**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C. 20549

 

**FORM 10-QSB**

(Mark One)

[**X**]   QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the quarterlyperiod ended September 30, 2007**

 

[   ]   TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT 

For thetransition period from_________, 20__, to________, 20__.

 

Commission FileNumber: 000-31395

 

 

**VillageEDOCS, Inc.******(Exact name of small business issuer as specified in its charter)

 

| **Delaware**                                                               | ** ** | **33-0668917**                                    |
|----------------------------------------------------------------------------|------------|---------------------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization)            |       | I.R.S. Employer  Identification Number            |
|                                                                       |       |                                              |
| **1401 N. Tustin    Ave, Ste. 230****, Santa Ana, California  92705** | ** ** | ** **

**(714) 734-1030**                    |
| (Address of  principal executive offices)                                  |       | (Issuer's telephone  number, including area code) |

 

Check whether the issuer (1) filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during the preceding 12months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.
|   | YES | **X** | NO |   |
|--------|-----|-------|----|--------|

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).
|   | YES |   | NO**** | **X** |
|--------|-----|--------|--------|-------|

 

**APPLICABLE ONLY TOISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS**

Check whether the registrant filed all documents and reportsrequired to be filed by Section 12, 13, or 15(d) of the Exchange Act after thedistribution of securities under a plan confirmed by a court.
|   | YES |   | NO |   |
|--------|-----|--------|----|--------|

** **

**APPLICABLE ONLY TOCORPORATE ISSUERS**

There were 152,770,913 shares of the Registrant's commonstock outstanding as of October 31, 2007 

 
| Transitional Small Business Format (check one) | YES |   | NO |  **X** |
|------------------------------------------------|-----|--------|----|-------------|

----

**VillageEDOCS**

**Index**

** **

| ** ** | ** **                         | Page No. |
|------------|------------------------------------|----------|
| ** ** | **PART I.  FINANCIAL INFORMATION** |     |   |
|       |                               |     |   |   |   |
|       | Item 1.                            |     |  Condensed Consolidated Financial  Statements |   |   |
|       |                               |     |  Condensed Consolidated  Balance  Sheet as of September 30, 2007 (Unaudited) |   | 1 |
|       |                               |     |  Condensed Consolidated  Statements  of Operations for the three and nine  months ended September 30, 2007  and 2006 (Unaudited) |   | 2 |
|       |                               |     |  Condensed Consolidated  Statements  of Cash Flows for the nine months  ended September 30, 2007 and 2006  (Unaudited) |   | 3 |
|       |                               |     |  Notes to Unaudited Condensed Consolidated  Financial Statements |   | 5 |
|       | Item 2.                            |     |  Management's Discussion and  Analysis or Plan of Operation |   | 21 |
|       | Item 3.                            |     |  Controls and Procedures |   | 40 |
|       |                               |     |   |   |   |
| ** ** | **PART II. OTHER  INFORMATION**    |     |   |
|       |                               |     |   |   |   |
|       | Item 1.                            |     |  Legal Proceedings |   | 41 |
|       | Item 2.                            |     |  Unregistered Sales of Equity Securities and Use of  Proceeds |   | 41 |
|       | Item 3.                            |     |  Defaults Upon Senior Securities |   | 42 |
|       | Item 4.                            |     |  Submission of Matters to a Vote of Security Holders |   | 42 |
|       | Item 5.                            |     |  Other Information |   | 42 |
|       | Item 6.                            |     |  Exhibits |   | 43 |
|       |                               |     |  Signatures |   | 49 |
|       |                               |     |   |   |   |
|       |                               |     |   |   |   |

----

| **VillageEDOCS, Inc. and subsidiaries**                                                       |                                                                                                                                                                                              |                                                                                                                                                                                  |
|-----------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Condensed Consolidated  Balance Sheet**                                                     |                                                                                                                                                                                              |
| **(Unaudited)**                                                                               |                                                                                                                                                                                              |                                                                                                                                                                                  |
|                                                                                          |                                                                                                                                                                                              | **September 30,**                                                                                                                                                                     |
|                                                                                          |                                                                                                                                                                                              | **2007**                                                                                                                                                                              |
| **ASSETS**                                                                                    |                                                                                                                                                                                              |                                                                                                                                                                                  |
| Current assets:                                                                               |                                                                                                                                                                                              |                                                                                                                                                                                  |
| Cash                                                                                          |                                                                                                                                                                                              | $                          823,160                       |
| Accounts  receivable, net of allowance for doubtful                                           |                                                                                                                                                                                              |
| accounts  of approximately $43,000                                                            |                                                                                                                                                                                              |                           1,323,402                      |
| Inventories                                                                                   |                                                                                                                                                                                              |                              169,314      |
| Prepaid  expenses and other current assets                                                    |                              200,661                  |
| Total  current assets                                                                         |                                                                                                                                                                                              |                           2,516,537                      |
|                                                                                          |                                                                                                                                                                                              |                                                                                                                                                                                  |
| Property and equipment, net                                                                   |                                                                                                                                                                                              |                              423,974      |
| Other assets                                                                                  |                                                                                                                                                                                              |                               48,610 |
| Goodwill                                                                                      |                                                                                                                                                                                              |                           8,784,883                      |
| Other intangibles, net                                                                        |                                                                                                                                                                                              |                           3,636,252                      |
|                                                                                          |                                                                                                                                                                                              | $                      15,410,256                                            |
|                                                                                          |                                                                                                                                                                                              |                                                                                                                                                                                  |
| **LIABILITIES AND  STOCKHOLDERS' EQUITY**                                                     |                                                                                                                                                                                              |
| Current liabilities:                                                                          |                                                                                                                                                                                              |                                                                                                                                                                                  |
| Accounts  payable                                                                             |                                                                                                                                                                                              | $                          553,198                       |
| Accrued  expenses                                                                             |                                                                                                                                                                                              |                           2,325,696                      |
| Deferred  revenue                                                                             |                                                                                                                                                                                              |                              982,386      |
| Capital  lease obligation, current                                                            |                                                                                                                                                                                              |                               18,356 |
| Lines  of credit                                                                              |                                                                                                                                                                                              |                           1,331,146                      |
| Convertible  note and accrued interest payable to                                             |                                                                                                                                                                                              |
| related  party, net of unamortized debt discount of $1,226                                    |                              169,018                  |
|         Total current  liabilities                         |                                                                                                                                                                                              |                           5,379,800                      |
|                                                                                          |                                                                                                                                                                                              |                                                                                                                                                                                  |
| Capital lease obligation,  net of current portion                                             |                               27,102             |
| Long term liability                                                                           |                                                                                                                                                                                              |                               45,000 |
|         Total liabilities                                  |                                                                                                                                                                                              |                           5,451,902                      |
|                                                                                          |                                                                                                                                                                                              |                                                                                                                                                                                  |
| 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                                                                    |                                                                                                                                                                                              |                         32,701,906                                 |
| Accumulated deficit                                                                           |                                                                                                                                                                                              |                        (22,792,329)                                     |
| Total  stockholders' equity                                                                   |                                                                                                                                                                                              |                           9,958,354                      |
|                                                                                          |                                                                                                                                                                                              | $                      15,410,256                                            |
| See accompanying notes to  condensed consolidated financial statements.                       |

----

| **VillageEDOCS,  Inc. and subsidiaries**                                | ** ** | ** **                                                                                                                          | ** ** | ** **                                                                                                                    | ** ** |                                                                                                                 |       |                                                                                                     |
|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| **Condensed Consolidated  Statements of Operations**                    | ** ** | ** **                                                                                                                          | ** ** |                                                                                                                          |       |                                                                                                                 |
| **(Unaudited)**                                                         | ** ** | ** **                                                                                                                          | ** ** | ** **                                                                                                                    | ** ** |                                                                                                                 |       |                                                                                                     |
| ** **                                                              | ** ** | **Three Months Ended September 30,**                                                                                                | ** ** | **Nine Months Ended September 30,**                                                                                           |
|                                                                    |       | **2007**                                                                                                                            | ** ** | **2006**                                                                                                                      |       | **2007**                                                                                                             | ** ** | **2006**                                                                                                 |
| Net sales                                                               |       | $          4,037,055                                                                   |       | $          3,885,644                                                             |       | $             11,670,190                                 |       | $          8,987,575                                        |
| Cost of sales                                                           |       |             1,627,297                                                        |       |             1,275,463                                                  |       |             4,423,923                                         |       |             3,092,366                             |
| Gross  profit                                                           |       |             2,409,758                                                        |       |             2,610,181                                                  |       |             7,246,267                                         |       |             5,895,209                             |
| Operating expenses:                                                     |       |                                                                                                                                |       |                                                                                                                          |       |                                                                                                                 |       |                                                                                                     |
| Product  and technology                                                 |       |                                                                                                                                |       |                                                                                                                          |       |                                                                                                                 |       |                                                                                                     |
| development                                                             |       |                451,839                                        |       |                373,388                                  |       |             1,435,765                                         |       |             1,172,086                             |
| Sales  and marketing                                                    |       |                516,952                                        |       |                403,134                                  |       |             1,682,499                                         |       |             1,136,231                             |
| General  and administrative                                             |       |             1,293,346                                                        |       |             1,537,196                                                  |       |             4,349,096                                         |       |             3,630,290                             |
| Depreciation  and amortization                                          |       |                243,060                                        |       |                303,617                                  |       |                715,665                         |       |                516,206             |
| Total  operating expenses                                               |       |             2,505,197                                                        |       |             2,617,335                                                  |       |             8,183,025                                         |       |             6,454,813                             |
| Loss  from operations                                                   |       |                (95,439)                                       |       |                  (7,154)                      |       |              (936,758)                                   |       |              (559,604)                       |
|                                                                    |       |                                                                                                                                |       |                                                                                                                          |       |                                                                                                                 |       |                                                                                                     |
| Interest expense, net of  interest income                               |       |                (32,929)                                       |       |                   (35,547)               |       |                (91,036)                        |       |                (85,214)            |
| Other income (expense)                                                  |       |                  73,937                             |       |                1,772                                    |       |                  19,598              |       |                (22,193)            |
| Loss  before provision (benefit) for                                    |       |                                                                                                                                |       |                                                                                                                          |       |                                                                                                                 |       |                                                                                                     |
| income  taxes                                                           |       |                (54,431)                                       |       |                (40,929)                                 |       |            (1,008,196)                                             |       |              (667,011)                       |
|                                                                    |       |                                                                                                                                |       |                                                                                                                          |       |                                                                                                                 |       |                                                                                                     |
| Provision (benefit) for  income taxes                                   |       |                (11,162)                                       |       |                  (5,493)                      |       |                  14,910              |       |                  (1,493) |
| Net  loss                                                               |       | $            (43,269)                                                        |       | $            (35,436)                                                  |       | $            (1,023,106)                                      |       | $           (665,518)                                  |
|                                                                    |       |                                                                                                                                |       |                                                                                                                          |       |                                                                                                                 |       |                                                                                                     |
| Basic and diluted loss  available to                                    |       |                                                                                                                                |       |                                                                                                                          |       |                                                                                                                 |       |                                                                                                     |
| common  stockholders per common                                         |       |                                                                                                                                |       |                                                                                                                          |       |                                                                                                                 |       |                                                                                                     |
| share                                                                   |       | $                     --   |       | $                     --  |       | $                   (0.01) |       | $                (0.01)       |
|                                                                    |       |                                                                                                                                |       |                                                                                                                          |       |                                                                                                                 |       |                                                                                                     |
| Weighted average shares  outstanding -                                  |       |                                                                                                                                |       |                                                                                                                          |       |                                                                                                                 |       |                                                                                                     |
|   basic and diluted                                                |       |          151,187,580                                                                        |       |          146,868,127                                                                  |       |          149,380,374                                                         |       |          127,182,192                                             |
|                                                                    |       |                                                                                                                                |       |                                                                                                                          |       |                                                                                                                 |       |                                                                                                     |
|                                                                    |       |                                                                                                                                |       |                                                                                                                          |       |                                                                                                                 |       |                                                                                                     |
| See accompanying notes to  condensed consolidated financial statements. |       |                                                                                                                                |       |                                                                                                                          |

** **

----

** **

| **VillageEDOCS, Inc. and  subsidiaries**                     |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
|--------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Condensed Consolidated  Statements of Cash Flows**         |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| **(Unaudited)**                                              |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| ** **                                                   |   | **Nine Months Ended September 30, **                                                                                                                                  |
|                                                         |   | **2007**                                                                                                                                                                   | ** ** | **2006**                                                                                                                                                             |
| Cash Flows from Operating  Activities:                       |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| Net  loss                                                    |   | $            (1,023,106)                                                                                            |       | $              (665,518)                                                                            |
| Adjustments  to reconcile net loss to net cash               |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| (used  in) provided by operating activities:                 |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| Depreciation  and amortization                               |   |                    715,665                                                       |       |                   516,206                                                       |
| Provision  for (recovery of) doubtful accounts receivable    |   |                    (27,000)                                                      |       |                     53,927                                            |
| Estimated  fair value of stock options issued to             |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| employees  for services rendered                             |   |                    655,409                                                       |       |                   360,668                                                       |
| Estimated  fair value of stock options issued to consultants |   |                        8,332                                 |       |                             - |
| Common  stock issued to employees and non-employees          |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| for  services rendered                                       |   |                      76,211                                            |       |                     29,761                                            |
| Amortization  of debt discount                               |   |                      11,007                                            |       |                     11,007                                            |
| Changes  in operating assets and liabilities:                |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| Accounts  receivable                                         |   |                   (333,425)                                                           |       |                     66,243                                            |
| Inventories                                                  |   |                      21,134                                            |       |                     (8,759)                                           |
| Prepaid  expenses and other current assets                   |   |                    (78,375)                                                      |       |                    (58,640)                                                |
| Other  assets                                                |   |                    (11,068)                                                      |       |                       5,372                                 |
| Accounts  payable                                            |   |                   (104,201)                                                           |       |                    (71,138)                                                |
| Accrued  expenses and interest                               |   |                    135,471                                                       |       |                    (44,023)                                                |
| Deferred  revenue                                            |   |                    (94,522)                                                      |       |                    (27,051)                                                |
| Net  cash (used in) provided by operating activities         |   |                    (48,468)                                                      |       |                   168,055                                                       |
| Cash Flows from Investing  Activities:                       |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| Purchases  of property and equipment                         |   |                   (132,470)                                                           |       |                    (59,004)                                                |
| Cash  acquired in acquisition of GSI, net of cash paid       |   |                              - |       |                   234,535                                                       |
| Costs  incurred for purchase of GSI                          |   |                              - |       |                  (130,054)                                                           |
| Additions  to capitalized software development               |   |                              - |       |                    (12,788)                                                |
| Net  cash (used in) provided by investing activities         |   |                   (132,470)                                                           |       |                     32,689                                            |
| Cash Flows from Financing  Activities:                       |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| Proceeds  from lines of credit, net                          |   |                    491,146                                                       |       |                             - |
| Proceeds  from warrant exercise                              |   |                    200,000                                                       |       |                             - |
| Proceeds  from notes payable                                 |   |                              - |       |                     10,000                                            |
| Payments  on capital lease obligation                        |   |                    (25,867)                                                      |       |                                                                                                                                                                 |
| Principal  payments on notes payable                         |   |                              - |       |                  (216,562)                                                           |
| Principal  payments on notes payable to related parties      |   |                    (30,000)                                                      |       |                  (100,000)                                                           |
| Principal  payments on convertible notes to related parties  |   |                   (200,000)                                                           |       |                  (200,000)                                                           |
| Net  cash provided by (used in) financing activities         |   |                    435,279                                                       |       |                  (506,562)                                                           |
| Net  change in cash                                          |   |                    254,341                                                       |       |                  (305,818)                                                           |
|                                                         |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| Cash,  beginning of period                                   |   |                    568,819                                                       |       |                   762,051                                                       |
| Cash,  end of period                                         |   | $                823,160                                                                        |       | $                456,233                                                                  |
| Supplemental disclosure of  cash flow information -          |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| Cash  paid during the period for:                            |   |                                                                                                                                                                       |       |                                                                                                                                                                 |
| Interest                                                     |   | $                  73,810                                                             |       | $                 69,534                                                             |
| Income  taxes                                                |   | $                  26,072                                                             |       | $                   4,000                                                  |
| continued.                                                   |   |                                                                                                                                                                       |       |                                                                                                                                                                 |

** **

----

** **

| 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                                       |
| 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                                                  |         | $                           - |
|                                                                    |   |                                                                                                                                                                        |         |                                                                                                                                                            |
| See accompanying notes to  condensed consolidated financial statements. |   | *** ***                                                                                                                                                                | *** *** |                                                                                                                                                            |

** **

** **

** **

** **

** **

 

----

 

**VillageEDOCS,Inc.**

**Notes to Unaudited Condensed Consolidated FinancialStatements**

**September 30, 2007 and 2006**

 

** **

**1.          Management'sRepresentation**

 

The accompanying unaudited condensed consolidated financialstatements have been prepared by VillageEDOCS, Inc. (the "Company") inaccordance with accounting principles generally accepted in the United States of America for interim financial information. These principles are consistentin all material respects with those applied in the Company's consolidated financialstatements contained in the Company's annual report on Form 10-KSB for the yearended December 31, 2006, and pursuant to the instructions to Form 10-QSB andItem 310(b) of Regulation S-B promulgated by the United States Securities andExchange Commission ("SEC"). Interim financial statements do not include all ofthe information and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements. In theopinion of management, the accompanying unaudited condensed consolidatedfinancial statements contain all adjustments (all of which are of a normalrecurring nature, including the elimination of intercompany accounts) necessaryto present fairly the financial position, results of operations and cash flowsof the Company for the periods indicated. Interim results of operations are notnecessarily indicative of the results to be expected for the full year or anyother interim periods. These unaudited condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and footnotes thereto contained in the Company's annual report on Form10-KSB for the year ended December 31, 2006. 

** **

**2.          Background,Organization and Basis of Presentation**

 

VillageEDOCS, Inc. was incorporated in 1995 in Delaware, reincorporated in California in 1997, and reincorporated in Delaware in September2007. The Company has historically operated an electronic document delivery servicemarketed to organizations throughout the United States and internationally.  OnFebruary 17, 2004, the Company acquired Tailored Business Systems, Inc.("TBS").  TBS provides various programming, processing and printingservices to governmental entities, including installing software, hardware,printing and mailing of property tax forms.  On June 16, 2004, the holders of amajority of the voting capital stock of the Company voted to approve a Plan ofRestructuring that included the reorganization of the Company's electronicdocument delivery business into a wholly owned subsidiary of the Company.  Inconnection with the reorganization, the Company formed MessageVision, Inc. ("MVI")on October 25, 2004.  Effective April 1, 2005, the Company acquired PhoenixForms, Inc. dba Resolutions ("PFI" or "Resolutions").  Resolutionsprovides products for document management, document archiving, documentimaging, imaging software, document scanning, e-mail archiving, documentimaging software, and electronic forms.  Effective May 1, 2006, the Companyacquired GoSolutions, Inc. ("GSI").  GSI provides enhanced voice anddata communications services including speech-driven messaging, unified communications,and audio conferencing applications. The unaudited condensed consolidatedfinancial statements include the accounts of the Company and those of MVI, TBS,Resolutions, and GSI, its wholly-owned subsidiaries, since October 25, 2004, February17, 2004, April 1, 2005, and May 1, 2006, respectively.   All significantinter-company transactions and balances have been eliminated in consolidation.

 

**3.          GoingConcern**

 

The accompanying condensed consolidated financial statementshave been prepared assuming that the Company will continue as a going concern.The Company has incurred significant losses since inception, and has a workingcapital deficit ($2,863,263 as of September 30, 2007).  The Company's lossesare continuing and are expected to continue until such time as the Company isable to sufficiently expand its existing businesses or is able to consummatebusiness combination transactions with other businesses whose profits aresufficient to offset any ongoing losses from operating the holding company thatowns GSI, Resolutions, TBS and MVI.

 

The Company's success is dependent upon numerous items,certain of which are the successful growth of revenues from its products andservices, its ability to obtain new customers in order to achieve levels ofrevenues adequate to support the Company's current and future cost structure,and its success in obtaining financing for equipment and operations, for whichthere is no assurance. Unanticipated problems, expenses, and delays arefrequently encountered in establishing and maintaining profitable operations. These include, but are not limited to, competition, the need to developcustomer support capabilities and market expertise, setbacks in productdevelopment, technical difficulties, market acceptance and sales andmarketing.  The failure of the Company to meet any of these conditions couldhave a materially adverse effect on the Company and may force the Company toreduce or curtail operations. No assurance can be given that the Company canachieve or maintain profitable operations.

 

The Company believes it will have adequate cash to sustainoperations until it achieves sustained profitability.  However, until theCompany has a history of maintaining revenue levels sufficient to support itsoperations and repay its working capital deficit, the Company may requireadditional financing. Sources of financing could include capital infusions,additional equity financing or debt offerings.  Although cash flows fromoperations improved during 2006 to a level sufficient to support operatingexpenses, the Company's operations used net cash during the first nine monthsof 2007.  Should such cash flows continue to 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 achieveor sustain profitable operations.

 

These factors, among others, raise substantial doubt aboutthe Company's ability to continue as a going concern.  The condensedconsolidated financial statements do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets orthe classification of liabilities that might result from the outcome of theseuncertainties.

 

**4.           Summaryof Significant Accounting Policies**

 

Segments of an Enterprise andRelated Information 

 

TheCompany 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 five reportable segments aremanaged separately based on fundamental differences in their operations. At September30, 2007, the Company operated in the following five reportable segments (seeNote 9): 

 

(a)  Electronic document deliveryservices,

(b)  Government accounting solutions,

(c)  Electronic forms,

(d)  Integrated communications, and

(e)  Corporate. 

 

TheCompany evaluates performance and allocates resources based upon operatingincome. The accounting policies of the reportable segments are the same asthose described in this summary of significant accounting policies.

 

Concentration of Credit Risk

 

TheCompany extends credit to its customers and performs ongoing credit evaluationsof such customers.  The Company does not obtain collateral to secure itsaccounts receivable.  MVI and GSI generally require a valid credit card or ACHdebit account to collateralize credit extended to non-corporate clients. TheCompany evaluates its accounts receivable on a regular basis for collectibilityand provides for an allowance for potential credit losses as deemed necessary. At September 30, 2007, the Company has recorded an allowance for doubtfulaccounts of approximately $43,000.

 

Forthe three months ended September 30, 2007 and 2006, independent representativesof one enterprise accounted for approximately 27% and 28% of total revenues,respectively.  For the nine months ended September 30, 2007 and 2006,independent representatives of this enterprise accounted for approximately 28% oftotal revenues in each of the respective periods.  

 

Nosingle customer accounted for more than 10% of accounts receivable at September30, 2007.

 

Use of Estimates in the Preparation of FinancialStatements

 

Thepreparation 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 financial statements and the reported amounts of revenues and expensesduring the reporting period. Significant estimates made by management are,among others, the realizability of accounts receivable, inventories,recoverability of long-lived assets, valuation of stock options, warrants anddeferred tax assets.   Actual results could differ from those estimates.

 

Property and Equipment

 

Propertyand equipment are stated at cost and are depreciated using the straight-linemethod over the estimated useful lives of the assets, ranging from three toseven years.  Equipment under capital lease obligations is depreciated over theshorter of the estimated useful life or the term of the lease.  Majorbetterments and renewals are capitalized, while routine repairs and maintenanceare charged to expense when incurred.

 

Revenue Recognition

 

TheCompany recognizes revenue in accordance with Staff Accounting Bulletin ("SAB")No. 101, *Revenue Recognition in Financial Statements,* as revised bySAB No. 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 collectability isprobable.  Sales are recorded net of sales discounts.

 

TheCompany 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, allocated to a software product isrecognized upon delivery of the product, or deferred and recognized in futureperiods to the extent that an arrangement includes one or more elements thatare to be delivered at a future date and for which VSOE has not beenestablished.  Maintenance and support revenue is recognized ratably over themaintenance term.  First-year maintenance typically is sold with the relatedsoftware license and renewed on an annual basis thereafter. Estimated fairvalues of ongoing maintenance and support obligations are based on separatesales of renewals to other customers or upon renewal rates quoted in thecontracts. For such arrangements with multiple obligations, the Company allocatesrevenue to each component of the arrangement based on the estimated fair valueof the undelivered elements. Fair value of services, such as consulting ortraining, is based upon separate sales of these services. The Company at timesmay enter into multiple-customer contracts in which the Company allocatesrevenue based on the number of specified users at each customer, and recognizesrevenue upon customer acceptance and satisfying the other applicable conditionsof the above described accounting policy. 

 

Servicesrevenue is recognized as the service is performed assuming that sufficientevidence exists to estimate the fair value of the services.  Consulting andtraining services are billed based on contractual hourly rates and revenues arerecognized as the services are performed. Consulting services primarily consistof implementation services related to the installation of the Company'sproducts which do not require significant customization to or modification ofthe underlying software code. 

 

Revenuefrom subscription agreements consists of fixed monthly fees and usage charges,generally based on per minute rates.  Subscription agreement revenue related toMVI and GSI usage service charges are billed monthly in arrears and theassociated revenues are recognized in the month of service. Recurring chargesfor the GoSolo(TM) platform are billed in advance on a monthly basis andrecorded as deferred revenues. The Company recognizes subscription agreementrevenue ratably over the service period, which management believes approximatesthe actual provision of services. Professional service fee revenue consists ofconsulting fees charged to enterprise clients for GoSolo(TM) platformenhancements. The Company recognizes professional service fee revenue on a timeand materials basis over the service period, which management believesapproximates the actual provision of services.  Wholesale enhanced voicemailservices consists of fees charged to telecommunications providers for use ofthe GoSolo(TM) platform to provide their customers with hosted electronicvoicemail, billed monthly in arrears and the associated revenues are recognizedin the month of service.

 

Significantmanagement 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 anyperiod, material differences in the amount and timing of revenue recognizedcould result.

 

Risks andUncertainties

 

The Company operates inindustries that are subject to intense competition, government regulation andrapid technological change.  The Company's operations are subject tosignificant risks and uncertainties including financial, operational,technological, regulatory and other risks associated with an expandingbusiness, including the potential risk of business failure.

 

Loss per Share

 

Basic loss per share iscomputed by dividing loss available to common stockholders by the weightedaverage number of common shares assumed to be outstanding during the period ofcomputation. Diluted loss per share is computed similar to basic loss per shareexcept that the denominator is increased to include the number of additionalcommon shares that would have been outstanding if the potential shares had beenissued and if the additional common shares were dilutive.  All potentiallydilutive shares, approximately 1,200,000 and 10,396,000 of potentially dilutiveshares as of September 30, 2007 and 2006, respectively, have been excluded fromdiluted loss per share, as their effect would be anti-dilutive for the periods thenended.

 

Software DevelopmentCosts

 

The Company capitalizessoftware development costs pursuant to SFAS No. 86, *Accounting for the Costsof Computer Software to be Sold, Leased or Otherwise Marketed,* aftertechnological feasibility of the software is established, which is generallythe completion of a working prototype and ends upon general release of theproduct 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 consistof direct costs and allocated overhead associated with the development of thesoftware products.  Amortization of software development costs commences whenthe product becomes available for general release to customers and is computedbased on the straight-line method over the software's estimated economic lifeof approximately three years.  The Company reviews the unamortized softwaredevelopment costs at each balance sheet date and, if necessary, will write downthe balance to net realizable value if the unamortized costs exceed the netrealizable value of the asset.  At September 30, 2007, management determinedthat no impairment existed.

 

Inventories

 

Inventories consist primarily ofsupplies, forms, envelopes, and software licenses purchased for resale.  Costis determined on a first-in, first-out basis.  The Company periodically reviewsits inventory quantities on hand and adjusts for excess and obsolete inventorybased primarily on historical usage rates and its estimated forecast of productdemand.  Actual demand may differ from the Company's estimates.  Onceestablished, write-downs of inventory are considered permanent adjustments tothe basis of the excess or obsolete inventory.

 

Goodwill and Other IntangibleAssets

 

Goodwill represents the excess ofacquisition cost over the net assets acquired in a business combination and isnot amortized in accordance with SFAS No. 142, *Goodwill and Other IntangibleAssets.* The provisions of SFAS No. 142 require that the Company allocateits goodwill to its various reporting units, determine the carrying value ofthose businesses, and estimate the fair value of the reporting units so that atwo-step goodwill impairment test can be performed.  In the first step ofthe goodwill impairment test, the fair value of each reporting unit is comparedto its carrying value.  Management reviews, on an annual basis, the carryingvalue of goodwill in order to determine whether impairment has occurred. Impairment is based on several factors including the Company's projection offuture discounted operating cash flows. If an impairment of the carrying valuewere to be indicated by this review, the Company would perform the second stepof the goodwill impairment test in order to determine the amount of goodwillimpairment, if any. 

 

During the nine months ended September30, 2007, the carrying amount of the Company's goodwill increased by $92,400due to additional goodwill acquired in connection with the acquisition of TBS(see Note 5).

 

Identifiable intangibles acquiredin connection with business acquisitions are recorded at their respective fairvalues (see Note 5).  Deferred income taxes have been recorded to theextent of differences between the fair value and the tax basis of the assetsacquired and liabilities assumed.  

 

Long-Lived Assets

 

In the event that facts andcircumstances indicate that equipment or other long-lived assets may beimpaired, an evaluation of recoverability would be performed.  If anevaluation is required, the estimated future discounted cash flows associatedwith the asset are compared to the asset's carrying amount to determine if animpairment charge is necessary.  The amount of long-lived assetimpairment, if any, is charged to operations in the period in which long-livedasset impairment is determined.  At September 30, 2007, managementbelieves there is no impairment of its long-lived assets.  There can be noassurance, however, that market conditions will not change or demand for theCompany's products or services will continue, which could result in impairmentof long-lived assets in the future.

 

Stock-Based Compensation

 

At September 30, 2007, the Companyhad 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 the accounting of transactionsin which an entity exchanges its equity instruments for goods or services,primarily focusing on accounting for transactions where an entity obtainsemployee services in share-based payment transactions. SFAS 123(R) requires apublic entity to measure the cost of employee services received in exchange foran award of equity instruments, including stock options, based on thegrant-date fair value of the award and to recognize it as compensation expenseover the period the employee is required to provide service in exchange for theaward, usually the vesting period.  In March 2005, the SEC issued SAB 107relating to SFAS 123(R). The Company has applied the provisions of SAB 107 inits adoption of SFAS 123(R).

SFAS 123(R)requires companies to estimate the fair value of share-based payment awards onthe date of grant using an option-pricing model. The value of the portion ofthe award that is ultimately expected to vest is recognized as expense over therequisite service periods in the Company's condensed consolidated statements ofoperations.

Stock-basedcompensation expense recognized during the period is based on the value of theportion of share-based payment awards that is ultimately expected to vestduring the period. Stock-based compensation expense recognized in the Company'scondensed consolidated statements of operations for the three and nine monthsended September 30, 2007 and 2006 included compensation expense for share-basedpayment awards granted prior to, but not yet vested as of December 31,2005 based on the grant date fair value estimated in accordance with the proforma provisions of SFAS No. 123, *Accounting for Stock-BasedCompensation* ("SFAS 123"), and compensation expense for the share-basedpayment awards granted subsequent to December 31, 2005 based on the grantdate fair value estimated in accordance with the provisions of SFAS 123(R). Asstock-based compensation expense recognized in the condensed consolidatedstatements of operations for the three and nine months ended September 30, 2007and 2006 is based on awards ultimately expected to vest, it has been reducedfor estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated atthe time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. The estimated average forfeiture ratefor the nine months ended September 30, 2007 and 2006, of approximately 12%,and 21%, respectively, was based on historical forfeiture experience andestimated future employee forfeitures.

 

SFAS 123(R)requires the cash flows resulting from the tax benefits resulting from taxdeductions in excess of the compensation cost recognized for those options tobe classified as financing cash flows. Due to the Company's loss position,there were no such tax benefits during the nine months ended September 30, 2007and 2006.

 

***Description of Plans***

 

The Company's stock option plans provide for grants of options toemployees and directors of the Company to purchase the Company's shares, asdetermined by management and the board of directors, at the fair value of suchshares on the grant date. The options generally vest over a five-year periodbeginning on the grant date and have a seven-year term. As of September 30,2007, the Company is authorized to issue up to 95,000,000 shares under these plansand has approximately 56,000,000 shares available for future issuances.

***   ***

***Summary of Assumptions andActivity***

 

The fair value of stock-basedawards to employees and directors is calculated using the Black-Scholes optionpricing model even though the model was developed to estimate the fair value offreely tradeable, fully transferable options without vesting restrictions,which differ significantly from the Company's stock options. The Black-Scholesmodel also requires subjective assumptions, including future stock pricevolatility and expected time to exercise, which greatly affect the calculatedvalues. The expected term of options granted is derived from historical data onemployee exercises and post-vesting employment termination behavior. Therisk-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 ofthe date of the grant. The expected volatility is based on the historicalvolatility of the Company's stock price. These factors could change in thefuture, affecting the determination of stock-based compensation expense infuture periods.  The fair value of options granted was estimated using thefollowing weighted average assumptions:

 

|                     |   | Nine Months Ended                                                    |
|--------------------------|--------|----------------------------------------------------------------------|
|                     |   | September 30,                                                        |
|                     |   | 2007                                                                 |   | 2006 |
| Stock options:           |   |                                                                 |   |   |
| Expected term (in years) |   | 5.0                                                                  |   | 5.0 |
| Expected volatility      |   | 360% - 382%                                                          |   | 312% |
| Risk-free interest rate  |   | 4.86%                                                                |   | 3.55% |
| Expected dividends       |   |           -   |   |           -   |

 

 

A summary of option activity as of September 30, 2007 and changes duringthe nine months then ended, is presented below:

 

|                                                     |   | **September 30,  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                                        |   | (5,782,050)             | $0.19 |   |   |
| Options exercised                                        |   | -                  | $     - |   |   |
| Options outstanding at September 30, 2007                |   | 38,611,899         | $0.21 | 5.7 | $              -  |
| Options vested or expected to vest at September 30, 2007 |   | 36,314,892         | $0.22 | 5.6 | $              -  |
| Options exercisable at September 30, 2007                |   | 20,087,651         | $0.27 | 4.5 | $              -  |
|                                                     |   |                    |   |   |   |

 

Theweighted average grant date fair value of options granted during the nine monthsended September 30, 2007 was $0.09 per option.  Upon the exercise of options,the Company issues new shares from its authorized shares.

 

As of September 30, 2007, there was approximately $969,000 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 3.6 weighted average years.The total fair value of vested options issued to employees and directors duringthe nine months ended September 30, 2007 and 2006 was $655,409 and $360,668, respectively,net of an estimated forfeiture rate of 12% and 21%, respectively, which wasrecorded as general and administrative expense in the accompanying condensedconsolidated statements of operations.  In addition, the total fair value ofvested options issued to non-employee consultants for services rendered duringthe nine months ended September 30, 2007 and 2006 was $8,332 and $0,respectively, which was recorded as general and administrative expense in theaccompanying condensed consolidated statements of operations.

 

Beneficial Conversion Feature 

 

The convertible note provides for arate of conversion that is below market value (see Note 6). Such feature isnormally characterized as a "beneficial conversion feature"("BCF"). Pursuant to Emerging Issues Task Force ("EITF") Issue No.98-5 *Accounting For Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Ratio*and EITF Issue 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.

 

Product and Technology Development

 

Product and technology developmentexpense includes personnel costs relating to developing the features, contentand functionality of MVI's internet-enabled fax services and web site, TBS'sgovernment accounting software, Resolution's electronic form software, andGSI's communications services.  Product and technology development costs areexpensed as incurred.

 

Warranty Costs

 

The Company provides a limited 90day warranty on certain products sold. Estimated future warranty obligationsrelated to certain products and services are provided by charges to operationsin the period in which the related revenue is recognized. As of September 30,2007,management of the Company determined that a warranty reserve was notnecessary.  In addition, the charges to expense during the three and nine monthsended September 30, 2007 and 2006 were insignificant.

 

Recent Accounting Pronouncements

 

In February 2007, the FinancialAccounting Standards Board ("FASB") issued SFAS No. 159, *The Fair ValueOption for Financial Assets and Financial Liabilities - Including an Amendmentof FASB Statement No. 115* ("SFAS No. 159"). SFAS No. 159 permits entitiesto choose to measure many financial instruments and certain other items at fairvalue. The objective is to improve financial reporting by providing entitieswith the opportunity to mitigate volatility in reported earnings caused bymeasuring related assets and liabilities differently without having to applycomplex hedge accounting provisions. SFAS No. 159 also establishes presentationand disclosure requirements designed to facilitate comparison between entitiesthat choose different measurement attributes for similar types of assets andliabilities. The Company will adopt SFAS No. 159 in the first quarter of 2008,is still evaluating the effect, if any, on its consolidated financial positionand consolidated results of operations and has not yet determined its impact.

 

In July 2006, the FASB issued FASBInterpretation No. 48, *Accounting for Uncertainty in Income Taxes--aninterpretation of FASB Statement No. 109* ("FIN 48"), which clarifies theaccounting and disclosure for uncertainty in tax positions, as defined. FIN 48seeks to reduce the diversity in practice associated with certain aspects ofthe recognition and measurement related to accounting for income taxes. TheCompany is subject to the provisions of FIN 48 as of January 1, 2007.  TheCompany believes that its income tax filing positions and deductions will besustained on audit and does not anticipate any adjustments that will result ina material change to its financial position.  Therefore, no reserves foruncertain income tax positions have been recorded pursuant to FIN 48. The cumulativeeffect, if any, of applying FIN 48 is to be reported as an adjustment to theopening balance of retained earnings in the year of adoption.  The Company didnot record a cumulative effect adjustment related to the adoption of FIN 48. Tax years since 1992 remain subject to examination by the major taxjurisdictions in which the Company is subject to tax.  The Company's policy forrecording interest and penalties associated with income-based tax audits is torecord such items as a component of income taxes.

 

 

**5.**            **Acquisitions and IntangibleAssets**

 

*TBS*

 

On February 17, 2004, the Companypurchased 100% of the issued and outstanding capital stock of TBS from StephenA. Garner and James L. Campbell.  On May 7, 2007 and pursuant to the TBSacquisition agreement, the Company issued 1,100,000 shares of common stock toeach of Messrs. Garner and Campbell.  The shares were valued at $0.04 per share(the estimated fair value on the date that the shares were issued) and recordedas additional purchase price.  No additional shares of common stock are due toMessrs. Garner and Campbell pursuant to the TBS acquisition agreement.

 

On May 7, 2007 and in connectionwith the acquisition of TBS, the Company issued 110,000 shares of itsrestricted common stock to a non-affiliate pursuant to a finder's feeagreement.  The shares were valued at $0.04 per share (the estimated fair valueon the date that the shares were issued) and recorded as additional purchaseprice.

 

On May 7, 2007 and in connection with theacquisition of TBS, the Company issued 66,000 shares of its restricted commonstock to H. Jay Hill, who is an officer and director of the Company, as afinder's fee.  The shares were valued at $0.04 per share (the estimated fairvalue on the date that the shares were issued) and were recorded ascompensation expense.

 

 

*Other Intangible Assets*

 

On May 12, 2006, the Companyentered into a Patent License Agreement (the "License Agreement") with CatchCurve, Inc. ("Catch Curve").  Pursuant to the License Agreement, Catch Curve grantedthe Company a worldwide, non-exclusive, non-divisible, fully paid-up license touse certain patented technology in connection with any facsimile products orservices made or sold by the Company or its subsidiaries.  The Company isobligated to make aggregate license payments of $600,000 over a period of up tothirty-two months beginning on May 12, 2006, at which time no further paymentsare required under the License Agreement.   License payments of $180,000 aredue in each of the years ended December 31, 2007 and 2008. The LicenseAgreement stipulates that $350,000 of the total license fee is attributable tosales of products and services prior to the date of the License Agreement.  Theremainder of $250,000 is attributable to sales of products and servicessubsequent to the date of the License Agreement. Accordingly, on May 12, 2006,the Company recorded an intangible asset in the amount of $250,000.  Theintangible asset is being amortized over 58 months, the current remaining lifeof the patents covered by the License Agreement.  During the nine months ended September30, 2007, the Company made license payments of $135,000 under the LicenseAgreement.  At September 30, 2007, the unpaid balance due was $225,000.  Inaccordance with the terms of the License Agreement, the Company has classified$180,000 of the total amount due as a current liability and has classified theremainder of $45,000 as a long-term liability on the accompanying condensedconsolidated balance sheet.

----

 

Other intangibles consist of thefollowing as of September 30, 2007: 

 

|   |                                                            |   | Estimated Useful  Life |   | Gross  Carrying | Accumulated  | Net Carrying  |
|--------|-----------------------------------------------------------------|--------|------------------------|--------|-----------------|--------------|---------------|
|   |                                                            |   | (Years)                |   | Amount          | Amortization | Amount        |
|   | Corporate:                                                      |   |                   |   |            |         |          |
|   |    License  agreement                            |   | Five                   | $      | 250,000    |  $      | (69,827)      |  $ | 180,173  |
|   |                                                            |   |                   |   |            |         |          |
|   | TBS:                                                            |   |                   |   |            |         |          |   |   |
|   |   Customer  list        |   | Ten                    | $      | 500,000    |  $      | (181,250)     |  $ | 318,750  |
|   |   Trade name                                               |   | Five                   |   | 50,000     | (36,250)     | 13,750   |
|   |                                                            |   |                   |   | 550,000    | (217,500)    | 332,500  |
|   | Resolutions:                                                    |   |                   |   |            |         |          |
|   |   Customer relationships                                   |   | Ten                    |   | 570,000    | (144,675)    | 425,325  |
|   |   Software development                                     |   | Five                   |   | 104,170    | (37,441)     | 66,729   |
|   |   Trade name                                               |   | Five                   |   | 50,000     | (25,000)     | 25,000   |
|   |   Covenant not to compete                                  |   | Three                  |   | 26,100     | (19,575)     | 6,525    |
|   |                                                            |   |                   |   | 750,270    |         | (226,691)     |   | 523,579  |
|   | GSI:                                                            |   |                   |   |            |         |          |   |   |
|   |    Customer relationships                        |   | Ten                    |   | 2,200,000  |         | (311,667)     |   | 1,888,333  |
|   |    Technology                                    |   | Five                   |   | 490,000    |         | (138,833)     |   | 351,167  |
|   |    Trade names and marks                         |   | Ten                    |   | 420,000    |         | (59,500)      |   | 360,500  |
|   |                                                            |   |                   |   | 3,110,000  |         | (510,000)     |   | 2,600,000  |
|   |                                                            |   |                   |   |            |         |          |   |   |
|   | Total other  intangible assets                                  |   |                   | $      | 4,660,270  |  $      | (1,024,018)   |  $ | 3,636,252  |
|        |                                                                 |        |                        |        |                 |              |               |  |  |  |  |

 

Amortization of other intangibleassets was $424,901 and $289,602 during the nine months ended September 30,2007 and 2006, respectively.  During the nine months ended September 30, 2007,the Company did not acquire or dispose of any intangible assets.

 

The estimated amortization expensefor the five years ending December 31, 2011 is as follows: 

 

|   | Years Ending 

December 31, |   |   |
|--------|-----------------------------|--------|--------|
|   |                        |   |   |  
 

2007

$

566,000

 
 

2008

 

562,000

 
 

2009

 

549,000

 
 

2010

 

539,000

 
 

2011

 

419,000

 
 

 

$

2,635,000

 
 

** **

** **

**6.           Debt**

** **

               Bank Lines of Credit

 

In connection with the acquisitionof GSI, the Company has a $1,000,000 revolving line of credit (the"Line") with a financial institution and used proceeds to fund arequired payment of $840,000 pursuant to the Settlement Agreements with dissentingshareholders of GSI.  The Line matures on December 12, 2007.  Interest onoutstanding borrowings is payable monthly at a rate equal to the prime rate (7.75%per annum as of September 30, 2007 and subject to adjustment).  The line iscollateralized by the assets of GSI and guaranteed by four shareholders of theCompany who were formerly shareholders of GSI.   As of September 30, 2007, noprincipal payments have been made against outstanding borrowings of $840,000and the Company was in compliance with all loan covenants except for a pay downcovenant.  Pursuant to the pay down covenant, the Company was required toreduce the principal balance of the Line to zero for at least one 30consecutive day period in the twelve month period that ended on September 12,2007.   The financial institution has not notified the Company that it is indefault.  The Company and the financial institution are in the process of convertingthe Line to a non-revolving loan and extending the due date of the underlyingcommercial note to September 30, 2008.

 

Effective September 30, 2006,VillageEDOCS obtained a $500,000 revolving line of credit ("RLOC") with afinancial institution.  The RLOC is guaranteed by a shareholder of theCompany.  Interest on outstanding borrowings is payable monthly at an annualrate of interest equal to LIBOR (4.63% at October 31, 2007) plus 2%.  As of September30, 2007, there were outstanding borrowings of $491,146 on the RLOC and theCompany was in compliance with all loan covenants.

 

Effective November 28, 2005, TBSrenewed a $100,000 revolving line of credit ("TBS RLOC)" with a financialinstitution.  The TBS RLOC is guaranteed by the assets of TBS.   Interest onoutstanding borrowings is payable monthly at a variable annual rate equal tothe financial institution's prime rate in effect.  As of September 30, 2007, therewere no outstanding borrowings under TBS RLOC and the Company was in compliancewith all loan covenants.

 

Alexander Riess and WilliamFalcon

 

An aggregate of $30,000 in notespayable to Alexander Riess and William Falcon (related parties) were assumed inthe acquisition of Resolutions.  The notes were non-interest bearing.  Thenotes were paid in full as of March 1, 2007 in accordance with the acquisitionagreement.

 

C. Alan and Joan P. Williams

 

On February 17, 2004, the Companyborrowed $1,700,000 from C. Alan and Joan P. Williams and issued a convertiblepromissory note, bearing interest at 10 percent per annum.  During 2005, allbut $65,000 of the principal amount due pursuant to this note was convertedinto shares of the Company's common stock.   The note and accrued interest aredue at the earlier of one of three events: 1) October 31, 2007; 2) acquisitionof a controlling interest in the Company by a third party; or 3) the Companyachieves equity financing of a minimum of $3,000,000.  Effective April 14,2005, pursuant to an amendment to the note, the conversion price was fixed at$0.14 per share.  As an incentive for Mr. and Mrs. Williams to provide theloan, the Company issued them a warrant to purchase 5,000,000 shares of theCompany's restricted common stock at $0.10 per share exercisable until February17, 2009.  In connection with the issuance of the note, the Company recorded adebt discount of $730,000, consisting of an embedded put option of $280,000 andthe fair value of the warrant of $450,000, which were recorded as derivativeliabilities upon note issuance and subsequently reclassified to additionalpaid-in capital.  The Company is amortizing the discount using the effective interestmethod through October 31, 2007.

 

At September 30, 2007, the amountowed by the Company to the Williams pursuant to the unpaid balance of theconvertible promissory note payable was $63,771 in principal, net of $1,226 ofunamortized debt discount, and $105,247 in unpaid interest.

 

James L. Campbell and Stephen A.Garner

 

In connection with the acquisitionof TBS, the Company issued a $300,000 convertible promissory note to Stephen A.Garner and a $300,000 convertible promissory note to James L. Campbell (the"TBS Notes").  Messrs. Campbell and Garner are employees of TBS. Each of the TBS Notes bore interest at 5 percent per annum and was due andpayable in three equal annual installments of $100,000, with the firstinstallment paid in February 2005, the second installment paid in March 2006and the third and final installment paid in February 2007.

 

 

 

**7.           Stockholders'Equity**

 

a.       Common Stock

 

On February 22, 2007, the Companyissued an aggregate of 500,000 shares of its restricted common stock to aconsultant in connection with a placement agency agreement.  The 500,000 shareswere valued at $0.085 per share (fair value on the measurement date) and theCompany recorded $42,500 of consulting expense in the accompanying condensedconsolidated statements of operations during the nine months ended September30, 2007 in accordance with the nature of the services provided.

 

On May 7, 2007, and pursuant to theTBS acquisition agreement, the Company issued 1,100,000 shares of common stockto each of Messrs. Garner and Campbell.  The shares were valued at $0.04 pershare (the estimated fair value on the measurement date) and recorded asadditional purchase price.  No additional shares of common stock are due toMessrs. Garner and Campbell pursuant to the TBS acquisition agreement.

 

On May 7, 2007, and in connectionwith the acquisition of TBS, the Company issued 110,000 shares of itsrestricted common stock to a non-affiliate pursuant to a finder's feeagreement.  The shares were valued at $0.04 per share (the estimated fair valueon the measurement date) and recorded as additional purchase price.

 

On May 7, 2007, and in connection with theacquisition of TBS, the Company issued 66,000 shares of its restricted commonstock to H. Jay Hill, who is an officer and director of the Company, as afinder's fee.  The shares were valued at $0.04 per share (the estimated fairvalue on the measurement date) and were recorded as compensation expense.

 

On May 7, 2007, the Company issued 26,786 shares ofits restricted common stock to a non-affiliate independent contractor forproject management services rendered.  The shares were valued at $0.04 pershare (the estimated fair value on the measurement date) and were recorded asconsulting expense in June 2007.

 

As of May 24, 2007, a majority ofthe Company's stockholders approved a proposal to increase the authorizedshares of the Company to 500,000,000 from 400,000,000.

 

On August 28, 2007, and in connection with anengagement agreement, the Company issued an aggregate of 500,000 shares of itsrestricted common stock to Gemstone Securities LLC for services provided.  Theshares were valued at $0.06 per share (the estimated fair value on themeasurement date).

 

On August 28, 2007, the Company issued 2,000,000shares of its restricted common stock to C. Alan and Joan P. Williams at $0.10per share in consideration for $200,000 in cash proceeds to the Company fromthe exercise of common stock purchase warrants.

 

Effective September 7, 2007, the Companyreincorporated in Delaware under the name VillageEDOCS, Inc.  Pursuant to itsArticles of Incorporation filed with the State of Delaware, the Company isauthorized to issue two classes of shares of stock.  The first class isdesignated as preferred stock.  The total number of shares of Series APreferred stock that the Company is authorized to issue is forty eight million(48,000,000) of  $0.001 par value per share.  The second class is designated ascommon stock.  The total number of shares of common stock that the Company isauthorized to issue is five hundred million (500,000,000) of $0.0001 par value.

 

 

b.       StockOptions

 

During the nine months ended September30, 2007, the Company granted to its employees options to purchase shares ofits common stock under the 2002 Plan as follows:  4,242,392 shares at $0.19 pershare and 1,180,000 shares at $0.15.  All options were issued at or above fairvalue on the dates of grant and vest on various dates from the dates of grantthrough August 2012.  During the nine months ended September 30, 2007, optionsto purchase 5,782,050 were forfeited due to their expiration.

 

**8.           Commitmentsand Contingencies**

 

Leases

 

The Company leases certain property and equipmentunder operating lease agreements (including three related party leases - see Note10) which expire on various dates through 2012 and provide for monthly leasepayments ranging from $28 to $12,653.

 

On April 23, 2007, the Company obtained an executedcommercial real estate lease agreement from an unrelated third party for officespace from which the Company will conduct the operations of its corporateheadquarters and those of its wholly-owned subsidiary, MVI, for a term of fiveyears commencing on June 1, 2007.  Pursuant to the lease agreement, the Companyand MVI will occupy approximately 5,750 square feet at a cost of $10,063,$10,064, $10,675, $10,996, and $11,325 per month for each of the twelve monthperiods ended June 30, 2008, 2009, 2010, 2011, and 2012, respectively.

 

LegalProceedings and Claim

 

The Company is, from time to time, involved invarious legal and other proceedings which arise in the ordinary course ofoperating its business. 

 

In connection with the acquisition of GSI theCompany is entitled to certain rights of indemnification from GoSolutionsEquity, LLC, which is a former shareholder of GSI that became a shareholder ofthe Company as a result of our acquisition of GSI.  The Company made a claim ofindemnification from this entity in connection with the bankruptcy of one ofGSI's significant customers - Vartec Telecom, Inc. - and the facts andcircumstances relating to the procurement and maintenance of the Primerica LifeInsurance account and related Citigroup affiliates.  GoSolutions Equity, LLChas indicated that it does not believe that we have a valid basis for makingsuch indemnification claims.

 

The Company has engaged in limited discussions withGoSolutions Equity, LLC as it relates to the indemnification claims notice andtheir response to such claims notice.  However, the Company is unable to advisewhether it will be successful in the indemnification claims against GoSolutionsEquity, LLC.  Pursuant to the agreement with GSI, if the Company is successful,GoSolutions Equity, LLC would only be required to return up to approximately4.4 million of our shares issued to that entity to satisfy such indemnificationclaims.  GoSolutions Equity, LLC is not required to contribute cash to satisfyany indemnification claims.

 

In the opinion of management, the amount ofultimate liability, if any, with respect to these actions will not materiallyaffect the consolidated financial position or results of operations of theCompany.

 

In March 2007, GSI was served by the Trustee forVartec Telecom, Inc. ("Trustee") in the United States Bankruptcy Court for theNorthern District of Texas, Dallas Division ("Bankruptcy Court"), Case No.04-81694-hdh-7.  The complaint sought recovery of approximately $400,000 foralleged preferential transfers made in 2004.  On July 19, 2007, the BankruptcyCourt issued an order approving a compromise and settlement between the Trusteeand GSI pursuant to which the claims of the Trustee and the counterclaims ofGSI were settled in consideration for GSI's payment of $55,000, $40,000 ofwhich was payable within two (2) business days of the Bankruptcy Court'sapproval order and the remainder of which was due in three equal monthlypayments of $5,000 beginning on or before August 1, 2007.  As of September 30,2007, GSI had paid the Trustee the entire settlement amount of $55,000.

 

Consulting and Employee Agreements

 

The Company has entered into a variety ofconsulting and employee agreements for services to be provided to the Companyin the ordinary course of business.  These agreements call for minimum salarylevels and/or option grants and/or common share issuances and various paymentsupon performance of services and/or termination of the agreements (except forcause).

Indemnities and Guarantees

 

During the normal course of business, the Companyhas made certain indemnities and guarantees under which it may be required tomake payments in relation to certain transactions.  The Company indemnifies itsdirectors, officers, employees and agents to the maximum extent permitted underthe laws of the States of California, Florida, and Georgia.  These indemnitiesinclude certain agreements with the Company's officers under which the Companymay be required to indemnify such person for liabilities arising out of theiremployment relationship.  In connection with its facility leases, the Companyhas indemnified its lessors for certain claims arising from the use of thefacilities.  In connection with the Company's acquisition of TBS, the partieshave agreed to indemnify each other from claims relating to the acquisitionagreement to a maximum of $1,500,000 except in the event of fraud, willfulmisconduct, or breaches of certain representations and warranties contained inthe agreement.  In connection with the Company's acquisitions of Resolutionsand GSI, the parties have agreed to indemnify each other from claims relatingto the acquisition agreement.  The duration of these indemnities and guaranteesvaries and, in certain cases, is indefinite.  The majority of these indemnitiesand guarantees do not provide for any limitation of the maximum potentialfuture payments the Company could be obligated to make.  Historically, theCompany has not been obligated to make significant payments for theseobligations and no liabilities have been recorded for these indemnities andguarantees in the accompanying condensed consolidated balance sheet.

 

**9.           SegmentReporting**

 

The Company's operationsare classified into five principal reportable segments that provide differentproducts or services.  Separate management of each segment is required becauseeach business unit is subject to different marketing, production, andtechnology strategies.  The Company operates in the following five reportablesegments: 

 

(a)  Electronic document delivery services,(b)  Government accounting solutions,

(c)  Electronic forms,

(d)  Integrated communications, and

(e)  Corporate. 

 

The Company evaluatesperformance and allocates resources based upon operating income.  Theaccounting policies of the reportable segments are the same as those describedin the summary of accounting policies.  Inter-segment sales are eliminated uponconsolidation.

 

The following tablesummarizes segment asset and operating balances by reportable segment, has beenprepared in accordance with the internal accounting policies, and may not bepresented in accordance with accounting principles generally accepted in the United States of America:

 

 

 

**Quarter ended /**

** **

**Quarter**

** **

**Nine Months**

** **

**Nine Months**

(1)

 

 

**As of**

** **

**ended**

** **

**ended / As of**

** **

**ended**

 

 

 

**September 30,**

** **

**September 30,**

** **

**September 30,**

** **

**September 30,**

 

 

 

**2007**

** **

**2006**

** **

**2007**

** **

**2006**

 

 

 

 

 

 

 

 

 

 

 

Net revenue from external  customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery

 

$                789,319 

 

$            690,803 

 

$                 2,336,329 

 

$          2,199,925 

 

Government accounting solutions

 

                1,289,135 

 

            1,229,915 

 

                   3,316,973 

 

            2,864,614 

 

Electronic forms

 

                  454,501 

 

               660,357 

 

                   1,493,652 

 

            1,622,390 

 

Integrated communications

 

                1,504,100 

 

            1,304,569 

 

                   4,523,236 

 

            2,300,646 

 

Corporate

 

                          -   

 

                       -   

 

                              -   

 

                       -   

 

Total  net revenue from 

 

 

 

 

 

 

 

 

 

     external customers:

 

$             4,037,055 

 

$          3,885,644 

 

$               11,670,190 

 

$          8,987,575 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery

 

$                 71,932 

 

$               94,280 

 

$                    304,896 

 

$             577,278 

 

Government accounting  solutions

 

                  163,974 

 

               188,385 

 

                      271,519 

 

                 18,679 

 

Electronic forms

 

                   (44,514)

 

               112,054 

 

                      142,496 

 

                 57,375 

 

Integrated communications

 

                  407,521 

 

               (24,172)

 

                      660,727 

 

               121,358 

 

Corporate

 

                 (694,352)

 

             (377,701)

 

                  (2,316,396)

 

           (1,334,294)

 

Total  operating loss:

 

$                (95,439)

 

$              (7,154)

 

$                  (936,758)

 

$           (559,604)

 

 

 

 

 

 

 

 

 

 

 

Depreciation and  amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery

 

$                  17,272 

 

$                2,202 

 

$                     45,753 

 

$              24,011 

 

Government accounting  solutions

 

                    29,626 

 

                 34,495 

 

                        85,606 

 

               107,752 

 

Electronic forms

 

                    42,155 

 

                 46,926 

 

                      109,994 

 

               104,699 

 

Integrated communications

 

                  142,366 

 

               208,085 

 

                      436,811 

 

               260,347 

 

Corporate

 

                    11,641 

 

                 11,909 

 

                        37,501 

 

                 19,397 

 

Total  depreciation and amortization:

 

$                243,060 

 

$            303,617 

 

$                   715,665 

 

$            516,206 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of  interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery

 

$                          -   

 

$              (1,582)

 

$                              -   

 

$                     34 

 

Government accounting  solutions

 

                        750 

 

                       -   

 

                         1,008 

 

                       -   

 

Electronic forms

 

                        504 

 

                  1,624 

 

                         1,342 

 

                  4,838 

 

Integrated communications

 

                       (314)

 

                  2,178 

 

                          (648)

 

                  4,356 

 

Corporate

 

                    31,989 

 

                 33,327 

 

                        89,334 

 

                 75,986 

 

Total  interest expense, net of interest income:

 

$                 32,929 

 

$              35,547 

 

$                     91,036 

 

$              85,214 

 

continued.

 

 

 

 

 

 

 

 

 

 

 

 

 

**Quarter ended /**

** **

**Quarter**

** **

**Nine Months**

** **

**Nine Months**

(1)

 

 

**As of**

** **

**ended**

** **

**ended / As of**

** **

**ended**

 

 

 

**September 30,**

** **

**September 30,**

** **

**September 30,**

** **

**September 30,**

 

 

 

**2007**

** **

**2006**

** **

**2007**

** **

**2006**

 

Net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery

 

$                  70,980 

 

$              96,185 

 

$                   304,447 

 

$             578,602 

 

Government accounting  solutions

 

                  162,597 

 

               188,385 

 

                      276,184 

 

                 18,679 

 

Electronic forms

 

                    22,042 

 

               110,429 

 

                      208,214 

 

                 52,536 

 

Integrated communications

 

                  427,434 

 

               (19,408)

 

                      597,119 

 

               123,944 

 

Corporate

 

                 (726,322)

 

             (411,027)

 

                  (2,409,070)

 

           (1,439,279)

 

Total  net loss:

 

$                (43,269)

 

$            (35,436)

 

$               (1,023,106)

 

$           (665,518)

 

 

 

 

 

 

 

 

 

 

 

Identifiable assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery

 

$                941,297 

 

 

 

$                   941,297 

 

 

 

Government accounting  solutions

 

                4,742,109 

 

 

 

                   4,742,109 

 

 

 

Electronic forms

 

                3,664,843 

 

 

 

                   3,664,843 

 

 

 

Integrated communications

 

                5,795,553 

 

 

 

                   5,795,553 

 

 

 

Corporate

 

                  266,454 

 

 

 

                      266,454 

 

 

 

Total  identifiable assets:

 

$           15,410,256 

 

 

 

$               15,410,256 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery

 

$                 23,625 

 

$              16,877 

 

$                     75,842 

 

$              39,314 

 

Government accounting  solutions

 

                          -   

 

                 10,838 

 

                        63,175 

 

                 10,838 

 

Electronic forms

 

                          -   

 

                 (3,356)

 

                            973 

 

                 12,788 

 

Integrated communications

 

                      3,573 

 

                  8,852 

 

                        49,686 

 

                  8,852 

 

Corporate

 

                        181 

 

                       -   

 

                         5,969 

 

                       -   

 

     Total  capital expenditures:

 

$                 27,379 

 

$              33,211 

 

$                   195,645 

 

$              71,792 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) 2006 period results and  balances for the Integrated communications segment are reported as of and for  the period 

 

   from May 1, 2006 (date of  acquisition) through September 30, 2006.

 

 

 

** **

** **
****
** **

**10.           RelatedParty Transactions**

 

The Company has borrowed significantly from relatedparties, issued a significant number of options and warrants to relatedparties, and issued a significant number of shares of its common stock torelated parties upon conversion of convertible promissory notes payable asdescribed more fully in Note 6.  

 

During the three months ended September 30, 2007,the Company issued a non-interest bearing note payable to a related party inthe amount of $15,000.  The note had a balance of $15,000 at September 30, 2007and is included in accrued expenses in the accompanying condensed consolidatedbalance sheet.  The amount was due on demand and was repaid in November 2007.

 

TBS has a related party operating lease withPerimeter Center Partners for the rental of the land and building occupied byTBS.  The lease commenced on February 1, 2004 and has a term of five years,with monthly payments of $6,200.  In addition, TBS has an equipment lease withPerimeter Center Partners for certain equipment used in its operations.  Thelease commenced May 19, 2007 and has a term of approximately thirty-two andone-half months, with monthly payments of $1,746.  The Company has executed aGuaranty with respect to each lease.  Perimeter Center Partners is owned byStephen A. Garner and James L. Campbell, who are significant employees of theCompany and the former owners of TBS.

 

GSI leases the St. Petersburg office space pursuantto a noncancelable operating lease agreement expiring on April 30, 2011 at acost of $12,653, $13,232, $13,841, $14,485, and $15,164 per month for each ofthe twelve month periods ended April 2007, 2008, 2009, 2010, and 2011,respectively.  The building in which the office space is located is owned by anentity in which a member of GoSolutions Equity, LLC (a related party) owns aninterest.  

** **

 

 

ITEM 2 - MANAGEMENT'SDISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

 

 

**IMPORTANT NOTIFICATIONS**

 

*This Quarterly Report on Form 10-QSB includes forward-lookingstatements within the meaning of Section 21E of the Securities Exchange Act of1934, as amended. All statements that do not directly and exclusively relate tohistorical facts constitute forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995.  You are cautioned not toput undue reliance on any forward-looking statements.  For these statements, weclaim the protection of the safe harbor for forward-looking statementscontained in Section 21E of the Exchange Act.  For important additional andspecific information regarding these statements, we strongly urge you to referto the caption below entitled "CAUTIONARY INFORMATION ABOUTFORWARD-LOOKING STATEMENTS" and the caption entitled "CERTAIN FACTORSTHAT MAY AFFECT FUTURE RESULTS" which can be found in Item 6. Management'sDiscussion and Analysis or Plan of Operation of the Annual Report on Form10-KSB filed with the U.S. Securities and Exchange Commission ("SEC") on April2, 2007.*

** **

The Company's Internetwebsite address is www.villageedocs.com.  The Company's annual reports on Form10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, and allamendments thereto, are available free of charge on the Company's website assoon as reasonably practical after such reports are electronically filed with,or furnished to, the U.S. Securities and Exchange Commission.

** **

** **

** **

 

**INTRODUCTION**

** **

The following Management's Discussion and Analysis or Plan of Operations ("MD&A")is intended to help the reader understand VillageEDOCS.  MD&A is presentedin the following six sections:

 

§       BusinessOverview

§       CriticalAccounting Policies and Estimates

§       Resultsof Operations

§       Liquidityand Capital Resources

§       CautionaryInformation About Forward-Looking Statements, and

§       RecentAccounting Standards and Pronouncements

 

MD&A is provided as a supplement to, and should be read inconjunction with, the unaudited condensed consolidated balance sheet as of September30, 2007, and the unaudited condensed consolidated statements of operations forthe three and nine months ended September 30, 2007 and 2006, the unaudited condensedconsolidated statements of cash flows for the nine months ended September 30,2007 and 2006, and the related notes thereto as well as the audited consolidatedfinancial statements of the Company for the year ended December 31, 2006 includedin the Company's Annual Report on Form 10-KSB filed with the SEC on April 2,2007.

 

In MD&A, we use "we," "our," "us,""VillageEDOCS," and "the Company" to refer to VillageEDOCSand its wholly-owned subsidiaries, unless the context requires otherwise. Amounts and percents in tables may not total due to rounding.  This discussioncontains forward-looking statements based upon current expectations thatinvolve risks and uncertainties, such as our plans, objectives, expectationsand intentions. The Company cautions readers that important facts and factorsdescribed in MD&A and elsewhere in this document sometimes have affected,and in the future could affect our actual results, and could cause our actualresults for the remainder of 2007 and beyond to differ materially from thoseexpressed in any forward-looking statements made by, or on behalf of, theCompany. 

 

Our Internet web site address is www.villageedocs.com.  Our annualreports on Form 10-KSB, quarterly reports on Form 10-QSB, and current reportsof Form 8-K, and all amendments thereto, are available free of charge on ourwebsite as soon as reasonably practical after such reports are electronicallyfiled with, or furnished to, the U.S. Securities and Exchange Commission.  Theinformation on our web site is not incorporated by reference in this quarterlyreport on Form 10-QSB.

 

As reported in the Report of Independent Registered Public AccountingFirm on our December 31, 2006 consolidated financial statements, we havesuffered recurring losses from operations and have a working capital deficitthat raises substantial doubt about our ability to continue as a going concern.

 

Effective May 1, 2006, we acquired GoSolutions.  The acquisition ofGoSolutions has caused our results of operations during 2007 to varysignificantly from those reported for 2006 due to the acquisition.  However themajority of such effect is limited to the Integrated communications segment(see further discussion in "Results of Operations" below).

 

Our business and results of operations are affected by a wide variety offactors, as we discussed under the caption "*Certain Factors That May AffectFuture Results*" in Item 6. Management's Discussion and Analysis or Plan ofOperations of our Annual Report on Form 10-KSB filed with the SEC on April 2,2007 and elsewhere in this report, which could materially and adversely affectus and our actual results.  As a result of these factors, we may experiencematerial fluctuations in future operating results on a quarterly or annualbasis, which could materially and adversely affect our business, financialcondition, operating results and stock price.

 

Any forward-looking statements herein speak only as of the date hereof.Except as required by applicable law, we undertake no obligation to publiclyrelease the results of any revisions to these forward-looking statements thatmay be made to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.  Please refer to the discussionbelow under the caption entitled *Liquidity and Capital Resources*.

 

 

**BUSINESS OVERVIEW**

 

***General***

We are incorporated in the State of Delaware and have beenin business since 1995.  We conduct our business through four wholly-ownedsubsidiaries.  GoSolutions, Inc. ("GSI"), our most recent acquisition, providesenhanced voice and data communications services.  MessageVision, Inc. ("MVI")operates our Internet-based document delivery services.  Tailored BusinessSystems, Inc. ("TBS") operates our government accounting products and servicesbusiness.  Phoenix Forms, Inc. ("Resolutions") sells and operates our e-forms,archiving, imaging, and workflow products and services.

 

We generate revenue, operating income, and cash flows from:
- subscription agreements for enhanced voice, data, and     conferencing services;
- usage charges for delivery and other services involving     electronic documents;
- usage charges for our governmental accounting and online     payment hosted application services;
- recurring fixed monthly service fees for access to voice,     data, or application services;
- per item and flat fee charges for volume printing services     to governmental entities;
- fees for professional service;
- wholesale enhanced voicemail services;
- the sale of licenses for proprietary software and third     party software;
- fees for maintenance and support agreements;
- installation services;
- sales of third party computer hardware; and
- fees for training.

 

 

***Our Objective***

A core component of our mission is to provide solutions thatfacilitate the movement of business information between business enterprisesusing a dynamic and diverse set of delivery methods and content formats.  Ourproducts and services have been designed to help enterprises meet variouscommunications challenges, including the need to:
- communicate with an ever-expanding number of trading     partners, customers, and enterprises;
- increase the control, management, speed, accuracy and     security of the information delivered;
- manage an increasing set of methods used to communicate     (print/mail, email, web, fax, XML, and wireless);
- cost-effectively implement a solution that will allow the     enterprise to endure the slow acceptance of a common set of delivery     methods;
- meet the communications challenges with a service that is     more robust than available commercial grade proprietary technologies; and
- mitigate the negative impact of delivery methods on     workflow, business process and security requirements.

 

Our target markets include Financial Services, Healthcare,Manufacturing, and Local Government, and we serve approximately 1,200 activeclients.

While we do have some sources of non-recurring revenue, suchas hardware sales and third party software, we focus on developing andmaintaining sources of monthly recurring revenue, such as providing subscriberswith solutions for their critical day to day business processes for themovement of business information.

 

***Key Items in First Nine Months of 2007***

 
- Consolidated net revenue for the nine months ended     September 30, 2007 increased by 30% over the 2006 period due to a 16%     increase from TBS, a 6% increase from MVI, and the consolidation of $4,523,236     of net revenue of GSI (acquired May 1, 2006);

 
- Although operating expenses increased during the first nine     months of 2007 compared to the 2006 period, the most significant factor in     the overall increase was the addition of $1,388,739 in operating expenses     of GSI (nine months in the 2007 period compared to five months in the 2006     period).  Consolidated operating expenses during the 2007 period were 70%     of sales compared to 72% of sales in the 2006 period;

 
- Operating expenses decreased at TBS (-34%) and Resolutions     (-27%).  These decreases were offset by increases at MVI (+16%) and Corporate     (+74%);

 
- Net income increased significantly at TBS to $276,184     compared to $18,679 for the first nine months of 2006;

 
- Net income increased significantly at Resolutions to     $208,214 compared to $52,536 for the first nine months of 2006;

 
- GSI contributed $597,119 of net income for the first nine     months of 2007.

 

 

***Areas of Focus***

*Growth Strategy*

 

Our current and future growth strategy is focused onacquiring intellectual and technology assets that improve our ability to take aclient's unstructured content and documents and deliver it to the other partythrough the method preferred by each party, presenting the content in a mannerthat surpasses our client's goals.  In essence, we strive to bring a BusinessProcess Management discipline to their information.  We believe that if we aresuccessful in executing this strategy, our clients will enjoy improved compliance,collaboration, cost containment, and superior continuity of business processes.
 
Our ultimate vision is to become a business processmanagement/workflow service that provides competency and functionality in thefollowing areas: 

 
- Web Content Management;
- Digital Asset Management;
- Email Management;
- Records Management;
- Documentation Management;
- Information Indexing;
- Categorization/Taxonomy;
- Recognition;
- Document Imaging;
- Form Processing;
- Scanning;
- Collaboration
- Repositories, Storage;
- Long Term Archival;
- Content Integration,;
- Search and Retrieval;
- Content Syndication;
- Localization and     Personalization; and
- Publication (paper or     electronic).

 

We intend to continue our focus on obtaining growth from salesof higher margin products and services at GSI, MVI, TBS, and Resolutions and byacquiring companies that consistently generate net income and positive cashflows.  We believe that this strategy offers the best opportunity for ouroperations to continue to generate positive operating income and cash flows fromoperations and to achieve net income. 

 

Our acquisition strategy is focused in two areas: serviceinfrastructure and vertical market silo.  The service infrastructure area isour focus to acquire enterprises that fulfill our identified strategic technologicalcore competencies.  The vertical market silo acquisition strategy is to acquirecompanies that assist us in penetrating our target market segments of financialservices, healthcare, manufacturing, and local government.

 

*Capital Formation*

* *

During the remainder of 2007, we are actively seekingadditional financing by issuing equity or obtaining a combination of equity anddebt financing from new shareholders and/or lenders.  Although we believe theCompany may generate adequate cash to sustain operations at current levelsbased on our forecasts for the remainder of 2007, we may require additionalfunding to invest in resources that will enable us to operate profitably on aconsistent, month-over-month basis.  In addition, we may be required to repaycertain of our debt instruments in which case we will require additionalfunding.  We continue to caution that there can be no assurance that fundingwill be available on acceptable terms, if at all, or that any such funds weraise would enable us to maintain profitable operations. 

 

In spite of the impact of new laws, regulations, andaccounting pronouncements that have significantly increased our cost ofoperating as a public company, we intend to contain general and administrativecosts where possible.  However, we expect to incur significant costs during theremainder of 2007 and in 2008 related to compliance with Section 404 of theSarbanes-Oxley Act of 2002.  Should additional growth capital becomeavailable, we intend to direct the capital toward increasing sales andmarketing while holding down costs for general and administrative as well as productand technology expenses to the extent possible.

 

*Organizational Enhancements*

* *

Our goal is to drive efficiency and effectiveness throughoutour group of companies.  We are working to align each business unit aroundshared goals and performance targets.  In addition, we are striving to maximizecross-selling activities and we are devoting strategic product management andtechnical resources both to strengthening the integration of our existingproducts and services and to developing new products and services that willallow us to offer our clients powerful new solutions comprised of the best thateach of our business units has to offer.

***Challenges and Risks***

 

Looking forward, management has identified certainchallenges and risks that demand our attention.  Of these, two key challengesand risks are discussed below.

 

*Increased Competition and Capabilities in the Marketplace*

* *

We face strong competition from well-established nationaland global companies as well as from relatively new companies. We must continueto selectively expand into other profitable segments of our markets and offerpowerful product and service offerings in order to increase our share of the marketplace. The introduction of new technologies could render our existing products andservices obsolete or unmarketable or require us to invest in research anddevelopment at much higher rates with no assurance of developing competitiveproducts. Changes in technologies or customer requirements also may cause thedevelopment cycle for our new products and services to be lengthy and result insignificant development costs.  Competitive pressures may impair our ability toachieve profitability.

 

*Capital Resources*

* *

We believe that current and futureavailable capital resources, including the net proceeds from sale of ourproducts and services, will be sufficient to fund our operations at currentlevels for the foreseeable future, but will be insufficient to allow us to repayour debt.  We believe that it is desirable to maintain greater cash reservesthan we have in prior periods.  The exact amount of funds that we will requirewill depend upon many factors, and it is likely that we will require additionalfinancing.  Such sources of financing could include capital infusions,additional equity financing, or debt offerings.  In addition, since ourrevenues and cash flows have historically been subject to seasonality, webelieve that it is important to secure greater access to short term borrowingfacilities, such as operating lines of credit.  There can be no assurance thatadditional funding or borrowing facilities will be available to us onacceptable terms, if at all.  There can be no assurance that additional funds,if raised, would enable us to achieve or maintain profitable operations.  The inability to secure new sources of working capitalduring the remainder of 2007 or 2008 could have a material adverse effect onour business, financial condition and results of operations.

 

 

**CriticalAccounting Policies and estimates **

 

In preparing our consolidated financial statements, we makeestimates, assumptions and judgments that can have a significant effect on ourrevenues, income/loss from operations, and net income/net loss, as well as onthe value of certain assets on our consolidated balance sheet.  There were nosignificant changes in critical accounting policies or estimates from those atDecember 31, 2006.

 

** **

**RESULTS OF OPERATIONS**

 
Three Months Ended September 30, 2007 Compared to Three Months Ended September30, 2006
 
Net Revenue from External Customers
 

Net revenue fromexternal customers for the three months ended September 30, 2007 was $4,037,055,a 4% increase over net revenue for the prior year quarter of $3,885,644.

 

For the three months ended September 30, 2007, TBS generated32% of our net revenue, MVI generated 20% of our net revenue, GSI generated 37%of our net revenue, and Resolutions generated 11% of our net revenue.  During thethree months ended September 30, 2006, TBS generated 32% of our net revenue,MVI generated 18% of our net revenue, GSI generated 34% of our net revenue, andResolutions generated 17% of our net revenue.

 

The following is a comparison of the components ofconsolidated net revenue from external customers:

 

 

 

Three Months 

Three Months 

 

 

 

 

Ended

Ended

Variance

 

 

September 30, 2007

September 30, 2006

Amount

Percent

 

 

 

 

 

 

Net revenue from external customers:

 

 

 

 

 

 

 

 

 

 

Electronic document delivery services

$                 789,319  

$                 690,803 

$       98,516 

14%

Government accounting solutions

 

                  1,289,135 

                 1,229,915 

          59,220 

5%

Electronic forms

 

                     454,501 

                    660,357 

      (205,856)

-31%

Integrated communications

 

                  1,504,100 

                 1,304,569 

        199,531 

15%

Corporate

 

                                -   

                               -   

                    -   

 

Total net revenue from external  customers

$               4,037,055 

$              3,885,644 

$     151,411 

4%

 

 

The increase of $151,411 in the 2007 quarter resulted from a15% increase in revenue from GSI, a 5% increase from TBS, a 14% increase fromMVI, and a 31% decrease from Resolutions.

 

Revenue increased 5% at TBS due to increases in revenue fromutility billing, printing, maintenance agreements, and online services, thatresulted from pursuing a strategy to expand our sales of printing business intonew areas, building upon the property tax form processing which hashistorically produced the largest share of our overall printing revenue typicallyin the second half of each calendar year.  These increases were partiallyoffset by decreases in hardware sales and installation which resulted in partfrom our strategy to promote online, usage-based services rather than singleunit product sales.

 

Revenue decreased 31% at Resolutions due to decreases in almostall areas, including sales of our proprietary software products, servers, and maintenanceagreements for certain third party software products that resulted from theexpiration of certain of our contracts with third party software companies.

 

Revenue increased 14% at MVI due to increases in revenuefrom monthly fixed charges resulting largely from increased activity fromexisting clients.  In addition, supplemental services revenue increased. Theses increases were partially offset by a decrease in revenue from outboundservices that resulted from client attrition. 

 

Revenue increased 15% at GSI due to increases in revenuefrom subscription agreements and due to an increase in professional servicefees revenue related to its largest client.

 

Cost of Sales

 

The following is a comparison of the components ofconsolidated cost of sales:

 

 

 

Three Months 

Three Months 

 

 

 

 

Ended

Ended

Variance

 

 

 

September 30, 2007

September 30, 2006

Amount

Percent

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery services

$                  371,207 

$                 231,046 

$     140,161 

61%

Government accounting solutions

 

                     798,596 

                    575,336 

        223,260 

39%

Electronic forms

 

                     264,626 

                    247,460 

          17,166 

7%

Integrated communications

 

                     192,868 

                    221,621 

        (28,753)

-13%

Corporate

 

                                -   

                               -   

                    -   

 

Total cost of sales:

 

$               1,627,297 

$             1,275,463  

$     351,834 

28%

 

Cost of sales for the three months ended June 30, 2007 were$1,627,297 as compared to the $1,275,463 reported during the 2006 quarter. Total cost of sales during the 2007 quarter represented 40% and 33% of net salesduring 2007 and 2006 quarters, respectively.

 

Cost of sales for MVI for the three months ended September30, 2007 represented 47% of MVI's net sales as compared with 33% in the 2006 quarter. This increase is attributable to increased operations staffing costs.

 

Cost of sales for TBS for the three months ended September30, 2007 represented 62% of TBS' net sales as compared with 47% in the 2006 quarter. The increased costs at TBS were largely attributable to the reallocation ofstaff resources which increased operations staff costs and correspondinglyreduced administrative staff expenses.  

 

Cost of sales for Resolutions for the three months ended September30, 2007 represented 58% of Resolutions' net sales as compared with 37% in the2006 quarter.  The increased costs at Resolutions reflect a restructuring inthe 2007 quarter of staff resources from development to operations.

 

Cost of sales for GSI for the three months ended September30, 2007 represented 13% of GSI's net sales as compared with 17% in the 2006quarter.  The reduced cost at GSI reflects a change in revenue mix andoperations staffing.

 

Gross Profit

 

Gross profit for the three months ended September 30, 2007 decreased8% to $2,409,758 as compared to $2,610,181 for the 2006 quarter.  The decreasein the 2007 quarter of $200,423 resulted from decreases of $41,645, $223,022 and$164,040 from MVI, Resolutions and TBS, respectively, which were partially offsetby an increase of $228,284 from GSI.   Gross profit margin for the 2007 and2006 quarters was 60% and 67%, respectively.

 

Operating Expenses

 

The following is a comparison of the components ofconsolidated operating expenses:

 

 

 

Three Months 

Three Months 

 

 

 

 

Ended

Ended

Variance

 

 

 

September 30, 2007

September 30, 2006

Amount

Percent

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery services

$                  346,180 

$                 365,477 

$     (19,297)

-5%

Government accounting solutions

 

                     326,565 

                    466,194 

      (139,629)

-30%

Electronic forms

 

                     234,389 

                    300,843 

        (66,454)

-22%

Integrated communications

 

                     903,711 

                 1,107,120 

      (203,409)

-18%

Corporate

 

                     694,352 

                   377,701  

        316,651 

84%

Total operating expenses:

 

$               2,505,197 

$              2,617,335 

$   (112,138)

-4%

 

 

During the three months ended September 30, 2007, theoperating expenses of Corporate were $694,352, an increase of $316,651 (+84%) comparedto the 2006 quarter as a result of increased compensation, consulting, legal,and accounting expenses, including $200,923 in stock-based compensation expense. During the 2006 quarter, stock-based compensation expense was $116,077.

 

During the three months ended September 30, 2007, MVI's operatingexpenses were $346,180, a decrease of $19,297 (-5%) compared to the 2006quarter.  Product and technology development increased $20,693 (+18%) as aresult of additional staffing.  Sales and marketing increased by $71,408(+108%) as a result of staff additions and increased advertising.  General andadministrative decreased by $126,468 (-69%) due to decreased placement fees,consulting and travel as offset by increased facilities and benefits charges. Depreciation and amortization expense increased $15,070 (+684%) due to anincrease in depreciable fixed assets.

 

During the three months ended September 30, 2007, operatingexpenses at TBS were $326,565, a decrease of $139,629 (-30%) compared to the 2006quarter.  Product and technology development decreased $73,498 (-62%) due to reducedstaffing.  Sales and marketing increased $37,740 (+56%) due to the reallocationof staff resources and increased marketing expenses.  General andadministrative decreased by $99,002 (-40%) due to reduced telephone andmaintenance as well as staff restructuring.  Depreciation and amortizationexpenses decreased $4,869 (-14%).

 

During the three months ended September 30, 2007, operatingexpenses at Resolutions were $234,389, a decrease of $66,454 (-22%) compared tothe 2006 quarter.  Product and technology development decreased $4,631 (-13%) dueto a reduction in staff and consultants.  Sales and marketing decreased $56,118(-62%) due to reallocation of staff resources and reduced travel.  General andadministrative were almost flat.  Depreciation and amortization expenses decreased$4,771 (-10%).

 

During the three months ended September 30, 2007, GSIincurred $903,711 of operating expenses, a decrease of $203,409(-18%) comparedto the 2006 quarter.  Product and technology development increased $135,887(+130%) due to increased staffing costs.  Sales and marketing increased $58,382(+32%) due to increased marketing expenses and bonuses.  General andadministrative decreased by $331,959 (-54%) due to a reduction in staff-relatedexpenses.  Depreciation and amortization expenses decreased $65,719 (-32%).

 

Operating Loss

 

As a result of the foregoing, the Company reported anoperating loss for the three months ended September 30, 2007 of $95,439,compared to an operating loss of $7,154 for the three months ended September 30,2006.  

 

The following is a comparison of the components ofconsolidated income from operations:

 

 

 

Three Months 

Three Months 

 

 

 

 

Ended

Ended

Variance

 

 

 

September 30, 2007

September 30, 2006

Amount

Percent

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery services

$                    71,932 

$                   94,280 

$     (22,348)

-24%

Government accounting solutions

 

                     163,974 

                    188,385 

        (24,411)

-13%

Electronic forms

 

                     (44,514)

                    112,054 

      (156,568)

*

Integrated communications

 

                     407,521 

                    (24,172)

        431,693 

*

Corporate

 

                   (694,352)

                  (377,701)

      (316,651)

84%

Total operating loss

 

$                  (95,439)

$                   (7,154)

$     (88,285)

-1,234%

* calculation is not meaningful

 

 

 

 

 

 

GSI reported a significant improvement in operating income(loss) compared to the prior year quarter.  However, these improvements wereoffset by reduced operating income at TBS and MVI, an operating loss atResolutions, and a higher operating loss at Corporate.

 

Interest Expense, net

 

Interest expense, net for the quarter ended September 30,2007 decreased by $2,618 to $32,929 from the $35,547 reported in the 2006quarter, reflecting a small reduction in the interest rate applied tooutstanding borrowings from one of our operating lines of credit.

 

Other Income (Expense)

 

Other income, net for the quarter ended September 30, 2007 was$73,937 compared to other income, net of $1,772 reported in the 2006 quarter.  Ineach of the quarters, we recorded other income and expense related to settlementof liabilities related to prior years.   The most significant item of otherincome, net for the quarter ended September 30, 2007 was in the electronicforms segment and was recorded as a result of forgiveness of royalties that hadbeen accrued in prior years.

 

 

 

Net Loss

 

As a result of the foregoing, net loss for the three monthsended September 30, 2007 was $43,269, or $0.00 per share, compared to a netloss of $35,436, or $0.00 per share, for the three months ended September 30,2006 on weighted average shares of 151,187,580 and 146,868,127, respectively.

 

The following is a comparison of the components ofconsolidated net loss:

 

 

 

Three Months 

Three Months 

 

 

 

 

Ended

Ended

Variance

 

 

 

September 30, 2007

September 30, 2006

Amount

Percent

 

 

 

 

 

 

Net income (loss):

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery services

$                    70,980 

$                   96,185 

$     (25,205)

-26%

Government accounting solutions

 

                     162,597 

                   188,385  

        (25,788)

-14%

Electronic forms

 

                       22,042 

                    110,429 

        (88,387)

-80%

Integrated communications

 

                     427,434 

                    (19,408)

        446,842 

*

Corporate

 

                  (726,322)

                  (411,027)

      (315,295)

-77%

Total net income (loss)

 

$                  (43,269)

$                 (35,436)

$       (7,833)

-22%

* calculation is not meaningful

 

 

 

 

 

 
 Nine months ended September 30, 2007 Compared to Nine months endedSeptember 30, 2006
 
Net Revenue from External Customers
 

Net revenue from external customers for the nine monthsended September 30, 2007 was $11,670,190, a 30% increase over net revenue forthe prior year period of $8,987,575.

 

For the nine months ended September 30, 2007, TBS generated 28%of our net revenue, MVI generated 20% of our net revenue, GSI generated 39% of ournet revenue, and Resolutions generated 13% of our net revenue.  During the ninemonths ended September 30, 2006, TBS generated 32% of our net revenue, MVIgenerated 24% of our net revenue, GSI generated 26% of our net revenue, andResolutions generated 18% of our net revenue.

 

The following is a comparison of the components ofconsolidated net revenue from external customers:

 

 

 

 

 

 

 

 

 

Nine Months Ended

Nine Months Ended

Variance

 

 

 

September 30, 2007

September 30, 2006

Amount

Percent

 

 

 

 

 

 

Net revenue from external customers:

 

 

 

 

 

 

 

 

 

 

Electronic document delivery services

$               2,336,329 

$             2,199,925  

$     136,404 

6%

Government accounting solutions

 

                  3,316,973 

                 2,864,614 

        452,359 

16%

Electronic forms

 

                  1,493,652 

                 1,622,390 

      (128,738)

-8%

Integrated communications

 

                  4,523,236 

                 2,300,646 

     2,222,590 

97%

Corporate

 

                                -   

                               -   

                    -   

 

Total net revenue from external  customers

$           11,670,190  

$              8,987,575 

$ 2,682,615 

30%

 

 

The increase of $2,682,615 in the 2007 period resulted from a97% increase in revenue from GSI, a 16% increase from TBS, a 6% increase fromMVI, and an 8% decrease from Resolutions.

 

As anticipated, the most significant factor in the increasein consolidated revenue during the first half of 2007 was the consolidation ofa full nine months of revenue of GSI compared to five months during 2006(acquired May 1, 2006).  GSI contributed $4,523,236 during the 2007 periodcompared to 2,300,646 during the 2006 period.  On an annualized (not pro forma)basis, GSI's revenue increased approximately 9% over the 2006 period.

 

Revenue increased 16% at TBS due to increases in revenuefrom printing, maintenance agreements, online services, and software thatresulted from pursuing a strategy to expand our sales of printing business intonew areas, building upon the property tax form processing which hashistorically produced the largest share of our overall printing revenuetypically in the second half of each calendar year.  These increases werepartially offset by decreases in hardware sales and installation which resultedin part from our strategy to promote online, usage-based services rather thansingle unit product sales.

 

Revenue decreased 8% at Resolutions due to decreases insales of hardware as well as decreases in revenue from maintenance agreementsfor certain third party software products that resulted from the expiration ofcertain of our contracts with third party software companies.

 

Revenue increased 6% at MVI by due to an increase in revenuefrom monthly fixed charges and the addition of new clients which offset adecrease in revenue from outbound document delivery services that resulted fromclient attrition.  In addition, supplemental services revenue increased.  MVIintends to continue to concentrate sales efforts toward opportunities withlarger clients.  While such sales typically involve longer and more complexsales cycles, we believe they provide a greater protection from pricing erosiondue to the additional functionality and integration that are elements moreoften associated with our larger client relationships.

 

Cost of Sales

 

The following is a comparison of the components ofconsolidated cost of sales:

 

 

 

 

 

 

 

 

 

Nine Months Ended

Nine Months Ended

Variance

 

 

 

September 30, 2007

September 30, 2006

Amount

Percent

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery services

$                  950,033 

$                 693,931 

$     256,102 

37%

Government accounting solutions

 

                  2,030,091 

                 1,305,097 

        724,994 

56%

Electronic forms

 

                     622,181 

                    566,203 

          55,978 

10%

Integrated communications

 

                     821,618 

                    527,135 

        294,483 

56%

Corporate

 

                                -   

                               -   

                    -   

 

Total cost of sales:

 

$               4,423,923 

$              3,092,366 

$ 1,331,557 

43%

 

Cost of sales for the nine months ended September 30, 2007 increased$1,331,557 (+43%) compared to the 2006 period.  Total cost of sales during the2007 period represented 38% of net sales as compared to 34% during the 2006 period.

 

Cost of sales for MVI for the nine months ended September30, 2007 represented 41% of MVI's net sales as compared with 32% in the 2006 period. This increase is attributable to increased operations staffing costs.

 

Cost of sales for TBS for the nine months ended September30, 2007 represented 61% of TBS' net sales as compared with 46% in the 2006quarter.  The increased costs at TBS were largely attributable to the increasein revenue as well as reallocation of staff resources which increasedoperations staff costs and correspondingly reduced administrative staffexpenses.  

 

Cost of sales for Resolutions for the nine months endedSeptember 30, 2007 represented 42% of Resolutions' net sales as compared with 35%in the 2006 period.  The increased costs at Resolutions reflect a change inrevenue mix where sales of lower margin products and services were moreprominent during the 2007 period due to the reduction in revenue frommaintenance agreements, which generally yield greater margins.

 

Cost of sales for GSI for the nine months ended September30, 2007 represented 18% of net sales as compared with 23% in the 2006 periodas a result of increased usage-based revenues and reductions in telephony and operationsstaff costs. 

 

Gross Profit

 

Gross profit for the nine months ended September 30, 2007increased 23% to $7,246,267 as compared to $5,895,209 for the 2006 period.  Theincrease in the 2007 period of $1,351,058 resulted from decreases of $119,698,$184,716 and $272,635 from MVI, Resolutions and TBS, respectively, which wereoffset by an increase of $1,928,107 from GSI.  Gross profit margin for the 2007period on a consolidated basis was 62% as compared to 66% for the 2006 period.

 

Operating Expenses

 

The following is a comparison of the components ofconsolidated operating expenses:

 

 

 

 

 

 

 

 

 

Nine Months Ended

Nine Months Ended

Variance

 

 

 

September 30, 2007

September 30, 2006

Amount

Percent

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery services

$               1,081,400 

$                928,716  

$     152,684 

16%

Government accounting solutions

 

                  1,015,363 

                 1,540,838 

      (525,475)

-34%

Electronic forms

 

                     728,975 

                    998,812 

      (269,837)

-27%

Integrated communications

 

                  3,040,891 

                 1,652,153 

     1,388,738 

84%

Corporate

 

                  2,316,396 

                 1,334,294 

        982,102 

74%

Total operating expenses:

 

$               8,183,025 

$             6,454,813  

$ 1,728,212 

27%

 

** **

During the nine months ended September 30, 2007, operatingexpenses of Corporate were $2,316,396, an increase of $982,102 (+74%) comparedto the 2006 period.  The increase resulted from higher costs related toamortization of intangible assets, compensation, consulting, legal, andaccounting expenses, including $655,409 in stock-based compensation expenserelated to vested employee and director stock options.  During the 2006 period,stock-based compensation expense related to such stock options was $360,668.  Duringthe 2007 period, we incurred approximately $120,000 in consulting, legal, andaccounting expenses related to a planned acquisition that we elected toterminate prior to entering into a definitive agreement.  Had we completed theacquisition, these charges would have been allocated to the purchase price. Instead, these charges are included in operations.  In addition, accountingexpenses increased in the 2007 period as a result of prevailing market conditionsand the acquisition of GSI, which generated additional audit and tax returnpreparation costs for the consolidated entity due to increased scope andcomplexity.

 

During the nine months ended September 30, 2007, operatingexpenses at MVI were $1,081,400, an increase of $152,684 (+16%) compared to the2006 period.  Product and technology development increased $148,978 (+52%)compared to the 2006 period as a result of additional staffing.  Sales andmarketing increased by $95,134 (+35%) compared to the 2006 period as a resultof reallocation of sales staff to MVI during the 2007 period.  General andadministrative decreased by $113,170 (-33%) compared to the 2006 period due to decreasesin placement fees and bad debt expenses as offset by increased facilities andbenefits charges.  Depreciation and amortization expense increased $21,742(+91%) due to an increase in depreciable fixed assets.

 

During the nine months ended September 30, 2007, operatingexpenses at TBS were $1,015,363, a decrease of $525,475 (-34%) compared to the 2006period.  Product and technology development decreased $197,370 (-53%) comparedto the 2006 period due to reduced staffing.  Sales and marketing increased $46,612(+19%) compared to the 2006 period due to a change in the incentivecompensation structure.  General and administrative decreased $352,571 (-43%)compared to the 2006 period due to reduced telephone and maintenance as well asstaff restructuring.  Depreciation and amortization expenses decreased $22,146(-21%).

 

During the nine months ended September 30, 2007, Resolutionsincurred $728,975 in operating expenses, a decrease of $269,837 (-27%) ascompared to the 2006 period.  Product and technology development decreased by $49,649   (-34%) due to a reduction in staff and consultants.  Sales and marketing decreasedby $171,555 (-57%) due to reallocation of staff resources and reduced travel. General and administrative decreased by $53,928 (-12%) due to reduced bad debt,compensation, and rent expenses.  Depreciation and amortization expenses increased$5,295 (+5%).

 

During the nine months ended September 30, 2007, GSIincurred $3,040,891 of operating expenses.  Sales and marketing, product andtechnology, general and administrative, and depreciation and amortizationexpenses were $879,149, $725,803, $999,128, and $436,811, respectively, and areconsistent with prior periods although not directly comparable to the ninemonths ended September 30, 2006 since GSI was acquired effective May 1, 2006. Onan annualized (not pro forma) basis, the increase in operating expenses is approximately2%.

 

Operating Loss

 

As a result of the foregoing, the Company reported anoperating loss for the nine months ended September 30, 2007 of $936,758,compared to an operating loss of $559,604 for the nine months ended September30, 2006.  

 

The following is a comparison of the components ofconsolidated income from operations:

 

 

 

 

 

 

 

 

 

Nine Months Ended

Nine Months Ended

Variance

 

 

 

September 30, 2007

September 30, 2006

Amount

Percent

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery services

$                  304,896 

$                 577,278 

$   (272,382)

-47%

Government accounting solutions

 

                     271,519 

                      18,679 

        252,840 

1354%

Electronic forms

 

                     142,496 

                      57,375 

          85,121 

148%

Integrated communications

 

                     660,727 

                    121,358 

        539,369 

444%

Corporate

 

                (2,316,396)

              (1,334,294)

      (982,102)

-74%

Total operating loss

 

$                (936,758)

$               (559,604)

$   (377,154)

-67%

 

 

 

 

 

 

* calculation is not meaningful

 

 

 

 

 

 

 

In addition to increases in compensation, legal, andaccounting expenses, two other factors that contributed to the significantchange in operating loss were an increase in depreciation and amortization of $199,459over the 2006 period (due to an increase in intangible assets and relatedamortization expense and the acquisition of GSI) and the impact of employeerelated stock option expenses, which increased by $294,741 over the 2006 period.

 

Interest Expense, Net

 

Interest expense, net for the nine months ended September 30,2007 increased by $5,822 (+7%), which is primarily attributable to an increasein the principal balances outstanding pursuant to our operating lines ofcredit.

 

Other Income (Expense)

 

Other income for the nine months ended September 30, 2007was $19,598 compared to other expense of $22,193 reported in the 2006 period. In each of the periods, we recorded other income and expense related tosettlement of liabilities related to prior years as well as other non-operatingincome and expense items.  The most significant item of other income, net forthe nine months ended September 30, 2007 was in the electronic forms segmentand was recorded as a result of forgiveness of royalties that had been accruedin prior years.

 

Net Loss

 

As a result of the foregoing, net loss for the nine monthsended September 30, 2007 was $1,023,106, or $0.01 per share, compared to a netloss of $665,518, or $0.01 per share, for the nine months ended September 30,2006 on weighted average shares of 149,380,374 and 127,182,192, respectively.

The following is a comparison of the components of consolidatednet loss:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

Nine Months Ended

Variance

 

 

 

September 30, 2007

September 30, 2006

Amount

Percent

 

 

 

 

 

 

Net income (loss):

 

 

 

 

 

 

 

 

 

 

 

Electronic document delivery services

$                  304,447 

$                578,602  

$   (274,155)

-47%

Government accounting solutions

 

                     276,184 

                      18,679 

        257,505 

1379%

Electronic forms

 

                     208,214 

                      52,536 

        155,678 

296%

Integrated communications

 

                     597,119 

                    123,944 

        473,175 

382%

Corporate

 

                (2,409,070)

               (1,439,279)

      (969,791)

-67%

Total net loss

 

$             (1,023,106)

$               (665,518)

$   (357,588)

-54%

 

 

 

 

 

 

* calculation is not meaningful

 

 

 

 

 

 

 

 

**LIQUIDITY AND****CAPITAL RESOURCES**

 

During the nine months ended September 30, 2007, our netcash position increased by $254,341 to $823,160.  Our financing activities providednet cash of $435,279; however, our operating and investing activities used netcash of $48,468 and $132,470, respectively.

 

Net cash used in operating activities for the nine monthsended September 30, 2007 was $48,468, a decrease of $216,523 from the $168,055 providedby operating activities during the 2006 period.

 

Our investing activities during the first nine months of2007 consisted of the purchase of computer equipment. Net cash used ininvesting activities during the 2007 period increased $165,159 to $132,470 fromthe $32,689 provided by investing activities during the 2006 period, duringwhich we acquired net cash in the acquisition of GSI.

 

Net cash provided by financing activities for the ninemonths ended September 30, 2007 was $435,279, and included $491,146 of proceeds,net of repayments, from a line of credit, and $200,000 in proceeds from awarrant exercise.  These sources of cash were partially offset by $230,000 ofpayments on notes and convertible notes related to the TBS and Resolutionsacquisitions and payments on capital lease obligations of $25,867.  Net cash usedin financing activities for the 2006 period was $506,562 and included proceedsfrom notes payable to related parties of $10,000, as offset by $516,562 ofpayments on notes related to the TBS, Resolutions, and GSI acquisitions. 

 

We do not currently have any material commitments forcapital expenditures other than those expenditures incurred in the ordinarycourse of business. 

 

Due to a deficit in net tangible assets, we havehistorically been unable to obtain operating lines of credit from traditionalbanking institutions absent third party personal guarantees, except TBS, which hasa $100,000 unsecured operating line of credit that it had not utilized as of September30, 2007.  During July 2007, VillageEDOCS renewed a $500,000 operating line ofcredit guaranteed by a shareholder on which it owed approximately $491,000 asof September 30, 2007.  On June 28, 2006, GSI renewed a $1,000,000 operatingline of credit secured by the assets of GSI and guaranteed by four shareholderson which it owed the sum of $840,000 as of September 30, 2007.  We used the$840,000 during 2006 in connection with our acquisition of GSI.  The due dateof the note underlying the line of credit was extended to December 12, 2007 andGSI is currently working with the lender to convert the revolving line ofcredit to a non-revolving loan due in full on September 30, 2008.  The renewalof the commercial note is subject to the renewal of the personal guarantees bycertain of our shareholders that guaranteed the note when the line of creditwas last renewed.   We are in discussions with such shareholders to securetheir guarantees through September 30, 2008.  If the commercial note is notrenewed, or an extension is not granted, by December 12, 2007, we will requiresignificant and immediate additional funding to repay our borrowings.  Ourinability to repay outstanding borrowings when due would have a materialadverse effect on us.

 

Substantial risk exists that a decrease in demand for ourproducts and services would reduce the availability of cash from this sourcesince our operating cash flows are derived from products and services that aresubject to rapid technological change.

 

Since our inception, our operating and investing activitieshave used substantially more cash than they have generated. We believe that wehave made considerable progress toward achieving profitable operations byincreasing revenues from electronic document delivery services and through ouracquisition of TBS, Resolutions, and GSI.  In addition, we are actively seekingopportunities to acquire or otherwise combine with businesses that areoperating profitably and generating positive cash flows.  However, at presentand for the foreseeable future, we believe that we will continue to needworking capital to fund the growth of our businesses and to absorb theincreasing costs associated with operating as a fully reporting company in theprevailing regulatory environment.  Accordingly, we will experience negativeoperating and investing cash flows during certain months until MVI, TBS,Resolutions, and GSI consistently generate net cash flows sufficient to offsetthe anticipated expenses of operating the holding company.  While we believethat our available cash resources combined with our current revenue streams maybe sufficient to meet our anticipated working capital requirements for the nexttwelve months, we will require additional financing during the remainder of2007 and 2008 to fund capital expenditure requirements in the ordinary courseof business and to make required principal payments pursuant to our operatinglines of credit.  Should our current revenue streams or margins be subjected toeven minor decreases, our funding requirements could be greater.

 

We believe that sustainable profitability is achievable;however, we have a history of losses.  While GSI, MVI, TBS, and Resolutionshave each reported net income for the first nine months of 2007, this incomehas been insufficient to offset operating losses, interest expense andcorporate overhead.  If we are not successful in sustaining and increasingoperating profits from our four reporting segments, or reducing expenses of theholding company, we may never achieve profitability for the Company as a whole.

 

Between November 2000 and at least December 2004, ouroperating shortfalls were funded by one shareholder, an affiliate, to whom weowe $65,000 in principal and approximately $105,000 in interest as of September30, 2007. This shareholder has no obligation to continue to fund any futureoperating shortfalls.  We may be required to alter the terms of the convertiblepromissory note held by this shareholder to induce this shareholder or othersuch potential lenders to provide additional loans, which could result in thisshareholder or other such potential lenders obtaining rights, preferences orprivileges senior to those of other creditors or our stockholders.

 

This estimate is a forward-looking statement that involvesrisks and uncertainties. The actual time period may differ materially from thatindicated as a result of a number of factors so that we cannot assure you thatour cash resources will be sufficient for anticipated or unanticipated workingcapital and capital expenditure requirements for this period. We have advisedthat we will need to raise additional capital in the future to meet ouroperating and investing cash requirements. Such sources of financing couldinclude capital infusions, additional equity financing, or debt offerings.There can be no assurance that additional funding will be available onacceptable terms, if at all, or that such funds if raised, would enable theCompany to achieve and maintain profitable operations. If we are not able toobtain sufficient additional funds from investors, we may be unable to sustainall or part of our operations.  If we raise additional funds through theissuance of securities, these securities may have rights, preferences orprivileges senior to those of our common stock, and our stockholders mayexperience additional dilution to their equity ownership. 

 

The Report of Independent Registered Public Accounting Firmon our December 31, 2006 consolidated financial statements includes anexplanatory paragraph stating that the recurring losses incurred fromoperations and a working capital deficit raise substantial doubt about ourability to continue as a going concern. The condensed consolidated financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

**CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-QSB includesforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended. All statements that do not directly andexclusively relate to historical facts constitute forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are based on our plans, intentions, expectation,and belief and are subject to certain risks and uncertainties that could causeactual results to differ materially from those projected or expressed herein.You can identify these statements by forward-looking words such as"may", "will", "expect", "intend","anticipate", "believe", "expect","plan", "seek", "estimate", "project", "could", and "continue" or similar words. You should read statements thatcontain these words carefully because they discuss our expectations about ourfuture performance, contain projections of our future operating results or ofour future financial condition, or state other "forward-looking"information. These statements include, among others, information regardingfuture operations, future capital expenditures, and future net cash flow. Suchstatements reflect the Company's current views with respect to future eventsand financial performance and involves risks and uncertainties, including,without limitation, general economic and business conditions, changes inforeign, political, social and economic conditions, regulatory initiatives andcompliance with governmental regulations, the ability to achieve further marketpenetration and additional customers, and various other matters, many of whichare beyond the Company's control, including, without limitation, the risksdescribed under the caption "*Certain Factors That May Affect FutureResults"* in Item 6 of the Company's Annual Report on Form 10-KSB filedwith the Commission on April 2, 2007. Our future results and stockholder valuesmay differ materially from those expressed in these forward- lookingstatements. Many of the factors that will determine these results and valuesare beyond our ability to control or predict. We assume no obligation to updateany forward-looking statements.  Investors are cautioned not to put unduereliance on any forward-looking statements, which speak only as of the date ofthis Quarterly Report on Form 10-QSB.  Readers should also consult thecautionary statements and risk factors listed from time to time in our Reports,and all amendments thereto, on Forms 10-KSB, 10-QSB, 8-K, and other SECfilings.  For these statements, we claim the protection of the safe harbor forforward-looking statements contained in Section 21E of the Exchange Act.

Forward looking statements in this Quarterly Report on Form10-QSB include, without limitation:

 

The statements in MD&A under the captions *Introduction*and *Business Overview*of our strategies, beliefs, plans,expectations, anticipations and hopes with respect to (1) our expectations aboutthe benefits we may derive from acquisitions, (2) our current and future growthstrategy to acquire intellectual and technology assets and our expectationsabout the benefits we may derive, (3) our beliefs about our vision to become abusiness process management/workflow service and the benefits we expect toderive, (4) our acquisition strategy, and (5) our belief that obtaining plannedfinancings will allow us to generate adequate cash flows to sustain operationsat current levels until we being to operate profitably on a consistent,month-over month basis, which statements are subject to various risks anduncertainties, including, without limitation, our limited operating history,risks that we may not be able to obtain any additional financing at termsacceptable to us, or at all, risks that we may not successfully implement ouracquisition program, risks associated with assimilating acquired personnel andtechnology into the Company, and the risk that we will not be able to competeeffectively because our market place is highly competitive and has low barriersto entry. 

 

The statements in MD&A underthe caption *Results of Operations*of our strategies, beliefs, plans,expectations, anticipations and hopes with respect to Net Revenue, GrossProfit, Operating Expenses, Income (Loss) from Operations, and Net Loss and ourstrategies, beliefs, plans, expectations, anticipations and hopes with respectto Liquidity and Capital Resources set forth in MD&A under the caption *Liquidityand Capital Resources*, including, without limitation (1) our belief that wehave made considerable progress toward achieving profitable operations byincreasing revenues from electronic document delivery services and through ourrecent acquisition of TBS, Resolutions, and GSI, (2) our strategy of activelyseeking to combine with business that operate profitably and generate positivecash flows, (3) our belief that sustainable profitability is achievable, (4)our expectations about future funding requirements, and (5) our belief that currentcash position, cash generated through operations and equity offerings andavailable borrowings will be sufficient to meet our needs through at least thenext twelve months, which statements are subject to various risks anduncertainties, including, without limitation, our limited operating history,risks that we may not be able to obtain any additional financing at termsacceptable to us, or at all, the risk that we may be unable to sustain all orpart of our operations if we are not able to obtain sufficient additional fundsfrom investors, the risk that our funding requirements could be greater shouldour current revenue streams or margins decrease, risks that we may notsuccessfully implement our acquisition program, risks associated with assimilatingacquired personnel and technology into the Company, and the risk that we willnot be able to compete effectively because our market place is highlycompetitive and has low barriers to entry.

 

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In February 2007, the Financial Accounting StandardsBoard ("FASB") issued SFAS No. 159, *The Fair Value Option for FinancialAssets and Financial Liabilities - Including an Amendment of FASB Statement No.115* ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure manyfinancial instruments and certain other items at fair value. The objective isto improve financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. SFAS No. 159 also establishes presentation and disclosurerequirements designed to facilitate comparison between entities that choosedifferent measurement attributes for similar types of assets and liabilities.The Company will adopt SFAS No. 159 in the first quarter of 2008, is stillevaluating the effect, if any, on its consolidated financial position andconsolidated results of operations and has not yet determined its impact.

 

In July 2006, the FASBissued FASB Interpretation No. 48, *Accounting for Uncertainty in IncomeTaxes--an interpretation of FASB Statement No. 109* ("FIN 48"), whichclarifies the accounting and disclosure for uncertainty in tax positions, asdefined. FIN 48 seeks to reduce the diversity in practice associated withcertain aspects of the recognition and measurement related to accounting forincome taxes. The Company is subject to the provisions of FIN 48 as of January1, 2007.  The Company believes that its income tax filing positions anddeductions will be sustained on audit and does not anticipate any adjustmentsthat will result in a material change to its financial position.  Therefore, noreserves for uncertain income tax positions have been recorded pursuant to FIN48. The cumulative effect, if any, of applying FIN 48 is to be reported as anadjustment to the opening balance of retained earnings in the year ofadoption.  The Company did not record a cumulative effect adjustment related tothe adoption of FIN 48.  Tax years since 1992 remain subject to examination bythe major tax jurisdictions in which the Company is subject to tax.  TheCompany's policy for recording interest and penalties associated withincome-based tax audits is to record such items as a component of income taxes.

 
****
ITEM 3 - CONTROLS ANDPROCEDURES

 

(a) As of September 30, 2007, an evaluation was carried outunder the supervision and with the participation of the Company's management,including our Chief Executive Officer and our Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934).  Based upon that evaluation, the Chief Executive Officerand the Chief Financial Officer concluded that the design and operation ofthese disclosure controls and procedures during the nine months ended September30, 2007 were effective in timely alerting them to the material informationrelating to the Company (or the Company's consolidated subsidiaries) requiredto be included in the Company's periodic filings with the SEC, subject to thevarious limitations on effectiveness set forth below under the heading,"LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS," such thatthe information relating to the Company, required to be disclosed in SECreports (i) is recorded, processed, summarized and reported within the timeperiods specified in SEC rules and forms, and (ii) is accumulated andcommunicated to the Company's management, including our CEO and CFO, asappropriate to allow timely decisions regarding required disclosure.  

 

The Company's management has concluded that the condensedconsolidated financial statements included in this Quarterly Report on Form 10-QSBfairly present in all material respects the Company's financial condition,results of operations and cash flows for the periods presented in conformitywith accounting principles generally accepted in the United States of America.

 

(b) Changes in internal control over financial reporting:There were no changes in the Company's internal control over financialreporting that occurred during the quarter ended September 30, 2007 that havematerially affected, or are reasonably likely to materially affect, the Company'sinternal control over financial reporting. 

 

LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS 

 

The Company's management, including the CEO and CFO, doesnot expect that our disclosure controls and procedures or our internal controlover financial reporting will necessarily prevent all fraud and material error.An internal control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. Further, the design of the control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Because of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the Company havebeen detected. These inherent limitations include the realities that judgmentsin decision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people, or by managementoverride of the internal control. The design of any system of controls also isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions. Over time, control maybecome inadequate because of changes in conditions, and/or the degree ofcompliance with the policies or procedures may deteriorate.

** **
****
**PART II**

** **

** **

**ITEM 1 - LEGAL PROCEEDINGS.**

** **

Claim

 

In connection with our acquisition of GSI, we are entitledto certain rights of indemnification from GoSolutions Equity, LLC, which is aformer shareholder of GSI that became a shareholder of the Company as a resultof our acquisition of GSI.  We have made a claim of indemnification from thisentity in connection with the bankruptcy of one of GSI's significant customers -Vartec Telecom, Inc. - and the facts and circumstances relating to theprocurement and maintenance of the Primerica Life Insurance account and relatedCitigroup affiliates.  GoSolutions Equity, LLC has indicated that it does notbelieve that we have a valid basis for making such indemnification claims.

 

The Company has engaged in limited discussions withGoSolutions Equity, LLC as it relates to the indemnification claims notice andtheir response to such claims notice.  However, the Company is unable to advisewhether it will be successful in the indemnification claims against GoSolutionsEquity, LLC.  Pursuant to the agreement with GSI, if the Company is successful,GoSolutions Equity, LLC would only be required to return up to approximately4.4 million of our shares issued to that entity to satisfy such indemnificationclaims.  GoSolutions Equity, LLC is not required to contribute cash to satisfyany indemnification claims.

 

In the opinion of management, the amount of ultimateliability, if any, with respect to these actions will not materially affect theconsolidated financial position or results of operations of the Company.

 

** **

** **

**ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USEOF PROCEEDS.**

 

 

On August 28, 2007 and in connection with an engagement agreement,the Company issued an aggregate of 500,000 shares of its restricted commonstock to Gemstone Securities LLC.  The shares were valued at $0.06 per share(the estimated fair value on the measurement date).

 

On August 28, 2007, the Company issued 2,000,000 shares ofits restricted common stock to C. Alan and Joan P. Williams at $0.10 per sharein consideration for $200,000 in cash proceeds to the Company from the exerciseof common stock purchase warrants.

 

All offers and sales of our securities described above weremade pursuant to Section 4(2) of the Securities Act of 1933 and Regulation Dpromulgated thereunder.

** **

** **

**ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.**

** **

None.

** **

** **

**ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS.**

** **

None. 

 

** **

**ITEM 5 - OTHER INFORMATION.**

** **

None.****

**ITEM 6 - EXHIBITS. **

 

 

*** ***

Exhibit No.

Description******

 

2.1

Agreement and Plan of Merger dated January 31, 2004 by and  among VillageEDOCS, VillageEDOCS Merger Sub, Inc., Tailored Business Systems,  Inc., Stephen A. Garner, and James L. Campbell previously filed as Exhibit  2.1 to the Company's Current Report on Form 8-K filed on February 18, 2004  and incorporated herein by reference.

2.2

Plan of Internal Restructuring previously filed as Exhibit  B to the Company's Schedule 14C Information Statement filed on July 23, 2004  and incorporated herein by reference.

2.3

Stock Purchase Agreement dated as of April 1, 2005 and  executed April 15, 2005 by and among VillageEDOCS Acquisition Corp, Phoenix  Forms, Inc., and Its Shareholders.  Previously filed as Exhibit 2.1 to the  Company's Current Report on Form 8-K filed on April 19, 2005.

2.4

Merger Agreement, dated as of February 17, 2006, by and  among VillageEDOCS, VEDO Merger Sub, Inc., GoSolutions, Inc. and certain  stockholders of GoSolutions.  Previously filed as Exhibit 2.1 to the  Company's Current Report on Form 8-K filed on February 21, 2006.

2.5

Articles of Merger and Plan of  Merger.  Previously filed as Exhibit 99.2 to the Company's Current  Report on Form 8-K filed on May 4, 2006.

2.6

Form of Agreement and Plan of Merger of VillageEDOCS, Inc.  and VillageEDOCS.  Previously filed with the Company's Definitive Information  Statement on Schedule 14A filed on May 24, 2007. 

3.1

Articles of Incorporation, as amended.  Previously filed  with the Company's Form 10-SB filed on August 29, 2000. 

3.2

By-laws.  Previously filed with the Company's Form 10-SB  filed on August 29, 2000.

3.3

Article of Amendment to Articles of Incorporation to  increase authorized number of common shares.  Previously filed with the  Company's 14C Information Statement filed on July 23, 2004.

3.4

Article of Amendment to Articles of Incorporation to  increase authorized number of common shares and to create a class of  preferred stock.  Previously filed with the Company's 14C Information  Statement filed on June 7, 2005.

3.5

Form of Certificate of Designations of Preferences, Rights  and Limitations of Series A Convertible Preferred Stock.  Previously filed as  Exhibit 4.8 to the Company's Current Report on Form 8-K filed on April 19,  2005.

3.6

Certificate of Amendment of Articles of Incorporation to  increase authorized number of common shares.  Previously filed with the Company's  Current Report on Form 8-K filed on January 20, 2006.

3.7

Form of Certificate of Incorporation of VillageEDOCS,  Inc.  Previously filed with the Company's Definitive Information Statement on  Schedule 14A filed on May 24, 2007. 

3.8

Form of Bylaws of VillageEDOCS, Inc.  Previously filed  with the Company's Definitive Information Statement on Schedule 14A filed on May  24, 2007. 

 

** **

4.1

Letter Agreement dated July 30, 2002 by and between the  Company, C. Alan Williams, and Joan P. Williams previously filed as Exhibit  4.1 to the Company's Quarterly Report on Form 10-QSB for the period ended  June 30, 2002 and incorporated herein by reference.

4.2

Promissory Note Modification Agreement dated July 15, 2002  by and between the Registrant and James W. Townsend previously filed as  Exhibit 4.1 to the Company's Current Report on Form 8-K filed on July 2, 2002  and incorporated herein by reference.

 

 

 

 

 

 

4.3

Form of Unsecured Convertible Promissory Note. Previously  filed as Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-QSB  filed with the Securities and Exchange Commission on May 15, 2002 and  incorporated herein by reference.

4.4

Form of Convertible Secured Promissory Note. Previously  filed as Exhibit 4.6 to the Registrant's Quarterly Report on Form 10-QSB  filed with the Securities and Exchange Commission on May 15, 2002 and  incorporated herein by reference.

4.5

2002 Equity Incentive Plan dated as of January 30, 2002.   Previously filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form  10-QSB filed with the Securities and Exchange Commission on May 15, 2002 and  incorporated herein by reference.

4.6

Form of Stock Option Agreement.  Previously filed as  Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-QSB filed with  the Securities and Exchange Commission on May 15, 2002 and incorporated  herein by reference.

4.7

Promissory Note Modification Agreement dated May 9, 2002  by and among the Company, Joan P. Williams and C. Alan Williams.  Previously  filed as Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-QSB  filed with the Securities and Exchange Commission on May 15, 2002 and  incorporated herein by reference.

4.8

Security Agreement dated May 9, 2002 by and among the  Company, Joan P. Williams and C. Alan Williams.  Previously filed as Exhibit  4.4 to the Registrant's Quarterly Report on Form 10-QSB filed with the  Securities and Exchange Commission on May 15, 2002 and incorporated herein by  reference.

4.9

Promissory Note to Stephen A. Garner dated February 17,  2004 previously filed as Exhibit 4.1 to the Company's Current Report on Form  8-K filed on February 18, 2004 and incorporated herein by reference.

4.10

Promissory Note to James L. Campbell dated February 17,  2004 previously filed as Exhibit 4.2 to the Company's Current Report on Form  8-K filed on February 18, 2004 and incorporated herein by reference.

4.11

Guaranty by Tailored Business Systems, Inc. to Stephen A.  Garner dated February 17, 2004 previously filed as Exhibit 4.3 to the  Company's Current Report on Form 8-K filed on February 18, 2004 and  incorporated herein by reference.

4.12

Guaranty by Tailored Business Systems, Inc. to James L.  Campbell dated February 17, 2004 previously filed as Exhibit 4.4 to the  Company's Current Report on Form 8-K filed on February 18, 2004 and  incorporated herein by reference.

4.13

Form of Security Agreement dated February 17, 2004 by and  between Tailored Business Systems, Inc. and Stephen A. Garner previously  filed as Exhibit 4.5 to the Company's Current Report on Form 8-K filed on  February 18, 2004 and incorporated herein by reference.

4.14

Form of Security Agreement dated February 17, 2004 by and  between Tailored Business Systems, Inc. and James L. Campbell previously  filed as Exhibit 4.6 to the Company's Current Report on Form 8-K filed on  February 18, 2004 and incorporated herein by reference.

4.15

Registration Rights Agreement dated February 17, 2004 by  and between VillageEDOCS and Stephen A. Garner previously filed as Exhibit  4.7 to the Company's Current Report on Form 8-K filed on February 18, 2004  and incorporated herein by reference.

4.16

Registration Rights Agreement dated February 17, 2004 by  and between VillageEDOCS and James L. Campbell previously filed as Exhibit  4.8 to the Company's Current Report on Form 8-K filed on February 18, 2004  and incorporated herein by reference.

4.17

Form of Stock Pledge Agreement dated February 17, 2004 by and  between Tailored Business Systems, Inc. and Stephen A. Garner previously  filed as Exhibit 4.9 to the Company's Current Report on Form 8-K filed on  February 18, 2004 and incorporated herein by reference.

 

 

 

 

 

 

4.18

Form of Stock Pledge Agreement dated February 17, 2004 by  and between Tailored Business Systems, Inc. and James L. Campbell previously  filed as Exhibit 4.10 to the Company's Current Report on Form 8-K filed on  February 18, 2004 and incorporated herein by reference.

4.19

Notice of Intent to Exercise Conversion Right dated  February 10, 2005 by Joan P. Williams and C. Alan Williams.  Previously filed  as Exhibit 4.5 to the Company's Current Report on Form 8-K filed on February  14, 2005.

4.20

Promissory Note to Alexander Riess dated April 15, 2005.   Previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K  filed on April 19, 2005.

4.21

Promissory Note to William R. Falcon dated April 15, 2005.   Previously filed as Exhibit 4.2 to the Company's Current Report on Form 8-K  filed on April 19, 2005.

 

 

4.22

Common Stock Purchase Warrant to Alexander Riess dated as  of April 1, 2005.  Previously filed as Exhibit 4.3 to the Company's Current  Report on Form 8-K filed on April 19, 2005.

4.23

Common Stock Purchase Warrant to William R. Falcon dated  as of April 1, 2005.  Previously filed as Exhibit 4.4 to the Company's  Current Report on Form 8-K filed on April 19, 2005.

4.24

Note Purchase Agreement dated April 13, 2005 by and  between VillageEDOCS and Barron Partners LP.  Previously filed as Exhibit 4.5  to the Company's Current Report on Form 8-K filed on April 19, 2005.

4.25

Convertible Note to Barron Partners LP dated April 13,  2005.  Previously filed as Exhibit 4.6 to the Company's Current Report on  Form 8-K filed on April 19, 2005.

4.26

Registration Rights Agreement dated April 13, 2005 by and  between VillageEDOCS and Barron Partners LP.  Previously filed as Exhibit 4.7  to the Company's Current Report on Form 8-K filed on April 19, 2005.

4.27

Form of Certificate of Designations of Preferences, Rights  and Limitations of Series A Convertible Preferred Stock.  Previously filed as  Exhibit 4.8 to the Company's Current Report on Form 8-K filed on April 19,  2005.

4.28

Stock Purchase Warrant "A" dated April 13, 2005  to Barron Partners LP.  Previously filed as Exhibit 4.9 to the Company's  Current Report on Form 8-K filed on April 19, 2005.

4.29

Stock Purchase Warrant "B" dated April 13, 2005  to Barron Partners LP.  Previously filed as Exhibit 4.10 to the Company's  Current Report on Form 8-K filed on April 19, 2005.

4.30

Form of Note Assignment.  Previously filed as Exhibit 4.1  to the Company's Current Report on Form 8-K filed on July 6, 2005.

4.31

Form of Promissory Note Modification Agreement.   Previously filed as Exhibit 4.2 to the Company's Current Report on Form 8-K  filed on July 6, 2005.

4.32

Form of Notice of Intent to Exercise Conversion Right.   Previously filed as Exhibit 4.3 to the Company's Current Report on Form 8-K  filed on July 6, 2005.

4.33

Notice of conversion by Barron Partners LP dated September  30, 2005.  Previously filed as Exhibit 4.6 to the Company's Current Report on  Form 8-K filed on October 5, 2005.

4.34

Form of Convertible Secured Promissory Note by and among  C. Alan Williams, Joan P. Williams, and the Company previously filed as  Exhibit 4.19 to the Company's Annual Report on Form 10-KSB filed on April 14,  2006 and incorporated herein by reference.

4.35

Convertible Secured Promissory Note dated February 16,  2004 by and among C. Alan Williams, Joan P. Williams, and the Company  previously filed as Exhibit 4.20 to the Company's Annual Report on Form  10-KSB filed on April 14, 2006 and incorporated herein by reference.

4.36

Notice of conversion by Barron Partners LP dated October  21, 200.  Previously filed as Exhibit 4.1 to the Company's Current Report on  Form 8-K filed on October 24, 2005 and incorporated herein by reference.

 

 

 

 

4.37

Notice of conversion by Barron Partners LP dated March 8,  2006.  Previously filed as Exhibit 4.1 to the Company's Current Report on Form  8-K filed on March 9, 2006 and incorporated herein by reference.

4.38

Registration Rights Agreement  dated as of April 28, 2006 by and among VillageEDOCS and the principal  stockholders of GoSolutions, Inc.  Previously filed as Exhibit 99.5 to the  Company's Current Report on Form 8-K filed on May 4, 2006.

4.39

Principal VEDO Stockholders  Voting Agreement dated as of April 28, 2006 by and among Barron Partners, LP,  C. Alan Williams, Joan P. Williams and GoSolutions, Inc.  Previously filed as  Exhibit 99.6 to the Company's Current Report on Form 8-K filed on May  4, 2006.

4.40

Indemnity/Contribution Agreement  effective April 30, 2006, by and among VillageEDOCS, GoSolutions Equity, LLC  (the "LLC"), and the principals of the LLC identified on the  signature page thereto.  Previously filed as Exhibit 99.7 to the  Company's Current Report on Form 8-K filed on May 4, 2006.

4.41

Settlement and Release Agreement  dated as of April 28, 2006 by and among VillageEDOCS, GoSolutions, Inc., The  Zant Group Trust and Louis J. Zant.  Previously filed as Exhibit 99.9 to the  Company's Current Report on Form 8-K filed on May 4, 2006.

4.42

Second Extension Agreement dated  as of April 28, 2006 by and between The Zant Group Trust and GoSolutions,  Inc.  Previously filed as Exhibit 99.9 to the Company's Current Report  on Form 8-K filed on May 4, 2006.

4.43

Settlement and Release  Agreement, dated as of June 30, 2006, by and among VillageEDOCS, GoSolutions,  Inc., Bruce H. Bennett, and Sandra G. Bennett.  Previously filed as Exhibit  10.1 to the Company's Current Report on Form 8-K filed on July 12,  2006.

4.44

Warrant Exchange Agreement dated as of November 20, 2006  by and between the Company and Barron Partners, LP.  Previously filed as  Exhibit 10.1 to the Company's Amended Current Report on Form 8-K/A filed on  November 22, 2006.**

 

 

10.1

Consulting and Other Services agreement dated January 28,  2003 by and between the Company and Paul Allen.  Previously filed as Exhibit  4.8 to the Company's Registration Statement on Form S-8 filed with the  Securities and Exchange Commission on January 29, 2003 and incorporated  herein by reference.

10.2

Employment Offer Letter dated April 23, 2004 by and  between Tailored Business Systems, Inc. and James L. Kolassa.  Previously  filed as Exhibit 10.2 to the Company's Annual Report on Form 10-KSB filed on  March 31, 2005 and incorporated herein by reference.

10.3

Debt settlement agreement dated January 28, 2003 by and  between the Company and James R. Spoerl.  Previously filed as Exhibit 4.9 to  the Company's Registration Statement on Form S-8 filed with the Securities  and Exchange Commission on January 29, 2003 and incorporated herein by  reference.

10.4

Employment Agreement dated February 17, 2004 by and  between Tailored Business Systems, Inc. and Stephen A. Garner previously  filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on  February 18, 2004 and incorporated herein by reference.

10.5

Employment Agreement dated February 17, 2004 by and  between Tailored Business Systems, Inc. and James L. Campbell previously  filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on  February 18, 2004 and incorporated herein by reference.

10.6

General Release and Noncompetition Agreement dated  February 17, 2004 by Stephen A. Garner in favor of Tailored Business Systems,  Inc. previously filed as Exhibit 10.3 to the Company's Current Report on Form  8-K filed on February 18, 2004 and incorporated herein by reference.

10.7

General Release and Noncompetition Agreement dated  February 17, 2004 by James L. Campbell in favor of Tailored Business Systems,  Inc. previously filed as Exhibit 10.4 to the Company's Current Report on Form  8-K filed on February 18, 2004 and incorporated herein by reference.

10.8

Lease Agreement dated February 17, 2004 by and between  Perimeter Center Partners and Tailored Business Systems, Inc. previously  filed as Exhibit 10.5 to the Company's Current Report on Form 8-K filed on  February 18, 2004 and incorporated herein by reference.

10.9

Employment Agreement dated June 10, 2004 by and between  the Company and K. Mason Conner previously filed as Exhibit C to the  Company's Schedule 14C Information Statement filed on July 23, 2004 and  incorporated herein by reference.

10.10

Employment Agreement dated June 10, 2004 by and between  the Company and H. Jay Hill previously filed as Exhibit D to the Company's  Schedule 14C Information Statement filed on July 23, 2004 and incorporated  herein by reference.

10.11

Employment Agreement dated June 10, 2004 by and between  the Company and Michael Richard previously filed as Exhibit E to the  Company's Schedule 14C Information Statement filed on July 23, 2004 and  incorporated herein by reference.

10.12

Employment Agreement dated as of April 1, 2005 by and  between Phoenix Forms, Inc. and Alexander Riess.  Previously filed as Exhibit  10.1 to the Company's Current Report on Form 8-K filed on April 19, 2005.

10.13

Employment Agreement dated as of April 1, 2005 by and  between Phoenix Forms, Inc. and William R Falcon.  Previously filed as  Exhibit 10.2 to the Company's Current Report on Form 8-K filed on April 19,  2005.

10.14

Release of Claims Agreement dated as of April 1, 2005 by  Alexander Riess in favor of Phoenix Forms, Inc.  Previously filed as Exhibit  10.3 to the Company's Current Report on Form 8-K filed on April 19, 2005.

10.15

Release of Claims Agreement dated as of April 1, 2005 by  William R. Falcon in favor of Phoenix Forms, Inc.  Previously filed as  Exhibit 10.4 to the Company's Current Report on Form 8-K filed on April 19,  2005.

10.16

Amendment No. 1 to Executive Employment Agreement dated  April 28, 2005 by and between the Registrant and K. Mason Conner.  Previously  filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on  April 29, 2005.

10.17

Amendment No. 1 to Executive Employment Agreement dated  April 28, 2005 by and between the Registrant and H. Jay Hill.  Previously  filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on  April 29, 2005.

10.18

Amendment No. 1 to Executive Employment Agreement dated  April 28, 2005 by and between the Registrant and Michael A. Richard.   Previously filed as Exhibit 10.3 to the Company's Current Report on Form 8-K  filed on April 29, 2005.

10.19

Executive Employment Agreement, dates as of March 1, 2006,  by and between the Company and Jerry T. Kendall.  Previously files as Exhibit  10.1 to the Company's Current Report on Form 8-K filed on March 1, 2006.

10.20

Amendment No. 2 to Michael  Richard Executive Employment Agreement effective as of May 1, 2006.   Previously filed as Exhibit 99.11 to the Company's Current Report on  Form 8-K filed on May 4, 2006.

10.21

Amendment No. 2 to H. Jay Hill  Executive Employment Agreement effective as of May 1, 2006.  Previously filed  as Exhibit 99.12 to the Company's Current Report on Form 8-K filed on  May 4, 2006.

10.22

Amendment No. 2 to K. Mason  Conner Executive Employment Agreement effective as of May 1, 2006.   Previously filed as Exhibit 99.13 to the Company's Current Report on  Form 8-K filed on May 4, 2006.

10.23

Thor Bendickson Employment  Agreement effective as of May 1, 2006.  Previously  filed as Exhibit 99.14 to the Company's Current Report on Form 8-K  filed on May 4, 2006.

10.24

Shaun Charles Pope Employment  Agreement effective as of May 1, 2006.  Previously filed as Exhibit 99.15 to the  Company's Current Report on Form 8-K filed on May 4, 2006.

 

 

 

 

 

 

10.25

Frederick A. Burris Employment  Agreement effective as of  May 1, 2006.  Previously filed as Exhibit 99.16 to  the Company's Current Report on Form 8-K filed on May 4, 2006.

10.26

Patent License Agreement, dated  as of May 12, 2006, by and between VillageEDOCS and Catch Curve, Inc..   Previously filed as Exhibit 10.1 to the Company's Current Report on  Form 8-K filed on May 16, 2006.

10.27

Office Lease Agreement effective June 1, 2007 by and  between the Company and Tustin Avenue Investors, LLC.  Previously filed as  Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 25,  2007.

10.28

Placement Agency Agreement effective October 13, 2006 by  and between the Company and Stonegate Securities, Inc.  Previously filed as  Exhibit 10.28 to the Company's Quarterly Report on Form 10-QSB filed on  August 14, 2007.

10.29

Engagement Agreement effective July 10, 2007 by and  between the Company and GemStone Securities, LLC.  Previously filed as  Exhibit 10.29 to the Company's Quarterly Report on Form 10-QSB filed on  August 14, 2007.

10.30

Settlement Agreement dated June 6, 2007 by and among  Jeffrey H. Mims, VarTec Telecom, Inc, Excel Telecommunications, Inc., VarTec  Solutions, Inc., and GoSolutions, Inc. Previously filed as Exhibit 10.29 to  the Company's Quarterly Report on Form 10-QSB filed on August 14, 2007.

14.1

Code of Ethics.  Previously filed as Exhibit 14.1 to the  Company's Annual Report on Form 10-KSB filed on March 29, 2004 and  incorporated herein by reference.

 

 

21.1

Subsidiaries of the Registrant.*

31.1

Certification Under Section 302 of The Sarbanes-Oxley Act  of 2002 signed and dated November 14, 2007 by K. Mason Conner, Chief  Executive Officer.*

31.2

Certification Under Section 302 of The Sarbanes-Oxley Act  of 2002 signed and dated November 14, 2007 by Michael A. Richard, Chief  Financial Officer.*

32.1

Certification Pursuant To 18 U.S.C. §1350, As Adopted  Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 signed and dated November  14, 2007 by K. Mason Conner, Chief Executive Officer.**

32.2

Certification Pursuant To 18 U.S.C. §1350, As Adopted  Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 signed and dated November  14, 2007 by Michael A. Richard, Chief Financial Officer.**

*

Filed herewith

**

Furnished herewith

 
****
**SIGNATURES**

** **

**Pursuant to the requirementsof the Securities and Exchange Act of 1934, the Registrant has caused thisreport to be signed on its behalf by the undersigned, thereto duly authorized,in the capacities and on the dates indicated:**

** **

** **

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**VillageEDOCS (Registrant)**

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** **

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**Dated:  November 14, 2007**

**By:    /s/ K. Mason Conner**

** **

**       K. Mason  Conner**

** **

**       Chief  Executive Officer and Director**

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** **

** **

** **

** **

** **

**Dated:  November 14, 2007**

**By:  /s/ Michael A. Richard**

** **

**      Michael A. Richard**

 

**      Chief Financial  Officer**

** **

**      (Principal  Accounting Officer)**

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