VILLAGEEDOCS INC - FORM 10-K - EX-99.1

Attached files

file	filename
10-K - VILLAGEEDOCS INC	v181066_10k.htm
EX-21.1 - VILLAGEEDOCS INC	v181066_ex21-1.htm
EX-32.2 - VILLAGEEDOCS INC	v181066_ex32-2.htm
EX-32.1 - VILLAGEEDOCS INC	v181066_ex32-1.htm
EX-31.1 - VILLAGEEDOCS INC	v181066_ex31-1.htm
EX-31.2 - VILLAGEEDOCS INC	v181066_ex31-2.htm

Exhibit 99.1

VILLAGEEDOCS, INC.

Financial Statements

For the Years Ended December 31, 2009 and 2008

Together with Report of Independent Registered Public Accounting Firm

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of VillageEDOCS, Inc.

We have audited the accompanying consolidated balance sheets of VillageEDOCS, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity 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 the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VillageEDOCS, Inc. and subsidiaries at December 31, 2009 and 2008, and the 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 has incurred recurring losses from operations. This factor raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

/s/ KMJ Corbin & Company LLP

Costa Mesa, California

April 15, 2010

F-2

VillageEDOCS, Inc. and subsidiaries

Consolidated Balance Sheets

	December 31,			December 31,
	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	1,307,834		$	567,447
Accounts receivable, net of allowance for doubtful
accounts of approximately $52,000 and $47,000, respectively		405,000			573,580
Prepaid expenses and other current assets		86,925			231,501
Debt issuance costs, net		-			17,883
Current assets of discontinued operations		-			611,953
Total current assets		1,799,759			2,002,364

Property and equipment, net		217,368			303,322
Other assets		25,014			28,811
Goodwill		4,523,527			4,523,527
Other intangibles, net		2,929,508			3,569,228
Non-current assets of discontinued operations		-			3,064,171
	$	9,495,176		$	13,491,423

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	403,265		$	362,402
Current portion of accrued expenses and other liabilities		500,591			1,536,258
Deferred revenue		705,314			809,183
Lines of credit		130,592			716,234
Current portion of notes payable to related parties, net of unamortized
debt discount of $47,808 and $47,808, respectively		264,309			438,682
Convertible note and accrued interest payable to related party		-			178,370
Current liabilities of discontinued operations		-			763,355
Total current liabilities		2,004,071			4,804,484

Accrued expenses and other liabilities, net of current portion		806,045			81,318
Notes payable to related parties, net of current portion and
unamortized debt discount of $27,883 and $75,690, respectively		340,000			604,310
Derivative liability		4,650			-
Non-current liabilities of discontinued operations		-			1,737
Total liabilities		3,154,766			5,491,849

Commitments and contingencies

Stockholders' equity:
Series A Preferred stock, par value $0.001 per share:
Authorized — 48,000,000 shares
Issued and outstanding — 0 and 33,500,000 shares, respectively
(liquidation preference of $0 and $1,675,000, respectively)		-			33,500
Common stock, par value $0.0001 per share:
Authorized — 500,000,000 shares
Issued and outstanding — 226,546,613 and 180,270,913 shares, respectively		22,655			18,027
Additional paid-in capital		34,022,485			33,618,742
Accumulated deficit		(27,704,730	)		(25,670,695	)
Total stockholders' equity		6,340,410			7,999,574
	$	9,495,176		$	13,491,423

See accompanying notes to consolidated financial statements.

F-3

VillageEDOCS, Inc. and subsidiaries

Consolidated Statements of Operations

	Years Ended December 31,
	2009			2008
Net sales	$	10,291,252		$	9,799,854
Cost of sales		2,942,089			2,691,875
Gross profit		7,349,163			7,107,979
Operating expenses:
Product and technology development		1,851,477			1,535,265
Sales and marketing		1,967,083			1,624,005
General and administrative		3,993,577			4,139,953
Depreciation and amortization		828,738			743,627
Total operating expenses		8,640,875			8,042,850
Loss from continuting operations		(1,291,712	)		(934,871	)

Change in fair value of derivative liability		3,100			-
Interest expense, net of interest income		(144,579	)		(268,927	)
Other income, net		42,291			129,815
Loss from continuing operations before provision for
income taxes		(1,390,900	)		(1,073,983	)

Benefit for income taxes		(63,000	)		(80,000	)
Loss from continuing operations		(1,327,900	)		(993,983	)

(Loss) income from discontinued operations (net of income tax provision of $303,000 and $92,000, respectively)		(708,745	)		377,741
Net loss	$	(2,036,645	)	$	(616,242	)

Net income (loss) available to common shareholders
Basic	$	(2,036,645	)	$	(616,242	)
Diluted	$	(2,036,645	)	$	(616,242	)

Basic earnings (loss) per share:
Loss from continuing operations	$	(0.01	)	$	-
(Loss) income from discontinued operations	$	-		$	-
Net loss per share, basic	$	(0.01	)	$	-

Diluted earnings (loss) per share:
Loss from continuing operations	$	(0.01	)	$	-
(Loss) income from discontinued operations	$	-		$	-
Net loss per share, diluted	$	(0.01	)	$	-

Weighted average shares outstanding -
Basic		190,350,672			162,595,571
Diluted		190,350,672			197,497,477

See accompanying notes to consolidated financial statements.

F-4

VillageEDOCS and subsidiaries

Statements of Stockholders' Equity

For the Years Ended December 31, 2009 and 2008

	Series A
	Preferred Stock						Common Stock				Additional			Accumulated
	Shares			Amount			Shares		Amount		Paid-in Capital			Deficit			Total
Balances, January 1, 2008		33,500,000		$	33,500			152,770,913	$	15,277	$	32,397,585		$	(25,054,453	)	$	7,391,909

Estimated fair value of common stock issued to
employees as compensation		-			-			5,500,000		550		81,950			-			82,500
Estimated fair value of common stock
issued as acquisition cost of QSI		-			-			22,000,000		2,200		547,800			-			550,000
Estimated fair value of common stock warrants
issued in connection with consulting services		-			-			-		-		292,814			-			292,814
Estimated fair value of vested stock options		-			-			-		-		298,593			-			298,593
Net loss								-		-		-			(616,242	)		(616,242	)

Balances, December 31, 2008		33,500,000			33,500			180,270,913		18,027		33,618,742			(25,670,695	)		7,999,574

Estimated fair value of common stock issued to
employees as compensation		-			-			12,775,700		1,278		126,479			-			127,757
Conversion of preferred stock to common stock		(33,500,000	)		(33,500	)		33,500,000		3,350		30,150			-			-
Estimated effect of accounting change
for derivative liability		-			-			-		-		(8,810	)		2,610			(6,200	)
Estimated fair value of common stock warrants
issued in connection with financing activities		-			-			-		-		4,310			-			4,310
Estimated fair value of vested stock options		-			-			-		-		251,614			-			251,614
Net loss								-		-		-			(2,036,645	)		(2,036,645	)
Balances, December 31, 2009		-		$	-			226,546,613	$	22,655	$	34,022,485		$	(27,704,730	)	$	6,339,092

See accompanying notes to consolidated financial statements.

F-5

VillageEDOCS, Inc. and subsidiaries

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2009			2008
Cash Flows from Operating Activities:
Net loss	$	(2,036,645	)	$	(616,242	)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization		926,060			843,632
Provision for doubtful accounts receivable		28,992			17,667
Estimated fair value of stock options issued to
employees for services rendered		251,614			298,593
Estimated fair value of warrants issued to consultants		23,194			75,819
Change in fair value of derivative liability		(3,100	)		-
Common stock issued and issuable to employees
for services rendered		115,626			82,500
Amortization of debt discount and debt issuance costs		65,690			216,697
Loss on discontinued operations		799,013			-
Changes in operating assets and liabilities, net of
acquisitions and divestitures:
Accounts receivable		220,939			97,731
Inventories		(3,684	)		(9,043	)
Prepaid expenses and other current assets		95,050			(126,552	)
Other assets		3,797			31,806
Accounts payable		42,474			(132,250	)
Accrued expenses, other liabilities and interest		(433,650	)		(851,213	)
Deferred revenue		(41,423	)		109,329
Net cash provided by operating activities		53,947			38,474
Cash Flows from Investing Activities:

Purchases of property and equipment		(70,266	)		(134,408	)
Cash paid in acquisition of QSI, net of cash acquired		-			(286,435	)
Costs incurred for purchase of QSI		-			(227,291	)
Cash acquired from sale of TBS, net		2,090,084			-
Cash acquired from sale of PFI, net		-			53,832
Net cash provided by (used in) investing activities		2,019,818			(594,302	)
Cash Flows from Financing Activities:
(Payments) proceeds from lines of credit, net		(759,971	)		305,883
Proceeds from notes payable to related parties		865,000			300,000
Payments on notes payable to related parties		(1,351,490	)		(148,510	)
Cash paid for debt issuance costs		-			(65,000	)
Payments on capital lease obligation		(21,917	)		(19,009	)
Payments on convertible notes payable to related parties		(65,000	)		-
Net cash (used in) provided by financing activities		(1,333,378	)		373,364
Net change in cash and cash equivalents		740,387			(182,464	)

Cash and cash equivalents, beginning of year		567,447			749,911
Cash and cash equivalents, end of year	$	1,307,834		$	567,447
Supplemental disclosure of cash flow information -
Cash paid during the year for:
Interest	$	197,590		$	94,276
Income taxes	$	151,340		$	172,340

Supplemental Schedule of Noncash Investing
and Financing Activities:

Estimated fair value of common stock issued in connection with acquisition	$	-		$	550,000
Issuance of note payable to related party in acquisition	$	-		$	773,129
Cumulative effect of accounting change to accumulated deficit for derivative liabilities	$	2,610		$	-
Cumulative effect of accounting change to additional paid-in capital
for derivative liabilities	$	8,810		$	-

Conversion of preferred stock to common stock	$	33,500		$	-
Estimated fair value of warrants issued as debt issuance costs	$	-		$	149,661
Reclassification of warrant from accrued liabilities to additional
paid-in capital	$	-		$	50,000
Estimated fair value of warrants issued in connection with
consulting services	$	-		$	26,001
Reclassification of common stock issued to employees for
services from accrued liabilities to additional paid-in capital	$	98,106		$	-

See accompanying notes to consolidated financial statements.

F-6

VillageEDOCS, Inc. and subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2009 and 2008

1.	Background, Organization and Basis of Presentation

VillageEDOCS, Inc. (the “Company” or “VillageEDOCS”) was incorporated in 1995 in Delaware, reincorporated in California in 1997, and reincorporated in Delaware in September 2007. The Company has historically operated an electronic document delivery service marketed to organizations throughout the United States and internationally. On June 16, 2004, the holders of a majority of the voting capital stock of the Company voted to approve a Plan of Restructuring that included the reorganization of the Company's electronic document delivery business into a wholly owned subsidiary of the Company. In connection with the reorganization, the Company formed MessageVision, Inc. ("MVI") on October 25, 2004. Effective May 1, 2006, the Company acquired GoSolutions, Inc. ("GSI"). GSI provides enhanced voice and data communications services including speech-driven messaging, unified communications, and audio conferencing applications. Effective August 1, 2008, the Company acquired Decision Management Company, Inc. dba Questys Solutions (“QSI” or “Questys”). QSI provides products and services for document and content management, automated data capture, electronic agenda management, and business process workflow. On February 17, 2004, the Company acquired Tailored Business Systems, Inc. ("TBS"), which it subsequently sold effective December 4, 2009. Effective April 1, 2005, the Company acquired Phoenix Forms, Inc. dba Resolutions ("PFI" or "Resolutions"), which it subsequently sold effective December 1, 2007. The consolidated financial statements include the accounts of the Company and those of MVI, TBS, GSI, and QSI, its wholly owned subsidiaries, since October 25, 2004, February 17, 2004, May 1, 2006, and August 1, 2008, respectively. The results of operations of TBS are included through December 4, 2009. See Note 5 for additional information regarding the acquisition of QSI and the Company’s accounting for TBS as a discontinued operation. All significant inter-company transactions and balances have been eliminated in consolidation.

2.	Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant losses since inception. The Company’s losses are continuing and may continue until such time as the Company is able to sufficiently expand its existing businesses or is able to consummate business combination transactions with other businesses whose profits are sufficient to offset any ongoing losses from operating the holding company that owns QSI, GSI, and MVI.

The Company’s success is dependent upon numerous items, certain of which are the successful growth of revenues from its products and services, its ability to obtain new customers in order to achieve levels of revenues adequate to support the Company’s current and future cost structure, and its success in obtaining financing for equipment and operations, for which there is no assurance. Unanticipated problems, expenses, and delays are frequently encountered in establishing and maintaining profitable operations. These include, but are not limited to, competition, the need to develop customer support capabilities and market expertise, setbacks in product development, technical difficulties, market acceptance and sales and marketing. The failure of the Company to meet any of these conditions could have a materially adverse effect on the Company and may force the Company to reduce or curtail operations. No assurance can be given that the Company can achieve or maintain profitable operations.

F-7

VillageEDOCS, Inc. and subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2009 and 2008

The Company believes it will have adequate cash to sustain operations until it achieves sustained profitability. However, until the Company has a history of maintaining revenue levels sufficient to support its operations and repay its working capital deficit, the Company may require additional financing. Sources of financing could include capital infusions, additional equity financing or debt offerings. Although cash flows from operations improved during 2009 to a level sufficient to support operating expenses, we do not expect that such levels will continue until at least the fourth quarter of 2010. Should such cash flows decrease for any reason, management plans to obtain debt and equity financing from new and existing stockholders. There can be no assurance that funding will be available on acceptable terms, if at all, or that such funds, if raised, would enable the Company to achieve or sustain profitable operations.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the classification of liabilities that might result from the outcome of these uncertainties.

3.	Summary of Significant Accounting Policies

Segments of an Enterprise and Related Information

The Company reports information about segments of its business in its annual financial statements and reports selected segment information in its quarterly reports issued to stockholders. The Company also reports on its entity-wide disclosures about the products and services that it provides, the material countries in which it holds assets and reports revenues and its major customers. The Company's four reportable segments are managed separately based on fundamental differences in their operations. At December 31, 2009, the Company operated in the following four reportable segments (see Note 12):

(a) Electronic document delivery services,

(b) Electronic content management solutions,

(d) Corporate.

The Company evaluates performance and allocates resources based upon operating income. The accounting policies of the reportable segments are the same as those described in this summary of significant accounting policies.

Concentration of Credit Risk

The Company extends credit to its customers and performs ongoing credit evaluations of such customers. The Company does not obtain collateral to secure its accounts receivable. MVI and GSI generally require a valid credit card or ACH debit account to collateralize credit extended to non-corporate clients. The Company evaluates its accounts receivable on a regular basis for collectibility and provides for an allowance for potential credit losses as deemed necessary. At December 31, 2009 and 2008, the Company has recorded an allowance for doubtful accounts of approximately $52,000 and $47,000, respectively.

F-8

VillageEDOCS, Inc. and subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2009 and 2008

For the years ended December 31, 2009 and 2008, independent representatives of one customer accounted for approximately 30% and 37%, respectively, of total revenue from continuing operations. For the years ended December 31, 2009 and 2008, independent representatives of another customer accounted for approximately 20% and 16%, respectively, of total revenue from continuing operations.

One customer accounted for 23% of total accounts receivable at December 31, 2009. No single customer accounted for more than 10% of accounts receivable at December 31, 2008.

At times, deposits held with financial institutions may exceed the amount of insurance provided on such deposits by the Federal Deposit Insurance Corporation (“FDIC”) which provides deposit coverage with limits up to $250,000 per owner through December 31, 2013. As of December 31, 2009 and 2008, the Company had a balance of approximately $805,000 and $44,000, respectively, in excess of the FDIC limit.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management are, among others, the realizability of accounts receivable, valuation of inventories, recoverability of long-lived assets, and valuation of derivative liabilities, stock options, warrants, and deferred taxes. Actual results could differ from those estimates.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years. Equipment under capital lease obligations is depreciated over the shorter of the estimated useful life or the term of the lease. Major betterments and renewals are capitalized, while routine repairs and maintenance are charged to expense when incurred.

F-9

VillageEDOCS, Inc. and subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2009 and 2008

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, title transfer has occurred, or services have been performed, the price is fixed or readily determinable and collectibility is probable. Sales are recorded net of sales discounts.

The Company recognizes revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair market values of each of the elements. The fair value of an element must be based on vendor-specific objective evidence (“VSOE”) of fair value. Software license revenue generated by QSI, allocated to a software product is recognized upon delivery of the product, or deferred and recognized in future periods to the extent that an arrangement includes one or more elements that are to be delivered at a future date and for which VSOE has not been established. Maintenance and support revenue is recognized ratably over the maintenance term. First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. Estimated fair values of ongoing maintenance and support obligations are based on separate sales of renewals to other customers or upon renewal rates quoted in the contracts. For such arrangements with multiple obligations, the Company allocates revenue to each component of the arrangement based on the estimated fair value of the undelivered elements. Fair value of services, such as consulting or training, is based upon separate sales of these services. The Company at times may enter into multiple-customer contracts in which the Company allocates revenue based on the number of specified users at each customer, and recognizes revenue upon customer acceptance and satisfying the other applicable conditions of the above described accounting policy.

Services revenue is recognized as the service is performed assuming that sufficient evidence exists to estimate the fair value of the services. Consulting and training services are billed based on contractual hourly rates and revenues are recognized as the services are performed. Consulting services primarily consist of implementation services related to the installation of the Company’s products which do not require significant customization to or modification of the underlying software code.

Revenue from subscription agreements consists of fixed monthly fees and usage charges, generally based on per minute rates. Subscription agreement revenue related to QSI, MVI and GSI usage service charges are billed monthly in arrears and the associated revenues are recognized in the month of service. Recurring charges for the GoSolo (TM) platform are billed in advance on a monthly basis and recorded as deferred revenues. The Company recognizes subscription agreement revenue ratably over the service period, which management believes approximates the actual provision of services. Professional service fee revenue consists of consulting fees charged to enterprise clients for GoSolo(TM) platform enhancements. The Company recognizes professional service fee revenue on a time and materials basis over the service period, which management believes approximates the actual provision of services. Wholesale enhanced voicemail services consists of fees charged to telecommunications providers for use of the GoSolo(TM) platform to provide their customers with hosted electronic voicemail, billed monthly in arrears and the associated revenues are recognized in the month of service.

F-10

VillageEDOCS, Inc. and subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2009 and 2008

Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. If the Company made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue recognized could result.

Product and Technology Development

Product and technology development expense includes personnel costs relating to developing the features, content and functionality of QSI’s electronic content management solutions, MVI's internet-enabled fax services and web site, and GSI's communications services. Product and technology development costs are expensed as incurred.

Advertising

The Company expenses all advertising costs as incurred. Advertising costs were $68,191 and $28,628 from continuing operations, and $30,444 and $35,923 from discontinued operations, for the years ended December 31, 2009 and 2008, respectively.

Risks and Uncertainties

The Company operates in industries that are subject to intense competition, government regulation and rapid technological change. The Company’s operations are subject to significant risks and uncertainties including financial, operational, technological, regulatory and other risks associated with an operating business, including the potential risk of business failure.

Fair Value of Financial Instruments

The carrying amount of certain of the Company's financial instruments as of December 31, 2009 and 2008 approximate their respective fair values because of the short-term nature of these instruments. Such instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, capital lease obligation, lines of credit, and notes payable. The fair value of convertible notes payable to related party is not determinable as the borrowings are with a related party.

Earnings (Loss) per Share

Basic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional common shares were dilutive. All potentially dilutive shares, approximately 2,000,000 and 35,000,000 as of December 31, 2009 and 2008, respectively, have been excluded from diluted loss per share, as their effect would be anti-dilutive for the years then ended.

F-11

VillageEDOCS, Inc. and subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2009 and 2008

Comprehensive Income

The Company has no items of comprehensive income.

Cash and Cash Equivalents

All highly liquid instruments purchased with a maturity of three months or less at the time of purchase are considered cash equivalents.

Income Taxes

The Company accounts for income taxes in accordance with the asset and liability method for financial accounting and reporting purposes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

Stock-Based Compensation

At December 31, 2009, the Company had two stock-based compensation plans.

All share-based payments to employees, including grants of employee stock options and restricted stock grants, are recognized in the consolidated financial statements based upon their fair values. The Company uses the Black-Scholes option pricing model to estimate the grant-date fair value of share-based awards. Fair value is determined at the date of grant. The consolidated financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual effect differs from those estimates. The estimated average forfeiture rate for the years ended December 31, 2009 and 2008, of approximately 14%, and 17%, respectively, was based on historical forfeiture experience and estimated future employee forfeitures.

The cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows. Due to the Company’s loss position, there were no such tax benefits during the years ended December 31, 2009 and 2008.

Description of Plans

The Company’s equity incentive plans provide for awards of common stock and grants of options to employees and directors of the Company to purchase the Company’s shares, as determined by management and the board of directors, at or above the fair value of such shares on the grant date. The options generally vest over a five-year period beginning on the grant date and have a seven-year term. As of December 31, 2009, the Company is authorized to issue up to 95,000,000 shares under these plans and has approximately 49,100,000 shares available for future issuances.

F-12

VillageEDOCS, Inc. and subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2009 and 2008

Summary of Assumptions and Activity

The fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model even though the model was developed to estimate the fair value of freely tradeable, fully transferable options without vesting restrictions, which differ significantly from the Company’s stock options. The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the pricing term of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company’s stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods. The fair value of options granted was estimated using the following weighted average assumptions:

	2009	2008
Stock options:
Expected term (in years)	6.0	6.0
Expected volatility	182% -202%	258% - 273%
Risk-free interest rate	2.3%	3.0%
Dividend yield	-	-

A summary of option activity as of December 31, 2009 and changes during the year then ended, is presented below:

	December 31, 2009
				Weighted-Average
						Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term (Years)		Value
Options outstanding at January 1, 2009		42,730,939		$	0.17
Options granted		3,050,000		$	0.01
Options cancelled/forfeited		(4,690,000	)	$	0.10
Options expired		(719,963	)	$	1.07
Options exercised		-		$	-
Options outstanding at December 31, 2009		40,370,976		$	0.15		4.4	$	8,391
Options vested or expected to vest		38,799,875		$	0.15		4.3	$	6,036
Options exercisable at December 31, 2009		27,970,976		$	0.19		3.7	$	492

F-13

VillageEDOCS, Inc. and subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2009 and 2008

The weighted-average grant date fair value of options granted during 2009 and 2008 was $0.01 and $0.04 per option, respectively. Upon the exercise of options, the Company issues new shares from its authorized shares.

As of December 31, 2009, there was approximately $380,000 of total unrecognized compensation cost, net of forfeitures, related to employee and director stock option compensation arrangements. That cost is expected to be recognized on a straight-line basis over the next 2.6 weighted average years. The total fair value of vested options issued to employees and directors during the years ended December 31, 2009 and 2008 was $226,044 and $244,253, respectively, for continuing operations, and $25,570 and $54,340, respectively, for discontinued operations, net of an estimated forfeiture rate of 14% and 17%, respectively.

The expense was recorded in the accompanying consolidated statements of operations as follows:

	Years Ended December 31,
	2009		2008
Cost of sales	$	31,317	$	4,601
General and administrative		159,793		200,486
Sales and marketing		13,032		19,679
Product and technology		21,902		19,487
Discontinued operations		25,570		54,340
	$	251,614	$	298,593

The measurement date for the fair value of the equity instruments issued to consultants and vendors in exchange for goods and services is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

All issuances of the Company's stock to non-employees as non-cash consideration are valued at the market value of the shares issued or the value of consideration received whichever is more readily determinable. The majority of the non-cash consideration received pertains to services rendered by consultants and others and has been valued at the market value of the shares issued.

Inventories

Inventories consist primarily of supplies, forms, envelopes, and software licenses purchased for resale. Cost is determined on a first-in, first-out basis. The Company periodically reviews its inventory quantities on hand and adjusts for excess and obsolete inventory based primarily on historical usage rates and its estimated forecast of product demand. Actual demand may differ from the Company's estimates. Once established, write-downs of inventory are considered permanent adjustments to the basis of the excess or obsolete inventory.

F-14

VillageEDOCS, Inc. and subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2009 and 2008

Goodwill and Other Intangible Assets

Goodwill represents the excess of acquisition cost over the net assets acquired in a business combination and is not amortized. The Company allocates its goodwill to its various reporting units, determines the carrying value of those businesses, and estimates the fair value of the reporting units so that a two-step goodwill impairment test can be performed. In the first step of the goodwill impairment test, the fair value of each reporting unit is compared to its carrying value. Management reviews, on an annual basis, the carrying value of goodwill in order to determine whether impairment has occurred. Impairment is based on several factors including the Company's projection of future discounted operating cash flows. If an impairment of the carrying value were to be indicated by this review, the Company would perform the second step of the goodwill impairment test in order to determine the amount of goodwill impairment, if any.

The changes in the carrying amount of goodwill for the year ended December 31, 2009 are as follows (see Note 5):

Balance, January 1, 2009	$	7,244,732
Goodwill of TBS disposed		2,721,205
Balance, December 31, 2009	$	4,523,527

The Company performed an impairment test on goodwill as of December 31, 2009. Based on its analysis as of December 31, 2009, the Company's management believes there is no impairment of its goodwill. There can be no assurance, however, that market conditions will not change or demand for the Company's products or services will continue, which could result in impairment of goodwill in the future.

Identifiable intangibles acquired in connection with business acquisitions are recorded at their respective fair values (see Note 5). Deferred income taxes have been recorded to the extent of differences between the fair value and the tax basis of the assets acquired and liabilities assumed.

Long-Lived Assets

In the event that facts and circumstances indicate that equipment or other long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if an impairment charge is necessary. The amount of long-lived asset impairment, if any, is charged to operations in the period in which long-lived asset impairment is determined. At December 31, 2009 and 2008, management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Company's products or services will continue, which could result in impairment of long-lived assets in the future.

F-15

VillageEDOCS, Inc. and subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2009 and 2008

Warranty Costs

The Company provides a limited 90 day warranty on certain products sold. Estimated future warranty obligations related to certain products and services are provided by charges to operations in the period in which the related revenue is recognized. As of December 31, 2009 and 2008, management of the Company determined that a warranty reserve was not necessary. In addition, the charges to expense during the years ended December 31, 2009 and 2008 were insignificant.

Derivative Liability

Effective January 1, 2009, the Company adopted the provisions of an accounting pronouncement which applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result of adopting this pronouncement, 310,000 of issued and outstanding common stock purchase warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. These warrants have an exercise price of $0.01, as amended, and expire in February 2018. As such, effective January 1, 2009, the Company reclassified the fair value of these common stock purchase warrants, which have exercise price reset features, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue in 2008. On January 1, 2009, the Company reclassified from additional paid-in capital, as a cumulative effect adjustment, $2,610 to beginning retained earnings and $6,200 to a long-term derivative liability to recognize the fair value of such warrants on such date. During 2009, the Company issued an additional 155,000 warrants valued at $1,550 using the Black-Scholes option pricing model and recorded as general and administrative expense in the accompanying consolidated statements of operations and as a derivative liability on the accompanying consolidated balance sheet. The fair value of the 465,000 common stock purchase warrants declined to $4,650 as of December 31, 2009. As such, the Company recognized a $3,100 gain from the change in fair value of these warrants for the year ended December 31, 2009.

These common stock purchase warrants were initially issued in connection with a line of credit with a financial institution. The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, the Company estimates the fair value of these warrants using the Black-Scholes option pricing model using the following weighted average assumptions:

	December 31,			January 1,
	2009			2009
Annual dividend yield		—			—
Expected life (years)		8.11			9.70
Risk-free interest rate		3.62	%		2.46	%
Expected volatility		186	%		190	%

							December 31,
	Level 1		Level 2		Level 3		2009
Fair value of warrants	$	—	$	—	$	4,650	$	4,650

Total	$	—	$	—	$	4,650	$	4,650

Balance at December 31, 2008	$	—
Cumulative effect of EITF 07-5		6,200
Issuance of warrants		1,550
Change in fair value		(3,100	)

Balance at December 31, 2009	$	4,650

	Year			Year
	Ended			Ended
	December 31, 2009			December 31, 2008
Results of discontinued operations
Net sales	$	4,405,978		$	5,376,539
Income before income taxes	$	393,268		$	469,741

Loss on sale of discontinued operations:
Sales price, net	$	2,130,147		$	-
Net assets sold		(2,929,160	)		-
Loss on sale	$	(799,013	)	$	-

Income (loss) from discontinued operations before income taxes	$	(405,745	)	$	469,741
Provision (benefit) for income taxes		303,000			92,000
Income (loss) from discontinued operations	$	(708,745	)	$	377,741

	December 31,
	2008
Accounts receivable, net	$	520,026
Inventories		41,031
Prepaid expenses and other current assets		50,896
Current assets of discontinued operations		611,953
Property and equipment, net		85,466
Goodwill		2,721,205
Other intangibles, net		257,500
Non-current assets of discontinued operations		3,064,171
Assets of discontinued operations	$	3,676,124

Accounts payable	$	151,684
Current portion of accrued expenses and other liabilities		220,341
Deferred revenue		217,001
Lines of credit		174,329
Current liabilities of discontinued operations		763,355
Capital lease		1,737
Liabilities of discontinued operations	$	765,092

Cash paid at closing	$	300,000
Promissory note to seller, net of debt discount of $126,871		773,129
Estimated fair value of VillageEDOCS' common stock		550,000
Legal, accounting, and other costs		227,291
	$	1,850,420

Cash	$	13,565
Accounts receivable		309,887
Prepaid expenses and other current assets		55,298
Property and equipment		95,587
Other assets		12,006
Total liabilities		(1,008,198	)
Net tangible liabilities assumed		(521,855	)

Identifiable intangibles:
Trade name		210,000
Technology		390,000
Customer relationships		730,000
Covenant Not to Compete		70,000
Goodwill		972,275
	$	1,850,420

	Year
	Ended
	December 31, 2008
Net sales	$	11,565,584
Net loss	$	(620,065	)
Weighted average common shares
outstanding:
basic and diluted		175,433,927
Loss per share:
basic and diluted	$	-

	Estimated Useful	Gross					Net
	Life	Carrying		Accumulated			Carrying
	(Years)	Amount		Amortization			Amount
Corporate:
License agreement	Five	$	250,000	$	(187,492	)	$	62,508

QSI:
Customer relationships	Ten	$	730,000	$	(103,417	)	$	626,583
Technology	Five		390,000		(110,500	)		279,500
Trade name	Five		210,000		(59,500	)		150,500
Covenant not to compete	Two		70,000		(49,583	)		20,417
		$	1,400,000	$	(323,000	)	$	1,077,000
GSI:
Customer relationships	Ten	$	2,200,000	$	(806,667	)	$	1,393,333
Technology	Five		490,000		(359,333	)		130,667
Trade names and marks	Ten		420,000		(154,000	)		266,000
		$	3,110,000	$	(1,320,000	)	$	1,790,000

		$	4,760,000	$	(1,830,492	)	$	2,929,508

Years Ending December 31,

2010	$	625,000
2011		498,000
2012		455,000
2013		405,000
2014		335,000
Thereafter		611,000
	$	2,929,000

				Weighted Average
	Number			Exercise Price
	of Warrants			Per Share
Outstanding at January 1, 2009		10,017,643		$	0.07
Granted		390,000			0.01
Exercised		-			-
Expired/Forfeited		(653,214	)		(0.08	)
Balance at December 31, 2009		9,754,429		$	0.07

Weighted average fair value of warrants granted in 2009:	$	0.01
Weighted average fair value of warrants granted in 2008:	$	0.05

		December 31			December 31
		2009			2008
Current:
	Federal	$	(38,000	)	$	(52,000	)
	State		(25,000	)		(28,000	)
			(63,000	)		(80,000	)

Deferred:
	Federal		-			-
	State		-			-

		$	(63,000	)	$	(80,000	)

	December 31,			December 31,
Deferred tax assets:	2009			2008

Net operating loss carryforwards	$	9,354,000		$	9,416,000
Accrued expenses		92,000			141,000
Other		74,000			(31,000	)
Less valuation allowance		(8,424,000	)		(8,265,000	)
	$	1,096,000		$	1,261,000

Deferred tax liabilities:

Purchased Intangibles	$	(1,083,000	)	$	(1,246,000	)
Property and equipment and intangibles		(13,000	)		(15,000	)
Total deferred tax liabilities		(1,096,000	)		(1,261,000	)
Net deferred tax assets (liabilities)	$	-		$	-

	2009			2008
Computed benefit at federal statutory rate	$	(438,000	)	$	(243,000	)
State income tax benefit, net of federal effect		(46,000	)		2,000
Permanent items		98,000			196,000
Other		47,000			(61,000	)
Uncertain tax positions reserve		110,000			81,000
Payable adjustment		(8,000	)		(169,000	)
State net operating loss adjustment		(1,000	)		197,000
State effective tax rate adjustment		16,000			146,000
Change in valuation allowance		159,000			(229,000	)
	$	(63,000	)	$	(80,000	)

Balance at January 1, 2008	$	-
Additions based on tax positions related to the current year		81
Additions based on tax positions of prior years		-
Balance at December 31, 2008		81
Additions based on tax positions related to the current year		110
Additions based on tax positions related to the prior year		-
Reductions as a result of lapse of applicable statute of limitations		-
Balance at December 31, 2009	$	191

	Numerator			Denominator		Per Share
	(Loss)			(Shares)		Amount
Basic earnings per share:
Net loss	$	(616,242	)		-	$	-
Loss available to common shareholders		(616,242	)		162,595,571		-

Effect of dilutive securities:
Options and warrants		-			127,835		-
Convertible note payable to related party		-			1,274,071		-
Convertible preferred stock		-			33,500,000		-

Diluted earnings per share:
Loss available to common shareholders plus assumed exercises	$	(616,242	)		197,497,477	$	-

	Operating Leases
	Related Parties		Other		Total

2010	$	165,000	$	326,000	$	491,000
2011		55,000		186,000		241,000
2012		-		77,000		77,000
2013		-		11,000		11,000
Total minimum lease payments	$	220,000	$	600,000	$	820,000

	Year			Year
	ended / As of			ended / As of
	December 31			December 31
	2009			2008

Net revenue from external customers:

Electronic document delivery services	$	2,576,842		$	2,761,147
Electronic content management solutions		2,157,280			979,553
Integrated communications		5,557,130			6,059,154
Corporate		-			-
Total net revenue from external customers:	$	10,291,252		$	9,799,854

Operating income (loss) from continuing operations:

Electronic document delivery services	$	519,948		$	295,534
Electronic content management solutions		(638,676	)		(33,926	)
Integrated communications		753,019			1,102,461
Corporate		(1,926,416	)		(2,298,940	)
Total operating loss from continuing operations:	$	(1,292,125	)	$	(934,871	)

Depreciation and amortization from continuing operations:

Electronic document delivery services	$	74,026		$	89,154
Electronic content management solutions		264,781			111,646
Integrated communications		438,209			491,106
Corporate		51,722			51,721
Total depreciation and amortization:	$	828,738		$	743,627

Interest expense, net of interest income:

Electronic document delivery services	$	16,580		$	6,507
Electronic content management solutions		23,344			6,507
Integrated communications		51			(408	)
Corporate		104,604			256,321
Total interest expense, net of interest income:	$	144,579		$	268,927

VILLAGEEDOCS INC - FORM 10-K - EX-99.1 - April 15, 2010

Attached files