Vertical Computer Systems Inc. (OTCMKTS:VCSY) Hits $0.10

As you can see from the chart on the right, Vertical Computer Systems Inc. (OTCMKTS:VCSY) has been on a steady ascend over the last couple of months. The relatively small trading and dollar volumes, however, meant that not a whole lot of people were paying attention. Yesterday was a little bit different – the ticker added around 17% when a total of 7.48 million shares changed hands. VCSY closed the day at $0.10 (a new 52-week high) and the total trade value amounts to $678 thousand. Since there’s so much money at stake, we decided to see what’s going on.

At first glance, VCSY doesn’t look like the investment option you have always dreamt about. Back in 2004 their stock got suspended by the SEC because of delinquency in their reports. Now, eight years later, the filings are up-to-date, however, we get the feeling that the management team are still not really all that keen on discussing the operations with their shareholders. Over the last couple of months they have issued only one press release and even their website isn’t particularly informative. Still, the latest announcement (dated October 1) states that they have closed a licensing agreement with an entity called UniFocus, Inc. which suggests that they have at least one product already developed and that should mean that there is a source of revenues.

We were eager to open the financial statement covering the second quarter of 2013 to see if this is indeed the case and, sure enough, we can see that the revenues section does have some figures under it. The rest of the report, however, is quite depressing. Here are some of the highlights:

• cash: $36 thousand
• current assets: $480 thousand
• current liabilities: $13 million (!!!)
• quarterly revenue: $1.4 million
• quarterly net loss: $114 thousand

Revenues or no revenues, there’s no getting away from the fact that VCSY‘s balance sheet is an absolute nightmare. To make matters worse, we can see no significant increase in revenues year-over-year and while the net loss has shrunk, profitability is still quite far away. Meanwhile, they are burning through their diminishing cash reserves which, in turn, means that the working capital deficit is getting bigger by the minute.

All in all, with the figures above in mind, we’re really struggling to find any sort of long-term potential. This begs the question: “If it’s not the possibility of success, then what has been causing the ascend seen over the last couple of months?”

The answer can be found in the Legal Proceedings section of the 10-Q. In it we read that VCSY have been involved in numerous lawsuits both as a plaintiff and as a defendant. The legal actions that are drawing investors’ attention the most are patent infringement claims that the management team has filed against big names such as LG Electronics Inc, Interwoven, Inc (now a subsidiary of Hewlett-Packard Company (NYSE:HPQ)) and Samsung Electronics Co., Ltd.

There is not a whole lot of information about the proceedings available on the internet but from what we can gather, the Court ordered mediation for the case against Samsung and LG and a hearing should soon take place on the claims against Interwoven. This means that we should hear some news in the near future, but it is still unknown whether the development will be positive or not.

In the meantime, you should also keep in mind that there was a lawsuit against VCSY filed by a company called Micro Focus, Inc. The two sides decided to end the proceedings with a settlement agreement, but unfortunately, VCSY failed to stick to it. This, as you would imagine, could spell more trouble for the already distressed financial statement.

The long-term direction of the ticker will only be decided when there is some news about the rest of the actions. Until then, corrections are always a possibility which is why considering the risks involved is absolutely vital.

Other penny stocks that generated quite a lot of buzz during yesterday’s session include Pacific Clean Water Technologies, Inc. f/k/a Unseen Solar, Inc. (OTCMKTS:PCWT) who were, once again, crushed by the ongoing Awesome Penny Stocks promotion and Titan Pharmaceuticals, Inc. (OTCBB:TTNP), who after making some moves in the right direction, retraced their steps and are virtually back where they started.