CORRESP 1 filename1.txt Vertical Computer Systems, Inc. 201 Main Street, Suite 1175 Fort Worth, TX 76102 May 25, 2006 VIA EDGAR & OVERNIGHT DELIVERY ------------------------------ Mr. Daniel L. Gordon Branch Chief United States Securities and Exchange Commission 450 Fifth Street, N.W., Mail Stop 4561 Washington, DC 20549 Re: Vertical Computer Systems, Inc. Form 10-KSB for the year ended December 31, 2005 Filed 4/14/06 File No. 0-28685 Dear Mr. Gordon: This letter has been prepared in response to your request for Vertical Computer Systems, Inc. ("Vertical" or the "Company") to respond to the comments of the United States Securities and Exchange Commission (the "SEC" or the "Commission") as memorialized in your May 16, 2006 letter to me (the "Comment Letter") concerning the above-referenced Form 10-KSB for the fiscal year ended December 31, 2005 (the "Form 10-KSB"). The Company's responses to the Comment Letter appear below in boldface capitalization after a recitation of the relevant comment. Consolidated Balance Sheets, page F-3 ------------------------------------- COMMENT 1: We note that over half of your total assets are comprised of accounts receivable, but the substance of the receivables is not discussed in the notes to consolidated financial statements. Please tell us if there are any individually significant receivables and advise us of the collection history related to these accounts. In future filings, revise your critical accounting policies disclosure to discuss how you assess the collectibility of accounts, receivable. RESPONSE: THE COMPANY HAD NO AR BALANCES IN EXCESS OF 10% AT YEAR END for 2004. THE COMPANY HAD THE FOLLOWING AR BALANCES IN EXCESS OF 10% AT YEAR END FOR 2005: 2005 Balance at 12-31-05 Major payments Date of Payment -------------------------------------------------------------- $123,624 $75,659 02/01/06 $151,237 $129,761 01/04/06 THERE WERE NO COLLECTIBLE ISSUES WITH ANY OF THE COMPANY'S LARGE AR ACCOUNTS. IN FUTURE FILINGS, THE COMPANY WILL INCLUDE A DESCRIPTION OF HOW WE ASSESS THE COLLECTIBILITY OF ACCOUNTS RECEIVABLE AND WHETHER A CONCENTRATION EXISTS. Notes to Consolidated Financial Statements ------------------------------------------ Note 13. Stock Options and Warrants, page F-33 ---------------------------------------------- COMMENT 2: You disclose that most options are non-assignable, non-transferrable, vested on the date of grant, and usually expire three years from the date of grant. However, we note that 2.4 million incentive stock options were not vested as of December 31, 2005. Please revise in future filings to clarify the terms of your stock options and warrants outstanding and disclose your accounting policy for recognizing compensation expense related to these awards. RESPONSE: THE COMPANY ACKNOWLEDGES THE COMMISIONS COMMENT AND WILL CLARIFY THE TERMS OF STOCK OPTIONS AND WARRANTS ISSUED, VESTING, AND OUTSTANDING AS WELL AS THE COMPANY'S ACCOUNTING POLICY FOR RECOGNIZING COMPENSATION EXPENSE RELATED TO THESE AWARDS IN ALL FUTURE FILINGS. Exhibit 31 ---------- COMMENT 3: In future filings please remove reference to the title of the certifying officers in the first line as the certifications are required to be made in a personal capacity. RESPONSE: THE COMPANY ACKNOWLEDGES THE COMMISSION'S COMMENT AND WILL REMOVE REFERENCES TO THE TITLE(S) OF THE CERTIFYING OFFICERS IN THE FIRST LINE OF ALL FUTURE CERTIFICATIONS. Should you have any questions concerning this Response Letter, please contact me at (323) 842-5241 Very truly yours, /s/ Richard Wade ---------------- Richard Wade President and Chief Executive Officer cc: Clayton E. Parker, Esq. and Christopher J. DeLise, Esq., Kirkpatrick & Lockhart Nicholson Graham, LLP