2015 and 2014. This paragraph states that our recurring net 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, to succeed in the licensing of our intellectual property and to achieve improved operating results. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our Ability to Continue as a Going Concern Is Dependent on Our Ability to Raise Additional Funds and to Establish Profitable Operations.

The accompanying consolidated financial statements for the years ended December 31, 2015 and 2014 have been prepared assuming that we 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. We have suffered significant recurring operating losses, used substantial funds in our operations, and need to raise additional funds to accomplish our objectives. Stockholders’ deficit at December 31, 2015 was $26.9 million. Additionally, at December 31, 2015, we had negative working capital of approximately $17.6 million (although it includes deferred revenue of approximately $1.7 million) and have defaulted on substantially all of our debt obligations. These conditions raise substantial doubt about our 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 through licensing and development of commercially viable products , as well as increased revenues from NOW Solutions’ products and services as well as the successful launch of our new products by our subsidiaries (such as SnAPPnet™, and PTS™, Emily™ and web server applications), 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.

We have funding that is expected to be sufficient to fund our present operations for three months. However, we will need significant additional funding in order to complete our business plan objectives. Accordingly, we will have to rely upon additional external financing sources to meet our cash requirements. Management will continue to seek additional funding in the form of equity or debt to meet our cash requirements. Other than common or preferred stock in our subsidiaries, we do not have any common stock available to issue to raise money. However, there is no guarantee we will raise sufficient capital to execute our business plan. In the event that we are unable to raise sufficient capital, our business plan will have to be substantially modified and operations curtailed or suspended.

We Have a Working Capital Deficit, Which Means That Our Current Assets on December 31, 2015 Were Not Sufficient to Satisfy Our Current Liabilities on That Date.

We had a working capital deficit of approximately $17.6 million at December 31, 2015, which means that our current liabilities exceeded our current assets by approximately $17.6 million (although it includes deferred revenue of approximately $1.7 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 December 31, 2015 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™ technologies;

the demand for administrative software products and services: emPath®; PTS™, and SnAPPnet™

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;

general economic conditions and economic conditions specific to the Internet and Internet media; and

the licensing of our intellectual property.

We Face Product Development Risks Due to Rapid Changes in Our Industry. Failure to Keep Pace with These Changes Could Harm Our Business and Financial Results.

The markets for our products are characterized by rapid technological developments, continually-evolving industry trends and standards and ongoing changes in customer requirements. Our success depends on our ability to timely and effectively keep pace with these developments.

Keeping Pace with Industry Changes.

We must enhance and expand our product offerings to reflect industry trends, new technologies and new operating environments as they become increasingly important to customer deployments. We must continue to expand our business models beyond traditional software licensing and subscription models, including, by way of example, use of cloud based offering as an increasingly important method and business model for the delivery of applications. We must also continuously work to ensure that our products meet changing industry certifications and standards. Failure to keep pace with any changes that are important to our customers could cause us to lose customers and could have a negative impact on our business and financial results.

Impact of Product Development Delays or Competitive Announcements.

Our ability to adapt to changes can be hampered by product development delays. We may experience delays in product development as we have at times in the past. Complex products like ours may contain undetected errors or version compatibility problems, particularly when first released, which could delay or adversely impact market acceptance. We may also experience delays or unforeseen costs associated with integrating products we acquire with products we develop because we may be unfamiliar with errors or compatibility issues of products we did not develop ourselves. We may choose not to deliver a partially-developed product, thereby increasing our development costs without a corresponding benefit. This could negatively impact our business.

Our Failure to Maintain and Increase Acceptance of Our Cloud-Offerings Would Inhibit Our Growth Or Cause a Significant Decline in Our Revenues.

Our future success depends on maintaining and increasing acceptance of our Cloud-based offering, particularly, of emPath® and PTS™. Any decrease in the demand for these products would have a material adverse effect on our business, operating results and financial condition and would place a significant strain on our management and operations.

If We Are Unable to Make Periodic Updates for Our Products Concerning Changes in Tax Laws and Other Regulations on a Timely Basis Acceptance of Our Products in the Market could Be Adversely Affected And Our Revenues Would Decline.

Products like emPath® are affected by changes in tax laws and regulations, and we must generally update such products on an annual or periodic basis to maintain their accuracy and competitiveness. We cannot be certain we will be able to release these updates on a timely basis in the future. Any failure to do so could have a material adverse effect on the acceptance of our products. Additionally, any significant changes in tax laws or regulations applicable to such products could require us to make significant investments in modifications of these products, leading to significant and unexpected costs.

Errors and Defects in Our Software Could Affect Sales of Our Products.

The software products we offer may contain undetected errors, defects, or failures when first introduced or as new versions are released. Testing of software products presents many challenges since it is difficult to anticipate and simulate the wide range of software computing environments in which our customers use these products. While we test our products extensively, from time-to- time, we have discovered errors or defects in our products. These defects and errors may result in any of the following:

Delays in the release of our new products, versions and upgrades

Increased costs to fix such defects and errors, in turn leading to a strain on our software development resources

Design modifications of the product

A decrease in customer satisfaction with, our products and a decrease in sales, and a loss of existing and potential customers

Even after our products are tested by us and by current and prospective customers, errors and defects may be discovered after the commercial release has commenced, which may result in loss of or delay in market acceptance which could have a material adverse impact upon our business, operating results and financial condition.

Our software products may be vulnerable to break-ins and similar disruptive problems; addressing these issues may be expensive and require a significant amount of our resources.

We have included security features in our products that are intended to protect the privacy and integrity of customer data. Despite the existence of these security features, our software products may be vulnerable to break-ins and similar disruptive problems. Addressing these evolving security issues may be expensive and require a significant amount of our resources.

The Sale and Support of Software Products and the Performance of Related Services by Us Entail the Risk of Product or Service Liability Claims, Which Could Significantly Affect Our Financial Results.

Customers use our products in connection with the preparation and filing of tax returns and other regulatory reports. If any of our products contain errors that produce inaccurate results upon which users rely, or cause users to misfile or fail to file required information, we could be subject to liability claims from users. Our Cloud-based usage licenses and maintenance renewal agreements with our customers typically contain provisions intended to limit our liability to such claims, but such provisions may not be effective in doing so. These contractual limitations may not be legally enforceable and may not afford us with adequate protection against product liability claims in certain jurisdictions. If a successful claim for product or service liability was brought against us, this could result in substantial cost to us and divert management’s attention from our operations.

International Operations of Our Business Subject Us to Additional Risks in Those Foreign Countries.

Our international operations are subject to additional risks, which increase our exposure to foreign laws and regulations. Over time, our international operations may grow and increase their significance to our business. Sales to international customers subject our business to a number of risks, including foreign currency fluctuations, unexpected changes in regulatory requirements related to software, international political and economic instability, international tax laws, compliance with multiple, changing, and possibly conflicting governmental laws and regulations, and difficulty in staffing and managing foreign operations,. In addition, there may be weaker protection for our intellectual property abroad than in the United States, and we may have difficulties in enforcing such rights abroad. If we are not able to comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potentially become involved in litigation. In addition, in the event sales to any of our customers outside of the United States are delayed or canceled because of any of the risks described above, our revenues may be negatively impacted.

Security and Privacy Breaches Could Adversely Impact Our Business.

For services such as our cloud-based offerings, we may electronically store personal information about our clients and their employees. We take security measures to protect against the unauthorized access and disclosure of such information. However, there is no guarantee the precautions we take will be successful in protecting against all security breaches that may result in unauthorized access to such information. If our security measures are breached or if our services are subject to attacks that degrade or deny the ability of our clients to access our services, we may incur significant financial, legal, and regulatory exposure.

Privacy Concerns Could Result in Changes of Regulations or Laws That Affect Our Business.

Personal privacy is a significant issue in the United States as well as in other countries where our customers operate. Consequently, we are subject to regulations concerning the use of personal information we collect. Changes to regulations or laws affecting privacy that apply to our business could impose additional costs and potential liability on us and could also limit our use and disclosure of such information. If we are required to change our business activities or revise or eliminate services, our business could be adversely affected.

We May Have Difficulty Managing Our Growth and Integrating Recently Acquired Companies.

Our recent growth through acquisitions and licensing of new solutions, coupled with our development efforts to create new commercially viable products and improve existing ones, 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. Further, 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 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 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 proprietary technology, including our patented SiteFlash™ and Emily™, our patent-pending technologies and administrative software solutions like emPath®, PTS™, and SnAPPnet™, 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.

If Demand for Our Products Grow Quickly, We May Lack the Capacity Needed to Meet Demand or We May Be Required to Increase Our Capital Spending Significantly.

Our current plans may not be sufficient to meet our capacity needs for the foreseeable future or may not be implemented quickly enough to meet growing demand. Moreover, if we make significant capital expenditures to increase capacity and demand does not increase as we expect, these expenditures would adversely affect our profitability and return on capital.

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 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.

Item 2. Properties

The Company and NOW Solutions’ headquarters are currently located at 101 West Renner Road, Suite 300, Richardson, Texas, and comprise approximately 4,000 square feet. NOW Solutions has other offices at 6205 Airport Road, Building B, Suite 214, Mississauga, Ontario, Canada, which comprises 793 square feet, and Avenida N. Sra. De Copacabana, 895, Suite 901, Copacabana, Rio de Janeiro, Brazil, which comprises 1,200 square feet. All of these locations are leased fr om third parties and the premises are in good condition. We believe that our facilities are adequate for our present needs and near-term growth, and that additional facilities will be available at acceptable rates as we need them. Our other subsidiaries may be reached through our Richardson, Texas headquarters.

Item 3. Legal Proceedings

We are involved in the following ongoing legal matters:

On December 31, 2011, the Company and InfiniTek corporation (“InfiniTek”) entered into a settlement agreement to dismiss an action filed by the Company against InfiniTek in the Texas State District Court in Fort Worth, Texas, for breach of contract and other claims, a counter claim filed by InfiniTek against the Company for non-payment of amounts claimed the Company owed to InfiniTek, and an action filed by InfiniTek against the Company in California Superior Court in Riverside, California seeking damages for breach of contract and lost profit. Pursuant to the terms of the settlement agreement, Vertical agreed to pay InfiniTek $82,500 in three equal installments with the last payment due by or before August 5, 2012. Upon full payment, InfiniTek shall transfer and assign ownership of the NAVPath software developed by InfiniTek for use with NOW Solutions emPath® software application and Microsoft Dynamics NAV (formerly Navision) business solution platform. The amounts in dispute were included in our accounts payable and accrued liabilities and have been adjusted to the settlement amount of $82,500 at December 31, 2011. The Company has made $37,500 in payments due under the settlement agreement as of the date of this Report and each party is alleging the other party is in breach of the settlement agreement. We are currently seeking to resolve all disputes with InfiniTek.

On February 4, 2014, Victor Weber filed a lawsuit against Vertical, MRC and Richard Wade in the District Court of Clark County, Nevada for failure to make payment of the outstanding balance due under a $275,000 promissory note issued by Vertical to Mr. Weber. On July 24 2014, the court granted plaintiff’s motion for summary judgment against defendants. The judgment was filed on September 18, 2014. In June 2015, the Company and Mr. Weber entered into an agreement to pay off the $365,000 outstanding balance under the judgment, which included $275,000 in principal, accrued interest, attorney’s fees and court costs. Under the terms of the agreement, the Company issued 10,000,000 shares of its common stock with the Rule 144 restrictive legend to Mr. Weber at a fair market value of $250,000 in consideration of Mr. Weber’s forbearance in not taking any action to enforce the judgment. The Company also agreed to make payments of $100,000 by June 15, 2015 and $265,000 by July 15, 2015, or in the alternative, the Company had the option to issue another 10,000,000 shares of the Company’s common stock with the Rule 144 restrictive legend in lieu of making the $100,000 payment and issue an additional 15,000,000 shares of the Company’s common stock with the Rule 144 restrictive legend in lieu of making the $265,000 payment. On June 15, 2015, the Company issued 10,000,000 shares with the Rule 144 restrictive legend at a fair market value of $250,000 to Mr. Weber as repayment of a $100,000 payment resulting in a loss on extinguishment of $150,000. On July 15, 2015, the Company issued 15,000,000 shares with the Rule 144 restrictive legend at a fair market value of $408,000 to Mr. Weber as repayment of the $265,000 payment. Pursuant to the agreement, Mr. Weber filed disposition documents that the judgment has been satisfied and this matter is resolved.

On October 20, 2014, Michael T. Galvan and Michelle Bates (“ Galvan & Bates ”) filed a lawsuit in the Court of Chancery in the State of Delaware seeking to have the court compel the Company to hold a shareholder meeting for the purpose of electing all directors of the Company, designating the time and place of a meeting and other details reasonably necessary to hold such a meeting, attorney costs and fees (including reasonable attorney’s fees), and such other relief as the court deems proper. Galvan and Bates are stockholders of the Company. This case is styled Michael T. Galvan and Michelle Bates v. Vertical Computer Systems, Inc., No. 10234. The Company held an annual meeting of shareholders on February 25, 2015. This matter is resolved.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Our common equity is traded on the OTC Markets and quoted on the OTCQB under the symbol “VCSY.” The OTCQB may also be referred to as “OTCMKTS” or “Other OTC”.

The following is the range of high and low closing bid prices of our stock, for the periods indicated below.

	High		Low

Quarter Ended December 31, 2015	$	0,0475	$	0.0121
Quarter Ended September 30, 2015	$	0.0480	$	0.0205
Quarter Ended June 30, 2015	$	0.0370	$	0.0226
Quarter Ended March 31, 2015	$	0.0300	$	0.0176
Quarter Ended December 31, 2014	$	0.0198	$	0.0095
Quarter Ended September 30, 2014	$	0.0405	$	0.0123
Quarter Ended June 30, 2014	$	0.0750	$	0.0250
Quarter Ended March 31, 2014	$	0.0740	$	0.0480

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 14, 2016, there were 1,877 holders of record of VCSY common stock.

Equity Securities Under Compensation Plans

Equity Compensation Plan Information
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		-		-		-
Equity compensation plans not approved by security holders
Stock Options		-		-		-
Warrants		-		-		-
Unvested Restricted Stock Awards		2,250,000	$	0.0243		-
Total		2,250,000	$	0.0243		-

⁽¹⁾

Other than individual agreements with employees, directors and third party consultants, we do not have any equity compensation plans (i.e., stock option plans or restricted stock plans) that have been approved by security holders.

⁽²⁾

No stock options were issued to employees or consultants during the year ended December 31, 2015.

⁽³⁾

No warrants to purchase common stock were issued to employees or consultants during the year ended December 31, 2015.

⁽⁴⁾

Of the 2,250,000 common shares of restricted stock that had not vested at December 31, 2015 and were issued in connection with individual restricted stock agreements executed in 2015 with employees of the Company and its subsidiaries, 400,000 have vested through April 14, 2016.

Dividends

We have outstanding shares of 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 for each of the years ended December 31, 2015 and 2014. Our Board of Directors did not declare any dividends on our outstanding shares of Series A or Series C Preferred Stock during 2015 or 2014, nor has the Company paid any dividends on our outstanding shares of Series A or Series C Preferred Stock since 2001. We intend to retain future earnings, if any, to provide funds for use in the operation and expansion of our businesses. Accordingly, we do not anticipate paying cash dividends on any of our capital stock, including preferred stock, in the near future. For additional information concerning dividends, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

Unregistered Sales of Securities

During the last two years, we issued the following unregistered securities:

During the year ended December 31, 2014, 550,000 common shares granted to employees of the Company and a consultant of the Company vested. Stock compensation that was previously accrued totaling $10,226 was reclassified from accrued liabilities to stockholders’ equity associated with these shares vested.

During the year ended December 31, 2014, the Company granted 200,000 common shares to an employee of the Company. The shares vested immediately upon grant and the fair value of the shares was determined to be $3,200. The fair value was expensed in full during the year ended December 31, 2014.

In February 2015, the Company increased the number of its authorized shares of common stock to 2,000,000,000.

In March 2015, in connection with a $100,000 loan to Taladin, Ploinks, Inc. agreed to issue 1,000,000 shares of its common stock to the third party lender. The fair value of these subsidiary shares was determined to be nominal.

In March 2015, pursuant to an indemnity and reimbursement agreement executed between Mr. Valdetaro and the Company, we issued 1,000,000 shares of our common stock to reimburse Mr. Valdetaro for 1,000,000 shares of common stock with the Rule 144 restrictive legend transferred to Lakeshore on the Company’s behalf in connection with an extension granted by Lakeshore in August 2013. The issuance of these shares eliminated the derivative liability associated with the value of these shares. The fair market value of these shares on the date of issuance was $38,000 and resulted in the resolution of derivative liabilities and a loss on derivative liabilities of $26,000.

In March 2015, pursuant to two indemnity and reimbursement agreements executed between Mountain Reservoir Corporation (“MRC”) and the Company, we issued a total of 2,809,983 shares of our common stock with the Rule 144 restrictive legend to reimburse MRC. Of these shares, the Company was obligated to reimburse MRC with 1,309,983 shares of common stock that had been pledged by MRC and sold by a third party lender in 2009, 500,000 shares of common stock that had been wrongfully converted by the same lender in 2014, and 1,000,000 shares of common stock that had been transferred to another third party lender in 2013 on the Company’s behalf for a loan made by the lender. MRC has assigned its claim against the third party lender for the lender’s wrongful conversion of 500,000 common shares to the Company and we are pursuing the claim in the third party lender’s bankruptcy proceeding. The issuance of these shares eliminated the derivative liability associated with the value of these shares. The fair market value of these shares on the date of issuance was $112,399 of which $92,399 resulted in the resolution of derivative liabilities and a loss on derivative liabilities of $64,680 and $20,000 was recognized as stock reimbursement expense during the twelve months ended December 31, 2015.

In June 2015, in connection with an amendment concerning certain promissory notes issued by the Company and NOW Solutions to Mr. Weber in the aggregate principal amount of $735,400, the Company issued 20,000,000 shares of its common stock with the Rule 144 restrictive legend to its subsidiary, Taladin, Inc., which pledged these shares to secure payment of certain notes payable issued to Weber. The previous pledge agreements between MRC and Mr. Weber were cancelled. These shares are held in treasury.

In June 2015, the Company issued 10,000,000 common shares with the Rule 144 restrictive legend to its consolidated subsidiary NOW Solutions. These shares are held in treasury.

During the year ended December 31, 2015, the Company granted 2,250,000 unregistered shares of its common stock to employees of the Company and its subsidiaries pursuant to restricted stock agreements with the Company. These shares vest over 2 years in equal installments and the fair value of the awards is being expensed over this vesting period. The aggregate fair market value of the awards was determined to be $54,750. Stock compensation expense of $19,616 has been recorded for the year ended December 31, 2015 as additional paid-in capital.

During the year ended December 31, 2015, the Company issued 36,500,000 unregistered shares of its common stock as forbearance fees and late fees to lenders in connection with loans made to the Company and its subsidiaries. The aggregate fair value of these shares was determined to be $1,050,900.

During the year ended December 31, 2015, the Company issued 35,556,522 unregistered shares of its common stock to lenders to pay off accrued principal and interest debt in the aggregate amount of $482,612 and legal fees of $20,000 related to loans made by these lenders to the Company and its subsidiaries. The aggregate fair value of these shares was determined to be $895,913. Accordingly, the Company recorded a loss on debt extinguishment of $393,301.

During the year ended December 31, 2015, the Company issued 9,000,000 unregistered shares of its common stock and 3-5 year warrants to purchase 6,800,000 shares of common stock at a purchase price between $0.05-$0.10 per share (of which one warrant for 800,000 shares included a cashless warrant exercise provision). These shares and warrants were granted to lenders in connection with loans made by these lenders to the Company and its subsidiaries in the aggregate principal amount of $745,333. The aggregate relative fair value of these shares was determined to be $211,783 (which includes $82,904 under the Black-Scholes formula), and was accounted for as a discount on the loans. Amortization expense is $80,864 during the year ended December 31, 2015 and unamortized discounts are $130,919.

In January 2016, the Company granted 2,000,000 unregistered shares of its common stock and 200,000 shares of Ploinks common stock to a consultant of the Company and its subsidiaries pursuant to a consulting agreement with the Company. The aggregate fair market value of the 2,000,000 share award was determined to be $44,000. In addition, the Company agreed to issue up to 15,000,000 common shares of the Company and 1,500,000 shares of Ploinks common stock pursuant to restricted performance stock agreements with the consultant. These shares may vest over a term of 3 years and are based upon the Consultant achieving certain performance criteria.

In March 2016, the Company granted 100,000 unregistered shares of its common stock to a consultant of the Company and its subsidiaries pursuant to a consulting agreement with the Company.

In March 2016, the Company cancelled 1,000,000 unregistered shares of its common stock issued to a third party lender under an agreement to amend certain promissory notes issued by the Company and NOW Solutions in the aggregate principal amount of $715,000. Under the amendment, the Company agreed to make $22,000 monthly payments and an additional $10,000 penalty if such monthly payment is not timely made.

In March 2016, the Company issued 10,000,000 common shares with the Rule 144 restrictive legend to its consolidated subsidiary Ploinks. These shares are held in treasury. In exchange, Ploinks issued 5,000,000 of its common shares to the Company.

In March 2016, the Company issued a convertible promissory note in the aggregate principal amount of $100,000 to a third party lender for a loan made to the Company in the same amount. The debt accrues interest at 10% per annum and is due one year from the date of issuance. Beginning six months after issuance of the debenture and provided that the lowest Closing Price of the Common Stock for each of the 5 trading days immediately preceding the Conversion Date has been $0.03 or higher, the holder of the debenture may convert the debenture into shares of common stock at a price per share of 80% of the average per share price of the Company’s common stock for the 5 trading days preceding the notice of conversion date using the 3 lowest closing prices. In connection with the loan, the Company also issued to the lender a total of 1,000,000 shares of common stock of the Company and 3-year warrants under which the lender may purchase in aggregate a total of 1,000,000 unregistered shares of common stock of the Company at a purchase price of $0.10 per share.

From January 1, 2016 to April 14, 2016, $6,500 of principal and interest under a convertible note issued in the principal amount of $80,000 was converted into 515,873 common shares.

From January 1, 2016 to April 14, 2016, 400,000 VCSY common shares issued under restricted stock agreements to consultants and employees of the Company vested.

Unless otherwise noted, the offers, sales and issuances of our unregistered securities set forth above involved no underwriter’s discounts or commissions. In engaging in the transactions described above which involved our unregistered securities, we 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 our unregistered securities, we did not make a public offering or sale of our securities, the investors were either accredited or unaccredited but sophisticated, and the investors represented to us that they were acquiring the securities for investment purposes and for their own accounts, and not with an eye toward further distribution.

Item 6. Selected Financial Data

Not applicable.

Item 7. 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 our 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 8 of this Report, and the cautionary statements and risk factors included in Item 1A 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 year ended December 31, 2015, $541,300 of internal costs were capitalized. During 2014, the Company wrote off $771,251 of previously capitalized software costs related to its 70% owned subsidiary, Priority Time Systems. During the year ended December 31, 2014, $478,876 of internal costs were capitalized related to its Ploinks™ software application.

Revenue Recognition

Our revenue recognition policies are in accordance with standards on software revenue recognition, which include 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, primarily implementation and training services, to our clients 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 consulting fees are recognized as 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 being 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 value 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.

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.

Cloud-based offering. 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 cloud-based. 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 cloud-based software can enter into an agreement to purchase a software license at any time. We generate revenue from cloud-based offering as the customer utilizes the software over the Internet.

We will provide consulting services to customers in conjunction with the cloud-based offering. The rate for such service is based on standard hourly or daily billing rates. The consulting revenue is recognized as services are performed. Customers utilizing their own computer to access cloud-based functionality are charged a fee equal to the number of employees paid each month multiplied by an agreed-upon rate per employee. The revenue is recognized as the cloud-based services are rendered each month.

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, 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 the provisions of 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 issued and the quoted price of our common stock. See Note 10 of the Consolidated Financial Statements for a further discussion of stock-based compensation.

Valuation of the Embedded and Warrant Derivatives

The valuation of our embedded derivatives is determined by using the Company’s quoted stock price. 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. 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.

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.

Recently Issued Accounting Pronouncements

The Company does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on the Company’s consolidated financial statements.

Results of Operations

Year ended December 31, 2015 Compared To Year Ended December 31, 2014

Total Revenues. We had total revenues of $4,263,635 and $7,435,502 for the years ended December 31, 2015 and 2014, respectively. The decrease in total revenue was $3,171,867 for the year ended December 31, 2015, representing a 42.7% decrease compared to the total revenue for the year ended December 31, 2014. The decrease in revenue was primarily due to a one-time $2,600,000 software patent license issued in 2014, a $397,475 decrease in software maintenance, a $51,716 decrease in cloud-based offering and a $133,803 decrease in consulting services. Of the $4,263,635 and $7,435,502 total revenues for the years ended December 31, 2015 and 2014, respectively, $4,186,363 and $4,484,923 of such amounts were related to the business operations of NOW Solutions, a 75% owned subsidiary of the Company.

The revenues from licenses and software primarily consist of fees we bill for NOW Solutions’ new payroll and human resources (“ PRHR ”) software licenses and licenses fees for patents and technology we own. The decrease in license and software revenue from 2015 to 2014 was $2,577,860 which was primarily due to decreased sales of licensing fees for patents and technology in 2015 related to SiteFlash™.

Software maintenance revenue is generated from existing customers of our PRHR software who want the continued benefit of tax updates, customer support, and software enhancements. Software maintenance revenue decreased by $397,475or 10.0% from the year ended December 31, 2014 to the same period in 2015. The decrease was due to the loss of customer contracts and the effect of unfavorable currency exchange rates on our Canadian maintenance revenue.

Consulting revenue for the year ended December 31, 2015 decreased by $133,803 from the same period in the prior year, representing a 31.4% decrease. This decrease was due to a decline in customer needs for software upgrade implementation and customization and the effect of unfavorable currency exchange rates on our Canadian consulting revenue in 2015.

Cloud-based revenue decreased $51,716 or 13.9% for the year ended December 31, 2015 compared to the same period in 2014. The decrease was primarily related to customer user base adjustments during 2015 and the effect of unfavorable currency exchange rates on our Canadian cloud-based revenue.

Other revenues, consisting primarily of reimbursable travel expenses, decreased by $11,013 or 17.0% for the year ended December 31, 2015 compared to the same period for 2014. The decrease was mainly attributable to lower reimbursable travel in 2015 due to decreased consultant travel.

Cost of Revenues. We had direct costs associated with the above revenues of $1,767,155 for the year ended December 31, 2015 compared to $2,159,870 for the same period of 2014, representing a decrease of $392,715 or 18.2%. These direct costs are primarily related to costs providing customer support, professional services, software upgrades and enhancements. The decrease in direct costs is primarily related to a decrease in payroll costs including commission, consultant travel and rent (due to office consolidation) and consulting fees for the year ended December 31, 2015 compared to the same period for 2014.

Selling, General and Administrative Expenses. We had selling, general and administrative expenses of $3,088,568 and $5,035,088 for the years ended December 31, 2015 and 2014, respectively. The total selling, general and administrative expenses for the year ended December 31, 2015 decreased by $1,946,520 compared to the selling, general and administrative expenses for the year ended December 31, 2014, representing a 38.7% decrease. The decrease was primarily due to a decrease in expenses related to the protection and licensing of our patented intellectual property, decreased penalties and decreased consulting expense.

Bad Debt Expense . We had bad debt expense of $3,300 for 2015 compared to $42,492 in 2014. The 2015 and 2014 expenses were related to a reserve for several customer accounts greater than 90 days past due.

Impairment of Software Costs. For the year ended December 31, 2015 and 2014, $0 and $771,251 respectively, of capitalized software development costs related to its 70% owned subsidiary, Priority Time Systems, were considered impaired.

Operating Loss. We had an operating loss of $633,800 for the year ended December 31, 2015 compared to operating loss of $618,077 for the year ended December 31, 2014, a difference of $15,723. The increase in operating loss between 2015 and 2014 is primarily a result of lower revenues and gross profit somewhat offset by lower selling, general and administrative expense in 2015.

Gain/loss on Derivative Liability. Derivative liabilities are adjusted each quarter for changes in the market value of the Company’s common stock. In general, as our stock price increases, the derivative liability increases, resulting in a loss. As our stock price decreases, the derivative liability decreases, resulting in a gain. During the first quarter of 2015, the Company issued common shares and eliminated the derivative liabilities. The loss on derivative liability was $78,680 for the year ended December 31, 2015 compared to a gain on derivative liability of $211,621 for the year ended December 31, 2014.

Interest Expense . We had interest expense of $895,920 and $933,529 for the years ended December 31, 2015 and 2014, respectively. Interest expense decreased for the year ended December 31, 2015 by $37,609, representing or 4.0% compared to interest expense for the year ended December 31, 2014. The decrease was a result of an adjustment to interest expense recorded in previous years due to the settlement of our Canadian corporate income taxes.

Interest Income. Interest income for the year ended December 31, 2015 was $9 compared to $19 for the year ended December 31, 2014.

Forbearance Fees . Forbearance fees relate to fees charged by our lenders on loans in default. Forbearance fees for the year ended December 31, 2015 were $1,065,900 compared to $197,156 for the same period in 2014. Forbearance fees for 2015 relate to the issuance of VCSY common shares on senior secured debt of NOW Solutions and other notes in default for VCSY and NOW Solutions. Forbearance fees for 2014 relate to senior secured debt for NOW Solutions.

Loss on Extinguishment of Debt. Loss on extinguishment of debt was $393,301 for the year ended December 31, 2015. The expense relates to issuance of VCSY common stock to pay down certain notes payable and accrued interest. The loss is the difference in the fair market value of VCSY common stock issued in excess of the note payable and accrued interest balances.

Net Loss before Income Tax Benefit. We had a net loss of $3,067,592 for the year ended December 31, 2015 compared to a net loss of $1,537,122 for the year ended December 31, 2014. The net loss for 2015 was primarily due to an operating loss of $633,800 increased by $1,065,900 of forbearance fees, loss on debt extinguishment of $393,301, loss on derivative liabilities of $78,680 and interest expense of $895,920. The net loss for 2014 was primarily due an operating loss of $618,077 increased by $197,156 of forbearance fees and $933,529 of interest expense, partially offset by a gain on derivative liabilities of $211,621.

Income Tax Benefit . We had an income tax benefit of $571,980 and $86,300 for the year ended December 31, 2015 and 2014, respectively. Income taxes are related to NOW Solutions, a 75% owned subsidiary of the Company. The 2015 benefit is related to $9,642 of estimated foreign income tax expense offset by a benefit for settlement of foreign income taxes from previous years of $581,622. The 2014 benefit is related to US income tax expense of $166,675, foreign income tax expense of $14,867 offset by the settlement of foreign taxes from previous years of $267,842.

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. For the years ended December 31, 2015 and 2014, the total dividends applicable to Series A and Series C Preferred Stock (from prior years) were $588,000 each year. The Company did not declare or pay any dividends in 2015 or 2014.

Net Loss Applicable to Common Stockholders. We had net loss attributed to common stockholders of $3,153,367and $2,070,836 for the years ended December 31, 2015 and 2014, respectively. Net loss applicable to common stockholders for the year ended December 31, 2015 increased by $1,082,531 compared to December 31, 2014. The increase in the net loss applicable to common stockholders was due to the combination of factors described above in “Net Loss before Income Tax Benefit.”

Net Loss Per Share. The Company had a net loss per share of $0.00 and $0.00 for the years ended December 31, 2015 and 2014, respectively.

Financial Condition, Liquidity, Capital Resources and Recent Developments

At December 31, 2015, we had non-restricted cash-on-hand of $37,141 compared to $117,866 at December 31, 2014.

Net cash used in operating activities for the year ended December 31, 2015 was $526,012 compared to net cash used in operating activities of $134,350 for the year ended December 31, 2014.

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. During 2015, our deferred maintenance revenue (a liability) decreased slightly from $2,321,044 to $1,658,158. The decrease was primarily due to a decrease in currency exchange rates on Canadian deferred revenue and the loss of US and Canadian customers who purchased limited maintenance for less than one year.

Our accounts receivable decreased from $560,879 at December 31, 2014 to $382,463 at December 31, 2015 (net of allowance for bad debts). The decrease in receivables of $178,416 was due to a decrease in currency exchange rates on Canadian receivables and faster year-end collections of customer receivables in 2015.

Accounts payable and accrued liabilities decreased from $10,696,070 at December 31, 2014 to $10,645,353 at December 31, 2015. The decrease of $50,717 was primarily related to a decrease in accrued taxes payable due to the settlement of foreign income taxes partially offset by increases in accrued executive payroll, trade accounts payable and interest on notes payable. The balance in accounts payable and accrued liabilities is approximately 28.0 times the balance in accounts receivable. This is one of the reasons we do not have sufficient funds available to fund our operations and repay our debt obligations under their existing terms, as described below.

Net cash used in investing activities for the year ended December 31, 2015 was $541,300 consisting of the development of software products. Net cash used in investing activities for the year ended December 31, 2014 was $486,967 consisting of the purchase of equipment and software of $8,091 and the development of software products of $478,876.

Net cash provided by financing activities for the year ended December 31, 2015 was $959,413 consisting of borrowings on notes payable of $555,333, borrowings of related party convertible debentures of $100,000, borrowings on convertible debentures of $580,000 somewhat offset by repayments on notes payable of $132,848, payments on related party debt of $10,425, dividends paid to non-controlling subsidiary shareholders of $125,000 and an increase in back overdrafts of $7,647. Net cash provided by financing activities for the year ended December 31, 2014 was $43,267, consisting of borrowings on notes payable of $451,282 and borrowings on related party debt of $25,500. This was somewhat offset by repayments of notes payable of $418,294, payments of related party debt of $20,992 and a decrease in bank overdrafts of $5,771.

The total change in cash and cash equivalents for the year ended December 31, 2015 when compared to the year ended December 31, 2014 was a decrease of $80,725.

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, increasing sales of our products and services and/or succeed in licensing our intellectual property. Our inability to raise such funds or renegotiate the terms of our existing debt will significantly jeopardize our ability to continue operations.

Contractual Obligations and Commercial Commitments

As of December 31, 2015, the following contractual obligations and commercial commitments were outstanding:

	Balance at		Due in Next Five Years

Contractual Obligations	12/31/15		2016		2017		2018		2019		2020+

Notes payable	$	5,235,382	$	5,235,382	$	-	$	-	$	-		-
Convertible debts		710,000		710,000		-		-		-		-
Operating lease		207,388		76,380		74,204		56,804		-		-
Total	$	6,152,770	$	6,021,762	$	74,204	$	56,804	$	-	$	-

Of the above notes payable, the default status is as follows:

	2015		2014
In default	$	4,340,382	$	4,758,405
Not in default		1,605,000		165,500
Total Notes Payable	$	5,945,382	$	4,923,905

Going Concern Uncertainty

We had a net loss of $2,495,612 and $1,450,822 for the years ended December 31, 2015 and 2014, respectively, and have historically incurred losses. In addition, we had a working capital deficit of approximately $17.6 million at December 31, 2015. The foregoing raises substantial doubt about our ability to continue as a going concern.

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 that 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.

Furthermore, we are exploring certain opportunities with a number of companies to participate in co-marketing of each other’s products. We are proceeding to license our intellectual property to third parties. The exact results of our opportunities to license our intellectual property to other parties are unknown at this time.

Off-Balance Sheet Arrangements.

None.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

None.

Item 8. Financial Statements and Supplementary Data

Please refer to the Audited Consolidated Financial Statements of the Company and its subsidiaries for the fiscal years ended December 31, 2015 and 2014, which are attached to this Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, principally our chief executive officer (who is also currently serving as our Principal Accounting 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 Exchange Act 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 material weaknesses described below.

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 Exchange Act 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 December 31, 2015. 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 as of December 31, 2015:

●

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 due to the size of the Company which results in a lack of segregation of duties necessary for a good system of internal control.

●

There is a lack of control procedures that include multiple levels of supervision and review. Certain parts of the work of our chief financial officer are not monitored or reviewed.

●

Consolidation and currency translations are performed manually.

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:

○

Although we implemented a new accounting system effective January 1, 2009 that allows for the consolidation of the various entities in Vertical Computer Systems along with the translation from local currency to reporting currency, the system needs to be refined in order to perform currency translations accurately. As a result, we continue to performing our consolidation and currency translations manually. This will be remediated once funds become available to effectively implement needed system changes.

○

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. In January 2010, we contracted with a consulting firm to assess our internal controls over financial reporting and propose improvements that can be implemented given our size and number of employees. The company has not yet implemented these improvements in their entirety as of the filing of this report due to employee turnover and resource limitations.

○

Improving the segregation of duties relating to the processing of accounts and the recording of journal entries into certain accounts. The company has recently increased the size of its accounting staff which will allow for needed segregation of duties within the organization. As of the date of this report, the company is evaluating and reorganizing the duties of its accounting staff in order to address this internal control weakness.

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, 2015, 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:

○

We have implemented a new accounting system effective January 1, 2009 that allows for the consolidation of the various entities in Vertical Computer Systems along with the translation from local currency to reporting currency. Although the system eliminates many of the manual steps in translation and consolidation, many of the steps continue to be manual. This system also allows for some automation for recording software maintenance revenue and the recording of the deferred revenue liability account. This automation improves the accuracy of these accounts and is no longer considered a material weakness.

○

Improving the segregation of duties relating to the processing of accounts and the recording of journal entries into certain accounts. This improvement is expected to come based on recommendations from the consulting firm assessing our internal controls over financial reporting.

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 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Our present directors and executive officers are as follows:

Name	Age	Position	Tenure

Richard S. Wade	72	President, Chief Executive Officer and Director	15 years
William K. Mills	57	Secretary and Director	15 years

Richard S. Wade, President, Chief Executive Officer (Principal Executive Officer and Principal Accounting Officer) and Director of VCSY, Chairman and Director of NOW Solutions

Richard S. Wade is President, CEO and Chairman of the Board 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. 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, international operations, and financial matters. The breadth of Mr. Wade’s managerial and operational experience led the Board of Directors to believe this individual is qualified to serve as a director of the Company. 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 of VCSY

William K. Mills has been a director since December 2000. Mr. Mills is a founding partner of Parker Shumaker Mills, LLP (formerly Parker Mills, 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. The breadth of Mr. Mills’ professional and legal experience led the Board of Directors to believe this individual is qualified to serve as a director of the Company.

Significant Employees of the Company

Luiz Valdetaro, Chief Technology Officer of VCSY and NOW Solutions, 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.

Laurent Tetard, Chief Operating Officer-SaaS

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.

Harold Frazier, Jr., Director of Mobile Software Development

Harold Frazier, Jr. serves as the Director of Mobile Software Development of Vertical Computer Systems, Inc. He graduated from the University of Michigan, Ann Arbor with a B.S. in Computer Science. Since 2004, Mr. Frazier has focused on creating enterprise mobile software solutions in the education, social media, security, automotive and medical industries.

Significant Employees of NOW Solutions

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.

Jamie Patterson, Director of Software Development

Mr. Patterson joined the Company in 2006, originally as the Quality Assurance Manager, after working as an independent contractor for the company for three years. In 2000, he joined the Hewlett-Packard Company as a Research and Development Software Engineer. From 1992 to 2000 he worked for Ross Systems starting as a Support Analyst in the Customer Support Department. In 1993 he began developing software in the Integration Services department and Product Development department. Prior to Ross Systems, he worked as an IT engineer and software developer supporting a payroll application. Mr. Patterson is a graduate of University of Texas at Arlington with a Masters of Computer Science and Engineering degree and from the University of Washington with a B.S. in Civil Engineering.

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 2011.

Code of Ethics

We have adopted a Code of Ethics that applies to our Principal Executive Officer, Principal Accounting Officer and other persons performing executive functions, as well as all other employees and directors of the Company and its subsidiaries. Our Code of Ethics is filed as Exhibit 14.1 to this Report, and is available at our Internet website located at http://www.vcsy.com/investor .

Corporate Governance

Family Relationships

There are no family relationships between or among the directors, executive officers or persons nominated or charged by us to become directors or executive officers.

Involvement in Legal Proceedings

To the best of our knowledge, during the past five years, none of the following occurred with respect to a present or former director or executive officer of the Company:

(1) any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

(2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

(3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of any competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

(4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

Board of Directors Meetings and Subcommittees.

Meetings . Our Board of Directors held several meetings during the fiscal year ended December 31, 2015. All board actions were completed through unanimous written consents.

Audit Committee and Financial Expert . Our Board of Directors (the “ Board ”) does not have a separate audit committee. Although Mr. Wade (a member of the Board) has the qualifications of an “audit committee financial expert” as defined in Item 407(d)(5), Mr. Wade would not be deemed independent since he is an employee of the Company. At this point, we do not intend to establish a separate audit committee as this function will be performed by our full Board of Directors.

Compensation Committee . As all our executive officers are currently under employment agreements or are at-will employees, we do not have a separate compensation committee. At this point, we do not intend to establish a separate compensation committee as this function will be performed by our full Board of Directors.

Nominating Committee . We do not currently have a separate nominating committee as this function is performed by our full Board of Directors.

Shareholder Communication . We communicate regularly with shareholders through press releases, as well as annual, quarterly, and current (Form 8-K) reports. Our Chief Executive Officer addresses investor concerns on an on-going basis. Interested parties, including shareholders and other security holders, may communicate directly with our Board of Directors or with individual directors by writing to our Chief Executive Officer at 101 W. Renner Road, Suite 300, Richardson, TX 75082.

Item 11. 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, 2014 and 2015 to our highest paid executive officers and employees, who were employed by us during 2014 and 2015. 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 of Vertical earned a total annual salary and bonus for any of these years in excess of $100,000.

SUMMARY COMPENSATION TABLE

The below table shows information of compensation of the named officers for fiscal years ended December 31, 2014 and December 31, 2015:

	Annual Compensation								Long-Term Compensation
									Awards				Payouts
Name and Principal Position	Year	Salary			Bonus ⁽⁶⁾		Other Annual Compensation		Restricted Stock Award(s)		Options/ SARs		LTIP Payouts		All Other Compensation
		($)			($)		($)		($)		(#)		($)		($)

Richard Wade ⁽¹⁾	2015		$300,000	⁽¹⁾		-		-		-		-		-		-
President/ Chief Executive Officer	2014	$	300,000			-		-		-		-		-		-

Luiz Valdetaro ⁽²⁾	2015	$	200,000			-		-		-		-		-		-
Chief Technology Officer	2014	$	200,000			-		-		-		-		-		-

Laurent Tetard ⁽³⁾	2015	$	190,000			-		-		-		-		-		-
Chief Operating Officer-SaaS	2014	$	178,540			-		-		-		-		-		-

James Salz ⁽⁴⁾	2015	$	165,000			-		-		-		-		-		-
Corporate Counsel	2014	$	165,000			-		-	$	3,200		-		-		-

No stock options were exercised by the named executive officers during the fiscal year ended December 31, 2015 or 2014.

⁽¹⁾

Mr. Wade deferred $881,688 of salary earned during the period from 2002 through 2008, as adjusted in connection with an agreement to defer payroll claims between the Company and certain employees of the Company executed in 2010. For 2012, 2013, 2014, and 2015 the Company accrued unpaid salary for Mr. Wade of $63,500, $37,500, $25,000 and $87,500 respectively.

⁽²⁾

Mr. Valdetaro deferred $467,071 of salary earned during the period from 2002 through 2007, as adjusted in connection with an agreement to defer payroll claims between the Company and certain employees of the Company executed in 2010. For 2012, 2013, 2014, and 2015, the Company accrued unpaid salary for Mr. Valdetaro of $41,667, $66,667, $41,667, and $66,667, respectively.

⁽³⁾

Prior to 2012, Mr. Tetard served as the Executive Vice President of International Operations of NOW Solutions. Mr. Tetard deferred $98,438 of salary earned during the period from 2002 through 2007, as adjusted in connection with an agreement to defer payroll claims between the Company and certain employees of the Company executed in 2010. For 2012 and 2015, the Company accrued unpaid salary for Mr. Tetard of $20,625 and $7,917, respectively.

⁽⁴⁾

Mr. Salz deferred $185,914 of salary earned during the period from 2002 through 2007, as adjusted in connection with an agreement to defer payroll claims between the Company and certain employees of the Company executed in 2010. For 2012, 2013, 2014, and 2015, the Company accrued unpaid salary for Mr. Salz of $27,498, $55,000, $73,336, and $48,125, respectively.

No options or warrants held by executive officers or directors were granted or exercised during the fiscal years ended December 31, 2015 and 2014.

In December 2001, we executed an employment agreement with Richard Wade pursuant to which Mr. Wade serves as Chief Executive Officer and President of the Company. The agreement currently renews on annual basis unless terminated by either party. Under the agreement, Mr. Wade receives an annual base salary of $300,000 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.

In January 2012, we executed an employment agreement with Luiz Valdetaro to serve as Chief Technology Officer of the Company and its subsidiaries. The initial term of the agreement was 2 years and renews on annual basis unless terminated by either party. Under the agreement, Mr. Valdetaro receives an annual base salary of $200,000. In the event the employment agreement is terminated by Mr. Valdetaro’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 for the lesser of 12 months or through the remainder of the employment term. In the event of termination by the Company without cause, Mr. Valdetaro would receive base compensation for no less than six months of the remainder of the employment term. Mr. Valdetaro may also terminate his employment for good reason and shall be entitled to continued health insurance benefits and base compensation at the rate in effect at the time of his termination for good reason through the end of twelve months after which his employment is terminated for good reason.

In February 2012, we executed an employment agreement with Laurent Tetard to serve as Chief Operating Officer-SaaS of the Company and its subsidiaries. The initial term of the agreement was 2 years and renews on annual basis unless terminated by either party. Under the agreement, Mr. Tetard receives an annual base salary of $190,000. In the event the employment agreement is terminated by Mr. Tetard’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 for the lesser of 12 months or through the remainder of the employment term. In the event of termination by the Company without cause, Mr. Tetard would receive base compensation for no less than six months of the remainder of the employment term. Mr. Tetard may also terminate his employment for good reason and shall be entitled to continued health insurance benefits and base compensation at the rate in effect at the time of his termination for good reason through the end of twelve months after which his employment is terminated for good reason. In connection with the employment agreement, the Company issued Mr. Tetard 600,000 shares of its common stock at a fair market value of $13,500 and VHS issued 15,000 shares of Series B Preferred Stock of VHS at a fair market value which is nominal.

All executives are entitled to an annual bonus from a bonus pool for executives equal to 5% of the Company taxable income before net operating loss deduction and special deductions from the federal tax return filed. Each executive’s share of the bonus pool is equal to the percentage of their annual base compensation to the total of the combined annual base compensation of all executives in the pool.

Outstanding Equity Awards

There were no outstanding equity awards of the named officers at the end of 2015.

Narrative Disclosure to Outstanding Equity Awards at Fiscal Year End

Stock Option Plan. The Company has no formal stock option plan and has issued no stock options or warrants to any employees or to any other parties and do not have any stock options outstanding.

Stock Awards . The Company’s restricted stock agreements generally provide for the stock to vest over a 1 or 3 year period. In the event the employee is terminated without cause, a portion of the remaining unvested stock will vest on a pro-rata basis.

COMPENSATION OF DIRECTORS

We do not pay any compensation to our employee directors for their service on the Board. However, we do pay our non-employee directors as indicated below. The below table provides compensation for all non-employee directors in 2015:

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		42,000		-		-		-		-		-		42,000

Narrative Disclosure to Director Compensation Table

Non-employee directors are entitled to receive $3,500 per month in 2015 and 2014.

Reimbursement of Expenses

The Company reimburses travel expenses of members for their attendance at Board meetings.

Compensation Risks Assessment

As required by rules adopted by the SEC, management has made an assessment of the Company’s compensation policies and practices with respect to all employees to determine whether risks arising from those policies and practices are reasonably likely to have a material adverse effect on the Company. In doing so, management considered various features and elements of the compensation policies and practices that discourage excessive or unnecessary risk taking. As a result of the assessment, the Company has determined that its compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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 14, 2016, 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 1,129,367,529 shares of common stock outstanding as of April 14, 2016, together with options, warrants or other securities convertible or exchangeable by the beneficial owners into shares of common stock within 60 days of April 14, 2016.

Title of Class	Name and Address of Beneficial Owner ⁽¹⁾	Shares of Common Stock Beneficially Owned			Percent of Class
Common	Richard Wade		78,350,190	⁽²⁾		6.94	%
Common	William K. Mills		2,283,333	⁽³⁾		*
Common	All Directors and Executive Officers as a group (2 persons)		80,633,523			7.14	%

* Less than 1%.

⁽¹⁾

The address of each director and officer is c/o Vertical Computer Systems, Inc., 101 West Renner Road, Suite 300, Richardson, TX 75082.

⁽²⁾

Includes 74,932,543 shares owned by MRC. MRC has pledged approximately 35,000,000 common shares as collateral to secure various promissory notes issued in the aggregate principal amount of approximately $1,290,000. Mr. Wade is the President and CEO of the Company. MRC is a corporation controlled by the W5 Family Trust and Mr. Wade is the trustee of the W5 Family Trust.

⁽³⁾

Includes 250,000 shares owned by Mr. Mills, 1,083,333 shares of VCSY common stock owned by Parker Mills, L.L.P. (“Parker Mills”) and 3-year warrants to purchase 1,000,000 shares of VCSY common stock at $0.05 per share granted to Parker Mills. William Mills is a Director of the Company and a partner of Parker Mills.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Certain Relationships and Related Transactions

In August 2014, in connection with a $50,000 note payable issued to a third party lender by the Company, MRC amended a stock pledge agreement previously entered into with the lender under which MRC had pledged 16,976,296 common shares to secure payment of this note and another note issued to the lender .

In March 2015, pursuant to an indemnity and reimbursement agreement executed between Mr. Valdetaro and the Company, we issued 1,000,000 shares of our common stock with the Rule 144 restrictive legend to reimburse Mr. Valdetaro for 1,000,000 shares of common stock transferred to Lakeshore on the Company’s behalf in connection with an extension granted by Lakeshore in August 2013. The issuance of these shares eliminated the derivative liability associated with the value of these shares. The fair market value of these shares on the date of issuance was $38,000 and resulted in the resolution of derivative liabilities and a loss on derivative liabilities of $26,000.

In March 2015, pursuant to two indemnity and reimbursement agreements executed between Mountain Reservoir Corporation (“MRC”) and the Company, we issued a total of 2,809,983 shares of our common stock with the Rule 144 restrictive legend to reimburse MRC. Of these shares, the Company was obligated to reimburse MRC with 1,309,983 shares of common stock that had been pledged by MRC and sold by a third party lender in 2009, 500,000 shares of common stock that had been wrongfully converted by the same lender in 2014, and 1,000,000 shares of common stock that had been transferred to another third party lender in 2013 on the Company’s behalf for a loan made by the lender. MRC assigned its claim against the third party lender for the lender’s wrongful conversion of 500,000 common shares to the Company and we are pursuing the claim in the third party lender’s bankruptcy proceeding. The issuance of these shares eliminated the derivative liability associated with the value of these shares. The fair market value of these shares on the date of issuance was $112,399 of which $92,399 resulted in the resolution of derivative liabilities and a loss on derivative liabilities of $64,680 and $20,000 was recognized as stock reimbursement expense during the twelve months ended December 31, 2015.

In December 2015, the Company issued a convertible debenture in the principal amount of $100,000 to Parker Mills, LLP (“Parker Mills”). The debt accrues interest at 10% per annum and is due one year from the date of issuance. Beginning six months after issuance of the debenture, the holder of the debenture may convert the debenture into shares of common stock at a price per share of 80% of the average per share price of the Company’s common stock for the 5 trading days preceding the notice of conversion date using the 3 lowest closing prices. In connection with the loan, the Company also issued a total of 1,000,000 shares of common stock of the Company to the lender and 3-year warrants under which the lender may purchase in aggregate a total of 1,000,000 unregistered shares of common stock of the Company at a purchase price of $0.10 per share. In connection with the issuance of common stock and warrants, the Company recorded a discount of $20,798 against the face value of the loans based on the relative fair market value of the common stock and warrants. William Mills is a partner of Parker Mills and the Secretary and a Director of the Company.

As of December 31, 2015 and 2014, the Company had accounts payable to related parties in an aggregate amount of $108,379 and $36,333, respectively.

Director Independence; Board Leadership Structure

The Company’s common stock is quoted through the OTC Markets and quoted on the OTCQB under the symbol “VCSY”. For purposes of determining whether members of the Company’s Board of Directors are “independent,” the Company’s Board utilizes the standards set forth in the NASDAQ Stock Market Marketplace Rules. At present, the Company’s entire Board serves as its Audit, Compensation and Nominating Committees. The Company’s Board of Directors has determined that, of the Company’s present directors, William Mills, constituting one of the two members of the Board, is an “independent director,” as defined under NASDAQ’s Marketplace Rules, for purposes of qualifying as independent members of the Board and an Audit, Compensation and Nominating Committee of the Board, but that Richard Wade is not an “independent director” since he serves as executive officer of the Company. In reaching its conclusion, the Board determined that Mr. Mills does not have a relationship with the Company that, in the Board’s opinion, would interfere with his exercise of independent judgment in carrying out the responsibilities of a director, nor does Mr. Mills have any of the specific relationships set forth in NASDAQ’s Marketplace Rules that would disqualify him from being considered an independent director.

Currently, Mr. Richard Wade serves as both Chairman of the Board and Chief Executive Officer. As noted above, Mr. William Mills is the sole independent director and Mr. Mills has not taken on any supplemental role in his capacity as director. It is anticipated that additional independent directors may be added to the Board, however, the Company’s Board of Directors has not set a timetable for such action.

The Company’s Board of Directors is of the view that the current leadership structure is suitable for the Company at its present stage of development, and that the interests of the Company are best served by the combination of the roles of Chairman of the Board and Chief Executive Officer.

As a matter of regular practice, and as part of its oversight function, the Company’s Board of Directors undertakes a review of the significant risks in respect of the Company’s business. Such review is conducted in concert with the Company’s in-house legal staff, and is supplemented as necessary by outside professionals with expertise in substantive areas germane to the Company’s business. With the Company’s current governance structure, the Company’s Board of Directors and senior executives are, by and large, the same individuals, and consequently, there is not a significant division of oversight and operational responsibilities in managing the material risks facing the Company.

Item 14. Principal Accountant Fees and Services

Audit Fees. The aggregate fees billed for professional services rendered by our principal accounting firm of MaloneBailey were $74,500 and $80,000 for the audit of our annual financial statements for 2015 and 2014, which included the reviews of the financial statements in our Forms 10-Q for the applicable fiscal years.

Tax Fees . The principal accounting firm of MaloneBailey did not provide any tax services in 2015 and 2014.

All Other Fees . Other than the services described above, the aggregate fees billed for services rendered by our principal accountant was $0 and $0, respectively, for the fiscal years ended 2015 and 2014.

PART IV

Item 15. Exhibits and Financial Statement Schedules

The following documents are filed as part of this report:

Exhibits:

Exhibit No.	Description	Location
2.1	Certificate of Ownership and Merger Merging Scientific Fuel Technology, Inc. into Vertical Computer Systems, Inc.	Provided herewith

3.1	Original Unamended Certificate of Incorporation of Vertical Computer Systems, Inc. (f/k/a Xenogen Technology, Inc.)	Provided herewith

3.2	Certificate of Amendment of Certificate of Incorporation (changed name to Vertical Computer Systems, Inc.)	Provided herewith

3.3	Certificate of Amendment of Certificate of Incorporation (2000)	Provided herewith

3.4	Certificate of Amendment of Certificate of Incorporation	Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on February 27, 2015

3.5	Amended and Restated By-Laws of the Company	Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on January 13, 2015

4.1	Certificate of Designation of 4% Cumulative Redeemable Series A Preferred Stock	Provided herewith

4.2	Certificate of Designation of 10% Cumulative Redeemable Series B Preferred Stock	Provided herewith

4.3	Certificate of Designation of 4% Cumulative Redeemable Series C Preferred Stock	Provided herewith

4.4	Certificate of Designation of 15% Cumulative Redeemable Series D Preferred Stock	Provided herewith

4.5	Form of Restricted Stock Agreement	Provided herewith

4.6	Form of Convertible Note	Provided herewith

4.7	Form of Stock Purchase Warrant	Provided herewith

10.1	Employment Agreement between the Company and Richard Wade	Provided herewith

10.2	Secured Term Promissory Note in the principal amount of $1,759,150 payable by NOW Solutions to Lakeshore Investment, LLC.	Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 15, 2013

14.1	Code of Ethics	Provided herewith

21.1	Subsidiaries of the Company	Provided herewith

31.1	Certification of Principal Executive Officer and Principal Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 14, 2015	Provided herewith

32.1	Certification of Principal Executive Officer and Principal Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 14, 2015	Provided herewith

101.INS*	XBRL Instance Document	Provided herewith

101.SCH*	XBRL Taxonomy Extension Schema	Provided herewith

101.CAL *	XBRL Taxonomy Extension Calculation Linkbase	Provided herewith

101.DEF*	XBRL Taxonomy Extension Definition Linkbase	Provided herewith

101.LAB*	XBRL Taxonomy Extension Label Linkbase	Provided herewith

101.PRE*	XBRL Taxonomy Extension Presentation Linkbase	Provided herewith

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	VERTICAL COMPUTER SYSTEMS, INC.


April 14, 2016	By:	/s/ Richard Wade
		Richard Wade,
		President and Chief Executive Officer (Principal Executive Officer and Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

	DIRECTORS:


April 14, 2016	By:	/s/ Richard Wade
		Richard Wade, Director



April 14, 2016	By:	/s/ William Mills
		William Mills, Director

VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Financial Statements
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations and Comprehensive Income (Loss)	F-4
Consolidated Statements of Stockholders’ Deficit	F-5
Consolidated Statements of Cash Flows	F-6

Notes to Consolidated Financial Statements	F-7

F- 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Vertical Computer Systems, Inc.

Richardson, Texas

We have audited the accompanying consolidated balance sheets of Vertical Computer Systems, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2015 and 2014 and the related consolidated statements of operations and comprehensive income (loss), stockholders’ deficit, and cash flows for the years 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 audits.

We conducted our audits 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 audits 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vertical Computer Systems, Inc. and its subsidiaries as of December 31, 2015 and 2014 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company suffered net losses 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ MaloneBailey, LLP

www.malonebailey.com

Houston, Texas

April 14, 2016

F- 2

VERTICAL COMPUTER SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,			December 31,
	2015			2014
Assets
Current assets:
Cash	$	37,141		$	117,866
Accounts receivable, net of allowance for bad debts of $97,973 and $97,419		382,463			560,879
Prepaid expenses and other current assets		57,488			41,387
Total current assets		477,092			720,132

Property and equipment, net of accumulated depreciation of $1,038,609 and $1,026,654		2,375			28,089
Intangible assets, net of accumulated amortization of $319,413 and $302,016		1,181,661			657,978
Deposits and other assets		7,909			24,388

Total assets	$	1,669,037		$	1,430,587

Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable and accrued liabilities		10,536,974			10,659,737
Accounts payable to related parties		108,379			36,333
Bank overdraft		52			7,699
Deferred revenue		1,658,158			2,321,044
Derivative liabilities		-			51,719
Convertible debentures, net of unamortized discounts of $110,121 and $0		499,879			30,000
Notes payable		4,897,141			4,545,239
Notes payable and convertible debt to related parties, net of unamortized discounts of $20,798 and $0		417,445			348,666
Total current liabilities		18,118,028			18,000,437



Total liabilities		18,118,028			18,000,437

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 par value; 200,000 shares authorized; 50,000 shares issued and outstanding;		200,926			200,926
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			9,902,024
Stockholders’ Deficit
Common stock: $0.00001 par value, 2,000,000,000 shares authorized, 1,114,601,656 issued and 1,084,601,656 outstanding as of December 31, 2015 and 1,000,000,000 shares authorized, 999,735,151 shares issued and outstanding as of December 31, 2014		11,147			9,998
Treasury stock: 30,000,000 shares as of December 31, 2015 and no shares as of December 31, 2014		(300	)		-
Additional paid-in capital		22,252,823			19,925,061
Accumulated deficit		(49,739,924	)		(47,174,557	)
Accumulated other comprehensive income – foreign currency translation		558,668			145,808

Total Vertical Computer Systems, Inc. stockholders’ deficit		(26,917,586	)		(27,093,690	)

Non-controlling interest		566,571			621,816
Total stockholders’ deficit		(26,351,015	)		(26,471,874	)

Total liabilities and stockholders’ deficit	$	1,669,037		$	1,430,587

See accompanying notes to consolidated financial statements.

F- 3

VERTICAL COMPUTER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND OTHER COMPREHENSIVE INCOME (LOSS)

	Years Ended December 31,
	2015			2014
Revenues:
Licensing and software	$	22,500		$	2,600,360
Software maintenance		3,573,622			3,971,097
Consulting services		292,129			425,932
Cloud-based offering		321,619			373,335
Other		53,765			64,778
Total Revenues		4,263,635			7,435,502

Cost of Revenues		(1,767,155	)		(2,159,870	)

Gross Profit		2,496,480			5,275,632

Operating Expenses:
Selling, general and administrative expenses		3,088,568			5,035,088
Depreciation and amortization		38,412			44,878
Bad debt expense		3,300			42,492
Impairment of software costs		-			771,251
Total operating expenses		3,130,280			5,893,709

Operating loss		(633,800	)		(618,077	)

Other Income (Expense):
Gain (loss) on derivative liabilities		(78,680	)		211,621
Forbearance fees		(1,065,900	)		(197,156	)
Loss on extinguishment of debt		(393,301	)		-
Interest income		9			19
Interest expense		(895,920	)		(933,529	)

Net loss before non-controlling interest and income tax benefit		(3,067,592	)		(1,537,122	)

Income tax benefit		(571,980	)		(86,300	)

Net loss before non-controlling interest		(2,495,612	)		(1,450,822	)

Net loss attributable to non-controlling interest		(69,755	)		(32,014	)
Net loss attributable to Vertical Computer Systems, Inc.		(2,565,367	)		(1,482,836	)

Dividends applicable to preferred stock		(588,000	)		(588,000	)

Net loss available to common stockholders	$	(3,153,367	)	$	(2,070,836	)

Basic and diluted loss per share	$	(0.00	)	$	(0.00	)

Basic and diluted weighted average common shares outstanding		1,036,597,308			999,471,727

Comprehensive loss:
Net loss	$	(2,495,612	)	$	(1,450,822	)
Translation adjustments		412,860			264,356
Comprehensive loss		(2,082,752	)		(1,186,466	)
Comprehensive loss attributable to non-controlling interest		(69,755	)		(32,014	)
Comprehensive loss attributable to Vertical Computer Systems, Inc.	$	(2,152,507	)	$	(1,218,480	)

See accompanying notes to consolidated financial statements.

F- 4

VERTICAL COMPUTER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

YEARS ENDED DECEMBER 31, 2015 AND 2014

											Additional					Other			Non-
	Common Stock				Treasure Stock						Paid-in		Accumulated			Comprehensive			controlling
	Shares		Amount		Shares			Amount			Capital		Deficit			Interest			Interest			Total
Balances at December 31, 2013		998,985,151	$	9,990		-			-		$	19,420,513	$	(45,691,721	)	$	(118,548	)	$	1,080,882		$	(25,298,884	)
Shares issued for stock compensation that was previously accrued		550,000		6		-			-			10,220		-			-			-			10,226
Shares issued for stock compensation		200,000		2		-			-			3,198		-			-			-			3,200
Issuance of subsidiary stock		-		-		-			-			491,130		-			-			(491,130	)		-
Other comprehensive income translation adjustment		-		-		-			-			-		-			264,356			50			264,406
Net loss		-		-		-			-			-		(1,482,836	)		-			32,014			(1,450,822	)
Balances at December 31, 2014		999,735,151	$	9,998		-			-		$	19,925,061	$	(47,174,557	)	$	145,808		$	621,816		$	(26,471,874	)
Shares issued for resolution of derivative liabilities		3,309,983		33		-			-			130,366		-			-			-			130,399
Shares issued for reimbursement of stock		500,000		5		-			-			19,995		-			-			-			20,000
Shares issued for accrued interest and loan principal		35,556,522		356		-			-			895,557		-			-			-			895,913
Shares issued for loan forbearance		36,500,000		365		-			-			1,050,535		-			-			-			1,050,900
Shares issued to subsidiaries and held in treasury		30,000,000		300		(30,000,000	)		(300	)		-		-			-			-			-
Shares and warrants issued with convertible debt		7,500,000		75		-			-			182,458		-			-			-			182,533
Shares issued for loan discounts		1,500,000		15		-			-			29,235		-			-			-			29,250
Amortization of restricted stock awards		-		-		-			-			19,616		-			-			-			19,616
Dividends paid by subsidiary to non-controlling interest		-		-		-			-			-		-			-			(125,000	)		(125,000	)
Other comprehensive income translation adjustment		-		-		-			-			-		-			412,860			-			412,860
Net loss		-		-		-			-			-		(2,565,367	)		-			69,755			(2,495,612	)
Balances at December 31, 2015		1,114,601,656	$	11,147		(30,000,000	)		(300	)	$	22,252,823	$	(49,739,924	)	$	558,668		$	566,571		$	(26,351,015	)

See accompanying notes to consolidated financial statements.

F- 5

VERTICAL COMPUTER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2015			2014
Cash flows from operating activities:

Net loss	$	(2,495,612	)	$	(1,450,822	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Loss on extinguishment of debt and accrued interest		393,301			-
Depreciation and amortization		38,412			44,878
Amortization of restricted stock awards		19,616			-
Amortization of debt discounts		80,864			-
Loss (gain) on derivatives		78,680			(211,621	)
Common shares issued for stock compensation		20,000			3,200
Impairment of software development costs		-			771,251
Forbearance fees paid with common stock		1,050,900			-
Bad debt expense		3,300			42,492
Write off of property and equipment		4,919			-
Settlement of accrued income taxes		(581,622	)		(267,842	)
Changes in operating assets and liabilities:
Accounts receivable		158,158			(43,763	)
Prepaid expense and other assets		164			56,898
Accounts payable and accrued liabilities		1,083,971			1,173,885
Accounts payable to related parties		72,046			12,739
Deferred revenue		(453,109	)		3,055
Net cash provided by (used in) operating activities		(526,012	)		134,350

Cash flows from investing activities:
Software development		(541,300	)		(478,876	)
Purchase of equipment		-			(8,091	)
Net cash used in investing activities		(541,300	)		(486,967	)

Cash flows from financing activities:
Payments of notes payable		(132,848	)		(418,294	)
Borrowings on notes payable		555,333			451,282
Payments on related party debt		(10,425	)		(20,992	)
Borrowings on related party debt and convertible debt		100,000			25,500
Borrowings on convertible debentures		580,000			-
Dividends paid by subsidiary to non-controlling interest		(125,000	)		-
Bank overdraft		(7,647	)		5,771
Net cash provided by financing activities		959,413			43,267

Effect of changes in exchange rates on cash		27,174			264,507

Net decrease in cash		(80,725	)		(44,843	)
Cash, beginning of period		117,866			162,709
Cash, end of period	$	37,141		$	117,866

Supplemental Disclosure of Cash Flows Information:
Cash paid for interest	$	128,712		$	316,353

Non-cash Investing and Financing Activities:
Common shares issued for accrued stock compensation		-			10,226
Issuance of subsidiary stock		-			491,130
Common shares issued for conversion of debt and accrued interest		895,913			-
Common stock issued for settlement of derivative liabilities		130,399			-
Debt discount due to shares and warrants issued with debt		211,783			-
Accrued interest capitalized into debt principal		188,552			-

See accompanying notes to consolidated financial statements.

F- 6

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. We are a multinational provider of application software, software services, Internet core technologies, and derivative software application products through our distribution network. Our 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 our products and services. We operate one business segment.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries (collectively, “our”, “we”, the “Company” or “VCSY”, as applicable). Vertical’s subsidiaries which currently maintain daily business operations are NOW Solutions, a 75% owned subsidiary, and SnAPPnet, Inc. (“SnAPPnet”), an 80% owned subsidiary of Vertical. Vertical’s subsidiaries which have minimal operations are Vertical do Brasil, Taladin, Inc. (“Taladin"), and Vertical Healthcare Solutions, Inc. (“VHS”), each of which a wholly-owned subsidiary of Vertical, as well as Priority Time Systems, Inc. (“Priority Time”) a 70% owned subsidiary, Ploinks, Inc. (“Ploinks”) (formerly, OptVision Research, Inc.), a 93% owned subsidiary and Government Internet Systems, Inc. (“GIS”), an 84.5% owned subsidiary. Vertical’s subsidiaries which are inactive include EnFacet, Inc. (“ENF”), Globalfare.com, Inc. (“GFI”), Pointmail.com, Inc. and Vertical Internet Solutions, Inc. (“VIS”), each of which is a wholly-owned subsidiary of Vertical. To date, we have generated revenues primarily from software licenses, software as a service, consulting fees and maintenance agreements from NOW Solutions and SnAPPnet and patent licenses from Vertical Computer Systems, the parent company.

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. We currently have no investments accounted for using the equity or cost methods of accounting.

Cash and Cash Equivalents

Cash equivalents are highly liquid investments with an original maturity of three months or less.

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.

F- 7

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 those. We consider these separate agreements as being 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 value 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.

Cloud-based offering. 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® and SnAPPnet™, 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 a cloud-based offering. 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 our cloud-based offering can enter into an agreement to purchase a software license at any time. We generate revenue from our cloud-based offering as the customer utilizes the software over the Internet.

We will provide consulting services to customers in conjunction with our cloud-based offering. The rate for such service is based on standard hourly or daily billing rates. The consulting revenue is recognized as services are performed. Customers, utilizing their own computer to access our cloud-based offering, are charged a fee equal to the number of employees paid each month multiplied by an agreed-upon monthly rate per employee. The revenue is recognized as the cloud-based offering services are rendered each month.

F- 8

Concentration of Credit Risk

We maintain our cash in bank deposit accounts, which, at times, may exceed federally insured limits. We have 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. The company’s revenue consists of 57% in Canada and 43% in the US. Receivables arising from sales of the Company’s products are not collateralized. As of December 31, 2015, four customers represented approximately 81.4% (31.7%, 25.2%, 12.7 and 11.8%) of accounts receivable. As of December 31, 2014, three customers represented approximately 58.4% (21.2%, 20.1%, and 17.1%) of accounts receivable.

Capitalized Software Costs

For the year ended December 31, 2015 and 2014, the company capitalized $541,300 and $478,877, respectively of software development costs related to its Ploinks subsidiary. For the year ended December 31, 2014, the Company wrote off $771,251 of previously capitalized software development costs related to its 70% owned subsidiary, Priority Time Systems.

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

Long-lived assets are 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 2015 and 2014, there was no impairment of long-lived assets.

Stock-based Compensation

We account for share-based compensation in accordance with the provisions of share-based payments, 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. Equity instruments issued to other than employees are valued at the earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments, and are recognized as expense over the service period.

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 $97,973 and $97,419 as of December 31, 2015 and 2014, respectively.

Income Taxes

We provide for income taxes in accordance with the asset and liability method of accounting for income taxes.

F- 9

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. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

Since January 1, 2007, we account for uncertain tax positions in accordance with the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on income taxes which addresses how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to this guidance, we 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. No liability for unrecognized tax benefits was recorded as of December 31, 2015 and 2014.

Earnings per Share

Basic earnings per share is calculated by dividing net income (loss) 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” reflects 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 computation:

	Year Ended December 31, 2015								Year Ended December 31, 2014
	Net Loss Applicable to Common Stockholders (Numerator)			Shares (Denominator)		Per Share Amount			Net Loss Applicable to Common Stockholders (Numerator)			Shares (Denominator)		Per Share Amount
Basic EPS	$	(3,153,367	)		1,036,597,308	$	(0.00	)	$	(2,070,836	)		999,471,727	$	(0.00	)

Effect of dilutive securities:
Warrants & Restricted Stock		-			-		0.00			-			-		0.00

Diluted EPS	$	(3,153,367	)		1,036,597,308	$	(0.00	)	$	(2,070,836	)		999,471,727	$	(0.00	)

As of December 31, 2015 and 2014, common stock equivalents related to the convertible debt, preferred stock and stock derivative liabilities totaling 33,681,957 were not included in the denominators of the diluted earnings per share as their effect would be anti-dilutive.

Fair Value of Financial Instruments

For certain of our financial instruments, including cash, accounts receivable, short term debt and accrued expenses, the carrying amounts approximate fair value due to the short maturity of these instruments. The carrying value of our 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 us for debt of the same remaining maturities. For additional information, please see Note 4 – Derivative Liabilities and Fair Value Measurements.

F- 10

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.

Cash Reimbursements

We record reimbursement by our customers for out-of-pocket expense as part of consulting services revenue in accordance with the guidance related to 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.

Recently Issued Accounting Pronouncements

The Company does not expect the adoption of any recently issued accounting pronouncements to have a material impact on the Company’s financial position, operations or cash flows.

Note 2. Going Concern Uncertainty

The accompanying consolidated financial statements for 2015 and 2014 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 consolidated financial statements do not purport to represent realizable or settlement values. As of December 31, 2015, the Company had negative working capital of approximately $17.6 million and defaulted on several of its debt obligations. The company also incurred net losses in 2015 and 2014. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

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. The Company will require additional funds to pay down its liabilities, as well as finance its expansion plans consistent with anticipated changes in operations and infrastructure. However, there can be no assurance that the Company will be able to secure additional funds and that if such funds are available, whether the terms or conditions would be acceptable to the Company and whether the Company 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. Related Party Transactions

F- 11

In March 2015, pursuant to two indemnity and reimbursement agreements executed between Mountain Reservoir Corporation (“MRC”) and the Company, we issued a total of 2,809,983 shares of our common stock with the Rule 144 restrictive legend to reimburse MRC. Of these shares, the Company was obligated to reimburse MRC with 1,309,983 shares of common stock that had been pledged by MRC and sold by a third party lender in 2009, 500,000 shares of common stock that had been wrongfully converted by the same lender in 2014, and 1,000,000 shares of common stock that had been transferred to another third party lender in 2013 on the Company’s behalf for a loan made by the lender. MRC assigned its claim against the third party lender for the lender’s wrongful conversion of 500,000 common shares to the Company and we are pursuing the claim in the third party lender’s bankruptcy proceeding. The issuance of these shares eliminated the derivative liability associated with the value of these shares. The fair market value of these shares on the date of issuance was $112,399 of which $92,399 resulted in the resolution of derivative liabilities and a loss on derivative liabilities of $64,680 and $20,000 was recognized as stock reimbursement expense during the twelve months ended December 31, 2015.

As of December 31, 2015 and 2014, the Company had accounts payable to related parties in an aggregate amount of $108,379 and $36,333, respectively.

Related Party Notes Payable

	December 31,
	2015			2014
Notes payable bearing interest at 10% to 15% per annum. Of these notes payable $338,243 and $348,666 were in default at December 31, 2015 and 2014, respectively.	$	338,243		$	348,666

Convertible debenture bearing interest at 10% per annum, due one year from date of issuance. Net of unamortized discount of $20,798.	$	79,202		$	348,666
Total notes payable to related parties		417,445			348,666

Current maturities		(417,445	)		(348,666	)

Long-term portion of notes payable to related parties	$	-		$	-

The following table reflects our related party debt activity for the years ended December 31, 2015 and 2014:

December 31, 2013	$	344,158
Borrowings from related parties		25,500
Payments to related parties		(20,992	)
December 31, 2014		348,666
Borrowings from related parties		100,000
Payments to related parties		(10,423	)
Debt discounts due to stock and warrants issued with debt		(20,798	)
December 31, 2015	$	417,445

During the year ended December 31, 2015, the Company issued a convertible debenture in the principal amount of $100,000 to Parker Mills, LLP (“Parker Mills”). The debt accrues interest at 10% per annum and is due one year from the date of issuance. Beginning six months after issuance of the debenture, the holder of the debenture may convert the debenture into shares of common stock at a price per share of 80% of the average per share price of the Company’s common stock for the 5 trading days preceding the notice of conversion date using the 3 lowest closing prices. In connection with the loan, the Company also issued a total of 1,000,000 shares of common stock of the Company to the lender and 3-year warrants under which the lender may purchase in aggregate a total of 1,000,000 unregistered shares of common stock of the Company at a purchase price of $0.10 per share. In connection with the issuance of common stock and warrants, the Company recorded a discount of $20,798 against the face value of the loans based on the relative fair market value of the common stock and warrants. William Mills is a partner of Parker Mills and the Secretary and a Director of the Company.

During the year ended December 31, 2014, the Company borrowed $25,500 from an employee of the Company. The note is unsecured, bears interest at 11% per annum and is due on demand.

F- 12

Note 4. Derivative Liabilities and Fair Value Measurements

Derivative liabilities

In March 2015, pursuant to two indemnity and reimbursement agreements executed between MRC and the Company, we issued a total of 2,809,983 shares of our common stock with the Rule 144 restrictive legend to reimburse MRC. Of these shares, the Company was obligated to reimburse MRC with 1,309,983 shares of common stock that had been pledged by MRC and sold by a third party lender in 2009, 500,000 shares of common stock that had been wrongfully converted by the same lender in 2014, and 1,000,000 shares of common stock that had been transferred to another third party lender in 2013 on the Company’s behalf for a loan made by the lender. MRC assigned its claim against the third party lender for the lender’s wrongful conversion of 500,000 common shares to the Company and we are pursuing the claim in the third party lender’s bankruptcy proceeding. The issuance of these shares eliminated the derivative liability associated with the value of these shares. The fair market value of these shares on the date of issuance was $112,399 of which $92,399 resulted in the resolution of derivative liabilities and a loss on derivative liabilities of $64,680 and $20,000 was recognized as stock reimbursement expense during the year ended December 31, 2015.

In March 2015, 1,000,000 shares of common stock pledged by an officer of the company (through a company he controls) to secure payment of a $50,000 past due loan by a third party lender were eliminated as part of the derivative liability as the lender did not exercise their rights to obtain the stock. The derivative liability associated with this obligation of $12,000 was written-off to gain on derivative liability during the year ended December 31, 2015.

These contractual commitments to replace all of the pledged shares was evaluated under FASB ASC 815-40, Derivatives and Hedging and was determined to have characteristics of a liability and therefore constituted a derivative liability 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, 2015 and 2014, the aggregate fair value of the derivative liabilities was $0 and $51,719, respectively.

The aggregate change in the fair value of derivative liabilities was a loss of $78,680 for the year ended December 31, 2015. For the year ended December 31, 2014, the aggregate change in the fair value of derivative liabilities was a gain of $211,621

The valuation of our embedded derivatives is determined by using the VCSY stock price at December 31, 2015 and 2014. As such, our derivative liabilities have been classified as Level 1.

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.

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 of input that is significant to the fair value measurement of the instrument.

The following table provides a summary of the fair value of our derivative liabilities as of December 31, 2015 and December 31, 2014:

F- 13

	Fair value measurements on a recurring basis
	Level 1		Level 2		Level 3
As of December 31, 2015:
Liabilities
Stock derivatives – 0 shares	$	-	$	-	$	-

As of December 31, 2014:
Liabilities
Stock derivative – 4,309,983 shares	$	51,719	$	-	$	-

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 approximate current market rates.

Note 5. Property and Equipment

Property and equipment consist of the following as of December 31, 2015 and 2014:

	2015			2014

Equipment (3-5 year life)	$	908,086		$	921,152
Leasehold improvements (5 year life)		87,714			87,713
Furniture and fixtures (3-5 year life)		45,184			45,878

Total		1,040,984			1,054,743

Accumulated depreciation		(1,038,609	)		(1,026,654	)
	$	2,375		$	28,089

Depreciation expense for 2015 and 2014 was $20,795 and $2,598, respectively.

Note 6. Intangible Assets

Intangible assets consisted of the following as of December 31, 2015 and 2014:

	2015			2014
Capitalized software development	$	1,174,972		$	633,672
Acquired software (5 year life)		303,902			304,122
Customer list (5 year life)		2,200			2,200
Trademark		5,000			5,000
Website (5 year life)		15,000			15,000
Total		1,501,074			959,994
Accumulated amortization		(319,413	)		(302,016	)
	$	1,181,661		$	657,978

Amortization expense for 2015 and 2014 was $17,617 and $42,280, respectively.

During 2015, the Company capitalized $541,300 of software development costs related to its Ploinks™ software application.

During 2014, the Company wrote off $771,251 of previously capitalized software costs related to its 70% owned subsidiary, Priority Time Systems, and capitalized $478,876 of software development costs related to its Ploinks™ software application.

F- 14

Note 7. Accounts Payable and Accrued Expenses

Accounts payable and accrued liabilities consist of the following:

	2015		2014

Accounts payable	$	3,975,873	$	3,611,685
Accrued payroll		2,703,165		2,344,177
Accrued payroll tax and penalties		662,330		671,149
Accrued interest		2,424,178		2,074,934
Accrued taxes		499,102		1,618,956
Accrued liabilities - other		272,326		338,836
	$	10,536,974	$	10,659,737

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 payroll tax and penalties relate to unpaid payroll taxes, interest and penalties for prior years for non-functioning subsidiaries and employer payroll taxes on accrued payroll. Accrued taxes primarily consist of unpaid sales and use taxes, Canadian GST, Canadian income tax and other accrued taxes. Accrued liabilities – other primarily consists of accrued rent, board of director fees, unbilled professional and consulting fees, and other accrued expenses.

During the year ended December 31, 2015 the Internal Revenue Service has made a claim for payroll taxes owed of approximately $1.2 million. The company currently has this accrued in accounts payable

Note 8. Notes Payable and Convertible Debts

The following table reflects our third party debt activity, including our convertible debt, for the years ended December 31, 2015 and 2014:

December 31, 2013	$	4,542,512
Repayments of third party notes		(418,555	)
Borrowings from third parties		451,282
December 31, 2014		4,575,239
Repayments of third party notes		(132,848	)
Borrowings from third parties		1,135,333
Stock issued for debt payments		(258,552	)
Debt discounts due to stock and warrants issued with debt		(190,985	)
Amortization of debt discounts		80,864
Conversion of accrued interest to debt principal		188,552
Currency translation		(583	)
December 31, 2015	$	5,397,020

During the year ended December 31, 2015, the Company and its subsidiaries borrowed an aggregate of $555,333 from various third party lenders and issued several unsecured notes payable in the same amounts to the lenders, which bear interest at 10%-12% per annum. Of these notes, $132,848 was repaid at December 31, 2015.

During the year ended December 31, 2015, the Company issued convertible promissory notes and debentures in the aggregate principal amount of $580,000 to various third party lenders for loans made to the Company in the same amount. The debts accrue interest at 10% per annum and are due one year from the date of issuance. Beginning six months after issuance of the respective debenture, the holder of the debenture may convert the debenture into shares of common stock at a price per share of either (a) 80% of the average per share price of the Company’s common stock for the 5 trading days preceding the notice of conversion date using the 3 lowest closing prices or (b) 75% of the average per share closing bid price of the Company’s common stock during the 10 trading days prior to the notice of conversion date using the lowest 5 closing bid prices per share (which shall not be lower than $0.03 per share). In connection with the loans, the Company also issued a total of 6,500,000 shares of common stock of the Company to the lenders and 3-5 year warrants under which each lender may purchase in aggregate a total of 5,800,000 unregistered shares of common stock of the Company at a purchase price of between $0.05-$0.10 per share (of which one warrant for 800,000 shares included a cashless warrant exercise provision). These warrants were issued to the lenders in connection with these loans made to the Company. In connection with the issuance of common stock and warrants, the Company recorded a discount of $161,735 against the face value of the loans based on the relative fair market value of the common stock and warrants. The discount is being amortized over twelve months and $51,614 of amortization expense was recognized for the year ended December 31, 2015.

F- 15

During the year ended December 31, 2014, the Company borrowed an aggregate of $451,282 from various third party lenders and issued several notes payable in the same amounts to lender. Two notes were issued in the aggregate amount of $231,282, had interest rates of 12% per annum, included commitment fees of $22,000 and other payments of 133,000 owed to the lender under previous contractual obligations with the lender, and all amounts outstanding were paid in 2014. One note, issued in the amount of $50,000, bearing interest at the rate of 18% per annum, included a commitment fee of $2,000, was due in November 2014 and is secured by stock pledged by MRC. The remaining notes were issued in the aggregate amount of $170,000, were unsecured, bear interest at 11% per annum, and were due on demand or past due and in default. In connection with the $170,000 in notes issued during the year, the Company agreed to issue 1,000,000 shares of common stock of its subsidiary, Ploinks to the lender.

Lakeshore Financing

On January 9, 2013, NOW Solutions completed a financing transaction in the aggregate amount of $1,759,150, which amount was utilized to pay off existing indebtedness of the Company and NOW Solutions to Tara Financial Services and Robert Farias, a former employee of the Company, and all security interests granted to Tara Financial Services and Mr. Farias were cancelled.

In connection with this financing, the Company and several of its subsidiaries entered into a loan agreement (the “ Loan Agreement ”), dated as of January 9, 2013 with Lakeshore Investment, LLC (“ Lakeshore ”) under which NOW Solutions issued a secured 10-year promissory note (the “ Lakeshore Note ”) bearing interest at 11% per annum to Lakeshore in the amount of $1,759,150 payable in equal monthly installments of $24,232 until January 31, 2022. Upon the payment of any prepayment principal amounts, the monthly installment payments shall be proportionately adjusted proportionately on an amortized rata basis.

The Lakeshore Note is secured by the assets of the Company’s subsidiaries, NOW Solutions, Priority Time, SnAPPnet, Inc. (“ SnAPPnet ”) and the Company’s SiteFlash™ technology and cross-collateralized. Upon the aggregate principal payment of $290,000 toward the Lakeshore Note, the Company has the option to have Lakeshore release either the Priority Time collateral or the SiteFlash™ collateral. Upon payment of the aggregate principal of $590,000 toward the Lakeshore Note, Lakeshore shall release either the Priority Time collateral or the SiteFlash™ collateral (whichever is remaining). Upon payment of the aggregate principal of $890,000 toward the Lakeshore Note, Lakeshore shall release the SnAPPnet collateral and upon full payment of the Lakeshore Note, Lakeshore shall release the NOW Solutions collateral.

As additional consideration for the loan, the Company granted a 5% interest in Net Claim Proceeds (less any attorney’s fees and direct costs) from any litigation or settlement proceeds related to the SiteFlash™ technology to Lakeshore which was increased to 8% under an amendment to the Loan Agreement in 2013. In addition, until the Note is paid in full, NOW Solutions agreed to pay a Lakeshore royalty of 6% of its annual gross revenues in excess of $5 million dollars up to a maximum of $1,759,150. Management has estimated the fair value of the royalty to be nominal as of its issuance date and no royalty was owed as of September 30, 2015 or December 31, 2014.

In December 2014, the Company and Lakeshore entered into an amendment of the Lakeshore Note and the Loan Agreement. Under the terms of the amendment, NOW Solutions agreed to make $2,500 weekly advance payments to Lakeshore to be applied to the 25% dividend of NOW Solutions’ net income after taxes in connection with Lakeshore’s 25% minority ownership interest in NOW Solutions. Within 10 business days after the Company files its periodic reports with the SEC, NOW Solutions will also make quarterly payment advances to Lakeshore based on 60% of Lakeshore’s 25% share of NOW Solutions estimated quarterly net income after taxes, less any weekly payment advances received by Lakeshore during the then-applicable quarter and the weekly $2,500 payments shall be increased or decreased based only upon any increases or decreases of maintenance and cloud-based offering fees during the then-completed quarter (but will not decrease below a minimum of $2,500 per week). NOW Solutions shall pay Lakeshore the balance of Lakeshore’s 25% of NOW’s yearly net income after taxes (less any advances) within 10 business days after the Company files it annual 10-K report with the SEC and any payments in excess of Lakeshore’s 25% of NOW yearly profit shall be credited towards future weekly advance payments. The Company also agreed to pay attorney fees of $40,000 and paid fees of $80,000 to a former consultant and employee of the Company who is a member of Lakeshore. In consideration of the extension to cure the default under the Lakeshore Note and the Loan Agreement, the Company transferred a 20% ownership interest in Priority Time Systems, Inc., a 90% owned subsidiary of VCSY, and in SnAPPnet, Inc., a 100% owned subsidiary of VCSY, to Lakeshore. This resulted in an additional non-controlling interest recognized in the equity of the Company of $391,920 and $99,210 for Priority Time Systems, Inc. and SnAPPnet, Inc., respectively, during 2014. The Company had an option to buy back Lakeshore’s ownership interest in NOW Solutions, Priority Time and SnAPPnet, Inc. (which expired on January 31, 2015).

F- 16

In July 2015, we entered into an agreement with Lakeshore to amend the terms of the Loan Agreement and the Lakeshore Note. Under the terms of the amendment, the Company issued 13,000,000 common shares with the Rule 144 restrictive legend, resulting in a forbearance loss of $455,000 and Ploinks agreed to issue 3,000,000 common shares of its stock to Lakeshore. The fair value of the Ploinks shares was determined to be nominal. Also in July 2015, the Company further amended the Lakeshore Note and the Loan Agreement with Lakeshore. Pursuant to this Agreement, the Company issued 2,000,000 shares of its common stock with the Rule 144 restrictive legend resulting in a forbearance loss of $54,200 and paid $15,000 to Lakeshore as forbearance fees.

In August 2015, we entered into an agreement with Lakeshore to amend the terms of the Loan Agreement and the Lakeshore Note. Under the terms of the amendment, the Company issued 7,000,000 shares of its common stock with the Rule 144 restrictive legend resulting in a forbearance loss of $175,700 and Ploinks agreed to issue 2,000,000 common shares of its stock to Lakeshore. The fair value of the Ploinks shares was determined to be nominal.

The Company also agreed to make a $500,000 payment for amounts due to Lakeshore under the Lakeshore Note and the Loan Agreement. In the event that the Company did not make the Lakeshore $500,000 payment on or before August 21, 2015, then Lakeshore in lieu of the $500,000 payment, would obtain a purchase option (the “2015 Purchase Option”) to purchase an additional 250 shares of NOW Solutions common stock (representing a 25% ownership interest in NOW Solutions) until December 31, 2015 as follows: (a) 84 shares of NOW Solutions common stock currently owned by VCSY for a purchase price of $450,000 and (b) 166 shares of NOW Solutions common stock for a purchase price of $500,000 payable to NOW Solutions.

Furthermore, in the event that the Company did not make the $500,000 payment to Lakeshore on or before August 21, 2015, no further payment on the Note will be due until January1, 2016 at which time the Note plus all accrued interest will be recalculated and the Note will be re-amortized under the same interest rate and terms as the Note and the maturity date of the Note will be extended 10 years from January 1, 2016. In October 2015, Lakeshore provided notice to the Company of its intent to exercise the 2015 Purchase Option concerning the purchase of additional common shares of NOW Solutions,

then Lakeshore’s option will be cancelled and the Company shall make a principal reduction payment in the amount of $250,000 on or before December 31, 2015.

In the event that Lakeshore exercises the 2015 Purchase Option and purchases the additional common shares of NOW Solutions by December 31, 2015, then (a) after the second year, but before the end of the fourth year from the date Lakeshore purchases the additional shares of NOW Solutions under the 2015 Purchase Option, the Company will have the option to purchase for cash, all of Lakeshore's 500 shares for a price equal to the greater of $4.0 Million, 60% of trailing twelve months revenue, or 2.75X EBITDA. If the Company does not exercise its purchase option prior to the end of the fourth year from the date Lakeshore purchases the additional shares of NOW Solutions under the 2015 Purchase Option, then Lakeshore will have a purchase option to purchase for cash, all of the Company’s 500 shares for the greater of $3.5 Million, 55% of trailing twelve months revenue, or 2.50 X EBITDA, which will expire at the end of the seventh year from the date Lakeshore purchases the additional shares of NOW Solutions under the 2015 Purchase Option if exercised by Lakeshore. Lakeshore did not make the payment due by December 31, 2015 to purchase an additional ownership interest in NOW Solutions and as a consequence the 2015 Purchase Option expired.

The Lakeshore note is currently in default and the Company is currently in discussions with Lakeshore to resolve all outstanding issues to ensure that Lakeshore does take any action to enforce its rights under the security agreements related to the Note.

NOW Solutions will continue to make the $2,500 weekly payment which will be applied toward Lakeshore’s share of dividends until at least January 8, 2016. Any reconciliation payments due to Lakeshore will be deferred until January 15, 2016, at which time all reconciliation payments due through September 30, 2015 will be paid to Lakeshore. All of the foregoing $2,500 weekly payments were made through December 31, 2015.

During the year ended December 31, 2015, the Company, through its subsidiary, paid dividends to Lakeshore of $125,000.

F- 17

	December 31		December 31
	2015		2014

Third Party Notes Payable

Unsecured notes payable issued to third party lenders bearing interest at rates between 10% and 15% per annum and are past due their original maturity dates. Of these notes, $1,560,103 and $1,353,743 were in default or non-performing as of December 31, 2015 and 2014, respectively.	$	1,770,103	$	1,353,743

Secured notes payable issued to third party lenders, bearing interest at 10% to 18% per annum and are past due their original maturity dates or mature based on payment schedules between 2022 and 2024. These notes are secured by stock pledges by MRC totaling 33,976,296 common shares. Of these notes $310,449 and $1,278,460 were in default or non-performing at December 31, 2015 and 2014, respectively.		1,025,449		1,278,460

Secured notes payable issued to third party lenders, bearing interest at 11% to 18% per annum and mature between 2012 and 2022. These notes are secured by certain technology owned by the Company, supporting its Emily product. Of these notes $470,860 were in default or non-performing at December 31, 2015 and 2014.		470,860		470,860

Secured note payable issued to Lakeshore, bearing interest at 11% per annum and maturing December 31, 2022. The note is secured by all of the assets of NOW Solutions, Priority Time, and SnAPPnet, Inc. as well as the SiteFlash™ technology.		1,630,729		1,442,176

Total notes payable to third parties		4,897,141		4,545,239
Current maturities		4,897,141		(4,545,239	)
Long-term portion of notes payable to third parties	$	-	$	-

Certain notes payable also contain provisions requiring additional principal reductions in the event sales by NOW Solutions exceed certain financial thresholds or the Company receives proceeds from infringement claims regarding U.S. Patent #6,826,744, U.S. Patent #7,716,629 and U.S. Patent #8,949,780.

Third Party Convertible Promissory Notes and Debentures

Third party convertible promissory notes and debentures consist of the following:

	December 31, 2015			December 31, 2014

In December 2003, we issued a debenture in the amount of $30,000 to a third party. The debt accrues interest at 13% per annum and was due December 2005. The holder may convert the debenture into shares of common stock at 100% of the closing price.	$	30,000		$	30,000

During the year ended December 31, 2015, the Company issued $580,000 of convertible debentures to various third party lenders for loans made to the Company in the aggregate amount of $580,000, net of unamortized discounts of $110,121. The debt accrues interest at 10% per annum and is due one year from the date of issuance. Beginning six months after issuance of the respective debenture, the holder of the debenture may convert the debenture into shares of common stock at a price per share of either (a) 80% of the average per share price of the Company’s common stock for the 5 trading days preceding the notice of conversion date using the 3 lowest closing prices or (b) 75% of the average per share closing bid price of the Company’s common stock during the 10 trading days prior to the notice of conversion date using the lowest 5 closing bid prices per share (which shall not be lower than $0.03 per share).		469,879			-

Total convertible debentures		499,879			30,000
Current maturities		(499,879	)		(30,000	)
Long-term portion of convertible debentures	$	-		$	-

F- 18

Future minimum payments for third party, related party, and convertible debentures for the next five years are as follows:

Year	Amount

2016	$	5,945,384
2017		-
2018		-
2019		-
2020+		-

Total notes payable		5,945,384
Unamortized discounts		(130,919	)
Notes payable, net of discounts	$	5,814,465

For additional transactions involving notes payable after December 31, 2015, please see “Subsequent Events” in Note 12.

Note 9. Income Taxes

We account for income taxes using 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.

The provision of income taxes consists of the following for the years ended December 31, 2015 and 2014:

	Years Ended December 31,
	2015			2014
Current
Federal		-			166,675
State		-			-

Foreign		(571,980	)		(252,975	)
		(571,980	)		(86,300	)

During 2014, the Company recorded an income tax provision of $166,675 related to income taxes for NOW Solutions, a 75% owned subsidiary of the Company. Income taxes in previous years were not accrued as VCSY was able to utilize tax loss carry-forwards to offset NOW Solutions’ taxable income. As the company owns less than 80% of NOW Solutions, the Company is not allowed to file a consolidated income tax return and NOW Solutions cannot utilize VCSY’s tax loss carry-forwards.

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:

F- 19

	December 31, 2015			December 31, 2014

Net operating loss carry-forward	$	8,331,000		$	7,465,000
Reserves		537,000			497,000
Accrued vacation		37,000			40,000
Deferred compensation		882,000			757,000
		9,787,000			8,759,000
Valuation allowance		(9,787,000	)		(8,759,000	)
	$	-		$	-

At December 31, 2015 and December 31, 2014, VCSY had available net operating loss carry-forwards of approximately $24.0 million and $22.0 million, respectively. At December 31, 2015 NOW Solutions had available net operating loss carry-forwards of approximately $281,000. These net operating loss carry-forwards expire in varying amounts through 2033.

The benefit for income taxes differs from the amount computed by applying the U.S. federal income tax rate of 34% to loss before income taxes as follows for the years ended December 31, 2015 and 2014:

	2015			2014

U.S. federal income tax expense at statutory rates		(1,113,702	)		(522,621	)
Permanent differences		553,709			(65,441	)
Settlement of foreign income tax		(581,622	)		(267,842	)
Foreign income tax expense		9,642			14,867
Change in valuation allowance		559,993			754,737
		(571,980	)		(86,300	)

During 2013, the company recorded an arbitrary income tax assessment received from Canada Revenue Agency. During 2014 and 2015, the Company had the income taxes reassessed and, as a result, recognized a gain on settlement of foreign income taxes of $581,622 and $267,842 for the years ended December 31, 2015 and 2014, respectively.

During 2015, Canada Revenue Agency began garnishing NOW Solutions Canada customer receivables in order to pay down debts owed to them for income tax and goods and services tax (“GST”). The customer accounts receivable payments were applied directly to the taxes owed.

Note 10. Common and Preferred Stock

Terms of Common and Preferred Stock

Common Stock . The authorized capital stock of the Company consists of 2,000,000,000 shares of common stock, par value $0.00001 per share, of which 1,114,601,656 were issued and 1,084,601,656 were outstanding at December 31, 2015 and 1,000,000,000 shares of common stock authorized, of which 999,735,151 were issued and outstanding at December 31, 2014. Each share of our common stock entitles the holder to one vote on each matter submitted to a vote of our stockholders, including the election of directors. There is no cumulative voting and there are no redemption or sinking fund provisions related to the common stock. Stockholders of our common stock have no preemptive, conversion or other subscription rights.

Series A Cumulative Convertible Preferred Stock . We have authorized the issuance of 250,000 shares of Series A 4% Cumulative Convertible Preferred Stock (“Series A Preferred Stock”), of which there are 48,500 shares outstanding at December 31, 2015 and 2014. Holders of these shares of Series A Preferred Stock are entitled to vote on an as-converted basis with the holders of common stock, except that the holders are entitled to vote as a separate class on any matters affecting the Series A Preferred Stock stockholders, on the sale of the business, the increase in the number of directors, the payment of a dividend on any junior stock, and the issuance of any stock that is on parity or senior to the Series A Preferred Stock. Each share of Series A Preferred Stock is entitled to 500 votes per share. Dividends accrue at an annual rate of 4% of the liquidation preference and are payable quarterly subject to the board’s discretion. Each share of Series A Preferred Stock is convertible into 500 shares of common stock of the Company. In the event of liquidation, each share of Series A Preferred Stock will be entitled to a preference of $200, plus accrued but unpaid dividends, prior to the holders of any junior class of stock.

F- 20

Series B 10% Cumulative Convertible Preferred Stock . We have authorized the issuance of 375,000 shares of Series B 10% Cumulative Convertible Redeemable Preferred Stock (“Series B Preferred Stock”), of which there are 7,200 shares outstanding at December 31, 2015 and December 31, 2014. Holders of Series B Preferred Stock are not entitled to vote on matters presented to the stockholders, except as otherwise required by law. Cash or stock dividends accrue cumulatively at an annual rate of 10% per annum on March 15 and September 15 of each year and are payable subject to the board’s discretion. Each share of Series B Preferred Stock is convertible into 3.788 shares of common stock of the Company. The shares of Series B Preferred Stock are redeemable at a rate of $6.25 per share, or $45,000 if all outstanding shares are redeemed. In the event of liquidation, each share will be entitled to a preference of all dividends accrued and unpaid on each share up to the date fixed for distribution to any holders of any class of common stock.

Series C 4% Cumulative Convertible Preferred Stock . We have authorized the issuance of 200,000 shares of Series C 4% Cumulative Convertible Preferred Stock (“Series C Preferred Stock”), of which there are 50,000 shares outstanding at December 31, 2015 and December 31, 2014. Holders of Series C Preferred Stock are not entitled to vote on matters presented to the stockholders, except as otherwise required by law. Cash dividends accrue at an annual rate of 4% of the liquidation preference and are payable quarterly subject to the board’s discretion. Each share of Series C Preferred Stock is convertible into 400 shares of common stock of the Company; however, of the 50,000 shares of the Company’s Series “C” Cumulative Convertible Preferred Stock that are outstanding, the holder of 37,500 shares waived the conversion rights associated with these shares pursuant to an agreement in 2010. In the event of liquidation, each share will be entitled to a preference of all dividends accrued and unpaid on each share up to the date fixed for distribution to any holder of any class of common stock. In the event of liquidation, each share of Series C Preferred Stock will be entitled to a preference of $100, plus accrued but unpaid dividends, prior to the holders of any junior class of stock.

Series D 15% Cumulative Convertible Preferred Stock . We have authorized the issuance of 300,000 shares of Series D 15% Cumulative Convertible Redeemable Preferred Stock (“Series D Preferred Stock”), of which there were 25,000 shares outstanding at December 31, 2015 and December 31, 2014. Holders of these shares are not entitled to vote on matters presented to the stockholders, except as otherwise required by law. Cash dividends accrue cumulatively at an annual rate of 15% per annum on March 15 and September 15 of each year and are payable subject to the board’s discretion. Any aggregate deficiency shall be cumulative and shall be fully paid or set apart for payment before any dividend shall be paid or set apart for payment of any class of common stock. Each share of Series D Preferred Stock is convertible into 3.788 shares of common stock of the Company. The shares of Series D Preferred Stock are redeemable at a rate of $6.25 per share, or $156,250 if all outstanding shares are redeemed. In the event of liquidation, each share will be entitled to a preference of all dividends accrued and unpaid on each share up to the date fixed for distribution to any holders of any class of common stock.

2015

Common Stock

In February 2015, the Company increased the number of its authorized shares of common stock to 2,000,000,000.

F- 21

In June 2015, the Company issued 10,000,000 common shares with the Rule 144 restrictive legend to its consolidated subsidiary NOW Solutions. These shares are held in treasury.

During the year ended December 31, 2015, the Company granted 2,250,000 unregistered shares of its common stock to employees of the Company and its subsidiaries pursuant to restricted stock agreements with the Company. These shares vest over 2 years in equal installments and the fair value of the awards is being expensed over this vesting period. The aggregate fair market value of the awards was determined to be $54,750. Stock compensation expense of $19,616_has been recorded for the year ended December 31, 2015 as additional paid-in capital.

During the year ended December 31, 2015, the Company issued 35,556,522 unregistered shares of its common stock to lenders to pay off accrued principal and interest debt in the aggregate amount of $482,612 related to loan principal and interest made by these lenders to the Company and its subsidiaries and $20,000 related to attorney fees. The aggregate fair value of these shares was determined to be $895,913. Accordingly, the Company recorded a loss on debt extinguishment of $393,301.

As of December 31, 2015, there were 2,250,000 unvested stock compensation awards

Option and warrant activities 2015 is summarized as follows:

	Incentive Stock Options		Non-Statutory Stock Options		Warrants		Weighted Average Exercise Price
Outstanding at 12/31/14		-		-		-		-
Options/Warrants granted		-		-		6,800,000	$	.091
Options/Warrants exercised		-		-		-		-
Options/Warrants expired/cancelled		-		-		-		-
Outstanding at 12/31/15		-		-		6,800,000	$	.091

The weighted average remaining life of the outstanding warrants as of December 31, 2015 was 2.73. The intrinsic value of the exercisable warrants as of December 31, 2015 was $.0220.

F- 22

Preferred Stock

For the year ended December 31, 2015, total dividends applicable to Series A and Series C Preferred Stock was $588,000. The Company did not declare or pay any dividends in 2015. Although no dividends have been declared, the cumulative total of preferred stock dividends due to these stockholders upon declaration was $8,895,712 as of December 31, 2015.

2014

Common Stock

As of December 31, 2014, there were no outstanding, unvested stock compensation awards.

Preferred Stock

For the year ended December 31, 2014, total dividends applicable to Series A and Series C Preferred Stock was $588,000. The Company did not declare or pay any dividends in 2014. Although no dividends have been declared, the cumulative total of preferred stock dividends due to these stockholders upon declaration was $8,217,712 as of December 31, 2014.

We have evaluated our convertible cumulative preferred stock under the guidance set out in FASB ASC 470-20 and have accordingly classified these shares as temporary equity in the consolidated balance sheets.

For additional transactions involving Common and Preferred Stock after December 31, 2015, please see “Subsequent Events” in Note 12.

Note 11. Commitments and Contingencies

Commitments

We lease various office spaces which leases run from July 2014 through September 2018. We have future minimum rental payments as follows:

Years ending December 31,	Amount
2016		76,380
2017		74,204
2018		56,804
2019		-
2020		-
Total	$	207,388

Rental expense for the years ended December 31, 2015 and 2014 was $97,917 and $156,437, respectively.

Royalties

When we acquire rights to patents, licenses, or other intellectual property, we generally agree to pay royalties on any net sales of any products utilizing these rights. There were no sales of products requiring royalties in 2015 and 2014.

We also have royalty agreements associated with certain notes payable that provide a royalty when revenues exceed certain thresholds in addition to royalty agreements on subsidiary revenues pursuant to the terms of an acquisition agreement. For the years ended December 31, 2015 and 2014, we accrued royalties of $9,659 and $16,105, respectively, on revenues from subsidiaries.

F- 23

Litigation

We are involved in the following ongoing legal matters:

Note 12. Subsequent Events

In January 2016, the Company re-amortized the Lakeshore Note at 11% interest per annum pursuant to the amendment of the Loan Agreement and Note executed on August 6, 2015. The Company is currently in discussions with Lakeshore to resolve a dispute concerning the reconciliation payment due on January 15, 2016. The Company has made all monthly installment payments towards the Note and the $2,500 weekly payments which will be applied toward Lakeshore’s share of dividends through the date of this Report.

In March 2016, the Company granted 100,000 unregistered shares of its common stock to a consultant of the Company and its subsidiaries pursuant to a consulting agreement with the Company.

F- 24

From January 1, 2016 to April 14, 2016, $6,500 of principal and interest under a convertible note issued in the principal amount of $80,000 was converted into 515,873 common shares.

From January 1, 2016 to April 14, 2016, 400,000 VCSY common shares issued under restricted stock agreements to consultants and employees of the Company vested.

F- 25

Exhibit 2.1

CERTIFICATE OF OWNERSHIP AND MERGER

MERGING

SCIENTIFIC FUEL TECHNOLOGY, INC.,

A NEVADA CORPORATION,

INTO

VERTICAL COMPUTER SYSTEMS, INC.

A DELAWARE CORPORATION

(PURSUANT TO SECTION 78.457 OF THE NEVADA REVISED STATUTES & SECTION 253 OF THE DELAWARE GENERAL CORPORATE LAW)

VERTICAL COMPUTER SYSTEMS, INC. , a Delaware corporation (the "Corporation"), does hereby certify:

FIRST : That the Corporation is incorporated in the State of Delaware pursuant to the General Corporation Law of the State of Delaware.

SECOND : That the Corporation owns all of the outstanding shares of each class of the capital stock of Scientific Fuel Technology, Inc., a Nevada corporation.

THIRD : That the Corporation, by the following resolutions of its Board of Directors, duly adopted on the 26 ^th day of April, 2000, determined to merge into itself Scientific Fuel Technology, Inc., on the conditions set forth in such resolutions:

RESOLVED : That Vertical Computer Systems, Inc. merge into itself its wholly-owned subsidiary, Scientific Fuel Technology, Inc., and assume all of said subsidiary's liabilities and obligations;

FURTHER RESOLVED : That the President and the Secretary of the Corporation be and they hereby are directed to make, execute and acknowledge a certificate of ownership and merger setting forth a copy of the resolution to merge Scientific Fuel Technology, Inc. into this Corporation and to assume the subsidiary's liabilities and obligations on the date of adoption thereof and to file the same in the offices of the Secretary of States of Delaware and Nevada.

IN WITNESS WHEREOF , Vertical Computer Systems, Inc. has caused its corporate seal to be affixed and this certificate to be signed by Richard Wade, its authorized officer, this 27 ^th day of April, 2000.

	VERTICAL COMPUTER SYSTEMS, INC.

	By:
		/s/Richard Wade
		Richard Wade, President

Exhibit 3.1

CERTIFICATE OF INCORPORATION

XENOGEN TECHNOLOGY, INC.

(a Delaware corporation)

The undersigned, in order to form a corporation pursuant to the General Corporation Law of the State of Delaware, does hereby certify as follows:

FIRST :	The name of the corporation is Xenogen Technology, Inc.

SECOND :	The address of the registered office of the corporation in the state of Delaware is the Prentice-Hall Corporation System, Inc., 32 Loockerman Square, Suite L-100, in the City of Dover, County of Kent 19901. The name of its registered agent at the address is The Prentice-Hall Corporation System, Inc.

THIRD :	The purpose of the corporation is to engage in any lawful act or activity for which corporation may be organized under the General Corporation Law of the State of Delaware.

FOURTH :	The total number of shares of all classes which the corporation is authorized to have outstanding is Twenty One Million (21,000,000) shares of which stock Twenty Million (20,000,000) shares in the par value of $.001 each, amounting in the aggregate to Twenty Thousand Dollars ($20,000) shall be common stock and of which One Million (1,000,000) shares in the par value of $.001 each, amounting in the aggregate to One Thousand Dollars ($1,000) shall be preferred stock. The holders of preferred stock shall have such rights, preferences, and privileges as may be determined, prior to the issuance of such shares, by the board of directors.

FIFTH :	Election of directors at an annual or special meeting of stockholders need not be by written ballot unless the bylaws of the corporation shall otherwise provide. The number of directors of the corporation which shall constitute the whole board of directors shall be such as from time to time shall be fixed by or in the manner provided in the bylaws.

SIXTH :	In furtherance and not limitation of the powers conferred by statute, the board of directors is expressly authorized to make, repeal, alter, amend and rescind the bylaws of the corporation.

SEVENTH :	A director of the corporation shall not be personally liable for monetary damages to the corporation or its stockholders for breach of any fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the Delaware General Corporation Law of (iv) for any transaction from which the director derives and improper personal benefit.

EIGHTH :	A director or officer of the corporation shall not be disqualified by his or her office from dealing or contracting with the corporation as a vendor, purchaser, employee, agent or otherwise. No transaction, contract or act of the corporation shall be void or voidable or in any way affected or invalidated by reason of the fact that any director or officer of the corporation is a member of any firm, a stockholder, director or officer of any corporation or trustee or beneficiary of any trust that is in any way interested in such transaction, contract or act. No director or officer shall be accountable or responsible to the corporation for or in respect to any transaction, contract or act of the corporation or for any gain or profit directly or indirectly realized by him or her by reason of the fact that he or she or any firm in which he or she is a member or any corporation of which he or she is stockholder, director, or officer, or any trust of which he or she is a trustee, or beneficiary, is interested in such transaction, contract or act provided the fact that such director or officer or such firm, corporation, trustee or beneficiary of such trust, is so interested shall have been disclosed or shall have been known to the members of the board of directors which shall be present at any meeting at which action upon such contract, transaction or act shall have been taken. Any director may be counted in determining the existence of a quorum at any meeting of the board of directors as shall authorize or take action in respect to any such contract, transaction or act, and may vote thereat to authorize, ratify or approve any such contract, transaction or act, and any officer of the corporation may take any action within the scope of his or her authority, respecting such contract, transaction or act with like force and effect as if he or she or any firm of which her or she is a member, or any corporation of which her or she is a stockholder, director or officer, or any trust of which he or she is a trustee or beneficiary, were not interested in such transaction, contract or act. Without limiting or qualifying the foregoing, if in any judicial or other inquiry, suit, cause or proceeding, the question of whether a director or officer of the corporation has acted in good faith is material, and notwithstanding any statute or rule of law or equity to the contrary (if any there be) his or her good faith shall be presumed in the absence of proof to the contrary by clear and convincing evidence.

NINTH :	Whenever a compromise or arrangement is proposed between the corporation and its creditors or any class of them and/or between the corporation and its stockholders or any class of them, any court or equitable jurisdiction within the State of Delaware may, on the application in a summary way of the corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the corporation under the provisions of sectoin 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the corporation under the provisions of section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the corporation, as the case may be, and also on the corporation.

TENTH :	The corporation reserves the right to amend and repeal any provision contained in this certificate of Incorporation in the manner prescribed by the laws of the State of Delaware. All rights herein conferred are granted subject to this reservation.

ELEVENTH :	The incorporator is Jehu Hand whose mailing address is 29691 Monarch Drive, San Juan Capistrano 92672.

I, the undersigned, being the incorporator, for the purpose of forming a corporation under the laws of the State of Delaware do make, file and record this Certificate of Incorporation, do certify that the facts herein stated are true, and, accordingly, have hereunto set my hand this 3rd day of March 1992.

	/s/ Jehu Hand
	Jehu Hand
	Incorporator

Exhibit 3.2

CERTIFICATE OF AMENDMENT

CERTIFICATE OF INCORPORATION

XENOGEN TECHNOLOGY, INC.

(Pursuant to Section 242 of

the Delaware General Corporation Law)

The undersigned. Jehu Hand, being the President and Secretary of Xenogen Technology, Inc. (the "Corporation") does hereby certify that:

1. The Certificate of Incorporation is hereby amended pursuant to Section 242(a)(1) of the General Corporation Law of the State of Delaware to change the name of the Corporation by striking Article FIRST in its entirety and replacing therefor:

"FIRST: The name of the Corporation is Vertical Computer Systems, Inc."

2. The Certificate of Incorporation is hereby amended pursuant to Section 242(a) of the General Corporation Law of the Scare of Delaware to add thereto the following as Article TWELVETH:

"TWELVETH: The Corporation expressly elects not to be subject to Section 203 of the Delaware General Corporation Law."

3. The foregoing Amendment to the Certificate of Incorporation were first authorized by the Board of Directors and subsequently duly adopted by the sole stockholder holding all of the Corporation's outstanding stock entitled to vote thereon in accordance with Section 228 of the General Corporation Law of the Scare of Delaware.

IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment this 6th day of April, 1992 and DO HEREBY CERTIFY under the penalties of perjury, that the facts stated in this Certificate of Amendment are true and correct and are of our own knowledge.


	Jehu Hand
	President


	Jehu Hand
	President

Exhibit 3.3

CERTIFICATE OF AMENDMENT

CERTIFICATE OF INCORPORATION

VERTICAL COMPUTER SYSTEMS, INC.

Vertical Computer Systems, Inc., a corporation organized and existing under and by virtue of the Delaware General Corporation Law,

DOES HEREBY CERTIFY :

FIRST : That pursuant to the recommendation of the Board of Directors of Vertical Computer Systems, Inc., the following resolution amending the Certificate of Incorporation of said corporation has been adopted by the vote of stockholders of said corporation holding a majority of the outstanding stock entitled to vote thereon. The resolution setting forth the amendment is as follows:

RESOLVED, that Article IV of the Certificate of Incorporation shall be amended to read in its entirety as follows:

"The aggregate number of shares which the Corporation shall have the authority to issue is: 1,000,000,000 shares of Common Stock having a par value of $.0000l per share ("Common Stock"'); 1,000,000 shares of Series "A" Preferred Stock having a par value of $.001 per share; 375,000 shares of Series "B" Preferred Stock having a par value of$.00 I per share; 375,000 shares of Series "C" Preferred Stock having a par value of $.00l per share and 300,000 shares of Series "I)" Preferred Stock having a par value of $.001 per share (collectively "Preferred Stock"). Upon the filing of this Certificate of Amendment, all issued and outstanding Common Stock as of this Amendment's filing date, shall be subject to a forward split of twenty for one."

The Board of Directors is authorized subject to limitations prescribed by law and the provisions of this Article Fourth, to provide by resolution or resolutions for the issuance of the shares of Preferred Stock in one or more series, and by filing a certificate pursuant to the applicable laws of Delaware, to establish from time to time the number of shares included in any such series, and to fix the designation, powers, preferences and rights of the shares of any such series and the qualifications, limitations or restrictions thereof

SECOND : That these resolutions have been adopted by written consent of stockholders holding a majority of the outstanding stock entitled to vote thereon in accordance with Section 228 of the General Corporation Law of the State of Delaware.

THIRD : That said amendment was duly adopted in accordance with the provisions of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF , said Vertical Computer Systems, Inc., has caused this certificate to be signed by its President, this 7th day of February, 2000.


	VERTICAL COMPUTER SYSTEMS, INC.


	By:	/s/ Richard Wade
		Richard Wade, President

Exhibit 4.1

CERTIFICATE OF DESIGNATION OF

VERTICAL COMPUTER SYSTEMS, INC.

Pursuant to Section 151 of the General Corporation Law of the State of Delaware, the undersigned duly authorized officers of Vertical Computer Systems, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware, DO HEREBY CERTIFY:

FIRST : That, pursuant to authority expressly vested in the Board of Directors of said corporation by the provisions of its Certificate of Incorporation as amended, said Board of Directors duly adopted the following resolution:

RESOLVED : that the Board of Directors, pursuant to authority expressly vested in it by the provisions of the Certificate of lncorporation of the Corporation, hereby authorizes the issue from time to time of a series of Preferred Stock of the Corporation and hereby fixes the designation, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions of the series thereof, in addition to those set forth in said Certificate of lncorporation, to be in their entirety as follows:

SERIES “A” 4% CUMULATIVE CONVERTIBLE PREFERRED STOCK

Section I. Designation and Number . The series of Preferred Stock shall be designated and known as "Series "A" 4% Cumulative Convertible Preferred Stock." The number of shares constituting Series "A" 4% Cumulative Convertible Preferred Stock (hereinafter referred to as the "Series "A" Preferred Stock") shall be Two Hundred Fifty Thousand (250,000). For purposes of this Section, all equity securities of the corporation ranking as to dividends or distributions of assets on liquidation, dissolution or winding up of the corporation, junior to the Series "A" Preferred Stock, including the Common Stock, are sometimes hereinafter referred to as "Junior Securities."

Section 2. Liquidation Rights . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation, the holders of each share of the Series "A" Preferred Stock shall be entitled to receive, prior to and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of Junior Securities, by reason of their ownership thereof, an amount equal to Two Hundred Dollars ($200.00) per share (the "Liquidation Value") plus any accrued but unpaid dividends on the Series "A" Preferred Stock.

All of the preferential amounts to be paid to the holders of the Series "A" Preferred Stock under this Section 2 shall be paid or set apart for payment before the payment or setting apart for payment of any amount for, or the distribution of any assets of the corporation to, the holders of Junior Securities, in connection with such liquidation, dissolution or winding up. After the payment or the setting apart for payment to the holders of the Series "A" Preferred Stock of the preferential amounts so payable to them, the holders of Junior Securities shall be entitled to receive all remaining assets of the corporation in accordance with the Certificate of Incorporation of the corporation. If the assets or surplus funds to be distributed to the holders of the Series "A" Preferred Stock are insufficient to permit the payment to such holders of their full preferential amount, the assets and surplus funds legally available for distribution shall be distributed ratably among the holders of the Series "A" Preferred Stock in proportion to the full preferential amount each such holder is otherwise entitled to receive.

Section 3. Voting Rights . The holders of the Series "A" Preferred Stock shall have the following rights:

(a) except as otherwise provided herein or by law, the holders of Series "A" preferred stock shall be entitled to notice of any stockholder's meeting and to vote, together with the holders of all other voting capital stock of the Company, including the holders of Common Stock, as one class upon any matter submitted to the stockholders for a vote on the basis that each holder of Series "A" Preferred Stock shall have a number of votes equal to the number of shares of Common Stock into which the Series "A" Preferred Stock held by such holder is then convertible. For matters to be voted on by the Series "A" Preferred Stock, a quorum shall consist of a majority of the votes attributable to the Common Stock and Series "A" Preferred Stock.

(b) in the event the Corporation has in excess of 25,000 shares of Series "A" Preferred Stock outstanding, the holders of the Series "A" Preferred Stock of the Corporation shall have the right to elect one-half of the members of the Board of Directors out of the number fixed by the bylaws, and the holders of the Series " A " Preferred Stock shall continue to have such right until the earlier of (a) the total outstanding shares of Series "A" Preferred Stock falls to 25,000 shares or less or (b) one year from date of the initial issuance of Series “A” Preferred Stock.

Section 4. Dividend Rights . The holders of the Series "A" Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors out of the funds of the corporation legally available therefore, cumulative cash dividends at the annual rate of four percent (4%) of the Liquidation Value, payable quarterly on the first day of April, July, October and January in each year beginning April 1, 2000. The initial dividend paid after the date of original issuance of any shares of the Series "A" Preferred Stock shall accrue from such date of issuance on a pro rata basis. Dividends payable for any period less than a full quarter shall be computed on the basis of a 360-day year with 12 equal months of 30 days. Dividends shall be payable to holders of record, as they appear on the stock books of the Corporation on such record dates as may be declared by the Board of Directors, not more than sixty (60) days nor less than ten (10) days preceding the payment dates of such dividends. If the dividend on the Series "A" Preferred Stock is not paid in full, the aggregate deficiency shall be cumulative and shall be fully paid or set apart for payment before any dividends shall be paid or set apart for, or any other distributions paid, or any payments made on account of the purchase, redemption or retirement of, Junior Securities other than, in the case of dividends or distributions, dividends or distributions paid in Junior Securities. No full dividends shall be declared by the Board of Directors or paid or set apart for payment by the corporation on any Junior Securities for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum set apart sufficient for such payment on the Series "A" Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full dividends on the Series "A" Preferred Stock shall not bear interest.

Section 5. Covenants. So long as any of the shares of the Series "A" Preferred Stock authorized hereby shall be outstanding (as adjusted for all subdivision and combinations) in the case of (a) through (f) below, or twenty-five percent (25%) of the shares of Series "A" Preferred Stock authorized hereby shall be outstanding (as adjusted for all subdivisions and combinations) in the case of (g) below, the corporation shall not, without first obtaining the affirmative vote or written consent of not less than fifty-one percent (51%) of such outstanding shares of the Series "A" Preferred Stock:

(a) amend or repeal any provision of, or add any provision to, the corporation's Certificate of lncorporation or Bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of the Series "A" Preferred Stock; provided that, the authorization of Junior Securities shall not be deemed to alter or change the preferences, rights, privileges or powers of, or the restriction provided for the benefit of the Series "A" Preferred Stock;

(b) reclassify any Common Stock into shares having any preference or priority of the Series "A" Preferred Stock;

(c) pay or declare any cash dividend on any Junior Securities or apply any of its assets to the redemption, retirement, purchase or other acquisition directly or indirectly, through subsidiaries or otherwise, of any Junior Securities or any rights, options, warrants to purchase, or securities convertible into, Junior Securities except for the acquisition of shares of Common Stock or options to purchase shares of Common Stock from officers or employees of, or consultants to, the corporation in accordance with any stock option or other agreement entered into by the corporation;

(d) create or issue any securities of the corporation which have equity features and which rank on a parity with or senior to the Series "A" Preferred Stock upon payment of dividends or upon liquidation or other distribution of assets or with terms more favorable than those of the Series "A" Preferred Stock;

(e) increase the authorized number of shares of the Series "A" Preferred Stock;

(f) merge, consolidate, sell, lease, exchange or otherwise dispose of all or substantially all its properties and assets unless the corporation is the surviving corporation following such merger or consolidation; or

(g) increase the authorized number of directors constituting the Board of Directors of the corporation to a number greater than four (4).

Section 6. Conversion into Common Stock. The holder of any shares of Series "A" Preferred Stock shall have conversion rights as follows (the "Conversion Rights"):

(a) Right to Convert . After February 25, 2001, each share of Series "A" Preferred Stock shall be convertible, without the payment of any additional consideration by the holder thereof and at the option of the holder thereof, into five hundred (500) fully paid and nonassessable shares of common stock of the Company, subject to adjustment as outlined below.

Each share of Series "A" Preferred Stock is convertible into one share of the Company's common stock. In the event the Company shall, at any time prior to the expiration date of this conversion and prior to the exercise thereof: (i) declare or pay to the holders of the common stock a dividend payable in any kind of shares of stock of the Company; or (ii) change or divide or otherwise reclassify its common stock into the same or a different number of shares with or without par value, or into shares of any class or classes; or (iii) consolidate or merge with, or transfer its property as an entirety or substantially as an entirety to, any other corporation; then, upon subsequent exercise of this conversion, the holder thereof shall receive, in addition to or in substitution for the shares of common stock to which he would otherwise be entitled upon such exercise, such additional shares of stock of the Company, or such reclassified shares of stock of the Company, or such shares of the securities or property of the Company resulting from such consolidation or merger or transfer, which he would have been entitled to receive had he exercised this conversion prior to the happening of any of the foregoing events.

(b) Mechanics of Conversion. Holders of Series "A" Preferred Stock may exercise their conversion rights after February 15, 2001. Before any holder of Series "A" Preferred Stock shall be entitled to convert the same into full shares of common stock, he shall surrender the certificate or certificates therefore, duly endorsed, at the office of the corporation or of any transfer agent for the Series "A" Preferred Stock, and shall give written notice to the corporation at such office that he elects to convert the same and shall state therein his name or the name or names of his nominees in which he wishes the certificate or certificates for shares of common stock to be issued.

(c) The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series "A" Preferred Stock, or to his nominee or nominees, a certificate or certificates for the number of shares of common stock to which he shall be entitled as aforesaid, together with cash in payment of any accrued unpaid dividends on the shares of Series "A" Preferred Stock converted through the date of conversion, and a certificate or certificates for such Series "A" Preferred Stock as were represented by the certificates surrendered and not converted. Such conversion shall be deemed to have been immediately prior to the close of business on the date of such surrender of the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such shares of Common stock on such date.

(d) No Impairment. The corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series "A" Preferred Stock against impairment.

(e) Notices of Record Date. In the event of any taking by the corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend which is the same as cash dividends paid in previous quarters) or other distribution, the corporation shall mail to each holder of Series "A" Preferred Stock at least ten (10) days prior to the date specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution.

(f) Common Stock Reserved. The corporation shall reserve and keep available out of its authorized but unissued Common Stock such number of shares of Common Stock as shall from time to time be sufficient to effect conversion of the Series "A" Preferred Stock.

IN WITNESS WHEREOF, the officers named below acting for and on behalf of the corporation, have subscribed their names to this Certificate of Designation this day 4 ^th of May, 2001.

VERTICAL COMPUTER SYSTEMS, INC. a Delaware Corporation

By:
	Richard Wade, President

By:
	William Mills, Secretary

Exhibit 4.2

AMENDED

CERTIFICATE OF DESIGNATION OF

PREFERENCES, RIGHTS AND LIMITATIONS

10% CUMULATIVE CONVERTIBLE REDEEMABLE SERIES B PREFERRED STOCK

VERTICAL COMPUTER SYSTEMS, INC.

VERTICAL COMPUTER SYSTEMS, INC. (the "Company"), a corporation organized and existing under the laws of the State of Delaware, does hereby certify:

That, pursuant to authority conferred upon the Board of Directors by the Certificate of Incorporation of the Company, and pursuant to the provisions of Section 161, Delaware Statutes, said Board of Directors, by unanimous written consent effective as of April 1, 1993 and as amended June 1, 1993, duly adopted a resolution providing for the issuance of a series of 375,000 shares of 10% Cumulative Convertible Redeemable Series B Preferred Stock, $.001 par value ("Preferred Stock"), which resolution is as follows:

RESOLVED, that pursuant to the authority expressly granted and invested in the Board of Directors of this Company in accordance with the provisions of its Certifi-cate of Incorporation, a series of preferred stock of the Company be and hereby is given the distinctive designa-tion of "10% Cumulative Convertible Redeemable Series B Preferred Stock" (the "Preferred Stock"), said series to consist of 375,000 shares of the par value $.001 per share non-voting preferred stock, of which the preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof shall be as follows:

1. Dividends on Preferred Stock .

(a) Except as hereinafter provided, the holders of the Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors out of funds for the Company legally available therefor, cash or common stock dividends at the annual rate of 10% per annum on March 15 and September 15 of each year. Dividends will accrue from the date of the issuance of the Preferred Stock pursuant to a Confidential Private Placement Memorandum (the "Closing Date"). If the dividend on the Preferred stock for any dividend period shall not have been paid or set apart in full for such Preferred Stock, the aggregate deficiency shall be cumulative and shall be fully paid or set apart for payment before any dividend shall be paid or set apart for payment of any class of common stock of the Company. Accumulation of dividends of the Preferred Stock shall not bear interest.

(b) At the sole option of the Board of Directors, dividends may be paid in shares of common stock or the Preferred Stock based upon the then current conversion ratio of such Convertible Preferred Stock as described in paragraph 2 hereof.

2. Conversion of Preferred Stock into Common Stock .

(a) Subject to redemption by the Company as hereinafter described, the holder of record of any share or shares of Preferred Stock shall have the right, at his option, to convert each said share or shares of Preferred Stock into 3.788 fully paid and non-assessable shares of the Company's common stock, par value $.001 per share ("Common Stock").

(b) Any holder of a share or shares of Preferred Stock desiring to convert such Preferred Stock into Common Stock shall surrender the certificate or certificates representing the share or shares of Preferred Stock to be so converted, duly endorsed to the Company or in blank, at the principal office of the Company (or such other place a may be designated by the Company) and shall give written notice to the Company at said office that the holder elects to convert same, setting forth the name or names (with the address or addresses) in which the shares of Common Stock are to be issued. Shares of the Preferred Stock shall be deemed to have been converted as of the close of business on the date the Company shall receive the written notice of conversion, together with the duly executed certificate and payment in full of transfer tax, if applicable, and the rights of the holders of su.ch Preferred Stock shall cease at such time, and the person or persons in whose name or names the certificates for such shares are to be issued shall be treated for all purposes as having become the record holder or holders of such Common Stock at such time; provided, however, that any such surrender on any date when the stock transfer books of the Company shall be closed shall constitute the person or persons in whose name or names the certificates for such shares to be issued as the record holder or holders thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open.

(i) As promptly as practicable after the surrender for conversion of any certificate or certifi-cate representing Preferred Stock, the Company shall deliver or cause to be delivered at the principal office of the Company (or such other place as may be designated by the Company) to or upon the written order of the holder of such Preferred Stock, certificates representing the shares of Common Stock issuable upon the conversion, issued in such name or names as such holder may direct.

(ii) The Company shall at the time of such conversion pay to the holder of record of any share or shares of such Preferred Stock any accrued but unpaid dividends on such Preferred Stock so surrendered for conversion, except that no payment or adjustment shall be made for any accrued or unpaid dividends for the then current quarterly dividend.

(iii) The Company shall not be required to issue any fractions of shares of Common Stock or script upon the conversion of Preferred Stock. If more than one share of Preferred Stock shall be surrendered for conversion at any time by the holder, the number of full shares of Common Stock which shall be is5uable upon conversion of such Preferred Stock shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered. If any interest in a fractional share of Common Stock would otherwise be delivered upon the conversion of any Preferred Stock, the Company shall make adjustment for such fractional share of interest by payment of an amount in cash equal to the same fraction of the market value of a full share of Common Stock of the Company. For such purpose, the market value of a share of Common Stock shall be the prevailing market value of the Common Stock on any securities exchange or in the open market, as determined by the Company, which determination shall be conclusive.

(iv) in the event that the Company shall at any time subdivide or combine in a greater or lesser number of outstanding shares of Common Stock, the number of shares of Common Stock issuable upon conversion of the Preferred Stock shall be proportionately increased in the case of subdivision or decreased in the case of combination, effective in either case at the close of business on the date when such subdivision or combination shall become effective.

(v) In the event that the Company shall be recapitalized, consolidated or merged into any other corporation, or shall sell or convey to any corporation all or substantially all of its property as an entity, provisions shall be made as part of the terms of such recapitalization, consolidation, merger, sale or convey-ance so that any holder of Preferred Stock may thereafter receive in lieu of Common Stock otherwise issuable to him upon his conversion of Preferred Stock, and at the same conversion ratio stated in this Paragraph 2, the same kind and amount of securities or assets as may be distributable upon such recapitalization, consolidation, merger, sale or conveyance, with respect to the Common Stock of the Company.

(vi) Such adjustments shall be made success-sively if more than one event listed in subdivision (iv) and (v) of this subparagraph (C) of this Paragraph 2 shall occur.

(vii) No adjustment of the conversion ratio shall be made by reason of:

(A) the payment of any cash or Common Stock dividend on the Common Stock or any other classes of capital stock of the Company; or

(B) the purchase, acquisition, redemption or retirement by the Company of any shares of Common Stock or any other class of the capital stock of the Company, except as provided in subdivision (iv) of this subparagraph (c); or

(C) the issuance other than as provided in subdivision (iv) and (v) of this subparagraph (c) of any shares of Common Stock of the Company or of any securities convertible into shares of Common Stock or other securities of the Company, or any rights, warrants or options to subscribe for or purchase shares of the Common Stock or other securities of the Company, or of any other securities of the Company, provided that in the event the Company offers any of its securities or any rights, warrants or options to subscribe for or purchase any of its securities, to holders of itS Common Stock pursuant to any preemptive or preferential rights granted to holders of Common Stock by the Certificate of Incorporation of the Company, as may be amended, or pursuant to any similar rights that may be granted to such holders of Common Stock by the Board of Directors of the Company, then the Company shall mail written notice of such offer to holders of the preferred Stock then of record at least 20 days prior to the record date set for such determination of holders of the Common Stock entitled to receive any such offer; or

(D) Any offer by the Company to redeem or acquire shares of the Common Stock by paying or exchanging therefore stock of another corporation the carrying out by the Company of the transactions contemplated by such offer, provided that at leant twenty (20) days prior to the expiration of any such offer the Company shall mail written notice of such offer to the holders of the Preferred Stock then of record; or

(d) The Company shall at all times reserve and keep available solely for the purpose of issue upon conversion of the Preferred Stock, as herein provided, such number of shares of Common Stock as shall be issuable upon the conversion of all outstanding Preferred Stock.

(e) The issuance of certificate for shares of Common Stack upon conversion of the Preferred Stock shall be made without charge for any tax in respect to such issuance. However, if any certificate is to be issued in its name other than that of the holder of record of the Preferred Stock so converted, the person or persons requesting the issuance thereof shall pay to the Company the amount of tax which may be payable in respect of any transfer involved in such issuance, or shall establish the satisfaction of the Company that such tax has been paid or is not due and payable.

3. Redemption of Preferred Stock .

(a) The Preferred Stock may be redeemed at the option of the Company on or after the second anniversary of the Closing Date at $6.25 per share. The Company may redeem the Preferred Stock at any time prior to the two—year period, if all of the following are true: (i) The Company's Common Stock trades at or above $2.00 bid for thirty (30) consecutive trading days ending within fifteen (15) days of the date of the redemption notice, (ii) The Company's Common Stock is listed on NASDAQ and there has been reported volume of at least 100,000 shares per week for the prior four calendar weeks, and (iii) A registration statement is effective with respect to the Common Stock into which the Preferred Stock is convertible. The applicable redemption price in the first two years is $6.875 (110% of the stated value of one (1) share of Preferred Stock) plus all dividends accrued and unpaid on such Preferred Stock up to the date fixed for redemption. In the event that the Company shall call all or part of the Preferred Stock for redemption, the holder of the Preferred Stock shall have a period of not less than thirty (30) days within which to convert the Preferred Stock to Common Stock before such redemption shall occur.

(b) In the event that less than the entire amount of Preferred Stock outstanding is redeemed at any one time, the shares to be redeemed shall be selected by lot in a manner to be determined by the Board of Directors of the Company. Not less than thirty (30) nor more than sixty (60) days prior to the date fixed for redemption of the Preferred Stock or any part thereof, a notice specifying the time and place thereof shall be given by mail to the holders of record of the shares of Preferred Stock selected for redemption at the respective addresses as the same shall appear on the stock records of the Company, but no failure to mail such notice or any defect therein or in the mailing thereof shall affect the validity of the proceeding for redemption. Any notice which was mailed in the manner herein provided shall be Conclusively presumed to have been duly given whether or not the holder receive5 the notice. Upon such redemption date, or such earlier date as the Board of Directors shall designate for payment of the redemption price (unless the Company shall default on the payment of the redemption price set forth in such notice). The holders of the shares of Preferred Stock selected for redemption and to vhorn notice has been duly given shall cease to be stockholders with respect to such shares and shall have no interest in or claim against the Company by virtue thereof and shall have no rights with respect to such shares except the right to convert such shares within the time hereinabove set forth and except the right to receive the monies payable upon such redemption from the Company or otherwise, without interest thereon, upon surrender and endorsement, It required by the Company, of the certificates, and the shares represented thereby shall no longer be deemed to be Outstanding. Upon redemption or conversion of the Preferred Stock the manner set Out herein, or upon purchase of Preferred Stock by the Company, the Preferred Stock so acquired by the Company shall be cancelable and shall not be reissued. After giving any notice of redemption and prior to the close of business on the date prior to the redemption date. As hereinbefore provided, the holders of the Preferred Stock so called for redemption may convert such stock into Common Stock of the Company in accordance with the conversion privileges set forth in Paragraph 2 hereof.

4. Voting Rights. Except as otherwise required by law, the holders of Preferred Stock shall have no voting rights.

5. Priority of Preferred Stock in the Event of a Dissolution . In the event of any liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or otherwise, after payment or provi-sion for payment of debts and the liabilities of the Company, the holders of Preferred Stock shall receive preference on distribution including an amount equal to all dividends accrued and unpaid on each share up to the date fixed for distribution, before any distribution shall be made to the holder of any c1ass of Common Stock of the Company.

IN WITNESS WHEREOF, the undersigned have caused its corporate seal to be affixed and this Certificate to be executed by its President and Secretary as of the 1st day of June, 1993.

Attest:	VERTICAL COMPUTER SYSTEMS

/s/ Brett Howell	By: /s/ Brett Howell
Title: Secretary	Brett E. Howell, President

Exhibit 4.3

CERTIFICATE OF DESIGNATION OF

VERTICAL COMPUTER SYSTEMS, INC.

Pursuant to Section 151 of the General Corporation Law of the State of Delaware, the undersigned duly authorized officers of Vertical Computer Systems, Inc. (the “Corporation”), a corporation organized and existing under the General Corporation Law of the State of Delaware, DO HEREBY CERTIFY:

RESOLVED : that the Board of Directors, pursuant to authority expressly vested in it by the provisions of the Certificate of Incorporation of the Corporation, hereby authorizes the issue from time to time of a series of Preferred Stock of the Corporation and hereby fixes the designation, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions of the series thereof, in addition to those set forth in said Certificate of Incorporation, to be in their entirety as follows:

SERIES “C” 4% CUMULATIVE CONVERTIBLE PREFERRED STOCK

Section I. Designation and Number . The series of Preferred Stock shall be designated and known as "Series "C" 4% Cumulative Convertible Preferred Stock." The number of shares constituting Series “C” 4% Cumulative Convertible Preferred Stock (hereinafter referred to as the "Series “C” Preferred Stock") shall be Two Hundred Thousand (200,000). For purposes of this Section, all equity securities of the corporation ranking as to dividends or distributions of assets on liquidation, dissolution or winding up of the corporation, junior to the Series "C" Preferred Stock, including the Common Stock, are sometimes hereinafter referred to as "Junior Securities."

Section 2. Liquidation Rights . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation, the holders of each share of the Series “C” Preferred Stock shall be entitled to receive, prior to and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of Junior Securities, by reason of their ownership thereof, an amount equal to One Hundred Dollars ($100.00) per share (the "Liquidation Value") plus any accrued but unpaid dividends on the Series "C" Preferred Stock.

All of the preferential amounts to be paid to the holders of the Series “C” Preferred Stock under this Section 2 shall be paid or set apart for payment before the payment or setting apart for payment of any amount for, or the distribution of any assets of the corporation to, the holders of Junior Securities, in connection with such liquidation, dissolution or winding up. After the payment or the setting apart for payment to the holders of the Series “C” Preferred Stock of the preferential amounts so payable to them, the holders of Junior Securities shall be entitled to receive all remaining assets of the corporation in accordance with the Certificate of Incorporation of the corporation. If the assets or surplus funds to be distributed to the holders of the Series "C" Preferred Stock are insufficient to permit the payment to such holders of their full preferential amount, the assets and surplus funds legally available for distribution shall be distributed ratably among the holders of the Series "C" Preferred Stock in proportion to the full preferential amount each such holder is otherwise entitled to receive.

Section 3. Voting Rights . Except as otherwise provided herein or by law, the holders of Series “C” Preferred Stock shall not be entitled to notice of any stockholder's meeting and shall not be entitled to vote, together with the holders of all other voting capital stock of the Company, including the holders of Common Stock, upon any matter submitted to the stockholders for a vote.

Section 4. Dividend Rights . The holders of the Series "C" Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors out of the funds of the corporation legally available therefore, cumulative cash dividends at the annual rate of four percent (4%) of the Liquidation Value, payable quarterly on the first day of April, July, October and January in each year beginning July 1, 2001. The initial dividend paid after the date of original issuance of any shares of the Series "C" Preferred Stock shall accrue from such date of issuance on a pro rata basis. Dividends payable for any period less than a full quarter shall be computed on the basis of a 360-day year with 12 equal months of 30 days. Dividends shall be payable to holders of record, as they appear on the stock books of the Corporation on such record dates as may be declared by the Board of Directors, not more than sixty (60) days nor less than ten (10) days preceding the payment dates of such dividends. If the dividend on the Series "C" Preferred Stock is not paid in full, the aggregate deficiency shall be cumulative and shall be fully paid or set apart for payment before any dividends shall be paid or set apart for, or any other distributions paid, or any payments made on account of the purchase, redemption or retirement of, Junior Securities other than, in the case of dividends or distributions, dividends or distributions paid in Junior Securities. No full dividends shall be declared by the Board of Directors or paid or set apart for payment by the corporation on any Junior Securities for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum set apart sufficient for such payment on the Series "C" Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full dividends on the Series "C" Preferred Stock shall not bear interest.

Notwithstanding, any dividends payable pursuant to this Section 4 may, at the election of the Board of Directors, be paid, all or in part, in shares of the Corporation’s Common Stock. Each such share of Common Stock shall be valued at the closing sale price on the record date of the Corporation’s Common Stock on any exchange or over the counter market on which the Common Stock trades. If the Common Stock is not listed on any exchange or there is no market for the Common Stock, then the value set by the Board of Directors shall be determinative.

Section 5. Covenants. So long as fifty percent (50%) of the shares of the Series “C” Preferred Stock authorized hereby shall be outstanding (as adjusted for all subdivision and combinations, the corporation shall not, without first obtaining the affirmative vote or written consent of not less than fifty-one percent (51%) of such outstanding shares of the Series "C" Preferred Stock:

(a) amend or repeal any provision of, or add any provision to, the corporation's Certificate of Incorporation or Bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of the Series "C" Preferred Stock; provided that, the authorization of Junior Securities shall not be deemed to alter or change the preferences, rights, privileges or powers of, or the restriction provided for the benefit of the Series "C" Preferred Stock;

(b) reclassify any Common Stock into shares having any preference or priority of the Series “C" Preferred Stock;

(d) create or issue any securities of the corporation which have equity features and which rank senior to the Series "C" Preferred Stock upon payment of dividends or upon liquidation or other distribution of assets;

(e) increase the authorized number of shares of the Series “C” Preferred Stock;

Section 6. Conversion into Common Stock. The holder of any shares of Series “C” Preferred Stock shall have conversion rights as follows (the "Conversion Rights"):

(a) Right to Convert . Ninety (90) days after issuance, each share of Series "C" Preferred Stock shall be convertible, without the payment of any additional consideration by the holder thereof and at the option of the holder thereof, into four hundred (400) fully paid and nonassessable shares of common stock of the Company, subject to adjustment as outlined below.

Each share of Series “C” Preferred Stock is convertible into four hundred (400) shares of the Company's common stock. In the event the Company shall, at any time prior to the expiration date of this conversion and prior to the exercise thereof: (i) declare or pay to the holders of the common stock a dividend payable in any kind of shares of stock of the Company; or (ii) change or divide or otherwise reclassify its common stock into the same or a different number of shares with or without par value, or into shares of any class or classes; or (iii) consolidate or merge with, or transfer its property as an entirety or substantially as an entirety to, any other corporation; then, upon subsequent exercise of this conversion, the holder thereof shall receive, in addition to or in substitution for the shares of common stock to which he would otherwise be entitled upon such exercise, such additional shares of stock of the Company, or such reclassified shares of stock of the Company, or such shares of the securities or property of the Company resulting from such consolidation or merger or transfer, which he would have been entitled to receive had he exercised this conversion prior to the happening of any of the foregoing events.

(b) Mechanics of Conversion. Holders of Series “C” Preferred Stock may exercise their conversion rights at any time ninety (90) days after issuance. Before any holder of Series “C” Preferred Stock shall be entitled to convert the same into full shares of common stock, he shall surrender the certificate or certificates therefore, duly endorsed, at the office of the corporation or of any transfer agent for the Series "C" Preferred Stock, and shall give written notice to the corporation at such office that he elects to convert the same and shall state therein his name or the name or names of his nominees in which he wishes the certificate or certificates for shares of common stock to be issued.

(c) The corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series "C" Preferred Stock, or to his nominee or nominees, a certificate or certificates for the number of shares of common stock to which he shall be entitled as aforesaid, together with cash in payment of any accrued unpaid dividends on the shares of Series "C" Preferred Stock converted through the date of conversion, and a certificate or certificates for such Series "C" Preferred Stock as were represented by the certificates surrendered and not converted. Such conversion shall be deemed to have been immediately prior to the close of business on the date of such surrender of the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such shares of Common stock on such date.

(e) Notices of Record Date. In the event of any taking by the corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend which is the same as cash dividends paid in previous quarters) or other distribution, the corporation shall mail to each holder of Series "C" Preferred Stock at least ten (10) days prior to the date specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution.

IN WITNESS WHEREOF, the officers named below acting for and on behalf of the corporation, have subscribed their names to this Certificate of Designation this 13 ^th day of August, 2001.

VERTICAL COMPUTER SYSTEMS, INC.
a Delaware Corporation

By:
	Richard Wade, President

By:
	William Mills, Secretary

Exhibit 4.4

CERTIFICATE OF DESIGNATION OF

PREFERENCES, RIGHTS AND LIMITATIONS

15% CUMULATIVE CONVERTIBLE REDEEMABLE SERIES D PREFERRED STOCK

VERTICAL COMPUTER SYSTEMS, INC.

VERTICAL COMPUTER SYSTEMS. INC. (the "Company"), a corporation organized and existing under the laws of the State of Delaware, does hereby certify:

That, pursuant to authority conferred upon the Board of Directors by the Certificate of Incorporation of the Company, and pursuant to the provision of Section 161 Delaware Statutes, said Board of Directors, by unanimous written consent effective as of October 13. 1998, duly adopted a resolution providing for the issuance of a series of 1 00,000 shares of 15% Cumulative Convertible Redeemable Series D Preferred Stock, $.001 par value ("Preferred Stock"), which resolution is as follows:

RESOLVED, that pursuant to the authority expressly granted and invested in the Board of Directors of this Company in accordance with the provisions of its Certificate of Incorporation, a series of preferred stock of the Company be and hereby is given the distinctive designation of 15% Cumulative Convertible Redeemable Series D Preferred Stock' (the "Preferred Stock"), said series to consist of 100,000 shares of the par value $001 per share non-voting preferred stock, of which the preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof shall be as follows:

1. Dividends on Preferred Stock .

(a) Except as hereinafter provided, the holders of the Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors out of funds for the Company legally available therefor, cash or common stock dividends at the annual rate of 15% per annum on March 15 and September 15 of each year. Dividends will accrue from the date of the issuance of the Preferred Stock (the "Closing Date'). If the dividend on the Preferred Stock for any dividend period shall not have been paid or set apart in full for such Preferred Stock, the aggregate deficiency shall be cumulative and shall be fully paid or set apart for payment before any dividend shall be paid or set apart for payment of any class of common stock of the Company. Accumulation of dividends of the Preferred Stock shall not bear interest.

(b) Dividends shall be paid in cash.

2. Conversion of Preferred Stock into Common Stock .

(b) Any holder of a share or shares of Preferred Stock desiring to convert such Preferred Stock into Common Stock shall surrender the certificate or certificates representing the share or shares of Preferred Stock to be so converted, duly endorsed to the Company or in blank, at the principal office of the Company (or such other place as may be designated by the Company) and shall give written notice to the Company at said office that the holder elects to convert same, setting forth the name or names (with the address or addresses) in which the shares of Common Stock are to be issued. Shares of the Preferred Stock shall be deemed to have been converted as of the close of business on the date the Company shall receive the written notice of conversion, together with the duly executed certificate and payment in full of transfer tax, if applicable, and the rights of the holders of such Preferred Stock shall cease at such time, and the person or persons in whose name or names the certificates for such shares are to be issued shall be treated for all purposes as having become the record holder or holders of such Common Stock at such time: provided, however, that any such surrender on any date when the stock transfer books of the Company shall be closed shall constitute the person or persons in whose name or names the certificates for such shares to be issued as the record holder or holders thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open.

(i) As promptly as practicable after the surrender for conversion of any certificate or certificate representing Preferred Stock, the Company shall deliver or cause to be delivered at the principal office of the Company (or such other place as may be designated by the Company) to or upon the written order of the holder of such Preferred Stock, certificates representing the shares of Common Stock issuable upon the conversion, issued in such name or names as such holder may direct.

(iii) The Company shall not be required to issue any fractions of shares of Common Stock or script upon the conversion of Preferred Stock. If more than one share of Preferred Stock shall be surrendered for conversion at any time by the holder, the number of full shares of Common Stock which shall be issuable upon conversion of such Preferred Stock shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered. If any interest in a fractional share of Common Stock would otherwise be delivered upon the conversion of any Preferred Stock, the Company shall make adjustment for such fractional share of interest by payment of an amount in cash equal to the same fraction of the market value of a full share of Common Stock of the Company. For such purpose, the market value of a share of Common Stock on any securities exchange or in the open market, as determined by the Company, which determination shall be conclusive.

(iv) In the event that the Company shall at any time subdivide or combine in a greater or lesser number of outstanding shares of Common Stock, the number of shares of Common Stock issuable upon conversion of the Preferred Stock shall be proportionately increased in the case of subdivision or decreased in the case of combination, effective in either case at the close of business on the date when such subdivision or combination shall become effective.

(v) In the event that the Company shall be recapitalized, consolidated or merged into any other corporation, or shall sell or convey to any corporation all or substantially all of its property as an entity, provisions shall be made as part of the terms of such recapitalization, consolidation, merger, sale or conveyance so that any holder of Preferred Stock may thereafter receive in lieu of Common Stock otherwise issuable to him upon his conversion of Preferred Stock, and at the same conversion ratio stated in this Paragraph 2, the same kind and amount of securities or assets as may be distributable upon such recapitalization, consolidation, merger, sale or conveyance, with respect to the Common Stock of the Company.

(vi) Such adjustment shall be made successively if more than one event listed in subdivision (iv) and (v) of this subparagraph (c) of this Paragraph 2 shall occur.

(vii) No adjustment of the conversion ratio shall be made by reason of:

(A) the payment of any cash or Common Stock dividend on the Common Stock or any other classes of capital stock of the Company: or

(C) the issuance other than as provided in subdivision (iv) and (v) of this subparagraph (c) of any shares of Common Stock of the Company or of any securities convertible into shares of Common Stock or other securities of the Company, or any rights, warrants or options to subscribe for or purchase shares of the Common Stock or other securities of the Company. or of any other securities of the Company, provided that in the event the Company offers any of its securities or any rights, warrants or options to subscribe for or purchase any of its securities, to holders of its Common Stock pursuant to any preemptive or preferential rights granted to holders of Common Stock by the Certificate of Incorporation of the Company, as may be amended, or pursuant to any similar rights that may be granted to such holders of Common Stock by the board of Directors of the Company, then the Company shall mail written notice of such offer to holders of the Preferred Stock then of record at Least 20 days prior to the record date set for such determination of holders of the Common Stock entitled to receive any such offer: or

(D) Any offer by the company to redeem or acquire shares of the Common Stock by paying or exchanging therefore stock of another corporation the carrying out by the Company of the transactions contemplated by such offer, provided that at least twenty (20) days prior to the expiration of any such offer the Company shall mail written notice of such offer to the holders of the Preferred Stock then of record; or

(e) The issuance of certificate for shares of Common Stock upon conversion of the Preferred Stock shall be made without charge for any tax in respect to such issuance. However, if any certificate is to be issued in its name Other than that of the holder of record of the Preferred Stock so converted, the person or persons requesting the issuance thereof shall pay to the Company the amount of tax which may be payable in respect of any transfer involved in such issuance, or shall establish the satisfaction of the Company that such tax has been paid or is not due and payable.

3. Redemption of Preferred Stock.

(a) The Preferred Stock may be redeemed at the option of the Company on or after the second anniversary of the Closing Date at $6.25 per share. The Company may redeem the Preferred Stock at any time prior to the two-year period, if all of the following are true: (i) the Company's Common Stock trades at or above $2.00 bid for thirty (30) consecutive trading days ending within fifteen (15) days of the date of the redemption notice, (ii) the Company's Common Stock is listed on NASDAQ and there has been reported volume of at least 100,000 shares per week for the prior four calendar weeks, and (iii) a registration statement is effective with respect to the Common Stock into which the Preferred Stock is convertible. The applicable redemption price in the first two years is $6.875 (110% of the stated value of one (1) share of Preferred Stock) plus all dividends accrued and unpaid on such Preferred Stock up to the date fixed for redemption. In the event that the Company shall call all or part of the Preferred Stock for redemption, the holder of the Preferred Stock shall have a period of not less than thirty (30) days within which to convert the Preferred Stock to Common Stock before such redemption shall occur.

(b) In the event that less than the entire amount of Preferred Stock outstanding is redeemed at any one time, the shares to be redeemed shall be selected by lot in a manner to be determined by the Board of Directors of the Company. Not less than thirty (30) nor more than sixty (60) days prior to the date fixed for redemption of the Preferred Stock or any part thereof, a notice specifying the time and place thereof shall be given by mail to the holders of record of the shares of Preferred Stock selected for redemption at the respective addresses as the same shall appear on the stock records of the Company, but no failure to mail such notice or any defect therein or in the mailing thereof shall affect the validity of the proceeding for redemption. Any notice which was mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the holder receives the notice. Upon such redemption date, or such earlier date as the Board of Directors shall designate for payment of the redemption price (unless the Company shall default on the payment of the redemption price set forth in such notice). The holders of the shares of Preferred Stock selected for redemption and to whom notice has been duly given shall cease to be stockholders with respect to such shares and shall have no interest in or claim against the Company by virtue thereof and shall have no rights with respect to such shares except the right to convert such shares within the time hereinabove set forth and except the right to receive the monies payable upon such redemption from the Company or otherwise, without interest thereon, upon surrender and endorsement, if required by the Company, of the certificates, and the shares represented thereby shall no longer be deemed to be outstanding. Upon redemption or conversion of the Preferred Stock in the manner set out herein, or upon purchase of Preferred Stock by the Company, the Preferred Stock so acquired by the Company shall be cancelable and shall not be reissued. After giving any notice of redemption and prior to the close of business ont he date prior to the redemption date. As hereinbefore provided, the holders of the Preferred Stock so called for redemption may convert such stock into Common Stock of the Company in accordance with the conversion privileges set forth in Paragraph 2 hereof.

4. Voting Rights . Except as otherwise required by law, the holders of Preferred Stock shall have no voting rights.

5. Priority of Preferred Stock in the Event of a Dissolution . In the event of any liquidation, dissolution or winding up of the affairs of the company, whether voluntary or otherwise, after payment or provision for payment of debts and the liabilities of the Company, the holders of Preferred Stock shall receive preference on distribution including an amount equal to all dividends accrued and unpaid on each share up to the date fixed for distribution, before any distribution shall be made to the holders of any class of Common Stock of the company.

IN WITNESS WHEREOF, the undersigned has caused its corporate seal to be affixed and this Certificate to be executed by its President and Secretary as of the 13th day of October, 1998.

	VERTICAL COMPUTER SYSTEMS

	/s/ Brett E. Howell
	Brett E. Howell, President, Secretary & Treasurer

Exhibit 4.5

Form of Restricted Stock Agreement

RESTRICTED STOCK AGREEMENT

CONFIDENTIAL

THIS RESTRICTED STOCK AGREEMENT (the “ Agreement ” ) is made and entered into on ______________, 20__, by and between _______________, an individual residing at __________________________________ (the “ Participant ”) and Vertical Computer Systems, a Delaware corporation, located at 101 W. Renner Road, Suite 300, Richardson, TX 75082 (the “ Company ”) .

W I T N E S S E T H :

WHEREAS, the Company desires to provide the Participant an incentive with respect to the Participant’s employment with the Company or an affiliate of the Company (“ Affiliate (s”) or services to be rendered by Participant on behalf of the Company or its Affiliates , as applicable, and to promote the growth and success of the Company and its Affiliates by awarding the Participant a restricted stock award pursuant to the terms of this Agreement.

NOW, THEREFORE, for and in consideration of the mutual promises and covenants and the considerations as set forth herein, the parties do hereby agree as follows:

ARTICLE 1

AWARD OF SHARES

1.1. Grant . For and in consideration of services to be rendered by the Participant, the Company does hereby grant and issue to the Participant, and the Participant does hereby accept from the Company, effective as of the date of this Agreement (the “Date of Grant” ) a restricted stock award consisting of _________________ (____________) shares of common stock in the Company (the “ Shares ”) pursuant to the terms and conditions and subject to the restrictions hereinafter set forth.

1.2 Confidentiality . As a condition of the grant of Shares in this Agreement, Participant shall keep the terms of this Agreement and the award of Shares confidential. Participant shall not disclose the terms of this Agreement or the award of shares to any third party, including any other employees of or consultants to the Company and its Affiliates. Notwithstanding the foregoing, Participant may discuss or disclose the terms of this Agreement to (a) Participant’s accountant or legal counsel, provided such individuals or entities agree to keep the terms of this Agreement and the award of the Shares confidential, or (b) to the extent required by applicable law; provided, however, that if Participant is required in any legal proceeding, regulatory proceeding or any similar process to disclose any part of the terms of this Agreement, Participant shall give prompt notice of such request to the Company so that the Company may seek an appropriate protective action.

1.3 Vesting of Shares . The Shares that have become vested pursuant to this Section 1.3 are herein referred to as the “ Vested Shares ” and all Shares which are not vested are herein referred to as the “ Unvested Shares .”

(a) The Shares shall vest in accordance with the following schedule:

(1) First installment. _________________ (__________) of the total Shares on the ________ (__) month anniversary of the Date of Grant, provided that the Participant is employed by the Company or an Affiliate or the Participant is providing services to the Company or an Affiliate on the ________ (__)month anniversary of the Date of Grant.

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(2) Second installment. An additional ______________ (_______) of the total Shares on the ________ (__)month anniversary of the Date of Grant, provided that the Participant is employed by the Company or an Affiliate or the Participant is providing services to the Company or an Affiliate on such ________ (__) month anniversary.

(3) Third installment. An additional ______________ (_______) of the total Shares on the ________ (__) month anniversary of the Date of Grant, provided that the Participant is employed by the Company or an Affiliate or the Participant is providing services to the Company or an Affiliate on such ________ (__) month anniversary.

(b) In the event the Participant’s employment by the Company or an Affiliate or the Participant’s engagement to provide services to the Company or an Affiliate terminates as set forth below, the Shares will vest as follows:

(1) If the Participant is unable to perform the Participant’s duties in connection with the Participant’s employment by the Company or an Affiliate or Participant’s engagement to provide services to the Company or an Affiliate, and such failure is due to a partial or total disability or incapacity resulting from a mental or physical illness, injury or any other cause for a period of ten (10) consecutive weeks or for a cumulative period of seventy (70) business days during any five (5) month period (“ Disability ”), or due to death, the Shares will continue to vest for a period of nine (9) months after the date of such determination of Disability.

(2) If the Participant’s employment by the Company or an Affiliate or the Participant’s engagement to provide services to the Company or an Affiliate is terminated without cause by the Company or an Affiliate, as the case may be, the Shares will continue to vest for a period of nine (9) months after the date of such termination.

(c) Notwithstanding anything to the contrary in this Agreement, upon the occurrence of a Triggering Event (as defined below), the Shares shall immediately vest effective on the date of such Triggering Event. A “Triggering Event” shall mean (i) the date that any person or group of persons (other than the shareholders of the Company as of the date of this Agreement) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended) of a majority of the issued and outstanding shares of capital stock of the Company having the right to vote for the election of directors of the Company, (ii) the date of sale or other disposition of all or substantially all the assets of the Company, or (iii) a change in the composition of the Board of Directors of the Company affecting more than one member of the Board, prior to December 31, 2016.

1.4 Term; Forfeiture . Upon any forfeiture, all rights of the Participant with respect to the forfeited Unvested Shares shall cease and terminate, without any further obligation on the part of the Company, and the Unvested Shares shall be transferred back to the Company. Any Unvested Shares shall be forfeited on the first to occur of the following:

(a) 5 p.m. on the date which is nine (9) months following the date of the termination of (i) the Participant’s employment by the Company or an Affiliate of the Company or (ii) the Participant’s engagement to provide services to the Company or an Affiliate, in either instance due to death or Disability.

(b) 5 p.m. on the date of termination of (i) the Participant’s employment by the Company or an Affiliate or (ii) the Participant’s engagement to provide services to the Company or an Affiliate, in either instance for Cause;

(c) 5 p.m. on the date which is nine (9) months following the termination of (i) the Participant’s employment by the Company or an Affiliate or (ii) the Participant’s engagement to provide services to the Company or an Affiliate, in either instance without Cause.

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(d) 5 p.m. on the date of termination of (i) the Participant’s employment by the Company or an Affiliate or (ii) the Participant’s engagement to provide services to the Company or an Affiliate, in either instance by the Participant.

For purposes of this Section 1.4, “Cause” for a Participant who is an employee means (i) frequent and unjustifiable absenteeism, including unexcused and repeated failures to perform work for the Company or an Affiliate in the office of the Company or an Affiliate at the regularly prescribed times and for the regular scheduled hours the Participant is required to work, other than by reason of the Participant's illness or physical or mental disability; (ii) insubordination, or continued violation of the Participant’s obligation to perform the duties and responsibilities required of the Participant, including the Company’s policies applicable to all employees, after the Participant has been given written notice from his or her supervisor describing the violations and failure to cure or commence to cure such violations within thirty (30) days; (iii) any embezzlement or any act of dishonesty which is materially injurious to the Company or an Affiliate or (iv) for a breach by Participant under an employment agreement or non-disclosure agreement, as applicable.

For purposes of this Section 1.4, “Cause” for a Participant who is not an employee means (i) a breach by Participant of any consulting or services agreement between Participant and the Company or an Affiliate which is not timely cured, or (ii) any embezzlement or any act of dishonesty which is materially injurious to the Company or an Affiliate.

1.5 Shares Held by the Custodian . The Participant hereby authorizes and directs the Company to deliver any certificates evidencing the Shares to the President of the Company or another authorized agent of the Company (the “Custodian” ), to be held until the Shares become Vested Shares. The Participant hereby irrevocably appoints the Custodian, and any successor thereto, as the true and lawful attorney-in-fact of the Participant with full power and authority to execute any stock power or other instrument necessary to transfer the Shares to the Company, in the name, place and stead of the Participant, if the Shares do not vest as provided in Section 1.3 above.

1.6 No Rights to Distributions . The Participant shall not be entitled to any dividends paid or declared on Unvested Shares for which the record date is prior to the vesting of the Shares as provided in Section 1.3 above.

ARTICLE 2

RESTRICTIONS ON SHARES

2.1. Restrictions on Unvested Shares . No portion of the Shares or rights granted hereunder may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of by the Participant, including by will or intestacy, until such portion of the Shares becomes vested in accordance with Section 1.3 of this Agreement. Unvested Shares shall not be transferable by the Participant.

2.2. Restrictions on Vested Shares . Vested Shares shall be subject to the provisions set forth in this Agreement, any restrictive legends as set forth on the share certificate, and any State or Federal regulations, including Rule 144.

ARTICLE 3

GENERAL PROVISIONS

3.1. Legends . Any certificate representing the Shares shall be endorsed with the following legend or a legend with similar language as determined by the Company in its sole and absolute discretion. The Participant shall not make any transfer of the Shares without first complying with the restrictions on transfer described in such legend:

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TRANSFER IS RESTRICTED

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION. THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT REGISTRATION UNDER SAID ACT OR AN EXEMPTION THEREFROM.

The Participant agrees that the Company may also endorse any certificate representing the Shares with any other legends required by applicable federal or state securities law. The Company need not register a transfer of the Shares and may also instruct its transfer agent or other authorized agent, if any, not to register the transfer of the Shares unless the conditions specified in the foregoing legends are satisfied.

3.2 Participant Shareholder Rights . Neither the Participant nor any person claiming under or through the Participant will have any of the rights or privileges of a stockholder of the Company in respect of any Shares deliverable pursuant to this Agreement unless and until such Shares have been issued on the records of the Company or its transfer agents or registrars. After such issuance, the Participant will have all the rights as a stockholder of the Company with respect to such Shares.

3.3 Tax Consequences . The Participant understands that Participant shall be responsible for any taxes that may arise as a result of the transactions contemplated by this Agreement.

3.4 Insider Trading Policy . By accepting this grant of stock, the Participant acknowledges that (a) a copy of Vertical Computer Systems’ Insider Trading Corporate Communications Policy (the “ITCCP”) has been made available to the Participant, (b) the Participant has had an opportunity to review the ITCCP and (c) the Participant is bound by all the terms and conditions of the ITCCP.

3.5 Changes in Shares.

(a) In the event that as a result of any stock dividend, forward stock split, or other change in any Unvested Shares, the Participant shall be entitled to new or additional or different shares or securities, such new or additional or different shares or securities shall thereupon also be considered to be Unvested Shares and shall be subject to all of the conditions and restrictions which were applicable to the Shares pursuant to this Agreement.

(b) In the event that the Company shall combine the outstanding shares into a smaller number of shares in connection with a reverse stock split, the Unvested Shares shall be proportionately decreased, effective at the opening of business on the full business day next following the day such reverse stock split becomes effective.

3.6 Participant Representation . The Participant expressly acknowledges that the Participant has not been induced to enter into this Agreement by the expectation of employment or continued employment with the Company or an Affiliate.

3.7. No Employment Rights Created . The award of Shares hereunder shall not be construed (i) as granting Participant right to continue or extend Participant’s employment or Participant’s engagement to provide services to the Company or an Affiliate, or (ii) as interfering with the right of the Company or an Affiliate to terminate the Participant’s employment or engagement. The parties agree that the Company shall have no further obligations to Participant relating to the grant of Shares except as stated herein.

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3.8 Notices . Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by overnight courier, U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Participant, mailed notices shall be addressed to the Participant at the address set forth above. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of the President. Each notice, request, claim, demand or other communication delivered or sent in the manner described above shall be deemed sufficiently delivered or sent at such time as it is delivered to the addressee (with the return receipt deemed exclusive evidence of such receipt) or at such time as delivery is refused by the addressee.

3.9 Authority . Each party hereto represents and warrants that it has full power and authority to enter into this Agreement and to perform this Agreement in accordance with its terms.

3.10 Governing Law . This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of Texas without regard to its conflict of law principles, and the Federal and State courts of Texas shall have exclusive jurisdiction with respect to any dispute arising hereunder. The parties irrevocably waive any objection to such venue based on forum nonconveniens or similar principle with respect to the exclusive jurisdiction of the Federal and State courts of Texas.

3.11 Successors and Assigns . The rights, duties and obligations of a party hereunder may not be assigned, delegated or assumed without the prior written consent of the other party, provided that the Company may assign this Agreement to any successor entity or acquiring entity of the Company if the context so requires, without the Participant’s consent, and such assignment shall not constitute a termination of the Participant’s employment by the Company or an affiliate or the Participant’s engagement to provide services to the Company or an Affiliate, as applicable. Nothing herein shall cause a termination of this Agreement upon the acquisition, reorganization, or merger of the Company. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and each party’s respective successors or permitted assigns. Nothing herein shall be construed to confer upon any person not a party hereto any right, remedy or claim under or by reason of this Agreement.

3.13 Waiver . No waiver of any breach of any term or provision of this Agreement shall be construed to be, or shall be, a waiver of any other breach of this Agreement. No waiver shall be binding unless in writing and signed by the party against whom the waiver may be enforced.

3.14 Counterparts . This Agreement may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. It is not necessary that each party hereto execute the same counterpart.

3.15 Severability . If any provision of this Agreement shall be determined, under applicable law, to be overly broad in duration, substantive scope or otherwise, such provision shall be deemed narrowed to the broadest terms permitted by applicable law and shall be enforced as so narrowed. If any provision of this Agreement is nevertheless held invalid, void, or enforceable for any reason, the remaining provisions will nevertheless continue in full force and effect as if the invalid, void, or unenforceable provision had never been contained in this Agreement and the validity, legality and enforceability of the remaining provisions shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

3.16 Amendment . This Agreement may be amended only in writing executed by the Participant and an authorized representative of the Company.

3.17 Finality of Agreement . This Agreement, when executed by the parties, supersedes all other understandings and agreements of the parties with respect to the matters set forth herein.

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3.18 Independent Counsel . The Participant represents and warrants to the Company that the Participant was advised to consult with independent legal counsel of the Participant’s own choosing concerning this Agreement and that Participant has either done so or has had a reasonable opportunity to do so and has chosen not to seek independent legal counsel.

IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the day and year first set forth above.

	VERTICAL COMPUTER SYSTEMS, INC.

	By:
		Richard Wade
		President/CEO

Accepted and agreed:

Participant

By:
Name:

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Exhibit 4.6

[Form of Stock Convertible Debenture]

THIS DEBENTURE, AND THE SECURITIES INTO WHICH IT IS CONVERTIBLE (COLLECTIVELY, THE “ SECURITIES ”), HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE. THE SECURITIES ARE BEING OFFERED PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ ACT ”). THE SECURITIES ARE “ RESTRICTED ” AND MAY NOT BE OFFERED OR SOLD UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT, PURSUANT TO REGULATION D OR PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND THE COMPANY WILL BE PROVIDED WITH OPINION OF COUNSEL OR OTHER SUCH INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH EXEMPTIONS ARE AVAILABLE. FURTHER HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE MADE EXCEPT IN COMPLIANCE WITH THE ACT.

DEBENTURE

VERTICAL COMPUTER SYSTEMS, INC.

__% Convertible Debenture

Due _____________20__

$____________

This Debenture is issued by VERTICAL COMPUTER SYSTEMS, INC., a Delaware corporation (the “ Company ”), to _______________________________ (together with Holder’s permitted successors and assigns, the “ Holder ”) pursuant to exemptions from registration under the Securities Act of 1933, as amended.

ARTICLE I.

Section 1.01 Principal and Interest . For value received, on _______________, 20__, the Company hereby promises to pay to the order of the Holder in lawful money of the United States of America and in immediately available funds the principal sum of _____________________ dollars (US $ _________ ) , together with interest on the unpaid principal of this Debenture at the rate of ___ percent (__%) per year (computed on the basis of a 365-day year and the actual days elapsed) from the date of this Debenture until paid. At the Holder’s option, the entire principal amount and all accrued interest thereon shall be either (a) paid to the Holder no later than the six (6) month anniversary from the date hereof or (b) converted in accordance with Section 1.02 herein. Notwithstanding the provisions of this Section 1.01 or anything to the contrary contained in this Debenture or elsewhere, in the event (a) Holder elects not to convert all of the principal amount of the Debenture pursuant to the terms and conditions of this Debenture, and (b) the Company does not elect to redeem the entire outstanding convertible debenture pursuant to Section 1.04 below, the Company promises to pay to Holder or its order, in lawful money of the United States of America and in immediately available funds, the entire principal amount, all accrued interest thereon and any and all other amounts due hereunder on ___________, 20__.

Section 1.02 Optional Conversion . Commencing ______ (__) months after the date hereof, the Holder is entitled, for an additional period of ____ (__) months, at the Holder’soption and upon written notice to the Company, to convert, and sell on the same day, at any time and from time to time, until payment in full of this Debenture, all or any part of the principal amount of the Debenture, plus accrued interest, into shares (the “ Conversion Shares ”) of the Company’s common stock, par value $0.001 per share (“ Common Stock ”), at the price per share (the “ Conversion Price ”) equal to the amount equal to __________ percent (__%) of the average three (3) lowest Closing Prices of the Common Stock for the ____ (__) trading days immediately preceding the Conversion Date (as defined herein) . As used herein, “ Principal Market ” shall mean The New York Stock Exchange, The National Association of Securities Dealers Inc., the OTC (Over-The-Counter Bulletin Board), Nasdaq Small Cap Market, or American Stock Exchange, or any successor market. If the Common Stock is not traded on a Principal Market, the Closing Price shall mean, the reported Closing Price for the Common Stock, as furnished by the National Association of Securities Dealers, Inc., for the applicable periods. No fraction of shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded up to the nearest whole share. To convert this Debenture, the Holder hereof shall deliver written notice thereof, substantially in the form of Exhibit “A” to this Debenture, with appropriate insertions (the “ Conversion Notice ”), to the Company at its address as set forth herein. The date upon which the conversion shall be effective (the “ Conversion Date ”) shall be deemed to be the date the Company receives the Conversion Notice.

Section 1.03 The Company shall not affect any conversion of this Note, and the Holder shall not have the right to convert any portion of this Note, to the extent that after giving effect to the conversion set forth on the applicable notice of conversion in the form attached hereto as Exhibit A (the “Notice of Conversion”), the Holder (together with the Holder’s affiliates, and any other person or entity acting as a group together with the Holder or any of its affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates includes the number of shares of Common Stock issuable upon conversion of this Note with respect to which such determination is being made, but excludes the number of shares of Common Stock which are issuable upon (i) conversion of the remaining, unconverted principal amount of this Note beneficially owned by the Holder or any of its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein (including, without limitation, any other Notes) beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(f), beneficial ownership is calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder. To the extent that the limitation contained in this Section 1.04 applies, the determination of whether this Note is convertible (in relation to other securities owned by the Holder together with any affiliates) and of which principal amount of this Note is convertible will be in the sole discretion of the Holder, and the submission of a Notice of Conversion will be deemed to be the Holder’s determination of whether this Note may be converted (in relation to other securities owned by the Holder together with its affiliates) and which principal amount of this Note is convertible, in each case subject to such aggregate percentage limitations. For purposes of this Section 1.04, in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within two trading days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note. The limitations contained in this Section 104 apply to a successor Holder.

Section 1.04 Reservation of Common Stock . The Company shall reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of this Debenture, such number of shares of Common Stock as shall from time to time be sufficient to effect such conversion, based upon the Conversion Price.

Section 1.05 Right of Redemption . The Company at its option shall have the right to redeem, with ten (10) business days advance written notice (the “Redemption Notice”), a portion of or the entire outstanding convertible debenture. The redemption price shall be ______________ percent (___%) of the amount redeemed plus accrued interest.

Section 1.06 Interest Payments . The interest so payable will be paid at the time of maturity or conversion to the person in whose name this Debenture is registered. At the time such interest is payable, the Company, in its sole discretion, may elect to pay interest in cash (via wire transfer or certified funds) or in the form of Common Stock. In the event of default, as described in Article III Section 3.01 hereunder, the Company may elect that the interest be paid in cash (via wire transfer or certified funds) or in the form of Common Stock. If paid in the form of Common Stock, the amount of stock to be issued will be calculated as follows: the value of the stock shall be the Closing Price on: (i) the date the interest payment is due; or (ii) if the interest payment is not made when due, the date the interest payment is made. A number of shares of Common Stock with a value equal to the amount of interest due shall be issued. No fractional shares will be issued; therefore, in the event that the value of the Common Stock per share does not equal the total interest due, the Company will pay the balance in cash.

Section 1.07 Paying Agent and Registrar . Initially, the Company will act as paying agent and registrar. The Company may change any paying agent, registrar, or Company-registrar by giving the Holder not less than ten (10) business days’ written notice of its election to do so, specifying the name, address, telephone number and facsimile number of the paying agent or registrar. The Company may act in any such capacity.

ARTICLE II.

Section 2.01 Amendments and Waiver of Default . The Debenture may not be amended without the consent of the Holder. Notwithstanding the above, without the consent of the Holder, the Debenture may be amended to cure any ambiguity, defect or inconsistency, or to make any change that does not adversely affect the rights of the Holder.

ARTICLE III.

Section 3.01 Events of Default . An Event of Default is defined as follows: (a) failure by the Company to pay amounts due hereunder within fifteen (15) business days of the date of maturity of this Debenture; (b) failure by the Company’s transfer agent to issue Common Stock to the Holder within fifteen (15) business days of the Company’s receipt of a valid Notice of Conversion from Holder; or (c) events of bankruptcy or insolvency affecting the Company . In an Event of Default (as defined in hereof) under this Debenture, Holder shall have the right to accelerate the full repayment of all amounts due hereunder and the principal balance outstanding under this Debenture, from time to time, shall bear interest at the rate of _____ percent (__%) per annum, computed as described in Section 1.01 above, until such Default and any and all other Defaults hereunder are cured or all amounts due hereunder are paid by the Company.

Section 3.02 Failure to Issue Unrestricted Common Stock . As indicated in Article III Section 3.01, a breach by the Company of its obligations under Section 1.04 shall be deemed an Event of Default, which if not cured within fifteen (15) business days, shall entitle the Holder accelerated full repayment of the Debenture.

ARTICLE IV.

Section 4.01 Rights and Terms of Conversion . Unless redeemed by the Company pursuant to Section 1.05, this Debenture, in whole or in part, may be converted, at the election of Holder, at any time after one hundred and eighty (180) days following the date of closing, into shares of Common Stock at a price equal to the Conversion Price in accordance with the terms of Section 1.02.

Section 4.02 Re-issuance of Debenture . When the Holder elects to convert a part of the Debenture, then the Company shall reissue a new Debenture in the same form as this Debenture to reflect the new principal amount.

Section 4.03 Termination of Conversion Rights . The Holder’s right to convert the Debenture into the Common Stock in accordance with Section 4.01 shall terminate on the date that is the first(1st) year anniversary from the date hereof.

Section 4.04 Restriction on Short Sale of Stock . The Holder hereby acknowledges and agrees that it shall not short sell the Common Stock except in connection with a Conversion Notice, and thereafter only such number of Conversion Shares it receives with respect to such Conversion Notice.

ARTICLE V.

Section 5.01 Anti-dilution . In the event that the Company shall at any time subdivide the outstanding shares of Common Stock, or shall issue a stock dividend on the outstanding Common Stock, the Conversion Price in effect immediately prior to such subdivision or the issuance of such dividend shall be proportionately decreased, and in the event that the Company shall at any time combine the outstanding shares of Common Stock, the Conversion Price in effect immediately prior to such combination shall be proportionately increased, effective at the close of business on the date of such subdivision, dividend or combination as the case may be.

ARTICLE VI.

Section 6.01 Notice . Notices regarding this Debenture shall be sent to the parties at the following addresses, unless a party notifies the other parties, in writing, of a change of address:

If to the Company:	President/CEO Vertical Computer Systems, Inc.

	101 West Renner Road, Suite 300
	Richardson, Texas 75082

If to the Holder:	_____________________
	_____________________.
	_____________________

Section 6.02 Governing Law . This Debenture shall be deemed to be made under and shall be construed in accordance with the laws of the State of Delaware without giving effect to the principals of conflict of laws thereof. Each of the parties consents to the jurisdiction of the U.S. District Court sitting in the District of the State of Texas or the state courts of the State of Texas sitting in Dallas, Texas in connection with any dispute arising under this Debenture and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens to the bringing of any such proceeding in such jurisdictions.

Section 6.03 Severability . The invalidity of any of the provisions of this Debenture shall not invalidate or otherwise affect any of the other provisions of this Debenture, which shall remain in full force and effect.

Section 6.04 Entire Agreement and Amendments . This Debenture represents the entire agreement between the parties hereto with respect to the subject matter hereof and there are no representations, warranties or commitments, except as set forth herein. This Debenture may be amended only by an instrument in writing executed by the parties hereto.

Section 6.05 Counterparts . This Debenture may be executed in multiple counterparts, each of which shall be an original, but all of which shall be deemed to constitute on instrument.

IN WITNESS WHEREOF , with the intent to be legally bound hereby, the Company as executed this Debenture as of the date first written above.

	VERTICAL COMPUTER SYSTEMS, INC.

	By:
	Name: Richard S. Wade
	Title: President/CEO

EXHIBIT “A”

NOTICE OF CONVERSION

(To be executed by the Holder in order to Convert the Note)

TO:

The undersigned hereby irrevocably elects to convert $_________________________ of the principal amount of the above Note into Shares of Common Stock of Vertical Computer Systems, Inc., according to the conditions stated therein, as of the Conversion Date written below.

Conversion Date:

Applicable Conversion Price:

Signature:

Name:

Address:

Amount to be converted: $

Amount of Debenture unconverted: $

Conversion Price per share: $

Number of shares of Common Stock to be issued:

Please issue the shares of Common Stock in the following name and to the following address:

Issue to:

Authorized Signature:

Name:

Title:

Phone Number:

A- 1

Exhibit 4.7

[Form of Stock Purchase Warrant]

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO VERTICAL COMPUTER SYSTEMS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

Right to Purchase up to __________ Shares of Common Stock of
Vertical Computer Systems, Inc.
(subject to adjustment as provided herein)

COMMON STOCK PURCHASE WARRANT

No. __

Issue Date: _______, 20__

THIS WARRANT CERTIFIES THAT, for good and valuable consideration, __________ (“ Holder ”) is entitled to purchase _______________ (_______) fully paid and nonassessable shares of common stock (the “ Shares ”) of Vertical Computer Systems, Inc., a Delaware corporation (the “ Company ”) at $____.__ per Share (the “ Exercise Price ”), subject to the provisions and upon the terms and conditions set forth in this Warrant.

ARTICLE 1. VESTING; EXERCISE .

1.1 Exercise Price; Vesting . The Exercise Price is $____.__ per Share. This Warrant shall vest 100% on the date of issuance, and may be exercised, in whole or in part at any time and from time to time, following the date as of which the Company’s certificate of incorporation has been amended to provide sufficient common stock to accommodate the exercise. This Warrant must be exercised prior to 5:00 p.m., Dallas, Texas time on _______, 20__.

1.2 Method of Exercise . Holder may exercise this Warrant by delivering to the principal office of the Company, a duly executed Notice of Exercise in substantially the form attached hereto as Exhibit A , accompanied by [OPTION 1: payment in full of the Exercise Price payable in respect of the number of shares of Common Stock purchased upon such exercise] OR [OPTION 2- Cashless Exercise Provision (i) payment in full of the Exercise Price payable in respect of the number of shares of Common Stock purchased upon such exercise or (ii) without the payment by the Holder of any additional consideration, by surrender of this Warrant together with Notice of Exercise, in which event the Company shall issue to the Holder a number of Warrant Shares computed using the following formula:

X = Y (A–B)

where: X = The number of Warrant Shares to be issued to the Holder pursuant to this cashless exercise;

Y = The number of Warrant Shares in respect of which the cashless exercise election is made;

A = The fair market value of one Warrant Share at the time the cashless exercise election is made; and

B = The Warrant Exercise Price (as adjusted to the date of the cashless issuance). ]

For purposes of this subparagraph, the fair market value of one Warrant Share as of a particular date shall be determined as follows: (i) if traded on a securities exchange, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the ________ period ending ____ days prior to the net exercise election; (ii) if traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty-day period ending three days prior to the net exercise; and (iii) if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Company’s board of directors.

1.3. Fractional Shares . No fractional Shares shall be issuable upon exercise of this Warrant and the number of Shares to be issued shall be rounded up to the nearest whole Share.

1.4 Delivery of Certificate and New Warrant . Promptly after Holder exercises this Warrant and the Company receives payment of the aggregate Exercise Price, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised and has not expired, a new Warrant representing the Shares not so acquired.

1.5 Replacement of Warrant . On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor.

ARTICLE 2. ADJUSTMENTS TO THE SHARES .

2.1 Stock Dividends, Splits, Etc . If the Company declares or pays a dividend on the Shares payable in common stock or other securities, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend occurred. If the Company subdivides the Shares by reclassification or otherwise into a greater number of shares or takes any other action which increases the amount of stock into which the Shares are convertible, the number of shares purchasable under this Warrant shall be proportionately increased and the Exercise Price shall be proportionately decreased. If the outstanding shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Exercise Price shall be proportionately increased and the number of Shares purchasable hereunder shall be proportionately decreased.

2.2 Reclassification, Exchange, Combinations or Substitution . Upon any reclassification, exchange, substitution or other event that results in a change of the number and/or class of the securities issuable upon exercise of this Warrant, Holder shall be entitled to receive, upon exercise of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution or other event. The Company or its successor shall promptly issue to Holder an amendment to this Warrant setting forth the number and kind of such new securities or other property issuable upon exercise of this Warrant as a result of such reclassification, exchange, substitution or other event that results in a change of the number and/or class of securities issuable upon exercise of this Warrant. The amendment to this Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Exercise Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Article 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions or other events.

2.3 No Impairment . The Company shall not, by amendment of its Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder’s rights under this Article against impairment.

2.4 Certificate as to Adjustments . Upon each adjustment of the Exercise Price, the Company shall promptly notify Holder in writing, and, at the Company’s expense, promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Exercise Price in effect upon the date thereof and the series of adjustments leading to such Exercise Price.

ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY .

3.1 Notice of Certain Events . If the Company proposes at any time (a) to declare any dividend or distribution upon any of its stock, whether in cash, property, stock or other securities and whether or not a regular cash dividend; (b) to effect any reclassification or recapitalization of any of its stock; or (c) to merge or consolidate with or into any other corporation, or sell, lease, license or convey all or substantially all of its assets, or to liquidate, dissolve or wind up, then, in connection with each such event, the Company shall give Holder: (1) at least 10 days prior written notice of the date on which a record will be taken for such dividend or distribution (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (b) and (c) above; (2) in the case of the matters referred to in (b) and (c) above at least 10 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event).

3.2 Reserve . The Company agrees at all times to reserve and hold available out of the aggregate of its authorized but unissued common stock the number of shares of its common stock issuable upon the exercise of this Warrant. The Company further covenants and agrees that all shares of common stock that may be delivered upon the exercise of this Warrant will, upon delivery, be fully paid and nonassessable and free from all taxes, liens and charges with respect to the purchase thereof under this Warrant.

ARTICLE 4. MISCELLANEOUS .

4.1 Compliance with Securities Laws on Transfer . This Warrant and the Shares issuable upon exercise of this Warrant may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company).

4.2 Notices . Any notices, consents, waivers or other communications required or permitted to be given under the terms hereof must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by email or facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

If to the Company, to:	Vertical Computer Systems, Inc.
	101 W. Renner Road, Suite 300 Richardson, TX 75082
	Attention: Chief Executive Officer

If to the Holder:	__________________
	__________________
	__________________

or at such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party three (3) business days prior to the effectiveness of such change.

4.3 Governing Law, Jurisdiction and Venue . This Warrant shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to its principles regarding conflicts of law.

IN WITNESS WHEREOF, the parties have executed this Warrant as of the date first written above.

	*“COMPANY”*

	Vertical Computer Systems, Inc.

	By:
		Richard Wade, President/CEO

	*“HOLDER”*

	By:
	Name:

Exhibit A

NOTICE OF EXERCISE

( To Be Signed Only On Exercise of Warrant )

To:

Vertical Computer Systems, Inc., Attention: Chief Executive Officer

The undersigned, pursuant to the provisions set forth in the attached Warrant (No. __________), hereby irrevocably elects to purchase ________ shares of Common Stock of the Company, pursuant to the terms of such Warrant and tenders herewith:

$___________, in lawful money, the full Exercise Price for such shares at the price per share provided for in such Warrant, or, if undersigned elects to exercise the cashless exercise provision, ____________ of the shares purchasable under the Warrant pursuant to the cashless exercise provisions of such Warrant.

The undersigned requests that the certificates for such shares of Common Stock be issued in the name of, and delivered to _______________________, whose address is ___________________________________________________________________________.

The undersigned represents and warrants that all offers and sales by the undersigned of the shares of Common Stock issuable upon exercise of the attached Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the “Securities Act”) or pursuant to an exemption from registration under the Securities Act.

Dated:
			(Signature must conform to name of holder as specified on the face of the Warrant)

			Address:

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS AGREEMENT (the “Agreement”) effective the first day of December 2001 entered into by and between richard wade (“Executive”) and Vertical Computer Systems, Inc. , a Delaware corporation (“the Company”) or any of its affiliates, with its principal place of business at 6336 Wilshire Blvd. Los Angeles, California 90048. This Agreement may be unilaterally transferred to an affiliate of the Company, without economic detriment to the Employee.

BACKGROUND

A. The Company has been established for the purpose of e-commerce development and related Internet business operations;

B. The Company desires to employ Executive as Chief Executive Officer and President and Executive desires to be so employed and;

NOW, THEREFORE, the parties desire to memorialize herein the terms and conditions of Executive’s employment. In consideration of the mutual covenants and promises contained herein and other good and valuable consideration, the parties hereby acknowledge the receipt and sufficiency of which hereto, the parties agree as follows:

1. Position .

Executive shall serve as Chief Executive Officer and President upon the terms set forth in this Agreement. Executive shall have the responsibilities inherent in this position and shall report to the Board of Directors and Executive shall perform any other duties reasonably required by Board of Directors.

2. Term of Employment .

Subject to the provisions of this Agreement, the term of Executive’s employment under this Agreement shall commence on December 1, 2001 and shall continue up to December31, 2004 (the “Initial Term”). This Agreement may be renewed for an additional two (2) year term at Executive’s option and the Board’s approval. However, the Executive shall have the option to renew the agreement for two years provided the Company achieves a minimum profitability of $5,000,000 in 2002 with a 50% minimum increase in net profit in 2003 and 2004 respectively upon the good faith concurrence of the Board in the achievement of the performance criteria or validation of "profitability" by independent auditors. Unless either party elects to terminate this Agreement at the end of the initial or any renewal term by giving the other party written notice of such election at least ninety (90) days before the expiration of the then current term, this Agreement shall be deemed to have been renewed for an additional term of two (2 year commencing on the day after the expiration of the then current term. Either party may elect not to renew this Agreement with or without cause, in which case this Section 2 shall govern Executive’s termination, and not Section 5. Upon expiration of this Agreement after notice of non-renewal, Company shall provide Executive all compensation and benefits to which Executive is entitled through the date of termination and thereafter Company’s obligation hereunder shall cease.

Page 1 of 13

Notwithstanding what is contained in this agreement, the Executive will sign and abide by the employee handbook and all other company’s policies.

3. Compensation and Bonus .

3.1 Salary . The Company shall pay Executive an annual base salary of THREE HUNDRED THOUSAND DOLLARS ($300,000.00) during the term of Executive’s employment, payable in accordance with the Company’s semi-monthly payroll disbursement cycle (“Base Compensation”). Executive’s Base Compensation shall be reviewed and increased each year during the term of Executive’s employment, provided that the Company’s performance criteria are achieved as set forth by the Board each year; and

3.2 Bonus . Executive shall receive an annual bonus One Hundred Twenty (120) days after the end of the Company’s fiscal year from a pool equal to five (5) percent of the Company taxable income from the federal tax return filed before depreciation. Executive’s share of the bonus pool is equal to the percentage of his annual base compensation to the total combined annual base compensation of all executives of Company in bonus pool;

3.3 Warrants. Executive will receive 20,000,000 warrants at a strike price of $0.10 and 600,000 non-dilutable warrants at a strike price of $0.10 piggyback registration rights in the form attached. The Executive will be vested monthly in equal amounts over three (3) years, so long as Executive remains employed by the Company or as otherwise set forth herein in this Agreement.

3.4 Service with the Company . During the term of this Agreement, Executive shall perform such reasonable employment duties, commensurate with Executive’s position, as the Board of Directors, shall, from time to time, assign to Executive;

3.5 Performance of Duties . Executive shall serve the Company faithfully and to the best of his ability and devote full business time, attention, skill and effort exclusively to the performance of the duties described in this Agreement. Executive shall comply with all policies, procedures and budgets established by the Company in the performance of his duties and responsibilities. During the Period of Employment, (i) Executive’s working time, energy, skill and best efforts shall be devoted to the performance of Executive’s duties hereunder in a manner which will faithfully and diligently further the business and interests of Company; and (ii) Executive shall not accept any other employment, or engage, directly or indirectly, in any other business, commercial, or professional activity (whether or not providing compensation) that is or may be competitive with Company or any Affiliate that might create a conflict of interest with Company or any Affiliate or that otherwise might interfere with the business of Company or any Affiliate. Executive may engage in charitable, civic, fraternal, professional and trade association activities that do not interfere materially with Executive’s obligations to Company;

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3.6 Vacation and Sick Leave . Executive will be entitled to Four (4) weeks of vacation and sick leave equal to six (6) days per year. Vacation time and sick leave shall not be accumulated after the end of any year. Sick leave shall accumulate at the rate of one half day per month;

3.7 Expenses . The Company shall reimburse Executive for all expenses incurred in connection with his duties on behalf of the Company, provided that Executive shall keep, and present to the Company, records and receipts relating to reimbursable expenses incurred by her. Such records and receipts shall be maintained and presented in a format, and with such regularity, as the Company reasonably may require in order to substantiate the Company’s right to claim income tax deductions for such expenses. Without limiting the generality of the foregoing, Executive shall be entitled to reimbursement for any business-related travel, business-related entertainment, whether at his residence or otherwise, or other costs and customary business expenses reasonably incident to the performance of his duties on behalf of the Company. Executive will be entitled to reimbursement of all reasonable, customary business expenses incurred by his in the performance of his duties.

3.8 Benefits . Executive will be entitled to participate in the employee benefit plans or programs of the Company, including medical and life insurance and profit sharing, to the fullest extent possible, subject to the rules and regulations applicable hereto and to standard eligibility and vesting requirements of any coverage and shall be furnished with other services and perquisites appropriate to his position. Without limiting the generality of the foregoing, Executive shall be entitled to the following benefits:

(a) Comprehensive medical insurance for Executive, his spouse, and his dependent children with tWENTY PERCENT (20%) deductibles;

(b) Dental insurance for Executive, Executive’s spouse, and his dependent children;

(d) Annual physical examination;

(e) Long-term disability.

Page 3 of 13

4. Termination .

4.1 Due to Disability

(a) If Executive becomes unable to perform the duties specified hereunder due to partial or total disability or incapacity resulting from a mental or physical illness, injury or any other cause, Company will continue the payment of Executive’s base salary at its then current rate for a period of TWENTY-SIX (26) weeks following the date Executive is first unable to perform such duties due to such disability or incapacity. Thereafter, Company shall have no obligation for base salary, bonus or other compensation payments to Executive during the continuance of such disability or incapacity. Company will continue to provide benefits to Executive so long as Executive remains employed;

(b) If Executive is unable to perform the duties specified hereunder due to partial or total disability or incapacity resulting from a mental or physical illness, injury or any other cause for a period of TEN (10) consecutive weeks or for a cumulative period of SEVENTY (70) business days during any FIVE (5) month period (“Disability”), then, to the extent permitted by law, Company shall have the right to terminate this Agreement thereafter, in which event Company shall have no further obligations or liabilities hereunder after the date of such termination except Executive will be deemed disabled and eligible for the payments outlined in paragraph 4.1 (a). EXECUTIVE REPRESENTS THAT TO THE BEST OF HIS KNOWLEDGE HE HAS NO MEDICAL CONDITION THAT COULD CAUSE PARTIAL OR TOTAL DISABILITY THAT WOULD RENDER HER UNABLE TO PERFORM THE DUTIES SPECIFIED IN THIS AGREEMENT OTHERWISE THE BENEFITS IN PARAGRAPH 4.1(a) SHALL BE NULL AND VOID.

4.2 Due to Death . If Executive dies during the period of employment, Executive’s employment with Company shall terminate as of the end of the calendar month in which the death occurs. Company shall have no obligation to Executive or Executive’s estate for Base Compensation or other form of compensation or benefit other than amounts accrued through the date of Executive’s death, except as otherwise required by law or by benefit plans provided at Company expense.

In the event of the termination of Executive’s employment due to Executive’s death or Disability, Executive or Executive’s legal representatives, as the case may be, shall be entitled to:

(a) In the case of death, unpaid Base Compensation earned or accrued through Executive’s date of death and continued Base Compensation at a rate in effect at the time of death, for a period of (3) three months after which Executive’s death occurs, or the end of the employment term, which ever is the lesser amount.

(b) Any performance or special incentive bonus earned but not yet paid;

Page 4 of 13

(c) A pro rata performance bonus for the year in which employment terminates due to death or Disability based on the performance of Company for the year during which such termination occurs or, if performance results are not available, based on the performance bonus paid to Executive for the prior year; and

(d) Any other compensation and benefits to which Executive or Executive’s legal representatives may be entitled under applicable plans, programs and agreements of Company to the extent permitted under the terms thereof, including, without limitation, life insurance as provided in Section 3.8 above.

4.3 For Cause . Company may terminate Executive’s employment relationship with Company for "cause" by action of at least a majority of the Company's Board of Directors, at a meeting duly called and held upon at least 30 days written notice to the Executive specifying the particulars of the action or inaction alleged to constitute "cause" and at which meeting Executive and his counsel were entitled to be present and given adequate opportunity to be heard..

(a) For purposes of this Agreement, termination of employment of Executive by the Company for “cause” means termination for the following reasons: (i) frequent and unjustifiable absenteeism, other than solely by reason of his illness or physical or mental disability; (ii) failing to follow the reasonable instructions of the Chairman; (iii) proven dishonesty materially injurious to the Company or to its business, operations, assets or condition (an “Adverse Effect”); or gross violation of Company policy or procedure after being warned, notified, or Executive’s acknowledged, gross or willful misconduct, or willful neglect to act, which misconduct or neglect is committed or omitted by Executive in bad faith and had an Adverse Effect; or (iv) a failure by Executive to comply with any material provision of this Agreement, which failure is not cured (if capable of cure) within 30 days after receipt of written notice of such non-compliance by Executive. Action or inaction by Executive shall not be considered "willful" unless done or omitted by him intentionally or not in good faith and without reasonable belief that his action or inaction was in the best interest of the Company, and shall not include failure to act by reason of total or partial incapacity due to physical or mental illness.

(b) Company shall have no obligation to Executive for Base Compensation or other form of compensation or benefits, except as otherwise required by law, other than (i) amounts accrued through the date of termination, and (ii) reimbursement of appropriately documented expenses incurred by Executive before the termination of employment, to the extent that Executive would have been entitled to such reimbursement but for the termination of employment.

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4.4 Termination of Employment by the Executive

(a) The Executive may terminate his employment for Good Reason and receive the payments and benefits specified in Section 4.4 (a)(iii)(B)). For purposes of this Agreement, “Good Reason” will exist if any one or more of the following occur:

(i) Failure by the Company to honor any of its obligations under this Agreement, including, without limitation, its obligations under Sections 1 and 3.4 (Employment Capacity and Duties), Section 3.5 (Executive Performance Covenants), Sections 3.1, 3.2, 3.3 (Compensation), Section 3.7 (Reimbursement of Expenses). Sections 3.6 and 3.8 (Employee Benefits, Vacations), Section 11 (Indemnification) and Section 12.3 (Successors and Assigns); or

(ii) Any purported termination by the Company of the Executive’s employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 4.3 above and, for purposes of this Agreement, no such purported termination shall be effective.

(iii) (A) If there is a Change in Control of the Company (as defined below) and the employment of the Executive is concurrently or subsequently terminated (i) by the Company without Cause, (ii) by service of a Notice of Termination or (iii) by the resignation of the Employee because he has reasonably determined in good faith that his titles, authorities, responsibilities, salary, bonus opportunities or benefits have been materially diminished, or that a material adverse change in his working conditions has occurred or the Company has breached this Agreement, then Executive shall be entitled to the “Benefits” described in (B). For the purpose of this Agreement, a Change in Control of the Company has occurred when: (x) any person (defined for the purposes of this Section to mean any person within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)), other than the Company, or an employee benefit plan established by the Board of Directors of the Company, acquires, directly or indirectly, the beneficial ownership (determined under Rule 13d-3 of the regulations promulgated by the Securities and Exchange Commission under Section 13(d) of the Exchange Act) of securities issued by the Company having twenty percent (20%) or more of the voting power of all of the voting securities issued by the Company in the election of directors at the meeting of the holders of voting securities to be held for such purpose; or (y) a majority of the directors elected at any meeting of the holders of voting securities of the Company are persons who were not nominated for such election by the Board of Directors of the Company or a duly constituted committee of the Board of Directors of the Company having authority in such matters; or (z) the Company merges or consolidates with or transfers substantially all of its assets to another person.

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(B) Benefits. If during the term of this Agreement a Change of Control” occurs (as defined above) then the Executive shall be entitled to receive the following: (i) salary and vacation accrued through the date of the Change in Control plus an amount equal to three years of Executive’s salary then in effect, payable immediately upon Change in Control, (ii) an amount equal to three times target bonus for the fiscal year in which the Change in Control occurs (as well as any unpaid bonus from the prior fiscal year), all payable immediately upon Change in Control, (iii) acceleration in full of vesting of all outstanding stock options, Tarps and other equity arrangements subject to vesting and held by Executive (and in this regard , all such options and other exercisable rights held by Executive shall remain exercisable one year following the date of the Change in Control), (iv) (A) continuation of group health and insurance benefits at the Company’s cost pursuant to the Company’s standard programs as in effect from time to time (or at the Company’s election substantially similar benefits as in effect at the Termination Date (if applicable), through a third party carrier) for executive, his spouse and any children, for three years following date of Change in Control (even if executive ceases employment), and (B) thereafter, to the extent COBRA shall be applicable, continuation of health benefits for such persons at Executive’s cost, for a period of 18 months or such longer period as may be applicable under the Company’s policies then in effect, provided the Executive makes the appropriate election and payments, and (v) no other compensation , severance or other benefits.

(b) Additional Payments by the Company. If it is determined (as hereafter provided) that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program, or arrangement, including without limitation any stock option, stocck appreciation right or similar right or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a “Payment “), would be subject to the excise tax imposed by section 4999 of the Code (or any successor provisions thereto) or to any similar tax imposed by state or local law , or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest and penalties, are hereafter collectively referred to as the “Excise Tax”), then Executive will be entitled to receive an additional payment or payments (a “Gross-Up Payment”) in an amount such that, after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments

(c) The Executive shall have the right voluntarily to terminate his employment other than for Good Reason prior to the Scheduled Employment Termination Date, and if the Executive shall so terminate his employment, he shall be entitled only to payment of the amounts which would be payable under Section 4.3 had he been terminated for Cause.

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4.5 Termination Obligations .

(a) All tangible Company Property shall be returned promptly to Company upon termination of the Period of Employment;

(b) All benefits to which Executive is otherwise entitled shall cease upon Executive’s termination, unless explicitly continued either under this Agreement or under any specific written policy or benefit plan of Company;

(c) Upon termination of the Period of Employment, Executive shall be deemed to have resigned from all offices and directorships then held with Company or any Affiliate.

(d) Executive’s obligations under this Section 4.5 on Termination Obligations, Section 5 on Confidentiality and Non-Disclosure, Section 7 on Inventions, and Section 8 on Arbitration shall survive the termination of the Period of Employment and the expiration or termination of this Agreement; and

(e) Following any termination of the Period of Employment, Executive shall cooperate fully with Company in all matters relating to completing pending work on behalf of Company and the orderly transfer of work to other employees of Company. Executive shall also cooperate in the defense of any action brought by any third party against Company that relates in any way to Executive’s acts or omissions while employed by Company.

5. Confidentiality and Non-Disclosure .

Executive agrees to abide by the terms of the Confidentiality and Non-Disclosure Agreement appended hereto as Exhibit A and to comply with such confidentiality, non-disclosure, and proprietary information policies now in effect by the Company or as may be established in the future.

6. Company Property .

All products, records, designs, patents, plans, data, manuals, brochures, memoranda, devices, lists and other property delivered to Executive by or on behalf of the Company, all confidential information including, but not limited to, lists of potential customers, prices, and similar confidential materials or information respecting the business affairs of the Company, such as hardware manufacturers, software developers, networks, strategic partners, business practices regarding technology and schedules, legal actions and personnel information, and all records compiled by Executive which pertain to the business of the Company, and all rights, title and interest now existing or that may exist in the future in and to any intellectual property rights created by Executive for the Company, in performing his duties during the term of this Agreement shall be and remain the property of the Company. Executive agrees to execute and deliver at a future date any further documents that the Company, determines may be necessary or desirable to perfect the Company’s ownership in any intellectual or other property rights.

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7. Inventions .

7.1 Subject to the limitations of California Labor Code § 2870, a copy of which is attached as Exhibit B, “Inventions” shall mean any and all writings, original works or authorship, inventions, ideas, trademarks, service marks, patents, copyrights, know-how, improvements, processes, designs, formulas, discoveries, technology, computer hardware or software, procedures and/or techniques which Executive may make, conceive, discover, reduce to practice or develop, either solely or jointly with any other person or persons, at any time during the Period of Employment, whether or not during working hours and whether or not at the request or upon the suggestion of Company, which relate to or are useful in connection with any business now or hereafter carried on or contemplated by Company, including developments or expansions of its present fields of operations;

7.2 Executive shall make full disclosure to Company of all Inventions and shall do everything necessary or desirable to vest the absolute title thereto in Company. Executive shall write and prepare all specifications and procedures regarding such inventions, improvements, processes, procedures and techniques and otherwise aid and assist Company so that Company can prepare and present applications for copyright or Letters Patent therefor and can secure such copyright or Letters Patent wherever possible, as well as reissues, renewals, and extensions thereof, and can obtain the record title to such copyright or patents so that Company shall be the sole and absolute owner thereof in all countries in which it may desire to have copyright or patent protection. Executive shall not be entitled to any additional or special compensation or reimbursement regarding any Invention;

7.3 All Inventions shall be the sole and exclusive property of Company. Executive agrees to, and hereby does, assign to Company all of Executive’s right, title, and interest (throughout the United States and in all foreign countries), free and clear of all liens and encumbrances, in and to each Invention.

7.4 Continuing Obligations . The rights and obligations of Executive and Company set forth in this Section shall survive the termination of Executive’s employment and the expiration of this Agreement.

8. Arbitration .

8.1 Arbitrable Claims . To the fullest extent permitted by law, all disputes between Executive (and his attorneys, successors and assigns) and Company (and its Affiliates, shareholders, directors, officers, employees, agents, successors, attorneys and assigns) of any kind whatsoever, including, without limitation, all disputes arising under this Agreement (“Arbitrable Claims”), shall be resolved by arbitration. All persons and entities specified in the preceding sentence (other than Company and Executive) shall be considered third-party beneficiaries of the rights and obligations created by this Section on Arbitration. Arbitrable Claims shall include, but are not limited to, contract (express or implied) and tort claims of all kinds, as well as all claims based on any federal, state or local law, statute or regulation, excepting only claims under applicable workers’ compensation law and unemployment insurance claims. By way of example and not in limitation of the foregoing, Arbitrable Claims shall include any claims arising under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act and the California Fair Employment and Housing Act;

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8.2 Procedure . Arbitration of Arbitrable Claims shall be in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association, as amended (“AAA Employment Rules”), as augmented in this Agreement. Arbitration shall be initiated as provided by the AAA Employment Rules, although the written notice to the other party initiating arbitration shall also include a statement of the claim(s) asserted and the facts upon which the claim(s) are based. Arbitration shall be final and binding upon the parties and shall be the exclusive remedy for all Arbitrable Claims. Either party may bring an action in court to compel arbitration under this Agreement and to enforce an arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit or administrative action in any way related to any Arbitrable Claim. Notwithstanding the foregoing, either party may, at its option, seek injunctive relief pursuant to section 1281.8 of the California Code of Civil Procedure. All arbitration hearings under this Agreement shall be conducted in Los Angeles, California. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS, INCLUDING, WITHOUT LIMITATION, ANY RIGHT TO TRIAL BY JURY AS TO THE MAKING, EXISTENCE, VALIDITY OR ENFORCEABILITY OF THE AGREEMENT TO ARBITRATE;

8.3 Arbitrator Selection and Authority . A single arbitrator shall decide all disputes involving Arbitrable Claims. The arbitrator shall be selected by mutual agreement of the parties within thirty (30) days of the effective date of the notice initiating the arbitration. If the parties cannot agree on an arbitrator, then the complaining party shall notify the AAA and request selection of an arbitrator in accordance with the AAA Employment Rules. The arbitrator shall have authority to award equitable relief, damages, costs and fees to the same extent that, but not greater than, a court would have. The fees of the arbitrator shall be split between both parties equally, unless this would render this Section of Arbitration unenforceable, in which case the arbitrator shall apportion said fees so as to preserve enforceability. The arbitrator shall have exclusive authority to resolve all Arbitrable Claims, including, but not limited to, whether any particular claim is arbitrable and whether all or any part of this Agreement is void or unenforceable;

8.4 Continuing Obligations . The rights and obligations of Executive and Company set forth in this Section on Arbitration shall survive the termination of Executive’s employment and the expiration of this Agreement.

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9. Prior Agreements; Conflicts of Interest . Executive represents to Company: (a) that there are no restrictions, agreements or understandings, oral or written, to which Executive is a party or by which Executive is bound that prevent or make unlawful Executive’s execution or performance of this Agreement; (b) none of the information supplied by Executive to Company or any representative of Company or placement agency in connection with Executive’s employment by Company misstated a material fact or omitted information necessary to make the information supplied not materially misleading; and (c) Executive does not have any business or other relationship that creates a conflict between the interests of Executive and the Company.

10. Non-Competition . During the term of this Agreement Executive shall not:

10.1 Start employment with, offer consulting services to, or otherwise become involved in, advise or participate on behalf of any other company, entity or individual, in the field of the Company; and

10.2 Individually or through any agent, for herself or on behalf of any other person or entity (i) solicit employees of the Company, to entice them to leave the Company; or (ii) solicit or induce and third party now or at any time during the term of this Agreement who is providing services to the Company, through license, contract, partnership, or otherwise to terminate or reduce their relationships with the Company.

11. Indemnification . As an employee, officer and director of the Company, the Executive shall be indemnified against all liabilities, damages, fines, costs and expenses by the Company in accordance with the indemnification provisions of the Company’s Certificate of Incorporation as in effect on the date hereof, and otherwise to the fullest extent to which employees, officers and directors of a corporation organized under the laws of Delaware may be indemnified pursuant to Delaware General Corporations Law, as the same may be amended from time to time (or any subsequent statute of similar tenor and effect), subject to the terms and conditions of such statute.

12. Binding Agreement; Successors.

12.1 This Agreement shall be binding upon and shall inure to the benefit of the Company and its successors and assigns. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement to assume expressly and agree to perform this agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. For purposes of this Agreement, “ Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid.

12.2 This Agreement shall be binding upon and shall inure to the benefit of the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, beneficiaries, devises and legatees. If the Executive should die while any amounts are payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive’s devisee. Legatee, beneficiary or other designee or, if there be no such designee, to the Executive’s estate.

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12.3 Except as otherwise set forth in this Section 12, this Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, or transfer this Agreement or any rights or obligations hereunder. Without limiting the foregoing, the Executive’s right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than a transfer by his will or trust or by the laws of descent or distribution, and in the event of any attempted assignment or transfer contrary to this paragraph the company shall have no liability to pay any amount so attempted to be assigned or transferred.

13. Miscellaneous Provisions .

13.1 Authority . Each party hereto represents and warrants that it has full power and authority to enter into this Agreement and to perform this Agreement in accordance with its terms.

13.2 Governing Law . This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of California.

13.3 Captions . The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement.

13.4 Severability . In the event that any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby.

13.5 Amendment . This Agreement may be amended only in writing executed by the parties hereto.

13.6 Attorney’s Fees . In the event of a dispute the prevailing party shall be entitled to be reimbursed for its legal fees by the other party.

13.7 Special Costs . Notwithstanding Section 12.6, if a dispute arises regarding a termination of the Executive or the interpretation or enforcement of this Agreement, subsequent to a Change in Control or for Good Reason, all the reasonable legal fees and expenses incurred by the Executive and any arbitration costs in contesting any such termination or obtaining or enforcing all or part of any right or benefit provided for in this Agreement or in otherwise pursuing all or part of his claim will be paid by the Company, unless prohibited by law. The Company further agrees to pay pre-judgment interest on any money judgment obtained by Executive calculated at the prime interest rate reported in the Wall Street Journal in effect from time to time from the date that payment to him should have been made under this Agreement.

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13.8 Finality of Agreement . This Agreement, when executed by the parties, supersedes all other agreements of the parties with respect to the matters discussed.

IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the day and year first set forth above.

	“Executive”


	Richard Wade

	“Vertical Computer Systems, Inc.”

	By:
		William Mills – Director & Secretary

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Exhibit 14.1

CODE OF BUSINESS CONDUCT AND ETHICS

FOR

VERTICAL COMPUTER SYSTEMS, INC.

Introduction

This Code of Ethics is established pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, which requires that Vertical Computer Systems, Inc. (the “Company”) to establish a code of ethics. Vertical Computer Systems, Inc. (the “Company”) is committed to the highest standards of legal and ethical conduct. This Code of Business Conduct and Ethics (the “Code”) sets forth the Company’s policies with respect to the way we conduct ourselves individually and operate our business. The provisions of this Code are designed to deter wrongdoing and to promote honest and ethical conduct among our employees, officers and directors.

In the course of performing our various roles in the Company, each of us will encounter ethical questions in different forms and under a variety of circumstances. Moments of ethical uncertainty may arise in our dealings with fellow employees of the Company, with customers, or with other parties such as government entities or members of our community. In achieving the high ground of ethical behavior, compliance with governmental laws is not enough. Our employees should never be content with simply obeying the letter of the law, but must also strive to comport themselves in an honest and ethical manner. This Code provides clear rules to assist our employees, directors and officers in taking the proper actions when faced with an ethical dilemma.

The reputation of the Company is our greatest asset and its value relies on the character of its employees. In order to protect this asset, the Company will not tolerate unethical behavior by employees, officers or directors. Those who violate the standards in this Code will be subject to disciplinary action. If you are concerned about taking an action that may violate the Code or are aware of a violation by another employee, an officer or a director, follow the guidelines set forth in Sections 10 and 11 of this Code.

This Code applies equally to all employees, officers and directors of the Company. All references to employees contained in this Code should be understood as referring to officers and directors as well.

1. Compliance with Laws, Rules and Regulations

Company policy requires that the Company, as well as all employees, officers and directors of the Company, comply fully with both the spirit and the letter of all laws, rules and regulations. Whenever an applicable law, rule or regulation is unclear or seems to conflict with either another law or any provision of this Code, all employees, officers and directors are urged to seek clarification from their supervisor, the appropriate compliance official or the Chief Executive Officer. See Section 11 for contact information. Beyond mere compliance with the law, we should always conduct our business with the highest standards of honesty and integrity – wherever we operate.

2. Conflicts of Interest

Every employee has a primary business responsibility to the Company and must avoid conflicts of interest. A conflict of interest arises when an employee takes actions or enters into relationships that oppose the interests of the Company, harm the Company’s reputation or interfere with the employee’s performance or independent judgment when carrying out any actions on behalf of the Company. The Company strictly prohibits its employees from taking any action or entering into any relationship, personal or professional that creates, or even appears to create, a conflict of interest.

A conflict situation can arise when a director, officer or employee takes actions or has interests that may make it difficult to perform his or her work for the Company objectively and effectively. Conflicts of interests may also arise when a director, officer or employee, or a member of his or her family, receives an improper personal benefit as a result of his or her position with the Company. It may be a conflict of interest for a director, officer or employee to work simultaneously for a competitor, customer or supplier. The best policy is to avoid any direct or indirect business connection with our customers, suppliers or competitors, except on our behalf. Employees must be sensitive to potential conflicts of interest that may arise and use their best efforts to avoid the conflict.

In particular, except as provided below, no director, officer or employee shall:

be a consultant to, or a director, officer or employee of, or otherwise operate an outside business that:

markets products or services in competition with our current or potential products and services;

supplies products or services to the Company; or

purchases products or services from the Company;

accept any personal loan or guarantee of obligations from the Company, except to the extent such arrangements have been approved by the Chief Executive Officer and are legally permissible; or

conduct business on behalf of the Company with immediate family members, which include your spouse, children, parents, siblings and persons sharing your same home whether or not legal relatives.

Directors, officers and employees must notify the Chief Executive Officer of the existence of any actual or potential conflict of interest. With respect to officers or directors, the Board may make a determination that a particular transaction or relationship will not result in a conflict of interest covered by this policy. With respect to all other employees or agents, the Chief Executive Officer, acting alone, or the Board may make such a determination. Any waivers of this policy as to an officer or director may only be approved by the Board of Directors.

Any employee, officer or director who is aware of a transaction or relationship that could reasonably be expected to give rise to a conflict of interest in violation of this section must inform the appropriate personnel in accordance with the procedures set forth in Section 11 of this Code. If an employee has any questions regarding the Company’s policy on conflicts of interest or needs assistance in avoiding a potential conflict of interest, he or she is urged to seek the advice of a supervisor or the Chief Executive Officer.

3. Corporate Opportunities

Employees, officers and directors are prohibited from taking for themselves personally, opportunities that are discovered through the use of Company property, Company information or their position in the Company. Furthermore, employees may not use Company property, information or influence or their position in the Company for improper personal gain. Finally, employees have a duty to advance the Company’s legitimate interests when the opportunity to do so arises. Consequently, employees are not permitted to compete with the Company.

4. Confidentiality

Employees must maintain the confidentiality of confidential information entrusted to them by the Company or its customers or suppliers, except when disclosure is authorized by the Company or required by applicable laws or regulations. Confidential information includes proprietary information of the Company, as well as all non-public information that might be of use to competitors, or harmful to the Company or its customers, if disclosed. This confidentiality requirement is in addition to any other obligations imposed by the Company to keep information confidential.

5. Insider Trading

Employees, officers and directors will frequently become aware of confidential non-public information concerning the Company and the parties with which the Company does business. As set forth in more detail in the Company’s Insider Trading Policy, the Company prohibits employees from using such confidential information for personal financial gain, such as for purposes of stock trading, or for any other purpose other than the conduct of our business. Employees must maintain the confidentiality of such information and may not make disclosures to third parties, including members of the employee’s family. All non-public information about the Company should be treated as confidential information. To use non-public information for personal financial benefit or to “tip” others who may make stock trades on the basis of this information is not only unethical but also illegal. This policy also applies to trading in the securities of any other company, including our customers or suppliers, if employees have material, non-public information about that company which the employee obtained in the course of their employment by the Company. In addition to possible legal sanctions, any employee, officer or director found to be in violation of the Company’s insider trading policy will face decisive disciplinary action. Employees are encouraged to contact the Company’s Chief Executive Officer with any questions concerning this policy.

6. Protection and Proper Use of Company Assets

All Company assets should be used for legitimate business purposes and all employees, officers and directors must make all reasonable efforts to protect the Company’s assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on the Company’s profitability and must therefore be avoided. The suspected occurrence of fraud or theft should be immediately reported to the appropriate person in accordance with the procedures set forth in Section 11 of this Code.

An employee’s obligation to protect the Company’s assets extends to the Company’s proprietary information. Proprietary information includes intellectual property such as patents, trademarks, copyrights and trade secrets. An employee who uses or distributes such proprietary information without the Company’s authorization will be subject to disciplinary measures as well as potential legal sanctions.

7. Fair Dealing

Although the success of our Company depends on our ability to outperform our competitors, the Company is committed to achieving success by fair and ethical means. We seek to maintain a reputation for fair dealing among our competitors and the public alike. In light of this aim, the Company prohibits employees from engaging in any unethical or illegal business practices. An exhaustive list of unethical practices cannot be provided. Instead, the Company relies on the judgment of each individual employee to avoid such practices. Furthermore, each employee should endeavor to deal fairly with the Company’s customers, suppliers, competitors and employees. No employee should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair business practice.

8. Disclosures

It is Company policy to make full, fair, accurate, timely and understandable disclosure in compliance with all applicable laws, rules and regulations in all reports and documents that the Company files with, or submits to, the Securities and Exchange Commission and in all other public communications made by the Company. Employees shall endeavor in good faith to assist the Company in such efforts.

9. Waivers

The Company expects all employees, officers and directors to comply with the provisions of this Code. Any waiver of this Code for executive officers, directors or employees may be made only by the Board of Directors or a Board committee and will be promptly disclosed to the public as required by law and stock exchange regulations.

10. Compliance Guidelines and Resources

In some situations, our employees may not be certain how to proceed in compliance with this Code. This uncertainty may concern the ethical nature of the employee’s own acts or the employee’s duty to report the unethical acts of another. When faced with this uncertainty, the employee should carefully analyze the situation and make use of Company resources when determining the proper course of action. The Company also encourages employees to talk to their supervisors, or other personnel identified below, when in doubt about the best course of action.

1. Gather all the facts . Do not take any action that may violate the Code until you have gathered all the facts that are required to make a well-informed decision and, if necessary, you have consulted with your supervisor, or the Chief Executive Officer.

2. Is the action illegal or contrary to policy? If the action is illegal or contrary to the provision of this Code, you should not carry out the act. If you believe that the Code has been violated by an employee, an officer or a director, you must promptly report the violation in accordance with the procedures set forth in Section 11.

3. Discuss the problem with your supervisor . It is your supervisor’s duty to assist employees in complying with this Code. Feel free to discuss a situation that raises ethical issues with your supervisor if you have any questions. You will suffer no retaliation for seeking such guidance.

4. Additional resources . The Chief Executive Officer is available to speak with you about problematic situations if you do not feel comfortable approaching your direct supervisor. If you prefer, you may request assistance in writing by sending a request to the Chief Executive Officer.

11. Reporting Procedures

All employees have a duty to report any violations of this Code, as well as violations of any laws, rules, or regulations. The Company does not permit retaliation of any kind against employees for good faith reports of ethical violations.

If you believe that the Code has been violated by an employee , you must promptly report the violation to your direct supervisor or the Chief Executive Officer. If a report is made to a supervisor, the supervisor must in turn report the violation to the Chief Executive Officer. All violations by an officer or director of the Company must be reported directly to the entire Board of Directors.

Contact Information

Reports may be made in person, by telephone or in writing by sending a description of the violation and the names of the parties involved to the appropriate personnel mentioned in the preceding paragraph. The contact information is as follows:

Chief Financial Officer

Vertical Computer Systems, Inc.

101 West Renner Road, Suite 300

Richardson, Texas 75082

12. Disciplinary Action

Employees, officers and directors of the Company will be held accountable for adherence to this Code. The penalty for a particular violation of this Code will be decided on a case-by-case basis and will depend on the nature and severity of the violation as well as the employee’s history of non-compliance and cooperation in the disciplinary process. Significant penalties will be imposed for violations resulting from intentional or reckless behavior. Penalties may also be imposed when an employee fails to report a violation due to the employee’s indifference, deliberate ignorance or reckless conduct. All violations of this Code will be treated seriously and will result in the prompt imposition of penalties which may include (1) an oral or written warning, (2) a reprimand, (3) suspension, (4) termination and/or (5) restitution.

13. No Rights Created

This Code is a statement of certain fundamental principles, policies and procedures that govern the Company’s officers, directors and employees in the conduct of the Company’s business. It is not intended to and does not create any rights in any employee, supplier, competitor, shareholder or any other person or entity.

Exhibit 21.1

Subsidiaries of the Company

EnFacet, Inc., a Texas corporation

Globalfare.com, Inc., a Nevada corporation

Government Internet Systems, Inc., a Nevada corporation

Now Solutions, Inc., a Delaware corporation

Ploinks, a Texas corporation

Pointmail, Inc., a California corporation

Priority Time Systems, Inc., a Nevada corporation

SnAPPnet, Inc., a Texas corporation

Taladin, Inc., a Texas corporation

Vertical Healthcare Solutions, Inc., a Texas corporation

Vertical Internet Solutions, Inc., a California corporation

EXHIBIT 31.1

Certification of the Principal Executive Officer and Principal Accounting Officer

I, Richard S. Wade, chief executive officer (principal executive officer and principal accounting officer), certify that:

1. I have reviewed this annual report for the twelve months ended December 31, 2015 on Form 10-K of Vertical Computer Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 14, 2016	By:	/s/ Richard S. Wade
		Richard S. Wade
		Chief Executive Officer
		(Principal Executive Officer and Principal Accounting Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Vertical Computer Systems, Inc. (the “Company”) on Form 10-K for the twelve months ended December 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard S. Wade, Principal Executive Officer and Principal Accounting Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: April 14, 2016	By:	/s/ Richard S. Wade
		Richard S. Wade
		Chief Executive Officer
		(Principal Executive Officer and Principal Accounting Officer)