###### ** **

 

 

 

 

 

 

###### Exhibit 99.1

 

 

### VILLAGEEDOCS, INC.

###  

** **

** **

###### Financial Statements

Forthe Years Ended December 31, 2007 and 2006

Togetherwith Report of Independent Registered Public Accounting Firm

** **

F-1

----

 

 

 

 

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

To the Boardof Directors of VillageEDOCS, Inc.

 

We haveaudited the accompanying consolidated balance sheet of VillageEDOCS, Inc. andsubsidiaries (the"Company") as of December 31, 2007,and the related consolidated statements of operations, stockholders' equity andcash flows for each of the years in the two-year period then ended. Theseconsolidated financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits. 

 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements. The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financialreporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company's internal control over financial reporting.Accordingly, we express no such opinion.  An audit also includes assessing theaccounting principles used and significant estimates made by management, as wellas evaluating the overall consolidated financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of VillageEDOCS, Inc.and subsidiaries at December 31, 2007, and the results of their operations andtheir cash flows for each of the years in the two-year period then ended inconformity with accounting principles generally accepted in the United Statesof America.

 

As describedin Note 3 to the consolidated financial statements, effective January 1, 2006,the Company changed its method of accounting for share-based compensation toadopt Statement of Financial Accounting Standards No. 123(R), *Share-BasedPayment.*

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern.  As discussed in Note 3 to theconsolidated financial statements, the Company has incurred recurring lossesand has a working capital deficit of $2,279,882.  These factors raise substantialdoubt about the Company's ability to continue as a going concern.  Management'splans in regard to these matters are also described in Note 2.  The consolidatedfinancial statements do not include any adjustments relating to therecoverability and classification of asset carrying amounts or the amount andclassification of liabilities that might result should the Company be unable tocontinue as a going concern.

 

 

/s/ KMJ Corbin& Company LLP

Irvine, California

March 31, 2008

F-2

----

 

 

 

 

 

 

| **VillageEDOCS,  Inc. and subsidiaries**                                                      |   |                   |
|-----------------------------------------------------------------------------------------------|--------|------------------------|
| **Consolidated  Balance Sheet**                                                               |   |                   |
| ** **                                                                                    |   |                   |
|                                                                                          |   | **December 31, ** |
|                                                                                          |   | **2007 **         |
| **ASSETS**                                                                                    |   |                   |
| Current  assets:                                                                              |   |                   |
| Cash                                                                                          |   |  $                | 749,911  |
| Accounts  receivable, net of allowance for doubtful                                           |   |                   |
| accounts  of approximately $49,000                                                            |   | 899,117           |
| Inventories                                                                                   |   | 31,988            |
| Prepaid  expenses and other current assets                                                    |   | 193,557           |
| Total  current assets                                                                         |   | 1,874,573         |
|                                                                                          |   |                   |
| Property and  equipment, net                                                                  |   | 379,192           |
| Other assets                                                                                  |   | 48,611            |
| Goodwill                                                                                      |   | 6,272,457         |
| Other  intangibles, net                                                                       |   | 2,993,449         |
|                                                                                          |   |  $                | 11,568,282  |
|                                                                                          |   |                   |
|                                                                                          |   |                   |
| **LIABILITIES  AND STOCKHOLDERS' EQUITY**                                                     |   |                   |
| Current  liabilities:                                                                         |   |                   |
| Accounts  payable                                                                             |   |  $                | 561,845  |
| Accrued  expenses                                                                             |   | 2,491,416         |
| Deferred  revenue                                                                             |   | 425,636           |
| Capital  lease obligation, current                                                            |   | 19,008            |
| Lines  of credit                                                                              |   | 484,680           |
| Convertible  note and accrued interest payable to                                             |   |                   |
| related  party                                                                                |   | 171,870           |
|         Total  current liabilities                         |   | 4,154,455         |
|                                                                                          |   |                   |
| Capital lease  obligation, net of current portion                                             |   | 21,918            |
|                                                                                          |   |                   |
|         Total  liabilities                                 |   | 4,176,373         |
|                                                                                          |   |                   |
| Commitments  and contingencies                                                                |   |                   |
|                                                                                          |   |                   |
| Stockholders'  equity:                                                                        |   |                   |
| Series  A Preferred stock, par value $0.001 per share:                                        |   |                   |
| Authorized   -- 48,000,000 shares                                                        |   |                   |
|         Issued  and outstanding --  33,500,000 shares |   | 33,500            |
| (liquidation  preference of $1,675,000)                                                       |   |                   |
| Common  stock, par value $0.0001 per share:                                                   |   |                   |
| Authorized  -- 500,000,000 shares                                                             |   |                   |
|         Issued  and outstanding -- 152,770,913 shares      |   | 15,277            |
| Additional  paid-in capital                                                                   |   | 32,397,585        |
| Accumulated  deficit                                                                          |   | (25,054,453)           |
| Total  stockholders' equity                                                                   |   | 7,391,909         |
|                                                                                          |   |  $                | 11,568,282  |
| See  accompanying notes to consolidated financial statements.                                 |   |                   |

F-3

----

 

 

 

 

 

 

| **VillageEDOCS,  Inc. and subsidiaries**                      | ** ** |                         |             |              |
|---------------------------------------------------------------|------------|------------------------------|------------------|-------------------|
| **Consolidated  Statements of Operations**                    | ** ** |                         |             |              |
| ** **                                                    | ** ** |                         |             |              |
| ** **                                                    | ** ** | **Years Ended December 31,** |
|                                                          |       | **2007**                     | ** **       | **2006**          |
| Net sales                                                     |       |  $                      | 14,180,658  |              |  $ | 10,742,096  |
| Cost of sales                                                 |       | 5,611,387               |             | 4,315,122    |
| Gross  profit                                                 |       | 8,569,271               |             | 6,426,974    |
| Operating  expenses:                                          |       |                         |             |              |
| Product  and technology                                       |       |                         |             |              |
| development                                                   |       | 1,724,724               |             | 1,425,435    |
| Sales  and marketing                                          |       | 1,975,315               |             | 1,153,245    |
| General  and administrative                                   |       | 5,758,493               |             | 4,129,010    |
| Depreciation  and amortization                                |       | 791,365                 |             | 599,885      |
| Total  operating expenses                                     |       | 10,249,897              |             | 7,307,575    |
| Loss  from operations                                         |       | (1,680,626)                  |             | (880,601)         |
|                                                          |       |                         |             |              |
| Interest  expense, net of interest income                     |       | (111,561)                    |             | (105,786)         |
| Other income                                                  |       | 43,381                  |             | 40,099       |
| Loss  before provision for                                    |       |                         |             |              |
| income  taxes                                                 |       | (1,748,806)                  |             | (946,288)         |
|                                                          |       |                         |             |              |
| Benefit  (provision) for income taxes                         |       | 89,000                  |             | (14,005)          |
| Loss  from continuing operations                              |       |  $                      | (1,659,806)      |              |  $ | (960,293) |
|                                                          |       |                         |             |              |
| (Loss) income  from discontinued operations                   |       |                         |             |              |
| (net  of income tax provision of $485,000 and $0)             |       | (1,625,424)                  |             |  $           | 78,161  |
|                                                          |       |                         |             |              |
| Net  loss                                                     |       |  $                      | (3,285,230)      |              |  $ | (882,132) |
|                                                          |       |                         |             |              |
| Basic and  diluted loss available to                          |       |                         |             |              |
| common  stockholders per common share                         |       |                         |             |              |
| Loss  from continuing operations                              |       |  $                      | (0.01)           |              |  $ | (0.01) |
| Income  (loss) from discontinued operations                   |       |  $                      | (0.01)           |              | -    |
| Loss  per share                                               |       |  $                      | (0.02)           |              |  $ | (0.01) |
|                                                          |       |                         |             |              |
| Weighted  average shares outstanding -                        |       |                         |             |              |
|   basic and  diluted                                     |       | 150,218,437             |             | 131,185,095  |
|                                                          |       |                         |             |              |
|                                                          |       |                         |             |              |
| See  accompanying notes to consolidated financial statements. |       |                         |             |

 

 

 

 

 

 

F-4

----

 

 

 

 

 

 
| **VillageEDOCS  and subsidiaries**                   |   |                |   |                |         |                |             |                |    |                |   |                |             |                |
|------------------------------------------------------|--------|---------------------|--------|---------------------|--------------|---------------------|------------------|---------------------|---------|---------------------|--------|---------------------|------------------|---------------------|
| **Statements  of Stockholders' Equity**              |   |                |   |                |         |                |             |                |    |                |   |                |             |                |
| **For  the Years Ended December 31, 2007 and 2006**  |   |                |   |                |         |                |             |                |    |                |   |                |             |                |
|                                                 |   |                |   |                |         |                |             |                |    |                |   |                |             |                |
|                                                 |   | Series A            |   |                |         |                |             |                |    |                |
|                                                 |   | Preferred Stock     |   | Common Stock        |         | Additional          |             | Accumulated         |    |                |
|                                                 |   | Shares              |   | Amount              |         | Shares              |             | Amount              |    | Paid-in Capital     |   | Deficit             |             | Total               |
| Balances,  January 1, 2006                           |   | 13,500,000     |   |  $             | 13,500  |                | 99,167,526  |                |  $ | 9,917          |   |  $             | 26,542,554  |                |  $ | (20,887,091) |   |  $ | 5,678,880  |
|                                                 |   |                |   |                |         |                |             |                |    |                |   |                |             |                |
| Estimated  fair value of common stock issued to      |   |                |   |                |         |                |             |                |    |                |   |                |             |                |
| employees as compensation                            |   | -    |   | -    |         | 66,000         |             | 7              |    | 7,253          |   | -    |             | 7,260          |
| Estimated  fair value of common stock                |   |                |   |                |         |                |             |                |    |                |   |                |             |                |
| issued as acquisition cost of TBS                    |   | -    |   | -    |         | 2,200,000      |             | 220            |    | 241,780        |   | -    |             | 242,000        |
| Estimated  fair value of common stock issued as      |   |                |   |                |         |                |             |                |    |                |   |                |             |                |
| acquisition cost of TBS                              |   | -    |   | -    |         | 110,000        |             | 11             |    | 12,089         |   | -    |             | 12,100         |
| Estimated  fair value of common stock                |   |                |   |                |         |                |             |                |    |                |   |                |             | -    |
| issued as acquisition cost of GSI                    |   | -    |   | -    |         | 42,663,879     |             | 4,266          |    | 4,262,122      |   | -    |             | 4,266,388      |
| Estimated  fair value of common stock issued         |   |                |   |                |         |                |             |                |    |                |   |                |             |                |
|     in connection with consulting services |   | -    |   | -    |         | 660,722        |             | 66             |    | 67,435         |   | -    |             | 67,501         |
| Issuance  of preferred stock in consideration        |   |                |   |                |         |                |             |                |    |                |   |                |             |                |
|    for cancellation of common stock warrants    |   | 22,500,000     |   | 22,500         |         | -    |             | -    |    | (22,500)            |   | -    |             | -    |
| Conversion  of preferred stock to common stock       |   | (2,500,000)         |   | (2,500)             |         | 2,500,000      |             | 250            |    | 2,250          |   | -    |             |                |
| Estimated  fair value of vested stock options        |   | -    |   | -    |         | -    |             | -    |    | 557,111        |   | -    |             | 557,111        |
| Net  loss                                            |   |                |   |                |         | -    |             | -    |    | -    |   | (882,132)           |             | (882,132)           |
|                                                 |   |                |   |                |         |                |             |                |    |                |   |                |             |                |
| Balances,  December 31, 2006                         |   | 33,500,000     |   | 33,500         |         | 147,368,127    |             | 14,737         |    | 31,670,094     |   | (21,769,223)        |             | 9,949,108      |
|                                                      |        |                     |        |                     |              |                     |                  |                     |         |                     |        |                     |                  |                     |  |  |  |  |  |

 

   Continued.

F-5

----

 

 

 

 

 

 
|                                                 |   | Series A            |   |                |         |                |              |                |    |                |
|------------------------------------------------------|--------|---------------------|--------|---------------------|--------------|---------------------|-------------------|---------------------|---------|---------------------|
|                                                 |   | Preferred Stock     |   | Common Stock        |         | Additional          |              | Accumulated         |    |                |
|                                                 |   | Shares              |   | Amount              |         | Shares              |              | Amount              |    | Paid-in Capital     |   | Deficit |   | Total |
| Estimated  fair value of common stock issued to      |   |                |   |                |         |                |              |                |    |                |   |   |   |   |
| employees as compensation                            |   | -    |   | -    |         | 66,000         |              | 6              |    | 2,634          |   | -    |   | 2,640  |
| Estimated  fair value of common stock                |   |                |   |                |         |                |              |                |    |                |   |   |   |   |
| issued as acquisition cost of TBS                    |   | -    |   | -    |         | 2,200,000      |              | 220            |    | 87,780         |   | -    |   | 88,000  |
| Estimated  fair value of common stock issued as      |   |                |   |                |         |                |              |                |    |                |   |   |   |   |
| acquisition cost of TBS                              |   | -    |   | -    |         | 110,000        |              | 11             |    | 4,389          |   | -    |   | 4,400  |
| Estimated  fair value of common stock issued         |   |                |   |                |         |                |              |                |    |                |   |   |   |   |
|     in connection with consulting services |   | -    |   | -    |         | 1,026,786      |              | 103            |    | 73,468         |   | -    |   | 73,571  |
| Issuance  of common stock in consideration           |   |                |   |                |         |                |              |                |    |                |   |   |   |   |
|    for exercise of common stock warrrants       |   | -    |   | -    |         | 2,000,000      |              | 200            |    | 199,800        |   | -    |   | 200,000  |
| Estimated  fair value of common stock warrants       |   |                |   |                |         |                |              |                |    |                |   |   |   |   |
| issued in connection with consulting services        |   | -    |   | -    |         | -    |              | -    |    | 33,332         |   | -    |   | 33,332  |
| Estimated  fair value of common stock warrants       |   |                |   |                |         |                |              |                |    |                |   |   |   |   |
| cancelled in disposition of PFI                      |   | -    |   | -    |         | -    |              | -    |    | (553,000)           |   | -    |   | (553,000) |
| Estimated  fair value of vested stock options        |   | -    |   | -    |         | -    |              | -    |    | 879,088        |   | -    |   | 879,088  |
| Net  loss                                            |   |                |   |                |         | -    |              | -    |    | -    |   | (3,285,230) |   | (3,285,230) |
| Balances,  December 31, 2007                         |   | 33,500,000     |   |  $             | 33,500  |                | 152,770,913  |                |  $ | 15,277         |   |  $ | 32,397,585  |   |  $ | (25,054,453) |   |  $ | 7,391,909  |
|                                                 |   |                |   |                |         |                |              |                |    |                |   |   |   |   |
|                                                      |        |                     |        |                     |              |                     |                   |                     |         |                     |  |  |  |  |  |  |  |  |  |

 

  See accompanying notes to consolidatedfinancial statements

 

F-6

----

 

| **VillageEDOCS,  Inc. and subsidiaries**                    |   |                                     |          |          |
|-------------------------------------------------------------|--------|------------------------------------------|---------------|---------------|
| **Consolidated  Statements of Cash Flows**                  |   |                                     |          |          |
| ** **                                                  |   | ** Years Ended December 31, ** |
|                                                        |   | **2007**                                 | ** **    | **2006**      |
| Cash Flows  from Operating Activities:                      |   |                                     |          |          |
| Net  loss                                                   |   |  $                                  | (3,285,230)   |          |  $ | (882,132) |
| Adjustments  to reconcile net loss to net cash              |   |                                     |          |          |
| (used  in) provided by operating activities:                |   |                                     |          |          |
| Depreciation  and amortization                              |   | 909,839                             |          | 738,504  |
| Provision  for (recovery of) doubtful accounts receivable   |   | (18,368)                                 |          | 37,901   |
| Estimated  fair value of stock options issued to            |   |                                     |          |          |
| employees  for services rendered                            |   | 879,088                             |          | 557,111  |
| Estimated  fair value of warrants issued to consultants     |   | 33,332                              |          | -        |
| Common  stock issued to employees and non-employees         |   |                                     |          |          |
| for  services rendered                                      |   | 76,211                              |          | 74,761   |
| Amortization  of debt discount                              |   | 12,233                              |          | 14,676   |
| Loss  on discontinued operations                            |   | 1,404,523                           |          | -        |
| Gain  on sale of assets                                     |   | **- **                              |          | 1,700    |
| Changes  in operating assets and liabilities, net of        |   |                                     |          |          |
|    acquisitions and divestitures:                      |   |                                     |          |          |
| Accounts  receivable                                        |   | (250,013)                                |          | 352,818  |
| Inventories                                                 |   | 22,960                              |          | (423)         |
| Prepaid  expenses and other current assets                  |   | (180,706)                                |          | (76,774)      |
| Other  assets                                               |   | (11,069)                                 |          | 31,300   |
| Accounts  payable                                           |   | (63,251)                                 |          | (152,285)     |
| Accrued  expenses and interest                              |   | 265,217                             |          | (142,944)     |
| Deferred  revenue                                           |   | 112,215                             |          | (177,589)     |
| Net  cash (used in) provided by operating activities        |   | (93,019)                                 |          | 376,624  |
| Cash Flows  from Investing Activities:                      |   |                                     |          |          |
| Purchases  of property and equipment                        |   | (147,680)                                |          | (132,511)     |
| Cash  acquired in acquisition of GSI, net                   |   | -                                   |          | 234,535  |
| Costs  incurred for purchase of GSI                         |   | -                                   |          | (130,054)     |
| Cash  acquired from sale of PFI, net                        |   | 837,510                             |          | -        |
| Additions  to capitalized software development              |   | -                                   |          | (1,189)       |
| Net  cash provided by (used in) investing activities        |   | 689,830                             |          | (29,219)      |
| Cash Flows from  Financing Activities:                      |   |                                     |          |          |
| Payments  on lines of credit, net                           |   | (355,320)                                |          | -        |
| Proceeds  from warrant exercise                             |   | 200,000                             |          | -        |
| Proceeds  from notes payable                                |   | -                                   |          | 10,000   |
| Payments  on capital lease obligation                       |   | (30,399)                                 |          | (4,075)       |
| Principal  payments on notes payable to related parties     |   | (30,000)                                 |          | (346,562)     |
| Principal  payments on convertible notes to related parties |   | (200,000)                                |          | (200,000)     |
| Net  cash used in financing activities                      |   | (415,719)                                |          | (540,637)     |
| Net  change in cash                                         |   | 181,092                             |          | (193,232)     |
|                                                        |   |                                     |          |          |
| Cash,  beginning of year                                    |   | 568,819                             |          | 762,051  |
| Cash,  end of year                                          |   |  $                                  | 749,911  |          |  $ | 568,819  |
| Supplemental  disclosure of cash flow information -         |   |                                     |          |          |
| Cash  paid during the year for:                             |   |                                     |          |          |
| Interest                                                    |   |  $                                  | 95,360   |          |  $ | 99,320  |
| Income  taxes                                               |   |  $                                  | 74,642   |          |  $ | 4,000  |

F-7

----

 

 

 

 

 

 

 

| **Supplemental  Schedule of Noncash Investing**                                                                            |    |                |                 |           |
|----------------------------------------------------------------------------------------------------------------------------|---------|---------------------|----------------------|----------------|
| **  and  Financing Activities:**                                                                                      |    | ** 2007**      | ** **           | ** 2006** |
|                                                                                                                       |    |                |                 |           |
|                                                                                                                       |    |                |                 |           |
| Issuance  of common stock as acquisition cost                                                                              |    |  $             | 92,400          |           |  $ | 254,100  |
| Issuance  of common stock on conversion of preferred stock                                                                 |    |  $             | -     |           |  $ | 2,500  |
| Issuance  of preferred stock in consideration for cancellation of         warrants |  $ | -    |                 |  $        | 22,500  |
| Estimated  fair value of common stock issued in connection                                                                 |    |                |                 |           |
| with  acquisition                                                                                                          |    |  $             | -     |           |  $ | 4,266,388  |
| Accrual  for patent license                                                                                                |    |  $             | -     |           |  $ | 250,000  |
| Acquisition  of property and equipment through capital lease         obligation    |    |  $             | 63,175          |           |  $ | 12,225  |
|                                                                                                                       |    |                |                 |           |

F-8

----

 

 

 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

 

# 1.   Background, Organization andBasis of Presentation

VillageEDOCS, Inc. (the "Company" or "VillageEDOCS") was incorporated in 1995 inDelaware, reincorporated in California in 1997, and reincorporated in Delawarein September 2007. The Company has historically operated an electronic documentdelivery service marketed to organizations throughout the United States andinternationally.  On February 17, 2004, the Company acquired TailoredBusiness Systems, Inc. ("TBS").  TBS provides various programming,processing and printing services to governmental entities, including installingsoftware, hardware, printing and mailing of property tax forms.  On June16, 2004, the holders of a majority of the voting capital stock of the Companyvoted to approve a Plan of Restructuring that included the reorganization of theCompany's electronic document delivery business into a wholly owned subsidiaryof the Company.  In connection with the reorganization, the Company formedMessageVision, Inc. ("MVI") on October 25, 2004.  Effective April 1, 2005,the Company acquired Phoenix Forms, Inc. dba Resolutions ("PFI" or"Resolutions"), which it subsequently sold effective December 1, 2007. Effective May 1, 2006, the Company acquired GoSolutions, Inc. ("GSI").  GSIprovides enhanced voice and data communications services including speech-drivenmessaging, unified communications, and audio conferencing applications. Theconsolidated financial statements include the accounts of the Company and thoseof MVI, TBS, Resolutions, and GSI, its wholly owned subsidiaries, since October25, 2004, February 17, 2004, April 1, 2005, and May 1, 2006, respectively.  The accounts of Resolutions are included through November 30, 2007.  SeeNote 5 for additional information regarding the accounting for Resolutions as adiscontinued operation.  All significant inter-company transactions andbalances have been eliminated in consolidation.

 

# 2.  Going Concern

The accompanying consolidated financial statements have been prepared assumingthat the Company will continue as a going concern. The Company has incurredsignificant losses since inception, and has a working capital deficit of$2,279,882.  The Company's losses are continuing and are expected tocontinue until such time as the Company is able to sufficiently expand itsexisting businesses or is able to consummate business combination transactionswith other businesses whose profits are sufficient to offset any ongoing lossesfrom operating the holding company that owns GSI, TBS and MVI.

 

The Company's success is dependent upon numerous items, certain of which are thesuccessful growth of revenues from its products and services, its ability toobtain new customers in order to achieve levels of revenues adequate to supportthe Company's current and future cost structure, and its success in obtainingfinancing for equipment and operations, for which there is no assurance.Unanticipated problems, expenses, and delays are frequently encountered inestablishing and maintaining profitable operations.  These include, but arenot limited to, competition, the need to develop customer support capabilitiesand market expertise, setbacks in product development, technical difficulties,market acceptance and sales and marketing.  The failure of the Company tomeet any of these conditions could have a materially adverse effect on theCompany and may force the Company to reduce or curtail operations. No assurancecan be given that the Company can achieve or maintain profitable operations.

 

| F-9
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

The Company believes it will have adequate cash to sustain operations until itachieves sustained profitability.  However, until the Company has a historyof maintaining revenue levels sufficient to support its operations and repay itsworking capital deficit, the Company may require additional financing. Sourcesof financing could include capital infusions, additional equity financing ordebt offerings.  Although cash flows from operations improved during 2006to a level sufficient to support operating expenses, the Company's operationsused net cash during 2007.  Should such cash flows continue to decrease forany reason, management plans to obtain debt and equity financing from new andexisting stockholders.  There can be no assurance that funding will be availableon acceptable terms, if at all, or that such funds, if raised, would enable theCompany to achieve or sustain profitable operations.

 

These factors, among others, raise substantial doubt about the Company's abilityto continue as a going concern.  The consolidated financial statements donot include any adjustments to reflect the possible future effects on therecoverability and classification of assets or the classification of liabilitiesthat might result from the outcome of these uncertainties.

 

3.  Summary of Significant Accounting Policies

 

a.  Segments of an Enterprise and Related Information

 

The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.131, *"Disclosures about Segments of an Enterprise and Related Information."*SFAS No. 131 requires the Company to report information about segments of itsbusiness in annual financial statements and requires it to report selectedsegment information in its quarterly reports issued to stockholders. SFAS No.131 also requires entity-wide disclosures about the products and services anentity provides, the material countries in which it holds assets and reportsrevenues and its major customers. The Company's four reportable segments aremanaged separately based on fundamental differences in their operations. AtDecember 31, 2007, the Company operated in the following four reportablesegments (see Note 12): 

 

(a)  Electronic document delivery services,

(b)  Government accounting solutions,

(c)  Integrated communications, and

(d)  Corporate. 

 

The Company evaluates performance and allocates resources based upon operatingincome. The accounting policies of the reportable segments are the same as thosedescribed in this summary of significant accounting policies.

 

b.  Concentration of Credit Risk

 

      F-10
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

The Company extends credit to its customers and performs ongoing creditevaluations of such customers.  The Company does not obtain collateral tosecure its accounts receivable.  MVI and GSI generally require a validcredit card or ACH debit account to collateralize credit extended tonon-corporate clients. The Company evaluates its accounts receivable on aregular basis for collectibility and provides for an allowance for potentialcredit losses as deemed necessary.  At December 31, 2007, the Company hasrecorded an allowance for doubtful accounts of approximately $49,000.  

 

For the years ended December 31, 2007 and 2006, independent representatives ofone enterprise accounted for approximately 31% and 23%, respectively, of totalrevenues.  

 

No single customer accounted for more than 10% of accounts receivable atDecember 31, 2007.

 

At December 31, 2007, the Company had amounts on deposit with financialinstitutions in excess of the federally insured limits of $100,000, whichapproximated $410,000.

 

c.  Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Significant estimates made by managementare, among others, the realizability of accounts receivable, inventories,recoverability of long-lived assets, valuation of stock options, warrants, anddeferred taxes.   Actual results could differ from those estimates.

 

d.  Property and Equipment

 

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

 

e.  Revenue Recognition

 

The Company recognizes revenue in accordance with Staff Accounting Bulletin ("SAB")No. 101, *"Revenue Recognition in Financial Statements,"* as revised by SABNo. 104.  As such, the Company recognizes revenue when persuasive evidenceof an arrangement exists, title transfer has occurred, or services have beenperformed, the price is fixed or readily determinable and collectibility isprobable.  Sales are recorded net of sales discounts.

 

      F-11
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

The Company has adopted Statement of Position ("SOP") 97-2, "*Software RevenueRecognition,"* as well as SOP 98-9, *"Modification of SOP 97-2, SoftwareRevenue Recognition with Respect to Certain Transactions."*  The SOPsgenerally require revenue earned on software arrangements involving multipleelements to be allocated to each element based on the relative fair marketvalues of each of the elements. The fair value of an element must be based onvendor-specific objective evidence ("VSOE") of fair value. Software licenserevenue generated by TBS and Resolutions (through the date of disposal - seeNote 5), allocated to a software product is recognized upon delivery of theproduct, or deferred and recognized in future periods to the extent that anarrangement includes one or more elements that are to be delivered at a futuredate and for which VSOE has not been established.  Maintenance and supportrevenue is recognized ratably over the maintenance term.  First-yearmaintenance typically is sold with the related software license and renewed onan annual basis thereafter. Estimated fair values of ongoing maintenance andsupport obligations are based on separate sales of renewals to other customersor upon renewal rates quoted in the contracts. For such arrangements withmultiple obligations, the Company allocates revenue to each component of thearrangement based on the estimated fair value of the undelivered elements. Fairvalue of services, such as consulting or training, is based upon separate salesof these services. The Company at times may enter into multiple-customercontracts in which the Company allocates revenue based on the number ofspecified users at each customer, and recognizes revenue upon customeracceptance and satisfying the other applicable conditions of the above describedaccounting policy. 

 

Services revenue is recognized as the service is performed assuming thatsufficient evidence exists to estimate the fair value of the services. Consulting and training services are billed based on contractual hourly ratesand revenues are recognized as the services are performed. Consulting servicesprimarily consist of implementation services related to the installation of theCompany's products which do not require significant customization to ormodification of the underlying software code. 

 

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

 

Significant management judgments and estimates must be made in connection withdetermination of the revenue to be recognized in any accounting period. If theCompany made different judgments or utilized different estimates for any period,material differences in the amount and timing of revenue recognized couldresult.

 

f.  Product and Technology Development

 

      F-12
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

Product and technology development expense includes personnel costs relating todeveloping the features, content and functionality of MVI's internet-enabled faxservices and web site, TBS's government accounting software, and GSI'scommunications services.  Product and technology development costs areexpensed as incurred.

 

g.  Advertising

 

The Company expenses all advertising costs as incurred.  Advertising costswere $57,410 and $99,236 for the years ended December 31, 2007 and 2006,respectively. 

 

h.   Risks and Uncertainties

 

The Company operates in industries that are subject to intense competition,government regulation and rapid technological change.  The Company'soperations are subject to significant risks and uncertainties includingfinancial, operational, technological, regulatory and other risks associatedwith an operating business, including the potential risk of business failure.

 

i.    Fair Value of Financial Instruments

 

The carrying amount of certain of the Company's financial instruments as ofDecember 31, 2007 approximate their respective fair values because of theshort-term nature of these instruments. Such instruments consist of cash,accounts receivable, accounts payable, accrued expenses, capital leaseobligations, lines of credit, and notes payable. The fair value of convertiblenotes payable to related party is not determinable as the borrowings are with arelated party.

 

j.  Loss per Share

 

Basic loss per share is computed by dividing loss available to commonstockholders by the weighted average number of common shares assumed to beoutstanding during the period of computation. Diluted loss per share is computedsimilar to basic loss per share except that the denominator is increased toinclude the number of additional common shares that would have been outstandingif the potential shares had been issued and if the additional common shares weredilutive.  All potentially dilutive shares, approximately 2,657,000 and4,150,000 as of December 31, 2007 and 2006, respectively, have been excludedfrom diluted loss per share, as their effect would be anti-dilutive for theperiods then ended.

 

k.   Comprehensive Income

 

The Company has no items of comprehensive income.

 

l.       Web Site Development Costs

 

During the years ended December 31, 2007 and 2006, the Company did notcapitalize any additional amounts related to its web site in accordance with theEmerging Issues Task Force ("EITF") Issue No. 00-2, "*Accounting for Web SiteDevelopment Costs."*  Web site development costs were amortized usingthe straight-line method over the estimated useful life of three years.

 

      F-13
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

m.   Software Development Costs

 

The Company capitalizes software development costs pursuant to SFAS No. 86, "*Accountingfor the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,*"after technological feasibility of the software is established, which isgenerally the completion of a working prototype and ends upon general release ofthe product to the Company's customers. All costs incurred in the research anddevelopment of new software and costs incurred prior to the establishment oftechnological feasibility are expensed as incurred. Capitalized costs consist ofdirect costs and allocated overhead associated with the development of thesoftware products.  Amortization of software development costs commenceswhen the product becomes available for general release to customers and iscomputed based on the straight-line method over the software's estimatedeconomic life of approximately three years.  The Company reviews theunamortized software development costs at each balance sheet date and, ifnecessary, will write down the balance to net realizable value if theunamortized costs exceed the net realizable value of the asset.  AtDecember 31, 2007, management determined that no impairment existed.

 

n.     Income Taxes

 

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

 

o.     Stock-Based Compensation

 

At December 31, 2007, the Company had two stock-based compensation plans.

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), *Share-Based Payment*, ("SFAS 123(R)") which establishes standards for theaccounting of transactions in which an entity exchanges its equity instrumentsfor goods or services, primarily focusing on accounting for transactions wherean entity obtains employee services in share-based payment transactions. SFAS123(R) requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments, including stockoptions, based on the grant-date fair value of the award and to recognize it ascompensation expense over the period the employee is required to provide servicein exchange for the award, usually the vesting period.  In March 2005, theUnited States Securities and Exchange Commission ("SEC" or "Commission") issuedStaff Accounting Bulletin ("SAB") No. 107 *Share-Based Payment*("SAB 107")relating to SFAS 123(R). The Company has applied the provisions of SAB 107 inits adoption of SFAS 123(R).

      F-14
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

SFAS 123(R) requires companies to estimate the fair value of share-based paymentawards on the date of grant using an option-pricing model. The value of theportion of the award that is ultimately expected to vest is recognized asexpense over the requisite service periods in the Company's consolidatedstatements of operations.

Stock-based compensation expense recognized during the period is based on thevalue of the portion of share-based payment awards that is ultimately expectedto vest during the period. Stock-based compensation expense recognized in theCompany's consolidated statements of operations for the years ended December 31,2007 and 2006 included compensation expense for share-based payment awardsgranted prior to, but not yet vested as of December 31, 2005 based on the grantdate fair value estimated in accordance with the pro forma provisions of SFASNo. 123, *Accounting for Stock-Based Compensation* ("SFAS 123"), andcompensation expense for the share-based payment awards granted subsequent toDecember 31, 2005 based on the grant date fair value estimated in accordancewith the provisions of SFAS 123(R). As stock-based compensation expenserecognized in the consolidated statements of operations for the years endedDecember 31, 2007 and 2006 is based on awards ultimately expected to vest, ithas been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures tobe estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. The estimated averageforfeiture rate for the years ended December 31, 2007 and 2006, of approximately12%, and 11%, respectively, was based on historical forfeiture experience andestimated future employee forfeitures.

 

SFAS 123(R) requires the cash flows resulting from the tax benefits resultingfrom tax deductions in excess of the compensation cost recognized for thoseoptions to be classified as financing cash flows. Due to the Company's lossposition, there were no such tax benefits during the years ended December 31,2007 and 2006.

 

***Description of Plans***

 

The Company's stock option plans provide for grants of options to employees anddirectors of the Company to purchase the Company's shares, as determined bymanagement and the board of directors, at the fair value of such shares on thegrant date. The options generally vest over a five-year period beginning on thegrant date and have a seven-year term. As of December 31, 2007, the Company isauthorized to issue up to 95,000,000 shares under these plans and hasapproximately 58,000,000 shares available for future issuances.

*** ***

 

 

      F-15
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

 

 

***Summary of Assumptions and Activity***

 

The fair value of stock-based awards to employees and directors is calculatedusing the Black-Scholes option pricing model even though the model was developedto estimate the fair value of freely tradeable, fully transferable optionswithout vesting restrictions, which differ significantly from the Company'sstock options. The Black-Scholes model also requires subjective assumptions,including future stock price volatility and expected time to exercise, whichgreatly affect the calculated values. The expected term of options granted isderived from historical data on employee exercises and post-vesting employmenttermination behavior. The risk-free rate selected to value any particular grantis based on the U.S. Treasury rate that corresponds to the pricing term of thegrant effective as of the date of the grant. The expected volatility is based onthe historical volatility of the Company's stock price. These factors couldchange in the future, affecting the determination of stock-based compensationexpense in future periods.  The fair value of options granted was estimatedusing the following weighted-average assumptions:

 

 
 
 
 
 
 
 
 
**2007**
** **
**2006**
    Stock options: 
 
 
 
 
    Expected term (in years)
 
    6.0
 
    5.0
    Expected volatility
 
    121% - 124%
 
    316%
    Risk-free interest rate
 
    3.5%
 
    3.55%
    Dividend yield
 
    -
 
    -
 

A summary of option activity as of December 31, 2007 and changes during the yearthen ended, is presented below:

 

 
 
**December 31, 2007**
 
 
** **
**Weighted-Average**
** **
 
 
** **
** **
**Remaining**
**Aggregate**
 
 
** **
**Exercise**
**Contractual**
**Intrinsic**
 
 
**Shares**
**Price**
**Term (Years)**
**Value**
    Options outstanding at January 1, 2007
 
    38,971,557 
     $
    0.19 
 
 
    Options granted
 
    5,422,392 
     $
    0.18 
 
 
    Options forfeited
 
    (7,163,280)
     $
    0.21 
 
 
    Options exercised
 
    - 
     $
    - 
 
 
    Options outstanding at December 31, 2007
 
    37,230,669 
     $
    0.21 
    5.6
     $
    - 
    Options vested or expected to vest
 
    35,943,447 
     $
    0.21 
    5.6
     $
    - 
    Options exercisable at December 31, 2007
 
    26,849,848 
     $
    0.23 
    5.0
     $
    - 
 
 
 
 
 
 
 

The weighted-average grant date fair value of options granted during 2007 was$0.07 per option.  Upon the exercise of options, the Company issues newshares from its authorized shares.

 

    F-16
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

As of December 31, 2007, there was approximately $1,085,000 of totalunrecognized compensation cost, net of forfeitures, related to employee anddirector stock option compensation arrangements. That cost is expected to berecognized on a straight-line basis over the next 3.5 weighted average years.The total fair value of vested options issued to employees and directors duringthe years ended December 31, 2007 and 2006 was $879,088 and $557,111,respectively, net of an estimated forfeiture rate of 12% and 11%, respectively,which was recorded as general and administrative expense in the accompanyingconsolidated statements of operations.

 

All issuances of the Company's stock for non-cash consideration have beenassigned a dollar amount equaling either the market value of the shares issuedor the value of consideration received whichever is more readily determinable.The majority of the non-cash consideration received pertains to servicesrendered by consultants and others and has been valued at the market value ofthe shares issued. In certain issuances, the Company may discount the valueassigned to the issued shares for illiquidity and restrictions on resale.

 

p.              Inventories

Inventories consist primarily of supplies, forms, envelopes, and softwarelicenses purchased for resale.  Cost is determined on a first-in, first-outbasis.  The Company periodically reviews its inventory quantities on handand adjusts for excess and obsolete inventory based primarily on historicalusage rates and its estimated forecast of product demand.  Actual demandmay differ from the Company's estimates.  Once established, write-downs ofinventory are considered permanent adjustments to the basis of the excess orobsolete inventory.

 

q.              Goodwill and Other Intangible Assets

Goodwill represents the excess of acquisition cost over the net assets acquiredin a business combination and is not amortized in accordance with SFAS No. 142,"*Goodwill and Other Intangible Assets*." The provisions of SFAS No. 142require that the Company allocate its goodwill to its various reporting units,determine the carrying value of those businesses, and estimate the fair value ofthe reporting units so that a two-step goodwill impairment test can beperformed.  In the first step of the goodwill impairment test, the fairvalue of each reporting unit is compared to its carrying value.  Managementreviews, on an annual basis, the carrying value of goodwill in order todetermine whether impairment has occurred.  Impairment is based on severalfactors including the Company's projection of future undiscounted operating cashflows. If an impairment of the carrying value were to be indicated by thisreview, the Company would perform the second step of the goodwill impairmenttest in order to determine the amount of goodwill impairment, if any. 

 

The changes in the carrying amount of goodwill for the year ended December 31,2006 are as follows (see Note 5):

 

    Balance, January 1, 2007
 
    $
    8,692,483  
    Goodwill of TBS acquired (see Note 7)
 
    92,400   
    Goodwill of PFI disposed (see Note 5)
 
    (2,512,426)
    Balance, December 31, 2007
 
    $
              6,272,457   
 

 

 

      F-17
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

The Company performed an impairment test on goodwill as of December 31, 2007. Based on its analysis as of December 31, 2007, the Company's management believesthere is no impairment of its goodwill.  There can be no assurance,however, that market conditions will not change or demand for the Company'sproducts or services will continue, which could result in impairment of goodwillin the future. 

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

 

r.               Beneficial Conversion Feature

 

The convertible note provides for a rate of conversion that could fall belowmarket value (see Note 6). Such feature is normally characterized as a"beneficial conversion feature" ("BCF"). Pursuant to Emerging Issues Task Force("EITF") Issue No. 98-5 *Accounting For Convertible Securities with BeneficialConversion Features or Contingently Adjustable Conversion Ratio* and EITFIssue No. 00-27, *Application of EITF Issue No. 98-5 To Certain ConvertibleInstruments*, the relative fair value of the BCF has been recorded as adiscount from the face amount of the debt instrument. The Company is amortizingthe discount using the effective interest method through maturity of suchinstrument.

 

s.               Long-Lived Assets

 

In the event that facts and circumstances indicate that equipment or otherlong-lived assets may be impaired, an evaluation of recoverability would beperformed.  If an evaluation is required, the estimated future discountedcash flows associated with the asset are compared to the asset's carrying amountto determine if an impairment charge is necessary.  The amount oflong-lived asset impairment, if any, is charged to operations in the period inwhich long-lived asset impairment is determined.  At December 31, 2007,management believes there is no impairment of its long-lived assets.  Therecan be no assurance, however, that market conditions will not change or demandfor the Company's products or services will continue, which could result inimpairment of long-lived assets in the future.

 

t.                Warranty Costs

 

The Company provides a limited 90 day warranty on certain products sold.Estimated future warranty obligations related to certain products and servicesare provided by charges to operations in the period in which the related revenueis recognized. As of December 31, 2007, management of the Company determinedthat a warranty reserve was not necessary.  In addition, the charges toexpense during the years ended December 31, 2007 and 2006 were insignificant.

 

u.     New Accounting Pronouncements

 

      F-18
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*.SFAS No. 157 defines fair value, establishes a framework for measuring fairvalue in GAAP and expands disclosures about fair value measurements. ThisStatement applies under other accounting pronouncements that require or permitfair value measurements, the FASB having previously concluded in thoseaccounting pronouncements that fair value is the relevant measurement attribute.Accordingly, this Statement does not require any new fair value measurements.SFAS No. 157 is effective for fiscal years beginning after December 15, 2007.The Company plans to adopt SFAS No. 157 beginning in the first quarter of 2008.The adoption of this pronouncement is not expected to have material effect onthe Company's consolidated financial statements.

 

On February 15, 2007, the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities - Including an Amendment of FASBStatement No. 115*. SFAS No. 159 permits an entity to choose to measure manyfinancial instruments and certain other items at fair value. Most of theprovisions in SFAS No. 159 are elective; however, the amendment to FASBStatement No. 115, *Accounting for Certain Investments in Debt and EquitySecurities* , applies to all entities with available-for-sale and tradingsecurities. Some requirements apply differently to entities that do not reportnet income. The fair value option established by SFAS No. 159 permits allentities to choose to measure eligible items at fair value at specified electiondates. A business entity will report unrealized gains and losses on items forwhich the fair value option has been elected in earnings at each subsequentreporting date. SFAS No. 159 is effective as of the beginning of an entity'sfirst fiscal year that begins after November 15, 2007.  The adoption ofthis pronouncement is not expected to have material effect on the Company'sconsolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141R, *Business Combinations*.SFAS No. 141R provides companies with principles and requirements on how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, liabilities assumed, and any noncontrolling interest in theacquiree as well as the recognition and measurement of goodwill acquired in abusiness combination. SFAS No. 141R also requires certain disclosures to enableusers of the financial statements to evaluate the nature and financial effectsof the business combination. Acquisition costs associated with the businesscombination will generally be expensed as incurred. SFAS No. 141R is effectivefor business combinations occurring in fiscal years beginning after December 15,2008. Early adoption of SFAS No. 141R is not permitted. We are currentlyevaluating the impact SFAS No. 141R will have on any future businesscombinations.

 

Other recent accounting pronouncements issued by the FASB (including the EITF)and the American Institute of Certified Public Accountants did not or are notbelieved by management to have a material impact on the Company's present orfuture consolidated financial statements.

 

 

 

      F-19
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

 

4.  Property and Equipment

 

            Property and equipment consist of the following as ofDecember 31, 2007:

                                                                                                                       

 
    Equipment under capital lease
    $
    84,831 
 
 
    Computer equipment
 
    864,955 
 
 
    Furniture and equipment
 
    518,827 
 
 
    Automobiles
 
    48,800 
 
 
    Software
              
    171,002 
 
 
 
 
    1,688,415  
 
 
    Less-- accumulated depreciation
 
    (1,309,223) 
 
 
 
    $
    379,192  
 
 
 
 
 
 
                                                                                                     

Depreciation expense for property and equipment for 2007 and 2006 was $259,156and $180,452, respectively, for continuing operations and $29,984 and $50,125for discontinued operations, respectively.

 

 

5.  Acquisitions, Discontinued Operations, Dispositions, and IntangibleAssets

* *

*GSI*

 

Effective May 1, 2006, VEDO Merger Sub, Inc., a wholly owned subsidiary ofVillageEDOCS, Inc., acquired 100% of the outstanding common and preferred stockof GSI (the "Acquisition"). 

 

GSI is a Florida corporation formed in 2000 to acquire Go Solo Technologies,Inc., which has been operating continuously since 1999.  GSI isheadquartered in St. Petersburg, Florida.  

 

The terms of the Acquisition were the result of arms-length negotiations. None of the GSI shareholders were previously affiliated with VillageEDOCS, Inc..

 

Effective May 1, 2006, VillageEDOCS issued 42,663,879 shares of its commonstock, net of approximately 17,336,121 shares not issued in connection with twosettlements (see below), with an estimated fair value of $4,266,388, to GSI'sstockholders.  VillageEDOCS, Inc's common stock was valued at $0.10 pershare, the fair value of VillageEDOCS, Inc's common stock on the date of theacquisition.

 

      F-20
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

In connection with the Acquisition, VillageEDOCS, Inc. and dissentingshareholders of GSI holding approximately 1,771,000 and 3,021,000 shares ofGSI's common and preferred Series A stock, respectively, entered into settlementagreements (the "Settlement Agreements").  Pursuant to the SettlementAgreements, the dissenting shareholders agreed to waive all dissenters' rightsregarding approval of the Acquisition.  In exchange for the waiver,VillageEDOCS, Inc. agreed to pay cash in the amount of $965,000 in lieu ofshares of its common stock.  

 

The Acquisition was accounted for using the purchase method of accounting. 

 

VillageEDOCS, Inc. funded the required payment under the Settlement Agreementswith proceeds from GSI's cash balance of $965,000, $840,000 of which wasprovided by GSI's $1,000,000 revolving line of credit with a financialinstitution (see Note 6).

 

In connection with the Acquisition, VillageEDOCS, Inc. incurred approximately$130,000 in acquisition-related costs including, but not limited to, expensesincurred for legal, accounting and travel.

 

The acquisition price was comprised of the following:

    Cash in accordance with settlement agreements
 
     $
    965,000 
    Estimated fair value of VillageEDOCS' common stock
    4,266,388 
    Legal, accounting, and other costs
 
    130,054 
 
 
     $
    5,361,442 
 

 

The following represents an allocation of the purchase price over the historicalnet book value of the acquired assets and liabilities of GSI as of May 1, 2006,the effective date of the Acquisition:

 

    Cash
 
     $
    1,199,535 
    Accounts receivable, net
 
    332,457 
    Prepaid expenses and other current assets
 
    68,912 
    Property and equipment, net
 
    240,272 
    Other assets
 
    34,895 
    Line of credit
 
    (840,000)
    Deferred revenue
 
    (1,386,194)
    Other liabilities
 
    (949,686)
    Net tangible liabilities assumed
 
    (1,299,809)
 
 
 
    Identifiable intangibles:
 
 
    Customer relationships
 
    2,200,000 
    Technology
 
    490,000 
    Trade names and marks
 
    420,000 
    Goodwill
 
    3,551,251 
 
 
     $
    5,361,442 
 

      F-21
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

 

The pro forma combined historical results, as if GSI had been acquired as ofJanuary 1, 2006 are estimated as follows:

 

 
 
 
 
 
 
 
 
**Year**
 
 
 
 
**Ended**
 
 
 
 
**December 31, 2006**
 
 
 
 
**(unaudited)**
 
    Net sales
 
 
     $
    15,079,240 
 
    Net loss
 
 
     $
    (1,173,259)
 
    Weighted average common
 
 
 
 
    shares outstanding:
 
 
 
 
    basic and diluted
 
 
    145,211,587 
 
    Loss per share:
 
 
 
 
    basic and diluted
 
 
     $
    (0.01)
 
 

The pro forma information has been prepared for comparative purposes only anddoes not purport to be indicative of what would have occurred had theacquisition actually been made at such date, nor is it necessarily indicative offuture operating results.

 

*Discontinued Operations and Disposition of Resolutions*

 

On December 10, 2007, the Company sold substantially all of the assets of itswholly-owned subsidiary Phoenix Forms, Inc. dba Resolutions to DocPath Corp. for$970,000 in cash, plus the cancellation of 10,000,000 warrants previously issuedwith an exercise price of $0.15 per share.  The warrants were originallyissued to Alexander Riess and William Falcon as consideration in the acquisitionof Phoenix Forms, Inc. by VillageEDOCS, Inc. in April 2005 and were valued at$553,000 on the date of cancellation (see below).

 

The Company's Board of Directors approved the disposal of the assets on December7, 2007 as part of a strategy to reduce debt and focus on growth at theremaining business units and growth by acquisition.  The Company used$845,005 of the proceeds from the asset sale to retire a commercial note with abank on December 11, 2007 (see Note 6).

 

The purchaser assumed substantially all of the employment agreements of PhoenixForms, Inc., its office lease, accounts payable, and certain other accruedliabilities and contracts as stipulated by the Assets Purchase Agreement. Accordingly, the Company does not expect to incur significant future cashexpenditures in connection with the disposal.

 

      F-22
 

 

 

 

**VillageEDOCS, Inc. and subsidiaries**Notes to Consolidated Financial StatementsFor the Years Ended December 31, 2007 and 2006

 

 

 

In connection with the disposal, the Company recorded a loss from discontinuedoperations of $1,625,424, net of tax of $485,000.  Such loss includesincome from PFI's operations of $264,099 before income taxes and a loss on thedisposal of approximately $1,404,523 (which consists of net proceeds of $926,835(net of $43,165 of expenses), plus the fair value of the cancelled warrant ofapproximately $553,000, less the net assets sold of $2,884,358, which includesthe carrying value of goodwill and certain intangible assets with a carryingvalue of $3,019,916 at the time of disposition, which were written off, and$35,493 of cash retained by the seller. The Company received $873,003 in December 2007 and the remaining $53,832 inJanuary 2008.  The amounts received in January 2008 have been included inthe prepaid expenses and other current assets in the accompanying consolidatedbalance sheet.

 

In accordance with SFAS No. 144, *Accounting for the Impairment of Disposal ofLong Lived Assets*, the operations associated with this transaction and theloss on the sale have been classified as income (loss) from discontinuedoperations in the accompanying consolidated statements of operations.

 

Discontinued operations' results were as follows:

 

 
 
 
 
 
 
 
 
 
 
 
**December 31,**
 
 
 
**2007**
** **
** **
**2006**
 
    Results of discontinued operations:
 
 
 
 
 
 
 
 
    Net sales
 
    $
    1,763,024
 
 
    $
    2,170,077
 
 
 
 
    Income before income taxes
 
    $
    264,099
 
 
    $
    78,161
 
 
 
 
 
 
 
 
 
 
 
 
 
    Loss on sale of discontinued operations:
 
 
 
 
 
 
 
 
    Sales price, net
 
    $
    1,479,835
 
 
    $
    -
 
    Net assets sold
 
 
    (2,884,358
    )
 
 
    -
 
 
 
 
    Loss on sale
 
    $
    (1,404,523
    )
 
    $
    -
 
 
 
 
 
 
 
 
 
 
 
 
 
    Income (loss) from discontinued operations before income taxes
 
    $
    (1,140,424
    )
 
    $
    78,161
 
    Income taxes
 
 
    (485,000
    ) |
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