ITEM 1. DESCRIPTION OF BUSINESS
IMPORTANT NOTIFICATIONS
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All statements that do not directly and exclusively relate to historical facts constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to put undue reliance on any forward-looking statements. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 21E of the Exchange Act. For important additional and specific information regarding these statements, we strongly urge you to refer to Item 1A
ITEM 1A. RISK FACTORS
We believe it is important to communicate our expectations to our stockholders. There may be events in the future, however, that we are not able to predict accurately or over which we have no control. The risk factors listed in this section, as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you make an investment decision with respect to our common stock, you should be aware that the occurrence of any of the events described in these risk factors and elsewhere in this report could have a material and adverse effect on our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline and you could lose all or part of your investment.
The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us may also adversely impact our business operations. If any of the following risks actually occur, our business, financial condition, or operating results could be negatively affected.
Risks Relating to Our Business
We have a limited operating history which makes financial forecasting and evaluation of our business and prospects difficult and we have received an opinion from our independent registered public accounting firm regarding substantial doubt regarding our ability to continue as a going concern.
Our limited operating history makes it difficult to forecast our future operating results. We were founded and began operating in 1995, but did not report income from operations until the quarter ended June 30, 2004, and have reported net losses through December 31, 2009. We do not have a long history upon which to base forecasts of future operating results, and any predictions about our future revenues and expenses may not be as accurate as they would be if we had a longer business history.
The likelihood of our future success must be considered in light of such limited operating history, as well as the problems, expenses, difficulties, complications and delays frequently encountered in connection with any business. There can be no assurance that our future revenues will ever be significant or that our operations will ever be profitable.
In addition, we cannot predict the consistency of our quarterly operating results. Factors which may cause our operating results to fluctuate significantly from quarter to quarter include:
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our ability to attract new and repeat customers;
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our ability to keep current with the evolving requirements of our target market;
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our ability to protect our proprietary technology;
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the ability of our competitors to offer new or enhanced products or services; and
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unanticipated delays or cost increases with respect to research and development.
Because of these and other factors, we believe that quarter-to-quarter comparisons of our results of operations are not good indicators of our future performance. If our operating results fall below the expectations of securities analysts and investors in some future periods, then our stock price may decline.
The Report of Independent Registered Public Accounting Firm on our December 31, 2009 consolidated financial statements includes an explanatory paragraph stating that the recurring losses incurred from operations raises substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our ability to operate is conditioned on our ability to obtain additional financing.
Our ability to satisfy our future capital requirements and implement our growth plans will depend upon many factors, including the financial resources available to us, the expansion of our sales and marketing efforts and the status of competition. We believe that current and future available capital resources, including the net proceeds from sale of our products and services, will be sufficient to fund our operations at current levels for the foreseeable future. However, the exact amount of funds that we will require will depend upon many factors, and it is possible that we will require additional financing. There can be no assurance that additional financing will be available to us on acceptable terms, or at all. If additional funds are raised by issuing equity securities, further dilution to the existing stockholders will result. If adequate funds are not available, we may be required to delay, reduce or eliminate our programs or obtain funds through arrangements with partners or others that may require us to relinquish rights to certain of our products, technologies or other assets. Accordingly, the inability to obtain such financing could have a material adverse effect on our business, financial condition and results of operations.
GoSolutions currently depends on one large customer for approximately half of its revenue.
For 2009, 49% of GoSolutions’ revenue (30% of consolidated net revenues) was derived from independent representatives of Primerica Life Insurance Company (“PLIC”). PLIC represents the majority of GoSolutions’ client base. PLIC is currently endorsing GoSolutions flagship service, GoSolo, and is under contract to do so only until July 2011.
Weakness in the financial markets and the economy in general
Weakness in the financial markets and in the economy as a whole has adversely affected and may continue to adversely affect segments of our customers, which has resulted and may continue to result in decreased usage levels, customer acquisitions and customer retention rates and, in turn, could lead to a decrease in our revenues or rate of revenue growth.
Certain segments of our customers - those whose business activity is tied to the health of the credit markets and the broader economy, such as banks, brokerage firms and those in the real estate industry - have been and may continue to be adversely affected by the current turmoil in the credit markets and weakness in the broader mortgage market and the general economy. To the extent our customers’ businesses have been adversely affected by these economic factors and their usage levels of our services decline, we have and may continue to experience a decrease in usage-based revenue. In addition, continued weakness in the economy has adversely affected and may continue to adversely affect our customer retention rates and the number of our new customer acquisitions. These factors have adversely impacted, and may continue to adversely impact, our revenues and profitability.
Increased numbers of credit and debit card declines as a result of decreased availability of credit and/or a weakening economy could lead to a decrease in our revenues or rate of revenue growth.
Substantially all of GSI’s subscribers pay for their services through credit and debit cards. Weakness in the credit markets and in the U.S. and global economy has resulted in and may continue to result in increased numbers of rejected credit and debit card payments. We believe this has resulted in and may continue to result in increased customer cancellations and decreased customer signups. This also has required and may continue to require us to increase our reserves for doubtful accounts and write-offs of accounts receivables. The foregoing may adversely impact our revenues and profitability.
We may have difficulty in retaining our customers, which may prevent our long-term success.
We anticipate that our sales and marketing and other costs of acquiring new subscriptions outside of our existing client base will be substantial relative to the monthly fees derived from subscriptions. Accordingly, we believe that our long-term success depends largely on our ability to retain our existing customers, while continuing to attract new ones. We continue to invest significant resources in our network infrastructure and customer and technical support capabilities to provide high levels of customer service. We cannot be certain that these investments will maintain or improve customer retention. We believe that competition from our competitors has caused, and may continue to cause, some of our customers to switch to a competing service provider. In addition, some new customers use our services only as a novelty and do not become consistent users of the service and, therefore, may be more likely to discontinue their service. These factors adversely affect our customer retention rates. Any decline in customer retention rates could have a material adverse effect on our business, prospects, financial condition and results of operations.
We are dependent on third party technologies and services.
We have incorporated technology developed by third parties in our services to be provided to our partners. We will continue to incorporate third-party technology in future products and services. We have limited control over whether or when these third-party technologies will be developed or enhanced. In addition, our competitors may acquire interests in these third parties or their technologies, which may render the technology unavailable to us. If a third party fails or refuses to timely develop, license or support technology necessary to our services, market acceptance of our services could be adversely affected. In addition, we rely on, and will continue to rely on, services supplied by third parties such as telecommunications, Internet access and electrical power. If these services fail to meet industry standards for quality and reliability, market acceptance of our services could be adversely affected.
Our business is dependent on a small number of telecommunications carriers in each region and our inability to maintain agreements at attractive rates with such carriers may negatively impact our business.
Our business substantially depends on the capacity, affordability, reliability and security of our telecommunications networks. Only a small number of carriers in each region, and in some cases only one carrier, offer the telephone number and network services we require. Certain of our telecommunications services are provided pursuant to short-term agreements that the providers can terminate or elect not to renew. As a result, any or all of our current carriers could discontinue providing us with service at rates acceptable to us, or at all, and we may not be able to obtain adequate replacements, which could materially and adversely affect our business, prospects, financial condition, operating results and cash flows.
A system failure or security breach could delay or interrupt service to our customers, harm our reputation or subject us to significant liability.
Our operations are dependent on our ability to protect our network from interruption by damage from fire, earthquake, power loss, telecommunications failure, unauthorized entry, computer viruses or other events beyond our control. There can be no assurance that our existing and planned precautions of backup systems, regular data backups, security protocols and other procedures will be adequate to prevent significant damage, system failure or data loss. Also, despite the implementation of security measures, our infrastructure may be vulnerable to computer viruses, hackers or similar disruptive problems caused by our subscribers, employees or other Internet users who attempt to invade public and private data networks. Currently, a significant number of our users authorize us to bill their credit or debit card accounts directly for all transaction fees charged by us. We rely on encryption and authentication technology to effect secure transmission of confidential information, including customer credit and debit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect transaction data. Any damage system failure or security breach that causes interruptions or data loss in our operations or in the computer systems of our customers or leads to the misappropriation of our or our customers’ confidential information could result in significant liability to us, cause considerable harm to us and our reputation and deter current and potential customers from using our services. Any of these events could have a material adverse effect on our business, prospects, financial condition, operating results and cash flows.
Our business is highly dependent on our billing systems.
A significant part of our revenues depends on prompt and accurate billing processes. Customer billing is a highly complex process, and our billing systems must efficiently interface with third-party systems, such as those of credit card processing companies. Our ability to accurately and efficiently bill our subscribers is dependent on the successful operation of our billing systems and the third-party systems upon which we rely, such as our credit card processor, and our ability to provide these third parties the information required to process transactions. In addition, our ability to offer new services or alternative-billing plans may be dependent on our ability to customize our billing systems. Any failures or errors in our billing systems or procedures could impair our ability to properly bill our current customers or attract and service new customers, and thereby could materially and adversely affect our business, prospects, financial condition, operating results and cash flows
Our customer contracts may not always limit our liability and may sometimes contain terms that could lead to disputes in interpretation.
Our customer contracts usually contain provisions limiting our liability with respect to damages resulting from our products and services. We cannot assure you that where we have limitation of liability provisions they will be enforceable in all instances or would otherwise protect us from liability. Our customers may dispute the interpretation of various provisions in their contracts. While we have had relatively few disputes with our customers with regard to the terms of their customer contracts, and any disputes to date have not been material, we can give you no assurance that we will not have material disputes in the future.
The markets in which we operate are highly competitive, and we may be unable to compete successfully against new entrants and established industry competitors with significantly greater financial resources.
Competition in the converging Internet and telecommunications industries is intense. We face competition for products and services from both public and private companies, as well as general voice mail providers, fax providers, paging companies, Internet service providers, email providers and internet telephony companies. Competitive pressures may impair our ability to achieve profitability. The increased competition may also make it more difficult for us to successfully enter into strategic relationships with major companies, particularly if the goal is to have an exclusive relationship with a particular company. We compete against other companies that provide one or more of the services that we currently provide. In addition, these competitors may add services to their offerings to provide enhanced telephony services comparable to those offered by the combined companies. Future competition could come from a variety of companies both in the Internet industry and the telecommunications industry. These industries include major companies that have much greater resources than we have, have been in operation for many years, and have large customer bases. These companies may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing and sale of their products and services than we may be able to do. There can be no assurance that additional competitors will not enter markets that we plan to serve or that we will be able to compete effectively. Increased competition may result in price reductions, reduced gross margins and loss of market share. We may be unable to attain, maintain or enhance our competitive position against current and future competitors.
Our industry is subject to rapid technological change and we must adapt quickly to compete effectively.
The markets in which we compete are characterized by (i) rapidly changing technology in information systems, networks, and information security software; (ii) evolving industry standards and communications protocols; and (iii) frequent improvements in products and services. Speech driven communications in particular have experienced rapid changes. These changes can be attributable to frequent new product introductions, continuing advances in technology, and changes in customer requirements and preferences. To succeed, we must continually improve our current products and services and develop and introduce new products and services that are competitive in terms of price, performance, and quality. These products must adequately address the information security requirements of our customers and their evolving information systems and networks.
The introduction of new technologies could render our existing products and services obsolete or unmarketable or require us to invest in research and development at much higher rates with no assurance of developing competitive products. Changes in technologies or customer requirements also may cause the development cycle for our new products and services to be lengthy and result in significant development costs. We may not be able to counter challenges to our current products and services, and our future products and service offerings may not keep pace with the technological changes implemented by competitors, developers of operating systems or networking systems, or persons seeking to breach information security. Our products and services may not satisfy evolving preferences of customers and prospects. Because of the complexity of our applications, which operate on or use multiple platforms and communications protocols, we may experience delays in introducing new products and service enhancements primarily due to development difficulties or shortages of development personnel. There can be no assurance that we will not experience lengthy delays or other difficulties that could delay or prevent the successful development, introduction or marketing of new products and services or service enhancements. If we fail to develop and introduce new products or improve existing services in a timely fashion, such failure may have a material adverse effect on our business, prospects, financial condition and results of operations.
Our failure to manage growth effectively could impair our business.
We believe that our acquisitions will open new cross-marketing opportunities in each company’s respective customer base. This expansion of business could place a significant strain on our management, financial resources, and other resources. There can be no assurance that such expansion will occur.
We intend to continue to grow by increasing our sales efforts and completing strategic acquisitions. To effectively manage our growth, we must, among other things:
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engage, train and manage a larger sales force and additional service personnel;
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expand the geographic coverage of our sales force;
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expand our information systems;
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identify and successfully integrate acquired businesses into our operations; and
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administer appropriate financial and administrative control procedures.
Our anticipated growth will likely place a significant strain on our management, financial, operational, technical, sales and administrative resources. Our ability to manage future growth, if it occurs, will also depend upon the capacity, reliability and security of our network infrastructure. Any failure to effectively manage our growth or to promptly address and respond to these circumstances may cause our business to suffer and our stock price to decline.
We intend to acquire new and complementary businesses, products and technologies and may be unable to complete these acquisitions or may not be able to successfully integrate an acquired business in a cost-effective and non-disruptive manner
Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. To this end, we have, from time to time, engaged in the process of identifying, analyzing and negotiating possible acquisition transactions and we expect to continue to do so in the future. We may choose to acquire new and complementary businesses, products, technologies and/or services instead of developing them ourselves. We may, however, face competition for acquisition targets from larger and more established companies with greater financial resources, making it more difficult for us to complete acquisitions. We cannot provide any assurance that we will be successful in consummating future acquisitions on favorable terms or that we will realize the benefits that we anticipate from one or more acquisitions that we consummate. Integrating any business, product technology or service we acquire could be expensive and time-consuming and/or disrupt our
ongoing business. Further, we are aware of the numerous risks associated therewith, including but not limited to:
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diversion of management’s attention from day-to-day operational matters and current products and customers;
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lack of synergy, or the inability to realize expected synergies;
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failure to commercialize the new technology or business;
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failure to meet the expected performance of the new technology or business;
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failure to retain key employees and customer or supplier relationships;
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lower-than-expected market opportunities or market acceptance of any new products;
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unexpected reduction of sales of existing products and services by new products or services;
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inability to achieve the financial and strategic goals for the acquired and combined businesses;
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difficulty in maintaining controls, procedures and policies during the transition and integration;
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difficulty effectively integrating the acquired technologies or products with our current products and technologies, particularly where such products reside on different technology platforms;
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difficulty managing geographically-dispersed operations;
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adverse effect on our relationships with partner companies or third-party providers of technology or products; and
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failure of our due diligence process to identify significant issues with product quality, product architecture, legal or tax contingencies, and product development, among other things.
In addition, as a successor, we may be subject to certain liabilities of our acquisition targets. We are, and will be, required to review goodwill and other intangible assets for impairment in connection with past and future acquisitions. We may be required to sustain significant exit or impairment charges if products or services acquired in business combinations are unsuccessful, which may materially increase operating expenses.
Our inability to consummate one or more acquisitions on such favorable terms or our failure to realize the intended benefits from one or more acquisitions, could have a material adverse effect on our business, liquidity, financial position and/or results of operations, including as a result of our incurrence of indebtedness and related interest expense and our assumption of unforeseen contingent liabilities. In addition, in order to finance any acquisitions, we will need to raise additional funds through public or private equity or debt financings. In that event, we could be forced to obtain financing on terms that are not favorable to us and, in the case of equity financing, that result in dilution to our stockholders.
Charges to earnings resulting from past or future acquisitions or internal reorganizations may adversely affect our operating results.
Under purchase accounting, we allocate the total purchase price to an acquired company’s net tangible assets, amortizable intangible assets and in-process research and development based on their fair values as of the date of the acquisition and record the excess of the purchase price over those fair values as goodwill. Management’s estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain. As a result,
any of the following or other factors could result in material charges that would adversely affect our results:
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Loss on impairment of goodwill and/or other intangible assets;
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Changes in the useful lives or the amortization of identifiable intangible assets;
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Accrual of newly identified pre-merger contingent liabilities, in which case the related charges could be required to be included in earnings in the period in which the accrual is determined to the extent it is identified subsequent to the finalization of the purchase price allocation; and
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Charges to income to reduce our cost structure.
In addition, fluctuations in the price of our common stock may expose us to the risk of securities class action lawsuits. Defending against such lawsuits could result in substantial costs and divert management’s attention and resources. Furthermore, any settlement or adverse determination of these lawsuits could subject us to significant liabilities.
Our business and users may be subject to sales tax and other taxes.
The application of indirect taxes (such as sales and use tax, value added tax, or VAT, goods and services tax, business tax, and gross receipt tax) to Internet businesses such as MVI is a complex and evolving issue. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the Internet and e-commerce. In many cases, it is not clear how existing statutes apply to the Internet or e-commerce. In addition, some jurisdictions have implemented laws specifically addressing the Internet or some aspect of e-commerce and several other proposals have been made at the U.S. federal, state and local level that would impose additional taxes on the sale of goods and services through the Internet. These proposals, if adopted, could substantially impair the growth of e-commerce, hamper our ability to retain and attract new customers and diminish our ability to derive financial benefit from our activities. In December 2004, the U.S. federal government enacted legislation extending the moratorium on states and other local authorities imposing access or discriminatory taxes on the Internet through November 2007. On October 31, 2007, the moratorium was extended through November 2014. This moratorium does not prohibit federal, state, or local authorities from collecting taxes on our income or from collecting taxes that are due under existing tax rules. The application of existing, new, or future laws could have adverse effects on our business, prospects and operating results. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which we conduct or will conduct business.
The successful operation of our business depends upon the provisioning of critical technology from other companies.
We depend upon third parties for several critical elements of our business, including various technology and infrastructure components. We rely on private third-party providers for our Internet and telephony connections and for co-location of a significant portion of our communications servers. Any protracted disruption in the services provided by any of these suppliers, or any failure by them to handle current or higher volumes of activity could have a material adverse effect on our business, prospects, financial condition, operating results and cash flows.
An increase in the cost of email transmissions could have a material adverse effect on our business.
We rely on email for the delivery of some of MVI's electronic documents and some of GSI’s electronic messages. In addition, the Company regularly communicates with our clients via email. If regulations or other changes in the industry lead to a charge associated with the sending or receiving of email, the cost of providing services would increase and, if significant, could materially adversely affect our business, prospects, financial condition, operating results and cash flows.
We rely significantly on the revenue generated by our fax services.
During 2009, approximately 25% of our net revenue was fax-related. Our future success is therefore subject to the continued use of fax as a messaging medium and/or our ability to diversify our service offerings and derive more revenue from other services, such as voice, email and unified messaging solutions. If the demand for fax as a messaging medium decreases, and we are unable to replace lost revenues from decreased usage of our fax services with a proportional increase in our customer base or with revenues from our other services, our business, financial condition, operating results and cash flows could be materially and adversely affected.
We believe that one of the attractions to fax versus alternatives, such as email, is that fax signatures are a generally accepted method of executing contracts. Various governmental and non-governmental entities, many of which possess greater resources than we do, are attempting to create a universally accepted method for electronically signing documents. Widespread adoption of so-called “digital signatures” could reduce demand for our fax services and, as a result, could have a material adverse effect on our business, prospects, financial condition, operating results and cash flows.
Protection of our intellectual property is limited and there is a risk of third party claims of infringement.
We regard our software as proprietary, and our success and ability to compete depends, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others; we may fail to do so. We will rely on copyright and trade secret laws, trademarks, confidentiality procedures and contractual provisions to protect our proprietary software, documentation, and other proprietary information. In addition, we execute confidentiality and non-disclosure agreements with our employees and limit access to distribution of our proprietary information. These efforts will allow us to rely upon the knowledge and experience of our management and technical personnel, to market our existing products, and to develop new products. The departure of any of our management or technical personnel, the breach of their confidentiality and non-disclosure obligations to us, or the failure to achieve our intellectual property objectives may have a material adverse effect on our business. Although we believe that the effectiveness of our products and services does not depend entirely upon the secrecy of our proprietary or licensed technology, the public disclosure of our technology could reduce the level of our product licensing. Further, litigation to defend and enforce our intellectual property rights could result in substantial costs and diversion of our resources and could have a material adverse effect on our business, prospects, financial condition and results of operations regardless of the final outcome of such litigation. Despite our efforts to safeguard and maintain our proprietary rights, we may not be successful in doing so or the steps taken by us in this regard may not be adequate to deter misappropriation or independent third-parties from copying or otherwise obtaining and using our products, services, technology, or other information that we regard as proprietary. Also, others may independently develop similar technologies or duplicate our technology. Our inability to protect our proprietary rights may have a material adverse effect on us. As the number of similar products and services in the industry increases and the functionality of these products further overlap, we may increasingly become subject to claims of infringement or misappropriation of the intellectual property or proprietary rights of others. Other third parties could assert infringement or misappropriation claims against us in the future with respect to current or future products and services. Any claims or litigation, with or without merit, could be costly and could result in a diversion of management’s attention and of our resources.
In the past, we received letters alleging that we had infringed the intellectual property rights of CatchCurve, Inc. with respect to its AudioFax technology. To avoid the costs of litigating the matter with CatchCurve or migrating our fax service software to another provider, we entered into a license agreement with CatchCurve for its AudioFax technology.
GoSolutions has in the past received letters alleging that they are infringing the intellectual property rights of Parus Holdings, the parent company of Webley Systems. We have received advice from an intellectual property attorney with experience in this industry with respect to the validity of the claim of the Parus patent, and have been made aware that there is substantial evidence to the effect that there existed prior art to the Parus patent that could impact its effectiveness. We have made efforts to migrate away from the technologies that are affected, and plan to continue to derive larger portions of revenue from different technologies to reduce any exposure to this intellectual property.
Our services may become subject to burdensome telecommunications regulation, which could increase our costs or restrict our service offerings.
Our GoSolo service provides Internet messaging and telecommunication services through data transmissions over both the public switched telecommunication network (“PSTN”) and the Internet. The PSTN based telecommunications services provided by GoSolo are subject to regulation by the Federal Communications Commission (“FCC”), state public utility commissions and foreign governmental authorities. These regulations affect the prices we pay for transmission services, the competition we face from telecommunications services and other aspects of our market. The FCC does not currently regulate the Internet messaging services provided as part of GoSolo. In addition, MVI and QSI provide services through data transmissions over public telephone lines and other facilities provided by carriers. However, we believe that our services are “information services” under the Telecommunications Act of 1996 and related precedent and therefore would not currently be subject to U.S. telecommunications services regulation. The FCC also views Internet-based services as being interstate and subject to the protection of federal laws preempting state efforts to impose traditional common carrier regulation on such services. However, as messaging and communications services converge and as the services we offer expand, we may become subject to FCC or other regulatory agency regulation. Changes in the regulatory environment could decrease our revenues, increase our costs and restrict our service offerings.
Our business segments, both directly and indirectly, rely on the Internet and other electronic communications gateways. We intend to expand our use of these gateways. To date, the use of the Internet has been relatively free from regulatory restraints. However, legislation, regulations, or interpretations may be adopted in the future that constrain our own and our customers’ abilities to transact business through the Internet or other electronic communications gateways. There is a risk that any additional regulation of the use of such gateways could have a material adverse effect on our business and financial condition.
The TCPA and FCC rules implementing the TCPA, as amended by the Junk Fax Act, prohibit sending unsolicited facsimile advertisements to telephone fax machines. The FCC may take enforcement action against companies that send “junk faxes” and individuals also may have a private cause of action. Although entities that merely transmit facsimile messages on behalf of others are not liable for compliance with the prohibition on faxing unsolicited advertisements, the exemption from liability does not apply to fax transmitters that have a high degree of involvement or actual notice of an illegal use and have failed to take steps to prevent such transmissions. We take significant steps to ensure that our services are not used to transmit unsolicited faxes on a large scale, and we do not believe that we have a high degree of involvement or notice of the use of our service to broadcast junk faxes. However, because fax transmitters do not enjoy an absolute exemption from liability under the TCPA and related FCC rules, we could face FCC inquiry and enforcement or civil litigation, or private causes of action, if someone uses our service for such impermissible purposes. If this were to occur and we were to be held liable for someone’s use of our service for transmitting unsolicited faxes, the financial penalties could cause a material adverse effect on our operations.
Since VillageEDOCS, Inc. is a holding company, our ability to fund corporate overhead and to make payments on our various debt obligations depends upon the operations of our subsidiaries.
VillageEDOCS, Inc. is a holding company, and substantially all of our assets consist of the stock of our subsidiaries and all of our operations are conducted by our direct wholly owned subsidiaries. As a result, our ability to fund corporate overhead and to make payments on our debt obligations is dependent upon the receipt of sufficient funds from our subsidiaries. Our debt obligations are guaranteed, on a joint, several, full, and unconditional basis by all of our subsidiaries.
Our success depends on the retention of existing executive officers and the ability to hire and retain additional key personnel.
Our future performance depends in significant part upon the continued service of the executive officers named in our public filings and those of certain other key technical, sales and management personnel. The loss of the services of one or more of any of the named executive officers or other key employees could have a material adverse effect on the business, prospects, financial condition and results of our operations. Our future success also depends on its continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense. Some technical job categories are under conditions of severe shortage in the United States. We may not be able to recruit or retain the caliber of staff required to carry out essential functions at the pace necessary to sustain or expand our business. There can be no assurance that we can retain our key employees or that we can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future.
Changes in generally accepted accounting principles may adversely affect us.
From time to time, the Financial Accounting Standards Board ("FASB") promulgates new accounting principles that could have a material adverse impact on our results of operations or financial condition. For example, in 2007, the FASB issued a new standard that became effective with our 2009 fiscal year that will result in significant changes in accounting for acquisitions, which could have a material adverse effect on our business, results of operations or financial condition.
A limited number of shareholders own a significant portion of our outstanding common stock and are able to influence our actions.
One shareholder owns 100,487,867 shares, or approximately 34%, of the outstanding shares of our common stock as of February 28, 2010. In addition, as of February 28, 2010, this shareholder holds warrants to purchase an additional 3,000,000 shares of our common stock at $0.10 per share. GoSolutions Equity LLC owns 26,786,840 shares, or approximately 12% of the outstanding shares of our common stock as of February 28, 2010. In addition, our officers and directors own in the aggregate approximately 8% of our outstanding common stock as of February 28, 2010. Each of these parties will also be able to significantly influence corporate actions requiring shareholder approval.
Our Certificate of Incorporation limits director liability, thereby making it difficult to bring any action against them for breach of fiduciary duty.
As permitted by Delaware law, our Certificate of Incorporation limits the liability of directors to us or our stockholders for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances. As a result of its charter provision and Delaware law, stockholders may have limited rights to recover against directors for breach of fiduciary duty.
Risks related principally to our common stock and its market value:
We recently announced our intent to terminate our status as a reporting company under the Exchange Act through a reverse split of our common stock.
On February 8, 2010, we announced our intent to terminate our status as a reporting company under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), through a reverse split of the outstanding shares of our common stock. If the transaction is completed, all obligations to file periodic reports with the SEC will be suspended. In addition, the deregistration of our common stock would also have the effect of terminating the eligibility of our common stock for quotation on the OTC bulletin board. However, we intend to take such actions within our control to enable our securities to be quoted in the pink sheets by broker-dealers so that our shareholders may have a place to trade their shares. Because of this proposed reverse stock split, it may be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares on the OTC bulletin board, as opposed to the pink sheets.
Once our reverse stock split is effective and we are no longer a reporting company under Section 12(g) of the Exchange Act, we will no longer be subject to Section 404 of the Sarbanes-Oxley Act of 2002.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our internal control over financial reporting and our auditor to attest to such evaluation on an annual basis. After the filing of this Form 10-K, assuming that we consummate our anticipated reverse stock split, we will no longer be subject to Section 404 of the Sarbanes-Oxley Act of 2002, we will not be filing periodic or other reports under the Exchange Act with the SEC, and will not be required to identify or report any material weaknesses in our internal controls over financial reporting.
Penny stock regulations may impose certain restrictions on marketability of our stock.
The Commission has adopted regulations which generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share, subject to certain exceptions. As a result, our common stock is subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require delivery, prior to the transaction, of a risk disclosure document mandated by the Commission relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealers presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our securities and may affect the ability of our shareholders to sell our securities in the secondary market and the price at which such purchasers can sell any such securities.
We have never paid dividends on our common stock and do not expect to pay any in the foreseeable future.
We have not paid any dividends on our common stock since our inception and do not intend to pay dividends on our common stock in the foreseeable future. Any earnings that we may realize in the foreseeable future will be retained to finance our growth.
The number of shares eligible for future sale may adversely affect the market for our common stock.
As of February 28, 2010, we had 226,546,613 shares of our common stock issued and outstanding, approximately 170,000,000 of which were “restricted securities” when issued. Rule 144 of the Commission provides, in essence, that a person holding “restricted securities” for a period of six months may sell only an amount every three months equal to the greater of (a) one percent of the issued and outstanding shares, or (b) the average weekly volume of sales during the four calendar weeks preceding the sale. The amount of “restricted securities” which a person who is not an affiliate may sell is not so limited, since non-affiliates may sell without volume limitation their shares held for one year if there is adequate current public information available concerning us. In such an event, “restricted securities” would be eligible for sale to the public at an earlier date. The sale in the public market of such shares of common stock may adversely affect prevailing market prices of the common stock.
Outstanding options and warrants could affect the market price of our common stock.
As of February 28, 2010, there were outstanding stock options and warrants to purchase approximately 50,000,000 shares of our common stock at exercise prices ranging between $0.01 per share and $2.50 per share. The exercise of such outstanding options and warrants will dilute the percentage ownership of our stockholders, and any sales in the public market of shares of common stock underlying such securities may adversely affect prevailing market prices for the common stock. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected since the holders of such outstanding securities can be expected to exercise their respective rights therein at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than those provided in such securities.
Our stock price will fluctuate which could result in substantial losses for investors.
The market price for our common stock may fluctuate significantly in response to a number of factors, some of which are
beyond our control. These factors include:
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Quarterly variations in operating results;
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Changes in financial estimates by securities analysts;
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Announcements by us or our competitors of new products, significant contracts, acquisitions, or strategic relationships;
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Disputes concerning our proprietary rights or any future patents, trademarks or copyrights;
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Publicity about us, our products and services, or our competitors;
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Additions or departures of key personnel;
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Any future sales of our common stock or other securities;
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Stock market price and volume fluctuations of publicly-traded companies; and
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Business combination transactions.
These and other external factors have caused and may continue to cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock.
In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. If securities class action litigation is brought against us, it could result in substantial costs and a diversion of management’s attention and resources, which could hurt our business.
Our common shareholders may experience substantial dilution.
The sale of a substantial number of shares of our common stock in the public market, or the prospect of such sales, could materially and adversely affect the market price of the Company’s common stock. We are authorized to issue up to 500,000,000 shares of common stock. To the extent of such authorization, our Board of Directors will have the ability, without seeking stockholder approval, to issue additional shares of common stock in the future for such consideration as the Board of Directors may consider sufficient. The issuance of additional common stock in the future will reduce the proportionate ownership and voting power of the Company’s common stock held by existing stockholders. Sales in the public market of substantial amounts of our common stock, including sales of common stock issuable upon exercise of options and warrants, could depress prevailing market prices for our common stock. Even the perception that such sales could occur might impact market prices for the common stock. The existence of outstanding options and warrants may prove to hinder our future equity financings.
We cannot be certain that our internal control over financial reporting will be effective or sufficient in the future.
Our ability to manage our operations and growth requires us to maintain effective operations, compliance and management controls, as well as our internal control over financial reporting. We may not be able to implement necessary improvements to our internal control over financial reporting in an efficient and timely manner and may discover deficiencies and weaknesses in existing systems and controls, especially when such systems and controls are tested by increased rate of growth or the impact of acquisitions. In addition, upgrades or enhancements to our computer systems could cause internal control weaknesses.
It may be difficult to design and implement effective internal control over financial reporting for combined operations as we integrate acquired businesses. In addition, differences in existing controls of acquired businesses may result in weaknesses that require remediation when internal controls over financial reporting are combined. The integration of two compliant systems could result in a noncompliant system or an acquired company may not have compliant systems. In either case, the effectiveness of our internal control may be impaired.
If we fail to achieve and maintain an effective system of internal controls, we may be unable to produce reliable financial reports or prevent fraud.
Significant Indebtedness
We have a significant amount of indebtedness related to our acquisition of QSI and are very likely to incur additional indebtedness in the future. In the future, we may not generate sufficient cash flow from operations, or have future borrowings available to us, sufficient to pay our debt.
In order to finance the acquisition consideration for future acquisitions, we may incur additional significant indebtedness. This additional indebtedness may, among other things, require us to:
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Maintain a specific ratio of net debt to consolidated operating income or other measurements;
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Dedicate a significant portion of our cash flow from operations to payments on this debt, thereby reducing the availability of cash flow to fund capital expenditures, to pursue other acquisitions or investments in new technologies and for general corporate purposes;
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Increase our vulnerability to general adverse economic conditions; and
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Limit our flexibility in planning for, or reacting to, changes in or challenges relating to its business and industry.
In addition, the terms of the financing obligations may contain restrictions, including limitations on our ability to:
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Incur additional indebtedness;
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Create or incur liens;
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Dispose of assets;
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Consolidate or merge with or acquire another entity;
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Pay dividends, redeem shares of capital stock or effect stock repurchases; and
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Make loans and investments.
The requirements and limitations that could be associated with additional indebtedness have the potential to increase our vulnerability to general adverse economic conditions, and limit our ability to respond to changes and challenges in our business. In addition, a failure to comply with any such restrictions could result in a default under these financing obligations or could require us to obtain waivers from our lenders for failure to comply with these restrictions. The occurrence of a default that we are unable to cure or the inability to secure a necessary consent or waiver could have a material adverse effect on our business, financial condition or results of operations.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
On February 5, 2010, we filed a Preliminary Schedule 13E3 and Preliminary Information Statement relating to a proposed reverse split of our common stock, which would have the effect of terminating our status as a reporting company under the Exchange Act. On March 5, 2010, we received comments from the staff regarding these filings. One of the staff’s comments was that we update all relevant audited financial information in these preliminary filings to be effective as of December 31, 2010. Accordingly, this necessitated the filing of this Form 10-K. We intend to file an amended Schedule 13E3 and Preliminary Information Statement shortly after the filing of this Form 10-K in order to proceed with this reverse stock split.
ITEM 2.
ITEM 2. PROPERTIES.
We occupy office space in California and Florida. The operations of VillageEDOCS, Inc., Questys, and MVI are conducted from approximately 5,750 square feet of leased office space located at 1401 N. Tustin Avenue, Suite 230, Santa Ana, CA 92705. We lease the Santa Ana office space pursuant to an operating lease agreement expiring in May 2012 at a cost of $10,364 per month. In addition, Questys during 2009 leased office space pursuant to an operating lease agreement that expired on November 30, 2009 at a cost of $11,856 per month. The operations of GoSolutions are conducted from approximately 8,000 square feet of leased office space located at 10701 Danka Way North, Suite 100, St. Petersburg, Florida 33716. GoSolutions leases the St. Petersburg office space pursuant to a noncancelable operating lease agreement expiring in April 30, 2011 at a cost of $12,653 per month. The building in which the office space is located is owned by an entity in which a member of GoSolutions Equity LLC (a significant shareholder of VillageEDOCS) owns an interest. (see Certain Relationships and Related Transactions).
Additionally, the Company leases space and operating systems equipment from Level 3 in Tustin, California, from U.S. Colo in Los Angeles, California, and from Qwest in Tampa, Florida, primarily to support the service operations of MVI, Questys, and GSI. The highly secure facilities are served by all major global telecommunications carriers and are physically-, environmentally-, and utility-redundant sites with multiple telecommunications feeds, multiple emergency power generators, and emergency fuel reserves. These fully redundant systems and emergency power provisions are designed to provide non-stop service and no single point of failure.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Litigation and Claims
In connection with our acquisition of GSI, we are entitled to certain rights of indemnification from GoSolutions Equity, LLC, which is a former shareholder of GSI that became a shareholder of the Company as a result of our acquisition of GSI. We have made a claim of indemnification from this entity in connection with the bankruptcy of one of GSI’s significant customers - Vartec Telecom, Inc. - and the facts and circumstances relating to the procurement and maintenance of the Primerica Life Insurance account and certain Citigroup affiliates. GoSolutions Equity, LLC has indicated that it does not believe that we have a valid basis for making such indemnification claims.
The Company has engaged in limited discussions with GoSolutions Equity, LLC as it relates to the indemnification claims notice and their response to such claims notice. However, the Company is unable to advise whether it will be successful in the indemnification claims against GoSolutions Equity, LLC. Pursuant to the agreement with GSI, if the Company is successful, GoSolutions Equity, LLC would only be required to return up to approximately 4.4 million of our shares issued to that entity to satisfy such indemnification claims. GoSolutions Equity, LLC is not required to contribute cash to satisfy any indemnification claims.
In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not materially affect the consolidated financial position or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We submitted no matters to a vote of our securities holders during the fourth quarter of our 2009 fiscal year. However, as discuss in more detail elsewhere in this Form 10-K, we do intend to solicit our shareholders, through an action by written consent, to approve a reverse split of our common stock, which will have the effect of terminating our status as a reporting company under the 1934 Act, which will have the effect of our shares trading in the pink sheets, as opposed to the OTC bulletin board.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company’s shares trade on the OTC Bulletin Board (“OTCBB”), operated by the Financial Industry Regulatory Authority, Inc. (FINRA), under the ticker symbol VEDO. The stock is thinly traded and transactions in the stock are sporadic and infrequent.
On February 8, 2010, we announced our intention to effectuate a reverse stock split that shall have the effect of suspending our obligation to file periodic reports with the SEC under the Exchange Act. The deregistration of our common stock would also have the effect of terminating the eligibility of our common stock for quotation on the OTC bulletin board. However, we intend to take such actions within our control to enable our securities to be quoted in the pink sheets by broker-dealers so that our shareholders may have a place to trade their shares. Accordingly, our historical price ranges are not necessarily indicative of the future quotations of common stock due to the anticipated change of our trading market from the OTC bulletin board to the pink sheets.
The following table reports, for the periods indicated, the high and low closing bid prices per share for our common stock as reported by the OTCBB. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transaction prices.
As of February 28, 2010, there were approximately 342 holders of record of the Company's common stock.
Dividend Policy
We have never declared dividends or paid cash dividends on our common stock. We intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
On December 15, 2009, C. Alan Williams purchased all 33,500,000 shares of our Series A Preferred Stock from Barron Partners, LP in a private transaction. Effective December 23, 2009, C. Alan Williams converted all 33,500,000 shares of our Series A Preferred Stock into 33,500,000 shares of our common stock pursuant to Section 4(2) of the Securities Act of 1933, as amended. Following this conversion, the Company had no shares of its Series A Preferred Stock outstanding.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
VillageEDOCS, Inc. qualifies as a smaller reporting company and is therefore not required to provide the information required by this Item.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
INTRODUCTION
The following Management Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand VillageEDOCS, Inc. MD&A is presented in the following six sections:
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Business Overview
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Critical Accounting Policies and Estimates
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Recent Accounting Standards and Pronouncements
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Results of Operations
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Liquidity and Capital Resources; and
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Cautionary Information about Forward-Looking Statements.
MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated balance sheets as of December 31, 2009 and 2008 and our audited consolidated statements of operations, stockholders’ equity and cash flows for the years then ended and the related notes thereto.
In MD&A, we use "we," "our," "us," "VillageEDOCS," and "the Company" to refer to VillageEDOCS, Inc. and its wholly-owned subsidiaries, unless the context requires otherwise. Amounts and percents in tables may not total due to rounding. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. We caution readers that important facts and factors described in MD&A and elsewhere in this document sometimes have affected, and in the future could affect our actual results, and could cause our actual results during 2010 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, us.
Our Internet web site address is www.villageedocs.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports of Form 8-K, and all amendments thereto, are available free of charge on our website as soon as reasonably practical after such reports are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission. The information on our web site is not incorporated by reference in this annual report on Form 10-K.
As reported in the Report of Independent Registered Public Accounting Firm on our December 31, 2009 consolidated financial statements, we have suffered recurring losses from operations which raises substantial doubt about our ability to continue as a going concern.
Effective August 1, 2008, we purchased Decision Management Company, Inc. d/b/a Questys Solutions (“Questys,” “QSI”). This acquisition has caused our results of operations for 2009 to vary significantly from those reported for 2008. See Note 5 to our consolidated financial statements contained elsewhere in this report for additional information regarding the acquisition.
Effective December 4, 2009, we sold TBS. Our Board of Directors approved the disposal of the assets and liabilities on December 2, 2009 as part of a strategy to reduce debt and focus on growth at the remaining business units and growth by acquisition. See Note 5 to our consolidated financial statements contained elsewhere in this report for additional information regarding the accounting for this segment as discontinued operations. Please refer to the discussion below under the caption entitled Liquidity and Capital Resources.
BUSINESS OVERVIEW
General
We have been in business since 1995. From inception until September 7, 2007, we were a California corporation. As the result of a merger into our wholly-owned Delaware subsidiary, we became a Delaware corporation.
We conduct our business through four wholly-owned subsidiaries. QSI, our most recent acquisition, provides electronic content management and workflow software and services. GSI provides enhanced voice and data communications services. MVI operates our Internet based document delivery services. From February 2004 through December 2009, TBS operated our government accounting products and services business.
We generate revenue, operating income, and cash flows from:
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subscription agreements for enhanced voice, data, and conferencing services;
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usage charges for delivery, management, and other services involving electronic documents;
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usage charges for our governmental accounting and online payment hosted application services;
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recurring fixed monthly service fees for access to voice, data, or application services;
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fees for professional service;
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wholesale enhanced voicemail services;
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the sale of licenses for proprietary software and third party software;
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fees for maintenance and support agreements;
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installation services;
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sales of third party computer hardware; and
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fees for training.
Our Objective
A core component of our mission is to provide solutions that facilitate the movement of business information between business enterprises using a dynamic and diverse set of delivery methods and content formats. Our products and services have been designed to help enterprises meet various communications challenges, including the need to:
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communicate with an ever-expanding number of trading partners, customers, and enterprises;
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increase the control, management, speed, accuracy and security of the information delivered;
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manage an increasing set of methods used to communicate (print/mail, email, web, fax, XML, and wireless);
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cost-effectively implement a solution that will allow the enterprise to endure the slow acceptance of a common set of delivery methods;
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meet the communications challenges with a service that is more robust than available commercial grade proprietary technologies; and
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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 600 active clients with over 23,000 users.
While we do have some sources of non-recurring revenue, such as hardware sales and third party software, we focus on developing and maintaining sources of monthly recurring revenue, such as providing subscribers with solutions for their critical day to day business processes for the movement, processing, and storage of business information.
Key Items in 2009
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Consolidated net revenue from continuing operations for 2009 increased by 5% over 2008;
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Operating expenses from continuing operations increased by 7% compared to 2008 and represented 84% of sales from continuing operations compared to 82% of sales from continuing operations in 2008;
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The most significant factor in the increase is the addition of the operating expenses from continuing operations of QSI for all twelve months of 2009, compared to five months during 2008;
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Operating expenses decreased at Corporate (-16%) and MVI (-18%);
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Net income increased 76% at MVI and net loss decreased 24% at Corporate; however, these improvements were offset by a net loss of $655,320 at QSI and a net income decrease of $378,440 (-33%) at GSI;
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Net loss for 2009 was $2,036,645, a 230% change from the net loss of $616,642 reported for 2008;
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We retired approximately $1,351,000 in notes payable to related parties and $65,000 in convertible notes payable to related parties using proceeds from the sale of TBS;
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We retired approximately $184,000 in accrued expenses that existed as of December 31, 2008;
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Our net payments on our lines of credit were approximately $760,000 during 2009.
Growth Strategy
Our current and future growth strategy is focused on supporting organic revenue growth and acquiring intellectual and technology assets that improve our ability to take a client's unstructured content and documents and deliver it to the other party through the method preferred by each party, presenting the content in a manner that surpasses our client’s goals. In essence, we strive to bring a Business Process Management discipline to their information. We believe that if we are successful 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 process management/workflow service that provides competency and functionality in the following areas:
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Web Content Management;
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Digital Asset Management;
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Email Management;
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Records Management;
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Documentation Management;
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Information Indexing;
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Categorization/Taxonomy;
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Recognition;
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Document Imaging;
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Form Processing;
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Scanning;
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Collaboration;
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Repositories;
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Storage;
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Long Term Archival;
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Content Integration;
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Search and Retrieval;
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Content Syndication;
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Localization and Personalization; and
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Publication (paper or electronic).
We intend to continue our focus on obtaining growth from sales of higher margin products and services at Questys, GSI, and MVI and by acquiring companies that consistently generate net income and positive cash flows. We believe that this strategy offers the best opportunity for our operations to generate positive operating income and cash flows from operations and to achieve net income.
Our acquisition strategy is focused in two areas: service infrastructure and vertical market silo. The service infrastructure area is our focus to acquire enterprises that fulfill our identified strategic technological core competencies. The vertical market silo acquisition strategy is to acquire companies that assist us in penetrating our target market segments of financial services, healthcare, manufacturing, and local government.
Capital Formation
During the remainder of 2010, we are actively seeking additional financing by issuing equity or obtaining a combination of equity and debt financing from new shareholders and/or lenders. Although we believe we will generate adequate cash to sustain operations at current levels in conjunction with borrowings from our existing lines of credit, we will require additional funding should we wish to complete acquisitions or to accelerate revenue growth from existing lines of business. In addition, should we be required to repay certain of our debt instruments prior to maturity, we will require additional funding. We continue to caution that there can be no assurance that funding will be available on acceptable terms, if at all, or that any such funds we raise would enable us to achieve or maintain profitable operations.
In spite of the impact of new laws, regulations, and accounting pronouncements that have significantly increased our cost of operating as a public company, we intend to contain general and administrative costs where possible. However, we expect to incur significant costs during 2010 related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002 if we are not able to effect the deregistration process that was approved by a majority of our stockholders in the first quarter of 2010. These costs would include new infrastructure required to remediate certain material weaknesses we have identified in our internal controls over financial reporting. Should additional growth capital become available during 2010, we intend to direct the capital toward increasing sales and marketing while holding down costs for non-essential general and administrative as well as product and technology expenses to the extent possible.
Organizational Enhancements
Our goal is to drive efficiency and effectiveness throughout our group of companies. We are working to align each business unit around shared goals and performance targets. In addition, we are striving to streamline corporate overhead and maximize cross-selling activities. We are devoting strategic product management and technical resources both to strengthening the integration of our existing products and services and to developing new products and services that will allow us to offer our clients powerful new solutions comprised of the best that each of our business units has to offer.
Challenges and Risks
Looking forward, management has identified certain challenges and risks that demand our attention. Of these, three key challenges and risks are discussed below.
Weakness in the financial markets and the economy in general
Weakness in the financial markets and in the economy as a whole has adversely affected and may continue to adversely affect segments of our customers, which has resulted and may continue to result in decreased usage levels, customer acquisitions and customer retention rates and, in turn, could lead to a decrease in our revenues or rate of revenue growth. Certain segments of our customers - those whose business activity is tied to the health of the credit markets and the broader economy, such as banks, brokerage firms and those in the real estate industry - have been and may continue to be adversely affected by the current turmoil in the credit markets and weakness in the general economy. To the extent our customers’ businesses have been adversely affected by these economic factors, we have and may continue to experience a decrease in usage-based revenue and sales of our software products. In addition, continued weakness in the economy has adversely affected and may continue to adversely affect our customer retention rates and the number of our new customer acquisitions. These factors have adversely impacted, and may continue to adversely impact, our revenues and our ability to achieve cash flow growth during 2010. However, we believe increased value to our shareholders can still be achieved through a combination of a focus on innovation to support productivity and disciplined expense control, while we continue to invest aggressively in sales and marketing and, to a somewhat lesser extent, in product development, to support long-term profitable growth.
Increased Competition and Capabilities in the Marketplace
We face strong competition from well-established national and global companies as well as from relatively new companies. We must continue to selectively expand into other profitable segments of our markets and offer powerful product and service offerings in order to increase our share of the marketplace. The introduction of new technologies could render our existing products and services obsolete or unmarketable or require us to invest in research and development at much higher rates with no assurance of developing competitive products. Changes in technologies or customer requirements also may cause the development cycle for our new products and services to be lengthy and result in significant development costs. Competitive pressures may impair our ability to achieve profitability.
Capital Resources
We believe that current and future available capital resources, including the net proceeds from sale of our products and services, will be sufficient to fund our operations at current levels for the foreseeable future, but will be insufficient to allow us to repay our debt in full. The exact amount of funds that we will require will depend upon many factors, and it is likely that we will require additional financing. Such sources of financing could include capital infusions, additional equity financing, or debt offerings. In addition, since our revenues and cash flows have historically been subject to seasonality, we believe that it is important to secure greater access to short term borrowing facilities, such as operating lines of credit. There can be no assurance that additional funding or borrowing facilities will be available to us on acceptable 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 capital during the remainder of 2010 or 2011 could have a material adverse effect on our business, financial condition and results of operations.
See also Item 1A “Risk Factors” for more information about risks and uncertainties facing VillageEDOCS, Inc.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our consolidated financial statements, we make estimates, assumptions and judgments that can have a significant effect on our revenues, income/loss from operations, and net income/net loss, as well as on the value of certain assets on our consolidated balance sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance as these policies affect the reported amounts of revenues, expenses, and significant estimates and judgments applied by management.
While there are a number of accounting policies, methods and estimates affecting our consolidated financial statements, areas that are particularly significant include:
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revenue recognition;
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stock-based compensation;
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goodwill and other intangible assets;
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long-lived assets;
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income taxes;
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contingencies;
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derivatives, and
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fair value measurement
In addition, please refer to Note 3 to the accompanying consolidated financial statements for further discussion of our significant accounting policies.
Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, title transfer has occurred, or the services have been performed, the price is fixed or readily determinable and collectibility is probable. Sales are recorded net of sales discounts.
We recognize revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair market values of each of the elements. The fair value of an element must be based on vendor-specific objective evidence (“VSOE”) of fair value. Software license revenue generated by Questys allocated to a software product is recognized upon delivery of the product, or deferred and recognized in future periods to the extent that an arrangement includes one or more elements that are to be delivered at a future date and for which VSOE has not been established. Maintenance and support revenue is recognized ratably over the maintenance term. First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. Estimated fair values of ongoing maintenance and support obligations are based on separate sales of renewals to other customers or upon renewal rates quoted in the contracts. For such arrangements with multiple obligations, we allocate revenue to each component of the arrangement based on the estimated fair value of the undelivered elements. Fair value of services, such as consulting or training, is based upon separate sales of these services. At times, we may enter into multiple-customer contracts in which we allocate revenue based on the number of specified users at each customer, and recognizes revenue upon customer acceptance and satisfying the other applicable conditions of the above described accounting policy.
Services revenue is recognized as the service is performed assuming that sufficient evidence exists to estimate the fair value of the services. Consulting and training services are billed based on contractual hourly rates and revenues are recognized as the services are performed. Consulting services primarily consist of implementation services related to the installation of our products which do not require significant customization to or modification of the underlying software code.
Revenue from subscription agreements consists of fixed monthly fees and usage charges, generally based on per minute rates. Subscription agreement revenue related to Questys, MVI and GSI usage service charges are billed monthly in arrears and the associated revenues are recognized in the month of service. Recurring charges for the GoSolo(TM) platform are billed in advance on a monthly basis and recorded as deferred revenues. We recognize subscription agreement revenue ratably over the service period, which management believes approximates the actual provision of services. Professional service fee revenue consists of consulting fees charged to enterprise clients for GoSolo (TM) platform enhancements. We recognize professional service fee revenue on a time and materials basis over the service period, which management believes approximates the actual provision of services. Wholesale enhanced voicemail services consists of fees charged to telecommunications providers for use of the GoSolo (TM) platform to provide their customers with hosted electronic voicemail, billed monthly in arrears and the associated revenues are recognized in the month of service.
Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. If we made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue recognized could result.
Stock-Based Compensation. All share-based payments to employees, including grants of employee stock options and restricted stock grants, are recognized in the consolidated financial statements based upon their fair values. We use the Black-Scholes option pricing model to estimate the grant-date fair value of share-based awards. Fair value is determined at the date of grant. The consolidated financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual effect differs from those estimates. The estimated average forfeiture rate for the years ended December 31, 2009 and 2008, of approximately 14%, and 17%, respectively, was based on historical forfeiture experience and estimated future employee forfeitures.
The cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows. Due to our loss position, there were no such tax benefits during the years ended December 31, 2009 and 2008.
Goodwill and Other Intangible Assets. Goodwill represents the excess of acquisition cost over the net assets acquired in a business combination and is not amortized. We allocate our goodwill to our various reporting units, determine the carrying value of those businesses, and estimate the fair value of the reporting units so that a two-step goodwill impairment test can be performed. In the first step of the goodwill impairment test, the fair value of each reporting unit is compared to its carrying value. Management reviews, on an annual basis, the carrying value of goodwill in order to determine whether impairment has occurred. Impairment is based on several factors including the Company's projection of future undiscounted operating cash flows. If an impairment of the carrying value were to be indicated by this review, we would perform the second step of the goodwill impairment test in order to determine the amount of goodwill impairment, if any.
We believe that the accounting estimates related to impairment of goodwill and other intangible assets are "critical accounting estimates" because (1) they are highly susceptible to change from period to period because they require us to make assumptions about future sales and cost of sales, and (2) the impact that recognizing an impairment would have on the assets reported on our consolidated balance sheet as well as our net loss would be material. Management's assumptions about future sales prices and future sales volumes have fluctuated in the past and are expected to continue to do so.
In estimating future sales, we use our internal budgets. We develop our budgets based on recent sales data for existing products and services, planned timing of new product and service launches, and customer commitments related to existing and newly developed products and services.
In each of the last two years, we determined that, based on our assumptions, as well as an impairment analysis, that the sum of the expected future discounted cash flows exceeded the reported carrying value and therefore we did not recognize an impairment loss.
If we had been required to recognize an impairment loss on our goodwill and intangible assets, it would likely not have materially affected our liquidity and capital resources because we are not subject to any restrictive covenants related to the results of operations we report in our consolidated financial statements.
Long-Lived Assets. We assess the recoverability of our long-lived assets by determining whether the depreciation and amortization of long-lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long-lived asset impairment, if any, is measured based on fair value and is charged to operations in the period in which long-lived asset impairment is determined by management.
Income Taxes. We account for income taxes using the asset and liability method under which deferred tax assets or liabilities are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.
Contingencies. From time to time we are or may be subject to various claims and contingencies, sometimes related to legal proceedings. Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties, and governmental actions. Management assesses the probability of loss for such contingencies and accrues a liability and/or discloses the relevant circumstances, as appropriate.
Derivatives. Effective January 1, 2009, we adopted the provisions of an accounting pronouncement which applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result of adopting this pronouncement, certain of our issued and outstanding common stock purchase warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as more fully described in Note 3 to the accompanying consolidated financial statements.
Fair Value Measurement. In September 2006, the FASB issued a pronouncement which defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the Unites States of America (“GAAP”), and expands disclosures about fair value measurements. This pronouncement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of this pronouncement by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On January 1, 2008, the Company adopted the provisions of this pronouncement, except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed by one year, which the Company adopted on January 1, 2009. The adoption of this pronouncement did not have a material effect on our financial position or results of operations. The book values of cash, accounts receivable, accounts payable, accrued expenses, capital lease obligation, and debt instruments approximate their respective fair values due to the short-term nature of these instruments.
RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS
Refer to Note 3 of Notes to Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements.
RESULTS OF OPERATIONS
The following discussion of our performance is organized by reportable operating segments, which is consistent with the way we manage our business. Effective August 1, 2008, we acquired QSI. Accordingly, we have included the results of operations of QSI from the date of acquisition. Effective December 4, 2009, we sold TBS and reclassified the revenues and expenses of TBS to discontinued operations for 2009 and 2008.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net Revenue from External Customers
Net revenue from external customers for 2009 was $10,291,252, a 5% increase over 2008 net revenue of $9,799,854.
During 2009, GSI, QSI, and MVI generated 54%, 21%, and 25% of our net revenue, respectively. During 2008, GSI, QSI, and MVI generated 62%, 10%, and 28% of our net revenue, respectively.
The following is a comparison of the components of consolidated net revenue from external customers:
Revenue decreased 8% at GSI due to decreases in user subscription fees as a result of a change in product mix and customer attrition.
Revenue decreased 7% at MVI due to a decrease in outbound revenue as a result of customer attrition and reduced usage volumes.
Revenue increased 120% at QSI due to comparing twelve months of revenue during 2009 with five months of revenue during 2008 (from date of acquisition). On a pro forma basis, QSI’s revenue for 2008 was $2,745,283.
Cost of Sales
The following is a comparison of the components of consolidated cost of sales:
Total cost of sales represented 29% and 27% of net sales during 2009 and 2008, respectively.
Cost of sales for MVI for 2009 represented 39% of MVI’s net sales as compared with 42% in 2008 as a result of reduced telecommunications expenses.
Cost of sales for GSI for 2009 represented 20% of GSI’s net sales as compared with 19% in 2008 because fixed cost of sales were not subject to reduction as revenue declined.
Cost of sales for QSI for each of 2009 and 2008 represented 37% of QSI’s net sales.
On a consolidated basis, cost of sales in 2009 included $31,317 in compensation expense related to the vesting of stock options, compared to $4,601 in 2008.
Gross Profit
Gross profit for 2009 increased 3% to $7,349,163 as compared to $7,107,979 for 2008. The increase for 2009 of $241,184 resulted from decreases of $11,936 and $485,811 from MVI and GSI, respectively, as offset by an increase of $738,931 in gross profit of QSI. Gross profit margin for 2009 and 2008 was 71% and 73%, respectively.
Operating Expenses
The following is a comparison of the components of consolidated operating expenses:
During 2009, the operating expenses of Corporate decreased 16% as a result of decreased compensation, recruiting fees, consulting, and insurance expenses. These decreases were offset by increases in filing fees, legal fees, travel, director fees, and accounting fees paid for non-audit services that for compliance reasons were not included in the services performed by our independent registered public accounting firm.
During 2009, MVI’s operating expenses decreased 18% compared to 2008. Product and technology development decreased $32,265 (-8%) due to staff attrition. Sales and marketing decreased by $132,321 (-43%) as a result of reduced staff expenses and advertising. General and administrative decreased by $56,566 (-11%) due to decreased salaries, bad debt and recruiting fees. Depreciation and amortization expense decreased by $15,128 (-17%).
During 2009, GSI’s operating expenses decreased 4% compared to 2008. Product and technology development decreased by $18,578 (-2%). Sales and marketing increased by $269,050 (+26%) due to increased travel, trade show, and compensation expense, including third party commissions. General and administrative decreased by $333,944 (-23%) due to reduced compensation, processing fees, and rent expense as offset by increases in telephone and legal expenses. Depreciation and amortization expenses decreased by $52,897 (-11%).
During 2009, QSI incurred $1,991,995 of operating expenses. Product and technology, sales and marketing, general and administrative, and depreciation expenses were $671,117, $381,401, $674,696, and $264,781, respectively
On a consolidated basis, operating expenses in 2009 included $159,793 in compensation expense related to the vesting of stock options, compared to $200,486 in 2008.
Operating Income (Loss)
As a result of the foregoing, the Company reported an operating loss for 2009 of $1,292,125, compared to an operating loss of $934,871 for 2008.
The following is a comparison of the components of consolidated loss from operations:
As illustrated by the above table, each of MVI and Corporate reported a significant improvement in operating income (loss) during 2009 compared to 2008. These improvements were offset by decreases at QSI and GSI.
Interest Expense, net of Interest Income
Interest expense, net for 2009 decreased by $124,348 to $144,579 from the $268,927 reported in 2008. The most significant factor in the decrease was a reduction in the amortization of debt issue costs as offset by increases in interest paid in connection with the Company’s lines of credit and notes payable to related parties.
Other Income, net
Other income, net for 2009 was $42,291 compared to other income, net of $129,815 reported in 2008. In each of the years, we recorded other income and expense related to settlement of liabilities.
Discontinued Operations
For the years ended December 31, 2009 and 2008, (loss) income from discontinued operations was $(405,745) and 491,532, respectively. In each of the respective years discontinued operations included the results of operations of TBS. See Note 5 to our consolidated financial statements contained elsewhere in this Annual Report on Form 10-K for additional information related to discontinued operations.
Net Loss
As a result of the foregoing, net loss for 2009 was $2,037,963, or $0.01 per share, compared to a net loss of $616,242, or $0.00 per share, for 2008 on weighted average shares of 190,350,672 and 162,595,571, respectively.
The following is a comparison of the components of consolidated net loss:
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2009, our net cash position increased by $740,387 to $1,307,834. Although our operating and investing activities provided net cash of $53,947 and $2,019,818, respectively, our financing activities used net cash of $1,333,378.
We do not currently have any material commitments for capital expenditures other than those expenditures incurred in the ordinary course of business.
Our sources of capital include cash flow from operations, available credit facilities, and the issuance of debt and equity securities. During 2009, we relied heavily on our operating lines of credit to fund the negative operating cash flows we experienced. We expect to experience further negative operating cash flows during 2010, and we expect to make use of remaining proceeds from the sale of TBS and from new sources of debt financing to offset such negative cash flows.
During 2009, we used cash flows generated by our operations to retire approximately $184,000 in accrued expenses which existed as of December 31, 2008. We also retired approximately $1,351,000 in notes payable debt in 2009 while incurring $865,000 in new notes payable debt.
On December 4, 2009, we sold TBS to N. Harris Computer Corporation and its affiliate for approximately $2.3 million in cash plus up to $0.7 million in additional future payments subject to certain earn-out provisions. Our Board of Directors approved the disposal of TBS on December 2, 2009 as part of a strategy to reduce debt and focus on growth at the remaining business units and growth by acquisition. We used $169,817 of the proceeds from the asset sale to pay outstanding amounts pursuant to the Line (see below) on December 4, 2009.
On February 6, 2008, we entered into an agreement with The Private Bank of The Peninsula (“Bank”) for an asset based line of credit (the “Line”). Pursuant to an amendment, the Bank renewed the Line and modified the terms to include an interest rate that was floating and was calculated at Wall Street Journal prime plus five percent (5%) on the cash borrowed provided that the minimum rate was eight and one half percent (8.5%) and minimum interest was $7,000 per three month period. Interest on outstanding borrowings was payable monthly. In addition, we were required to pay an amendment fee of $10,000 and, upon each advance, a fee equal to one quarter of one percent (0.25%) of the advance, and is subject to covenants as to minimum quarterly income and cash flow. The Bank’s maximum commitment amount for the Line, as amended, was $1.0 million. Advances were generally limited to 80% of eligible domestic accounts receivable. Outstanding advances under the Line were secured by a first lien position on all of our accounts receivable, contract rights, chattel paper, documents, and payment and by a second lien on our inventory, intellectual property, and equipment. As of December 31, 2009, there were outstanding borrowings of $130,592 on the Line and we were in compliance with all loan covenants, except a quarterly income covenant. As a result of our failure to comply with the quarterly income covenant, the Bank increased the interest rate to 13.5% per annum effective November 19, 2009. The Line matured on February 24, 2010 and, pursuant to an extension granted by the Bank, we repaid all outstanding advances in February and March 2010.
Effective September 30, 2006, we obtained a $500,000 revolving line of credit (“RLOC”) with a financial institution. On May 8, 2009, we retired the RLOC using the proceeds of the Williams May 2009 Note (see below). The terms of the note payable financing were deemed more favorable to the Company than the renewal terms offered by the financial institution.
QSI had an unsecured line of credit agreement with a financial institution for borrowings up to the maximum of $100,000 with no maturity date (“QSI RLOC”). Borrowings bore interest at the prime rate, plus 2.775%. On August 3, 2009, as stipulated by the QSI acquisition agreements, we repaid the outstanding borrowings of $100,000 in full and closed the line of credit using the proceeds of the Williams July 2009 Note (see below).
Effective August 1, 2008 and in connection with the acquisition of Questys, we issued a secured promissory note to the Pavlovics (the “Pavlovic Note”). The Pavlovics are a related party as a result of the shares of our common stock issued to them in connection with the acquisition of Questys. The Pavlovic Note is non-interest bearing and may be prepaid in whole or in part at any time without penalty and is due on August 1, 2011. Principal payments are due in three equal annual installments of $300,000 each on August 1, 2009, August 1, 2010, and August 1, 2011. On August 1, 2009, we paid the first installment of $300,000 using the proceeds of the Williams July 2009 Note (see below). The Pavlovic Note is secured by certain assets of Questys as defined in a Security Agreement dated as of August 1, 2008.
Prior to August 1, 2008 (effective date of acquisition of Questys), the Pavlovic’s made aggregate advances to Questys in the amount of $115,000, which were assumed in the acquisition (the “Pavlovic Shareholder Debt”). The Pavlovic Shareholder Debt is non-interest bearing and the Company and the Pavlovics have agreed to the repayment of the outstanding balance as follows: (i) $35,000 on or before August 1, 2009, (ii) $40,000 on or before August 1, 2010, and (iii) $40,000 on or before the August 1, 2011. On August 3, 2009, we paid the first installment of $35,000 using the proceeds of the Williams July 2009 Note (see below).
We funded the requirement for the initial $300,000 payment for the purchase of QSI from the proceeds of a $300,000 related party secured promissory note offering subscribed to by The Silver Lake Group, LLC (“SLG”) on August 4, 2008 (the “SLG Note”). SLG is owned by Ricardo A. Salas, who is one of our Directors. The SLG Note was originally due on October 31, 2008 and bore interest at a rate of nine percent (9%) per annum through October 31, 2008.
On October 30, 2008, VillageEDOCS, Inc. and SLG entered into an Amendment to Secured Promissory Note (“Amendment”) to modify the maturity date, interest rate, and repayment terms of the SLG Note. As of October 31, 2008, the remaining principal balance of the SLG Note, as amended, was $250,000 and no interest was outstanding. Pursuant to the Amendment, the SLG Note matured on March 31, 2009 and bore interest from November 1, 2008 at a rate of twelve percent (12%) per annum. As of December 31, 2009, the SLG Note was paid in full. The SLG Note was secured by the accounts receivable of GoSolutions, Inc., our wholly-owned subsidiary, as defined in a Security Agreement dated as of August 1, 2008.
On May 6, 2009 we arranged for an unsecured promissory note financing with C. Alan Williams and Joan P. Williams in the amount of $430,000 (the “Williams May 2009 Note”). The Williams May 2009 Note bore a per annum interest rate equal to the most favorable rate paid by the Williams plus two percent (2%). Our interest rate in effect through December 15, 2009 (date of repayment) with respect to the Williams May 2009 Note was 4.87%. The interest rate was subject to adjustment once per month. The term of the Williams May 2009 Note was thirty-six (36) months, with monthly installments paid by us consisting of principal and interest on the first of each month, beginning on August 1, 2009.
We used the proceeds from the Williams May 2009 Note, to retire the RLOC on May 8, 2009 (see above). We deemed the terms of the Williams May 2009 Note to be more favorable to us than the renewal terms offered by the financial institution.
On July 30, 2009 we arranged for an unsecured promissory note financing with C. Alan Williams and Joan P. Williams in the amount of $435,000 (the “Williams July 2009 Note”). The Williams July 2009 Note bore interest at ten percent (10%) per annum. The term of the Williams July 2009 Note was twelve (12) months, with monthly installments paid by us at the end of each month consisting of principal and interest, beginning on July 31, 2009.
We used the proceeds from the Williams July 2009 Note, to retire a line of credit with a financial institution on August 4, 2009 and to make installment payments to Vojin and Gloria Hadzi-Pavlovic pursuant to the agreement for the Company’s purchase of QSI dated as of August 1, 2008.
On February 17, 2004, we borrowed $1,700,000 from C. Alan and Joan P. Williams and issued a convertible promissory note, which bore interest at ten percent (10%) per annum (the “Williams Convertible Note”). During 2005, all but $65,000 of the principal amount due pursuant to this note was converted into shares of our common stock. In October 2009, the Williams agreed to extend the due date of the note to October 31, 2011. Effective February 17, 2009, we and the Williams agreed to extend the expiration date of the warrant to February 16, 2012 in exchange for the Williams’ agreement to extend their guaranty of the RLOC through December 31, 2010.
On December 15, 2009, we paid $927,917 to C. Alan and Joan P. Williams in full satisfaction of all outstanding principal and interest owed to the Williams pursuant to the Williams Convertible Note, the Williams May 2009 Note, and the Williams July 2009 Note.
Our inability to repay outstanding borrowings when due would have a material adverse effect on us.
Substantial risk exists that a decrease in demand for our products and services would reduce the availability of cash from this source since our operating cash flows are derived from products and services that are subject to rapid technological change.
Since our inception, our operating and investing activities have used substantially more cash than they have generated. We believe that we have made considerable progress toward achieving profitable operations by increasing revenues from electronic document delivery services and through our acquisition of QSI and GSI. In addition, we are actively seeking opportunities to acquire or otherwise combine with businesses that are operating profitably and generating positive cash flows. However, at present and for the foreseeable future, we believe that we will continue to need working capital to fund the growth of our businesses and to absorb the increasing costs associated with operating as a fully reporting company in the prevailing regulatory environment. Accordingly, we anticipate negative operating and investing cash flows during all of 2010 and at least until QSI, MVI, and GSI consistently generate net cash flows sufficient to offset the projected expense to operate the holding company.
We expect to use cash flow generated from operations, remaining proceeds from the sale of TBS, and potentially other sources, to fund any such negative operating cash flows during the remainder of 2010.
While we believe that our available cash resources combined with our current revenue streams and lines of credit will be sufficient to meet our anticipated working capital requirements for the next twelve months, we would likely require new sources of debt or equity financing during the remainder of 2010 should we be required to expand or significantly upgrade our technology infrastructure through additional capital expenditures. Should our current revenue streams or margins be subjected to even minor decreases, our external funding requirements would likely be greater.
We believe that sustainable profitability is achievable; however, we have a history of losses. While GSI and MVI each reported net income for 2009, this income was not sufficient to offset losses at QSI, interest expense and corporate overhead. If we are not successful in improving operating profits from our three operating segments, or in reducing expenses of QSI and the holding company as a percentage of revenue, we may not achieve profitability on a consolidated basis.
This estimate is a forward-looking statement that involves risks and uncertainties. The actual time period may differ materially from that indicated as a result of a number of factors so that we cannot assure you that our cash resources will be sufficient for anticipated or unanticipated working capital and capital expenditure requirements for this period. We have advised that we will need to raise additional capital in the future to meet our operating and investing cash requirements. Such sources of financing could include capital infusions, additional equity financing, or debt offerings. There can be no assurance that additional funding will be available on acceptable terms, if at all, or that such funds if raised, would enable us to achieve and maintain profitable operations. If we are not able to obtain sufficient additional funds from investors, we may be unable to sustain all or part of our operations. If we raise additional funds through the issuance of securities, these securities may have rights, preferences or privileges senior to those of our common stock, and our stockholders may experience additional dilution to their equity ownership.
The Report of Independent Registered Public Accounting Firm on our December 31, 2009 consolidated financial statements includes an explanatory paragraph stating that the recurring losses incurred from operations raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All statements that do not directly and exclusively relate to historical facts constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The “forward-looking statements” safe harbor does not apply to our company because we issue “penny stock” and are excluded from the safe harbor pursuant to Section 27A(b)(1)(C) of the Securities Act of 1933, as amended, and Section 21E(h)(1)(C) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our forward-looking statements are based on our plans, intentions, expectation, and belief and are subject to certain risks and uncertainties that could cause actual 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 that contain these words carefully because they discuss our expectations about our future performance, contain projections of our future operating results or of our future financial condition, or state other "forward-looking" information. . These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our current views with respect to future events and financial performance and involves risks and uncertainties, including, without limitation, general economic and business conditions, changes in foreign, political, social and economic conditions, regulatory initiatives and compliance with governmental regulations, the ability to achieve further market penetration and additional customers, and various other matters, many of which are beyond our control, including, without limitation, the risks described in Item 1A "Risk Factors". Our future results and stockholder values may differ materially from those expressed in these forward- looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict. We assume no obligation to update any forward-looking statements. Investors are cautioned not to put undue reliance on any forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Readers should also consult the cautionary statements and risk factors listed from time to time in our Reports, and all amendments thereto, on Forms 10-Q, 8-K, and other SEC filings
Forward looking statements in this Annual Report on Form 10-K include, without limitation:
The statements under the heading "Item 1. Business" and in MD&A under the caption Business Overview concerning (1) our strategy to develop innovative solutions to expand our ability to benefit our enterprise clients and increase the breadth and size of the markets we satisfy today, (2) our strategy to focus on acquiring intellectual and technology assets that continue to accelerate expansion of our client solutions, (3) our belief that we offer a complete set of business communication services and solutions and a scalable global platform, (4) our belief that our services improve and enhance data delivery or help customers to optimize the processing and delivery of the entire range of business documents, (5) our belief about the benefits businesses will derive from our software and service solutions and about its capabilities, (6) our intent to focus on obtaining growth from higher margin products and services and to make acquisitions of companies that consistently generate net income and positive cash flows, (7) our belief as to the reason that each of our businesses can compete effectively, (8) our strategy of preparing for significant growth , and (9) our strategy of directing new capital primarily toward increasing sales and marketing, which statements are subject to various risks and uncertainties, including, without limitation, our limited operating history, risks that we may not successfully implement our acquisition program, risks associated with assimilating acquired personnel and technology into the Company, the risk that we will not be able to compete effectively because our market place is highly competitive and has low barriers to entry, and our dependence on third party technology suppliers to provide key software and infrastructure.
The statements under the heading “Item 3. Legal Proceedings” concerning our belief as to the materiality of the indemnity claim.
The statements under MD&A under the captions Introduction and Business Overview of our strategies, beliefs, plans, expectations, anticipations and hopes with respect to (1) our expectations about the business prospects of QSI, MVI, and GSI, (2) our belief that we have improved our corporate governance, (3) our current and future growth strategy to streamline the corporate structure, bolster sales resources, acquire intellectual and technology assets and our expectations about the benefits we may derive, (4) our belief about our vision to become a business process management/workflow service and the benefits we expect to derive, (5) our acquisition strategy, (6) our expectations regarding challenges and risks that we believe are key challenges and risks, and (7) our belief that obtaining planned financings will allow us to generate adequate cash flows to sustain operations at current levels until we begin to operate profitably on a consistent, month-over month basis, which statements are subject to various risks and uncertainties, including, without limitation, our limited operating history, risks that we may not be able to obtain any additional financing at terms acceptable to us, or at all, risks that we may not successfully implement our acquisition program, risks associated with assimilating acquired personnel and technology into the Company, risks associated with governmental regulation, and the risk that we will not be able to compete effectively because our market place is highly competitive and has low barriers to entry. The statements in MD&A under the caption Critical Accounting Policies regarding calculation of allowances, reserves, and other estimates that are based on historical experience, the judgment of management, and various other assumptions that are believed to be reasonable under the circumstances, the results of which for the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from any other sources, our beliefs about critical accounting policies, and the significant judgments and estimates used in the preparation of our consolidated financial statements, which statements are subject to certain risks, including, among other things, the inaccuracy of our beliefs regarding critical accounting policies and that actual customer reserves or other estimates may be different from our estimates, requiring revisions to our estimated allowance for doubtful accounts, additional inventory write-downs, impairment charges, restructuring charges, litigation, warranty, and other reserves. The statements in MD&A under the caption Results of Operations of our strategies, beliefs, plans, expectations, anticipations and hopes with respect to Net Revenue, Gross Profit, Operating Expenses, Income (Loss) from Operations, and Net Loss and our strategies, beliefs, plans, expectations, anticipations and hopes with respect to Liquidity and Capital Resources set forth in MD&A under the caption Liquidity and Capital Resources, including, without limitation (1) our belief that we have made progress toward achieving profitable operations, (2) our strategy of actively seeking to combine with business that operate profitably and generate positive cash flows, (3) our belief that sustainable profitability is achievable, (4) our expectations about future funding requirements, (5) our expectations regarding retirement of additional accrued expense and notes payable debt during 2010, and (6) our belief that current cash position, cash generated through operations and available borrowings will be sufficient to meet our needs through at least the next twelve months, which statements are subject to various risks and uncertainties, including, without limitation, our limited operating history, risks that we may not be able to obtain any additional financing at terms acceptable to us, or at all, the risk that we may be unable to sustain all or part of our operations if we are not able to obtain sufficient additional funds from investors, the risk that our funding requirements could be greater should our current revenue streams or margins decrease, risks that we may not successfully implement our acquisition program, the risk that we may be required to repay certain notes payable debt prior to maturity, risks associated with assimilating acquired personnel and technology into the Company, and the risk that we will not be able to compete effectively because our market place is highly competitive and has low barriers to entry.
The statements under the heading “Item 9A. Controls and Procedures” of our belief that we are addressing the deficiencies that affected our internal control over financial reporting and the time we estimate we will require before we would be able to conclude that all material weaknesses have been remediated or our belief regarding the potential impact to us, which statements are subject to various risks and uncertainties including, without limitation the risk that for financial or other reasons we will be unable to effect some or all of the changes we believe are required within the time periods estimated, or at all.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
VillageEDOCS, Inc. qualifies as a smaller reporting company and is therefore not required to provide the information required by this Item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Exhibit 99.1, VillageEDOCS, Inc. Financial Statements is incorporated herein by this reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. - CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). As a result of this evaluation, we identified material weaknesses in our internal control over financial reporting as of December 31, 2009. Accordingly, we concluded that our disclosure controls and procedures were not effective as of December 31, 2009.
Our internal controls over financial reporting (“ICFR”) are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Management’s Annual Report on Internal Control Over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, management has determined that our internal controls over financial reporting were not effective as of December 31, 2009 because we had the following deficiencies:
1.
Shortage of qualified financial reporting personnel due to limited resources and number of locations generating transaction data. This shortage in financial reporting staff resulted in adjustments to our annual report for 2009, which were not detected initially by management. These adjustments included adjustments to accrued expenses and net income. Management has concluded that this control deficiency constitutes a material weakness.
2.
In part due to inability to purchase and implement more robust software tools, the Company did not maintain effective controls to ensure there is timely analysis and review of accounting records, spreadsheets, and supporting data. This control deficiency did not result in audit adjustments to the 2009 interim or annual consolidated financial statements. However, this control deficiency could result in a material misstatement of significant accounts or disclosures that would result in a material misstatement to the Company’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
3.
The Company did not effectively monitor access to, or maintain effective controls over changes to, certain financial application programs and related data. This control deficiency did not result in audit adjustments to the 2009 interim or annual consolidated financial statements. However, this control deficiency could result in a material misstatement of significant accounts or disclosures that would result in a material misstatement to the Company’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
4.
The Company does not maintain a sufficient level of IT personnel to execute general computing controls over our information technology structure, which include the implementation and assessment of information technology policies and procedures. This control deficiency did not result in an audit adjustment to the 2009 interim or annual consolidated financial statements, but could result in a material misstatement of significant accounts or disclosures, which would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
5.
The Company did not maintain adequate segregation of duties within its critical financial reporting applications, the related modules and financial reporting processes. This control deficiency did not result in audit adjustments to the 2009 interim or annual consolidated financial statements. This control deficiency could result in a misstatement of balance sheet and income statement accounts, in the Company’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
Management has determined that these control deficiencies constituted a material weakness in our internal control over financial reporting as of December 31, 2009. A material weakness is a control deficiency, or combination of control deficiencies, in our internal controls over financial reporting (“ICFR”) such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned functions.
Inherent Limitations Over Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Remediation of Material Weakness
As discussed in Management’s Annual Report on Internal Control over Financial Reporting, as of December 31, 2009, there were material weaknesses in our internal control over financial reporting. To the extent reasonably possible in our current financial condition, we intend to employ additional staff members in the finance department to better address ICFR deficiencies and ensure we continue to prepare our financial statements and disclosures in accordance with accounting principles generally accepted in the United States of America. We intend to complete a process of centralizing accounts receivable and accounts payable processes for all business units, which we believe will establish mitigating controls to compensate for the risk due to lack of segregation of duties. In addition, we are seeking ways to unify the financial reporting of all of our component companies and we continue to plan to make resources available to upgrade, where possible, certain of our information technology systems impacting financial reporting. We are currently seeking senior information technology management staff that is adequately qualified to oversee IT staff and to ensure that the IT general computing controls are effective over our systems impacting financial reporting.
Through these steps, we believe we are making progress toward addressing the deficiencies that affected our internal control over financial reporting as of December 31, 2009. However, the effectiveness of any system of internal controls is subject to inherent limitations and there can be no assurance that our ICFR will prevent or detect all errors. Because the remedial actions require hiring of additional personnel, upgrading certain of our information technology systems, and relying extensively on manual review and approval, the successful operation of these controls for at least several quarters may be required before management may be able to conclude that the material weakness has been remediated. We intend to continue to evaluate and strengthen our ICFR systems. These efforts require significant time and resources. If we are unable to establish adequate ICFR systems, we may encounter difficulties in the audit or review of our financial statements by our independent public accountants, which in turn may have a material adverse effect on our ability to prepare financial statements in accordance with accounting principles generally accepted in the United States of America and to comply with our Securities and Exchange Commission reporting obligations.
Attestation Report of the Registered Public Accounting Firm.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
Changes in Internal Control Over Financial Reporting.
We have made no change in our internal control over financial reporting during the fourth quarter of 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors and Executive Officers
All directors and executive officers may be reached by contacting the Company, located at 1401 N. Tustin Ave., Suite 230, Santa Ana, California 92705, telephone number (714) 734-1030.
The following tables and text set forth certain information concerning members of the Board of Directors of the Company and its executive officers. All of the ages are as of February 28, 2010. All of the Company’s directors and executive officers are citizens of the United States.
The following table sets forth the names and ages of the directors and executive officers of the Company and certain additional information:
Name
Age
Position
J. Thomas Zender
Chairman of the Board (1)
K. Mason Conner
Chief Executive Officer, President, Director
H. Jay Hill
Executive Vice President of Corporate Development, Director
Gerik M. Degner
Director(1)
Ricardo A. Salas
Director(1)
Michael A. Richard
Chief Financial Officer and Secretary
(1) Indicates that the director is “independent” within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.
Executive officers are appointed by the Board of Directors and, subject to the terms of their employment agreements, serve until their successors are duly elected and qualify, subject to earlier removal by the Board of Directors. Directors are elected at the annual meeting of shareholders to serve for their term and until their successors are duly elected and qualify, or until their earlier resignation, removal from office, or death. The remaining directors may fill any vacancy in the Board of Directors for an unexpired term. The term of the current directors continues until the next annual meeting of shareholders to be held in 2010. Mr. Zender has been a director since August 1997, Mr. Hill since October 1997, Mr. Conner since October 1998, Mr. Salas since July 2005, and Mr. Degner since August 2009.
K. MASON CONNER has been our Chief Executive Officer since 1999 and has served as our President since January 1, 2007. Mr. Conner joined the Company as Vice-President of Sales in 1997 and has been a Board Member since 1998, Acting Vice-President of Sales between 1998 and 2002, and President between 1998 and March 2006, and Mr. Conner is also a Director of GoSolutions, MVI, and QSI. He has 27 years in sales and business management experience, including 23 years of direct and channel sales experience in the voice and data communications products and services industry. In the early 1980's he was involved in the application of Internet Protocol technologies. In the late 1980s and early 1990s he was a principal strategist for an international initiative to transform K-12 education through the use of the Internet. He was a principal consultant with LTS for the electronic vulnerability threat assessment of the Los Angeles Airport Department after the "UnaBomber" threat. He has held sales management positions with Banyan Systems, Doelz Networks, and Timeplex. During the five years prior to joining the Company, Mr. Conner was Director of Sales at Telecom Multimedia Systems from 1996 to 1997, Vice President of Sales at Lo Tiro-Sapere from 1995 to 1996, and Vice President of Sales at Digital Network Architectures from 1991 to 1995.
GERIK M. DEGNER, CFA was nominated to join our Board of Directors in June, 2009. Since May of 2009, Mr. Degner has been a Director at Waveland Capital Group focusing on corporate finance, mergers and acquisitions and private equity services. From July 2007 to May 2009, Mr. Degner worked with Charterhouse Group, a middle market private equity group, as an Advisor responsible for transaction and business development activities. From August 2004 to July 2007, he founded and managed Synergem Venture Group, an investment banking consulting firm that worked with numerous private equity funds on strategic consolidation and special acquisition projects. From November 2002 to August 2004, Mr. Degner founded and managed Cimarron Equity Partners, a micro market private equity fund that focused on lower middle market companies. Mr. Degner’s background includes a variety of transactions including private equity placement, mergers and acquisitions, recapitalizations, growth financings and divestitures. Mr. Degner holds a B.A. in Psychology from the University of Colorado at Boulder and is a CFA Charterholder.
H. JAY HILL has been a director since 1997 and became the Executive Vice President of Corporate Development in May 2003. Mr. Hill is also a Vice President of Tailored Business Systems, Inc. and GoSolutions, Inc. For the last 20 years, he has primarily been a senior executive in turnaround situations in information technology and telecommunication companies. From November 2000 to May 2003, Mr. Hill was CEO, President and a Director of LightPort Advisors, Inc, a private Internet service provider for the financial services market. He has held similar positions with Unitron Medical Communications, Inc. (d/b/a Moon Communications) (1999-2000) and Amnet Corporation (Netlink) (1989-1994), and has held senior sales and marketing management positions with SunCoast Environmental Controls (1996-1999), Technology Research Corporation (1994-1996), Harris Corporation, Doelz Networks, Paradyne/AT&T, and Inforex. His primary background in sales and marketing commenced with Philadelphia Electric Company and IBM. Mr. Hill currently serves on our Audit Committee and our Compensation Committee.
RICARDO A. SALAS joined the board of directors in the second quarter of 2005. Since 2005, Mr. Salas has served Liquidmetal Technologies in various capacities, including as its President and Chief Executive Officer between December 2005 and October 2006. From January 2000 through June 2005, Mr. Salas served as Chief Executive Officer of iLIANT Corporation, an information technology and outsourcing service firm in the health care industry, and he continues to serve as Director of MED3000 Group, inc. following its acquisition of iLIANT Corporation in May of 2006. Mr. Salas was a founder of Medical Manager Corporation and served as a Vice President between June 1999 and January 2000. In April 1994, he founded National Medical Systems, Inc. and served as its Vice President through its merger into Medical Manager Corporation at the time of its initial public offering in February 1997. From 1987 through 2004, he was Vice President of J. Holdsworth Capital Ltd., a private investment firm. As an officer of J. Holdsworth Capital Ltd., Mr. Salas held positions in various investments Mr. Salas received his B.A. in Economics in 1986 from Harvard University in Cambridge, Massachusetts. Mr. Salas currently serves on our Audit Committee and our Compensation Committee.
J. THOMAS ZENDER has been a director since 1997 and has been Chairman of the Board since January 2001. He currently serves on our Audit Committee and our Compensation Committee. Mr. Zender is an information technology industry board member and executive with over 35 years management and business development experience. He has held management positions at General Electric, Honeywell, ITT and other companies. Mr. Zender has been an officer in three publicly held corporations, one NYSE listed company and two NASDAQ traded companies. From 1996 through 2001, he served as an interim executive for several early stage companies, including CEO of VillageEDOCS from 1997 to 1999. From 2001 to 2007 Mr. Zender served as president and CEO of Unity, a worldwide not-for-profit, trans-denominational spiritual support movement. He is a member of the Forum for Corporate Directs, and has served on their board. Mr. Zender served on the board of Peerless Systems, a NASDAQ traded company, from 2007 to 2008, and on the board of SAMSys Technologies, a Toronto Stock Exchange traded corporation, from 1996 to 2006. He holds a Business Administration degree from Ottawa University, with focus areas of management, marketing, and information technology.
MICHAEL A. RICHARD joined the Company in February 2001 and is the Chief Financial Officer and Corporate Secretary. Mr. Richard is also a Director and the Secretary of our wholly-owned subsidiaries, QSI, GSI, and MVI. Mr. Richard has over 15 years of diverse management and public corporate reporting experience for start-up and early stage ventures. From 1999-2000 he served as V.P. Controller for The BigHub.com, Inc., a public new media company providing unique content, private label search engine, e-commerce solutions, and direct mail. From 1995-1999, Mr. Richard served first as Controller and then as Vice President, Accounting (principal accounting officer), and finally as a Director of PortaCom Wireless, Inc., a public developer and operator of companies with contracts to provide wireless telecommunication services in China and other emerging markets.
Our Corporate Governance Practices
We have always believed in strong and effective corporate governance procedures and practices. In that spirit, we have summarized several of our corporate governance practices below.
Adopting Governance Guidelines
Our board of directors has adopted a set of corporate governance guidelines to establish a framework within which it will conduct its business and to guide management in its running of your Company. The governance guidelines can be found on our website at www.villageedocs.com and are summarized below.
Monitoring Board Effectiveness
It is important that our board of directors and its committees are performing effectively and in the best interest of the Company and its stockholders. The board of directors and each committee are responsible for annually assessing their effectiveness in fulfilling their obligations.
Conducting Formal Independent Director Sessions
At the conclusion of each regularly scheduled board meeting, the independent directors meet without our management or any non-independent directors.
Hiring Outside Advisors
The board and each of its committees may retain outside advisors and consultants of their choosing at our expense, without management’s consent.
Avoiding Conflicts of Interest
We expect our directors, executives and employees to conduct themselves with the highest degree of integrity, ethics and honesty. Our credibility and reputation depend upon the good judgment, ethical standards and personal integrity of each director, executive and employee. In order to provide assurances to the Company and its stockholders, we have implemented standards of business conduct which provide clear conflict of interest guidelines to its employees and directors, as well as an explanation of reporting and investigatory procedures.
Providing Transparency
We believe it is important that stockholders understand our governance practices. In order to help ensure transparency of our practices, we have posted information regarding our corporate governance procedures on our website at www.villageedocs.com.
Communications with the Board of Directors
Although we do not have a formal policy regarding communications with the board of directors, stockholders may communicate with the board of directors by writing to the Company at VillageEDOCS, Inc. Attention: Investor Relations, 1401 N. Tustin Ave., Ste. 230, Santa Ana, CA 92705. Stockholders who would like their submission directed to a member of the board may so specify, and the communication will be forwarded, as appropriate.
Standards of Business Conduct
The board of directors has adopted a Code of Business Conduct and Ethics for all of our employees and directors, including the Company’s principal executive and senior financial officers. You can obtain a copy of our Code of Business Conduct and Ethics via our website at www.villageedocs.com, or by making a written request to the Company at VillageEDOCS, Attention: Investor Relations, 1401 N. Tustin Ave., Ste. 230, Santa Ana, CA 92705. We will disclose any amendments to the Code of Business Conduct and Ethics, or waiver of a provision therefrom, on our website at the same address.
Ensuring Auditor Independence
We have taken a number of steps to ensure the continued independence of our independent registered public accounting firm. That firm reports directly to the Audit Committee, which also has the ability to pre-approve or reject any non-audit services proposed to be conducted by our independent registered public accounting firm.
Committees of the Board and Audit Committee Financial Expert
The Board of Directors has an Audit Committee and a Compensation Committee.
AUDIT COMMITTEE. The Audit Committee of the Board of Directors (the "Audit Committee") monitors the integrity of the Company's financial statements, the independence and qualifications of the independent registered public accounting firm, the performance of the Company's independent registered public accounting firm and the effectiveness of the Company's disclosure controls and procedures and internal controls. It is also responsible for retaining, evaluating, and, if appropriate, recommending the termination of the Company's independent registered public accounting firm. The Audit Committee has been established under a charter approved by the Board. Our Audit Committee consists of Messrs. Zender, Hill, and Salas. Mr. Salas serves as Chairman. During 2009 the Audit Committee met four times. The Audit Committee includes one member of executive management, H. Jay Hill, who is not considered to be independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Securities Exchange Act of 1934, as amended. We are not required by the OTCBB to have an audit committee comprised entirely of independent directors. We do not have an audit committee financial expert as defined by Item 401(e) of Regulation S-B of the Exchange Act at this time because we believe that we are not in a position to attract suitable candidates due to insufficient capital resources. In addition, we are not required by the OCTBB to have an audit committee financial expert.
COMPENSATION COMMITTEE. The Compensation Committee of the Board of Directors (the "Compensation Committee") administers the benefits, incentives and compensation of the Company's executive officers, reviews the performance of the Company's executive officers, reviews and approves executive compensation policy and objectives, concludes whether Company executives are compensated according to such standards, makes recommendations to the Board of Directors with respect to compensation, and carries out the Board's responsibilities relating to all forms of executive compensation. The Compensation Committee has been established under a charter approved by the Board. Non-qualified stock options which are granted to the members of the Compensation Committee are recommended by the Company's Chief Executive Officer and approved by the Board of Directors. Our Compensation Committee consists of Messrs. Zender, Hill, and Salas. Mr. Zender serves as Chairman. During 2009 the Compensation Committee met three times. The Compensation Committee includes one member of executive management, H. Jay Hill. Mr. Hill recuses himself from votes and discussions on his own compensation. We are not required by the OTCBB to have a compensation committee comprised entirely of independent directors.
Report of the Compensation Committee on Executive Compensation
The Compensation Committee of the Board of Directors is currently composed of two independent directors, Messrs. Zender and Salas, who have no “interlocking relationships” (as defined by the SEC), and Mr. Hill, who recuses himself from votes and discussions on his own compensation.
We are engaged in highly competitive businesses and compete nationally for personnel at the executive and technical staff level. Outstanding candidates are aggressively recruited, often at premium salaries. Highly qualified employees are essential to our success. We are committed to providing competitive compensation that helps attract, retain, and motivate the highly skilled people we require. We strongly believe that a considerable portion of the compensation for the Chief Executive Officer and other top executives must be tied to the achievement of business objectives, completing acquisitions, and to business unit and overall financial performance, both current and long-term.
Executive Compensation
Our executive compensation program is administered by the Compensation Committee. The role of the Compensation Committee is to review and approve salaries and other compensation of the executive officers of the Company, to administer the 2002 Equity Incentive Plan, and to review and approve stock awards and stock option grants to all employees including the executive officers of the Company.
General Compensation Philosophy
Our compensation philosophy is that total cash compensation should vary with our performance and any long-term incentive should be closely aligned with the interest of the stockholders. Total cash compensation for the executive officers consists of the following components:
·
Base salary;
·
An executive officer bonus that is related to growth in our sales and operating earnings.
Long-term incentives are realized through the granting of stock options to executives and key employees through the 2002 Equity Incentive Plan. We have also granted common stock and warrants to certain of our executive officers. We have no other long-term incentive plans for our officers and employees.
Base Salary and Executive Officer Bonus Target
Current base salaries for the executive officers were determined by arms’ length negotiations with the Board of Directors. Messrs. Conner, Richard and Hill have employment contracts with the Company which set a base salary and allow for bonus targets and levels to be set at the sole discretion of this committee.
Chief Executive Officer Compensation
The current base salary for the Chief Executive Officer of $248,062 is set according to his employment contract, which also includes provision for annual bonuses at the sole discretion of this committee.
Stock Options
Stock options are granted to aid in the retention of executive and key employees and to align the interests of executive and key employees with those of the stockholders. The level of stock options granted (i.e., the number of shares subject to each stock option grant) is based on the employee’s ability to impact future corporate results. An employee’s ability to impact future corporate results depends on the level and amount of job responsibility of the individual. Therefore, the level of stock options granted is proportional to the Compensation Committee’s evaluation of each employee’s job responsibility. For example, Mason Conner, as the President and Chief Executive Officer, has the highest level of responsibility and would typically be awarded the highest level of stock options. Stock options are granted at a price not less than the fair market value on the date granted.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation, for each of the last two years, awarded to, earned by or paid to:
(a)
our chief executive officer;
(b)
each of our two most highly compensated executive officers who were serving as executive officers at the end of the most recently completed fiscal year and whose total salary and bonus exceeds $100,000 per year; or
(c)
any additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as an executive officer of our company at the end of the most recently completed fiscal year (collectively, the “Named Executive Officers”).
SUMMARY COMPENSATION TABLE
(1) All of the shares of common stock earned by Messrs. Conner and Hill that were issued during 2009 were valued at $0.01 per share (the estimated fair value on the measurement date) and recorded as compensation expense.
(2) All of the shares of common stock earned by Messrs. Conner, Hill, and Richard that were issued during 2008 were valued at $0.015 per share (the estimated fair value on the measurement date) and recorded as compensation expense.
(3) Assumptions relating to the estimated fair value of stock options granted to Messrs. Conner and Hill during 2008 which we are accounting for in accordance with SFAS 123(R) are as follows: risk-free interest rate of 3.00%; expected dividend yield 0%; expected option life of 6.0 years; and volatility between 258% and 273%. Please see Note 3 to our consolidated financial statements for further discussion of our assumptions relating to the estimated fair value of equity awards.
NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE
We compensate our executive officers through a combination of a base salary, a cash bonus, and options to purchase shares of our common stock. In addition, in the future, we may provide other perquisites to some of our executive officers. We do not have a formal plan for determining the compensation of our executive officers. Instead, each executive officer negotiates their respective employment agreement with us.
All agreements with our named executive officers that provide for payments to such named executive officers at, following or in connection with the resignation, retirement or other termination of such named executive officers, or a change in control of our company or a change in the responsibilities of such named executive officers following a change in control are set forth in the following description of their respective employment agreements.
Employment agreements
On November 13, 2008, we entered into employment agreements with K. Mason Conner, our President and Chief Executive Officer, H. Jay Hill, our Executive Vice President - Corporate Development, and Michael Richard, our Chief Financial Officer. These agreements supersede the employment agreements dated June 10, 2004, as amended. Following is a summary of the significant terms of each of the employment agreements:
K. MASON CONNER. Mr. Conner's employment agreement provides for Mr. Conner to serve as our President and Chief Executive Officer for a term ending November 12, 2012. The employment agreement provides that, the term of the agreement shall automatically be extended for successive one year renewal terms, provided that if either Mr. Conner or the Company gives the other party at least one hundred twenty (120) days advance written notice of his or its intention to not renew the agreement for an additional term, the agreement will terminate upon the expiration of the current term.
Pursuant to the employment agreement, Mr. Conner’s present base salary of $236,250 will remain in effect through November 12, 2009. The Board will review his salary at annual intervals, and may adjust his annual base salary from time to time as the Board or its Compensation Committee deems to be appropriate, provided, however, that the salary for the twelve month period beginning November 13, 2009 and each succeeding year shall not be less than 105% of the salary for the prior year. Mr. Conner is entitled to an incentive bonus based upon the Company's adjusted earnings before interest, taxes, amortization and depreciation. For the years 2008 and 2009, the percentage bonus will be 7% of the adjusted earnings before interest, taxes, amortization and depreciation paid in Company shares. For each year subsequent to 2009, the Board will establish the percentage and form of payment.
H. JAY HILL. Mr. Hill’s employment agreement provides for Mr. Hill to serve as our Executive Vice President - Corporate Development for a term ending November 12, 2012. The employment agreement provides that, the term of the agreement shall automatically be extended for successive one year renewal terms, provided that if either Mr. Hill or the Company gives the other party at least one hundred twenty (120) days advance written notice of his or its intention to not renew the agreement for an additional term, the agreement will terminate upon the expiration of the current term.
Pursuant to the employment agreement, Mr. Hill’s present base salary of $210,000 will remain in effect through November 12, 2009. The Board will review his salary at annual intervals, and may adjust his annual base salary from time to time as the Board or its Compensation Committee deems to be appropriate, provided, however, that the salary for the twelve month period beginning November 13, 2009 and each succeeding year shall not be less than 105% of the salary for the prior year. Mr. Hill is entitled to an incentive bonus based upon the Company's adjusted earnings before interest, taxes, amortization and depreciation. For the years 2008 and 2009, the percentage bonus will be 6% of the adjusted earnings before interest, taxes, amortization and depreciation paid in Company shares. For each year subsequent to 2009, the Board will establish the percentage and form of payment.
MICHAEL A. RICHARD. Mr. Richard’s employment agreement provides for Mr. Richard to serve as our Chief Financial Officer for a term ending November 12, 2010. The employment agreement provides that, the term of the agreement shall automatically be extended for successive one year renewal terms, provided that if either Mr. Richard or the Company gives the other party at least one hundred twenty (120) days advance written notice of his or its intention to not renew the agreement for an additional term, the agreement will terminate upon the expiration of the current term.
Pursuant to the employment agreement, Mr. Richard’s present base salary of $160,000 will remain in effect through November 12, 2009. The Board will review his salary at annual intervals, and may adjust his annual base salary from time to time as the Board or its Compensation Committee deems to be appropriate, provided, however, that the salary for the twelve month period beginning November 13, 2009 and each succeeding year shall not be less than 105% of the salary for the prior year. Mr. Richard, at the discretion of the Board, is entitled to receive an annual incentive bonus in an amount to be determined by the Board.
The agreements with Messrs. Conner, Hill, and Richard provide for continuation of certain benefits, modification of vesting and exercise terms for stock and option awards, and for certain payments, either in lump sum or in a series of from six to twelve payments, to Messrs. Conner, Hill and Richard in the event their employment is involuntarily terminated for disability, without cause, or in the event that the agreement is not renewed. The amounts of such payments range from 50% to 200% of annual salary and bonus in effect upon termination. In the event of a Change in Corporate Control, any restricted stock, stock options or other awards granted to Messrs. Conner, Hill, or Richard shall become immediately vested in full and, in the case of stock options, exercisable in full. If each of Messrs. Conner, Hill, or Richard is terminated for cause, he shall be entitled to receive his base salary through the date of termination and any non-forfeitable benefits earned and payable to him under the terms of deferred compensation or incentive plans maintained by the Company.
The foregoing descriptions of the employment agreements are qualified in their entirety by reference to the actual terms of each agreement, copies of which have been filed with the Commission.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
The following table presents information regarding outstanding options held by our named executive officers as of the end of our fiscal year ended December 31, 2009.
(1) Except as indicated, these options held by Messrs. Conner, Hill, and Richard are vested in full as of December 31, 2008.
STOCK OPTIONS
The Company has adopted an equity incentive plan (the "2002 Plan") that authorizes the issuance of stock awards and options to acquire up to 90,000,000 shares of common stock, as amended, to employees and certain outside consultants. The 2002 Plan allows for the issuance of either non-qualified or, subject to stockholder approval, incentive stock options pursuant to Section 422 of the Internal Revenue Code. Options vest at the discretion of the Board of Directors as determined at the grant date, but not longer than a ten-year term. Under the 2002 Plan, the exercise price of each option shall not be less than fair market value on the date the option is granted.
During 1997, the Board of Directors of the Company adopted a stock option plan (the "1997 Plan") that authorizes the issuance of options to acquire up to 5,000,000 shares of common stock to employees and certain outside consultants. The 1997 Plan allows for the issuance of either non-qualified or incentive stock options pursuant to Section 422 of the Internal Revenue Code. Options vest at the discretion of the Board of Directors as determined at the grant date, but not longer than a ten-year term. Under the 1997 Plan, the exercise price of each option shall not be less than 85 percent of fair market value on the date the option is granted.
At December 31, 2008, we had outstanding options to purchase 40,370,976 shares of our common stock pursuant to the 2002 Plan and the 1997 Plan. The number of options under both the 2002 Plan and the 1997 Plan available for grant at December 31, 2009 and 2008 was approximately 49,100,000 and 43,000,000, respectively (see Notes to accompanying consolidated financial statements).
COMPENSATION OF DIRECTORS
The following table presents information regarding compensation paid to our non-employee directors for our fiscal year ended December 31, 2009.
Assumptions relating to the estimated fair value of stock options granted to Mr. Degner during 2009 are as follows: risk-free interest rate of 2.3%; expected dividend yield 0%; expected option life of 6.0 years; and volatility of 182% - 202%. Please see Note 3 to our consolidated financial statements for further discussion of our assumptions relating to the estimated fair value of equity awards.
NARRATIVE DISCLOSURE TO DIRECTOR COMPENSATION TABLE
Beginning in January 2009, non-employee directors began to receive annual retainer fees, which were paid in cash in quarterly installments. Each non-employee director receives a retainer of $30,000 for his participation as a director. It is our policy that our employee-directors do not receive cash compensation for their service as members of our Board of Directors. Non-employee directors have historically been eligible for participation in certain of our equity incentive plans. During 2009, we issued options to purchase an aggregate of 600,000 shares of our common stock to Gerik M. Degner, a non-employee director, in consideration for his services. There has been no determination made as to the number and exercise price of options, if any, that will be issued to either K. Mason Conner or H. Jay Hill for service during terms following the term that expired on October 5, 2001. Directors are reimbursed for out-of-pocket expenses incurred by them in connection with attending meetings. The Company has no other arrangements regarding compensation for services as a director.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information with respect to the beneficial ownership of shares of the Company's common stock owned as of February 28, 2010 beneficially by (i) each person who beneficially owns more than 5% of the outstanding common stock, (ii) each director of the Company, (iii) the President and Chief Executive Officer of the Company, the executive officers and significant employees of the Company whose cash and non-cash compensation for services rendered to the Company for the year ended December 31, 2009 exceeded $100,000, and (iv) directors, executive officers, and significant employees as a group:
* Less than 1 %
(1) The address of each individual is in care of the Company.
(2) Represents sole voting and investment power unless otherwise indicated.
(3) Based on 226,546,613 shares of the Company's common stock outstanding at February 28, 2010, plus, as to each person listed, that portion of the Company's common stock subject to outstanding options and warrants which may be exercised by such person, and as to all directors and executive officers as a group, unissued shares of the Company's common stock as to which the members of such group have the right to acquire beneficial ownership upon the exercise of stock options or warrants within 60 days of February 28, 2010.
(4) Excludes 31,465,401 shares reserved for issuance under outstanding options and warrants.
(5) Includes warrants to acquire 3,000,000 shares at $0.10 per share.
(6) Includes options to acquire 65,674 shares at $2.50 per share, options to acquire 1,719,658 shares at $0.19 per share, options to acquire 3,500,000 shares at $0.15 per share, options to acquire 2,000,000 shares at $0.16 per share, options to acquire 500,000 shares at $0.015 per share, and warrants to acquire 200,000 shares at $0.15 per share.
(7) Includes options to acquire 290,000 shares of common stock at $0.02 per share, options to acquire 66,261 shares at $2.50 per share, options to acquire 918,825 shares at $0.19 per share, options to acquire 500,000 shares at $0.15 per share, and options to acquire 200,000 shares at $0.015 per share.
(8) Includes options to acquire 65,674 shares at $2.50 per share, options to acquire 686,325 shares at $0.19 per share, options to acquire 1,500,000 shares at $0.18 per share, options to acquire 1,000,000 shares at $0.10 per share, options to acquire 500,000 shares at $0.15 per share, options to acquire 2,000,000 shares at $0.16 per share, options to acquire 200,000 shares at $0.015 per share, and warrants to acquire 350,000 shares at $0.15 per share.
(9) Includes options to acquire 800,000 shares of common stock at $0.18 per share.
(10) Includes options to purchase 150,000 shares of common stock at $2.50 per share, options to purchase 387,500 shares of common stock at $0.19 per share, options to purchase 650,000 shares of common stock at $0.15 per share, and options to purchase 250,000 shares at $0.16 per share.
(11) The members of GoSolutions Equity LLC are Daniel M. Doyle, Sr., H. Scott Seltzer, Larry C. Morgan, Shaun C. Pope, and Tom C. Lokey.
Securities Authorized for Issuance Under Equity Compensation Plans
The following provides information, as of December 31, 2009, concerning compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.
For a complete description of our equity compensation plans, please refer to Note 7 of our consolidated financial statements as of December 31, 2009, which are filed as Exhibit 99.1 hereto.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Review and Approval of Related Person Transactions.
Our Audit Committee reviews all relationships and transactions in which the company and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. The company’s legal consultant is primarily responsible for the development and implementation of processes and controls to obtain information from the directors and executive officers with respect to related person transactions and for then determining, based on the facts and circumstances, whether the company or a related person has a direct or indirect material interest in the transaction. As required under SEC rules, transactions that are determined to be directly or indirectly material to the company or a related person are disclosed in the company’s proxy statement. In addition, the Audit Committee reviews and approves or ratifies any related person transaction that is required to be disclosed. As set forth in the Audit Committee’s key practices, in the course of its review and approval or ratification of a disclosable related party transaction, the committee considers:
•
the nature of the related person’s interest in the transaction;
•
the material terms of the transaction, including, without limitation, the amount and type of transaction;
•
the importance of the transaction to the related person;
•
the importance of the transaction to the company;
•
whether the transaction would impair the judgment of a director or executive officer to act in the best interest of the company; and
•
any other matters the committee deems appropriate.
Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction, provided, however, that such director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction.
Description of Related Party Transactions
GSI leases the St. Petersburg office space pursuant to a noncancelable operating lease agreement expiring in April 30, 2011 at a cost of $12,653, $13,232, $13,841, $14,485, and $15,164 per month for each of the twelve month periods ended April 2007, 2008, 2009, 2010, and 2011, respectively. The building in which the office space is located is owned by an entity in which a member of GoSolutions Equity, LLC (a related party) owns an interest.
TBS had a related party operating lease with Perimeter Center Partners for the rental of the land and building occupied by TBS. The lease, as amended, commenced on February 1, 2004 and had a term of six years, with monthly payments of $6,200. Perimeter Center Partners is owned by Stephen A. Garner and James L. Campbell, who were each employees of TBS, former owners of TBS, and current stockholders of the Company.
TBS had a related party capital lease with Perimeter Center Partners for an inserting machine. The lease commenced on May 19, 2007. Monthly payments were $1,746.
Effective December 23, 2009, C. Alan Williams converted 33,500,000 shares of our Series A Preferred Stock into 33,500,000 shares of our common stock. The transaction resulted in no consideration to us because the Series A Preferred Stock was convertible for no additional consideration. Mr. Williams had previously purchased these shares from Barron Partners, LP in a private transaction not involving us. After the conversion by Mr. Williams, we had no shares of Series A preferred Stock outstanding.
On April 8, 2009 and pursuant to the terms of their respective employment agreements, we issued 6,879,200 shares of its restricted common stock to K. Mason Conner, who is our President and Chief Executive Officer and a Director, and 5,896,500 shares of our restricted common stock to H. Jay Hill, who is our Executive Vice President of Corporate Development and a Director. These shares were valued at $0.01 per share (the estimated fair value on the measurement date) and recorded as compensation expense.
On August 1, 2008 and in connection with the acquisition of Questys, we issued 22,000,000 shares of its common stock to Vojin Hadzi-Pavlovic and Gloria Hadzi-Pavlovic (the “Pavlovics”). These shares were valued at $0.025 per share (the estimated fair value on the measurement date) and recorded as additional purchase price.
On August 1, 2008 and in connection with the acquisition of Questys, we issued a secured promissory note to the Pavlovics in the amount of $900,000 (the “Pavlovic Note”). The Pavlovics are a related party as a result of the common stock issued to them by us any in connection with the acquisition of Questys. The Pavlovic Note is non-interest bearing and may be prepaid in whole or in part at any time without penalty and is due on August 1, 2011. Principal payments are due in three equal annual installments of $300,000 each on August 1, 2009, August 1, 2010, and August 1, 2011. The Pavlovic Note is secured by certain assets of Questys as defined in a Security Agreement dated as of August 1, 2008. Payment obligations under the Pavlovic Note are subordinate in certain respects to the rights of the Private Bank of the Peninsula to the extent set forth in a Subordination Agreement dated as of August 1, 2008.
Prior to August 1, 2008 (effective date of acquisition of Questys), the Pavlovics made aggregate advances to Questys in the amount of $115,000, which were assumed in the acquisition (the “Pavlovic Shareholder Debt”). The Pavlovic Shareholder Debt is non-interest bearing and we and the Pavlovics have agreed to the repayment of the outstanding balance as follows: (i) $35,000 on or before August 1, 2009, (ii) $40,000 on or before August 1, 2010, and (iii) $40,000 on or before the August 1, 2011.
We funded the requirement for the initial $300,000 payment for the purchase of QSI from the proceeds of a $300,000 related party secured promissory note offering subscribed to by The Silver Lake Group, LLC (“SLG”) on August 4, 2008 (the “SLG Note”). SLG is owned by Ricardo A. Salas, a Director of VillageEDOCS. The SLG Note was originally due on October 31, 2008 and bore interest at a rate of nine percent (9%) per annum through October 31, 2008.
On October 30, 2008, VillageEDOCS, Inc. and SLG entered into an Amendment to Secured Promissory Note (“Amendment”) to modify the maturity date, interest rate, and repayment terms of the SLG Note. As of October 31, 2008, the remaining principal balance of the SLG Note, as amended, was $250,000 and no interest was outstanding. Pursuant to the Amendment, the SLG Note matured on March 31, 2009 and bore interest from November 1, 2008 at a rate of twelve percent (12%) per annum. As of December 31, 2009, the SLG Note was paid in full. As of December 31, 2008, the outstanding principal balance due pursuant to the SLG note was $151,490. The SLG Note was secured by the accounts receivable of GoSolutions, Inc., our wholly-owned subsidiary, as defined in a Security Agreement dated as of August 1, 2008. Payment obligations under the SLG Note were subordinate in certain respects to the rights of the Bank to the extent set forth in a Subordination Agreement entered into effective August 1, 2008.
On May 6, 2009 we arranged for an unsecured promissory note financing with C. Alan Williams and Joan P. Williams in the amount of $430,000 (the “Williams May 2009 Note”). The Williams May 2009 Note bore a per annum interest rate equal to the most favorable rate paid by the Williams plus two percent (2%). Our interest rate in effect through December 15, 2009 (date of repayment) with respect to the Williams May 2009 Note was 4.87%. The interest rate was subject to adjustment once per month. The term of the Williams May 2009 Note was thirty-six (36) months, with monthly installments paid by us consisting of principal and interest on the first of each month, beginning on August 1, 2009. Payment obligations under the Williams May 2009 Note were subordinate in certain respects to the rights of the Private Bank of the Peninsula.
We used the proceeds from the Williams May 2009 Note, to retire the RLOC on May 8, 2009 (see above). The terms of the Williams May 2009 Note were deemed more favorable to us than the renewal terms offered by the financial institution.
On July 30, 2009 we arranged for an unsecured promissory note financing with C. Alan Williams and Joan P. Williams in the amount of $435,000 (the “Williams July 2009 Note”). The Williams July 2009 Note bore interest at ten percent (10%) per annum. The term of the Williams July 2009 Note was twelve (12) months, with monthly installments paid by us at the end of each month consisting of principal and interest, beginning on July 31, 2009. Payment obligations under the Williams July 2009 Note were subordinate in certain respects to the rights of the Private Bank of the Peninsula.
We used the proceeds from the Williams July 2009 Note, to retire a line of credit with a financial institution on August 4, 2009 and to make installment payments to Vojin and Gloria Hadzi-Pavlovic pursuant to the agreement for our purchase of QSI dated as of August 1, 2008.
On February 17, 2004, we borrowed $1,700,000 from C. Alan and Joan P. Williams and issued a convertible promissory note, which bore interest at ten percent (10%) per annum (the “Williams Convertible Note”). During 2005, all but $65,000 of the principal amount due pursuant to this note was converted into shares of our common stock. In October 2009, the Williams agreed to extend the due date of the note to October 31, 2011 (see Note 11). The note and accrued interest were due at the earlier of one of three events: 1) October 31, 2011; 2) acquisition of a controlling interest in us by a third party; or 3) we achieved 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 the loan, we issued them a warrant to purchase 5,000,000 shares of the Company's restricted common stock at $0.10 per share exercisable until February 17, 2009. Effective February 17, 2009, we and the Williams agreed to extend the expiration date of the warrant to February 16, 2012 in exchange for the Williams’ agreement to extend their guaranty of the RLOC through December 31, 2010. The extension of the warrants did not have a material effect on the consolidated financial statements.
During the years ended December 31, 2009 and 2008, $35,439 and $6,500, respectively, of interest expense was recognized in connection with these notes.
On December 15, 2009, we paid $927,917 to C. Alan and Joan P. Williams in full satisfaction of all outstanding principal and interest owed to the Williams pursuant to the Williams Convertible Note, the Williams May 2009 Note, and the Williams July 2009 Note.
At December 31, 2008, the amount owed by us to the Williams pursuant to the unpaid balance of the convertible promissory note payable was $65,000 in principal and $113,370 in unpaid interest. The interest rate in effect as of December 31, 2008 was ten percent (10%) per annum.
On November 17, 2008, we issued 2,500,000 shares of its common stock to K. Mason Conner pursuant to the 2002 Equity Incentive Plan. Mr. Conner is an officer and director of us. These shares were valued at $0.015 per share (the estimated fair value on the measurement date) and recorded as compensation expense.
On November 17, 2008, we issued 2,000,000 shares of its common stock to H. Jay Hill pursuant to the 2002 Equity Incentive Plan. Mr. Hill is an officer and director of us. These shares were valued at $0.015 per share (the estimated fair value on the measurement date) and recorded as compensation expense.
On November 17, 2008, we issued 1,000,000 shares of its common stock to Michael A. Richard pursuant to the 2002 Equity Incentive Plan. Mr. Richard is an officer of us. These shares were valued at $0.015 per share (the estimated fair value on the measurement date) and recorded as compensation expense.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table sets forth fees billed to us by our auditors during the fiscal years ended December 31, 2009 and 2008 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services by our auditors that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees, including procedures related to our acquisition of Questys, (iii) services rendered in connection with tax compliance, tax advice, and tax planning, and (iv) all other fees for services rendered. "All Other Fees" consisted of fees related to our proxy statements, registration statements, SEC comment letters, and press releases.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
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
Assets Purchase Agreement dated December 10, 2007 by and between Phoenix Forms, Inc. and DocPath Corp. Previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on December 11, 2007. **
2.7
Assets Purchase Agreement dated December 10, 2007 by and between Phoenix Forms, Inc. and DocPath Corp. Previously filed as Exhibit 2.1 to the Companys’s Current Report on Form 8-K filed on December 11, 2007.**
2.8
Stock Purchase Agreement dated as of August 1, 2008 by and among VillageEDOCS, Inc. and Decision Management Company, Inc. d/b/a Questys Solutions, Inc. and Its Sole Shareholder, Vojin Hadzi-Pavlovic and Gloria Hadzi-Pavlovic, Tenants In Common. Previously filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on August 6, 2008. **
2.9
Intellectual Property Purchase Agreement, dated December 4, 2009, among N. Harris Computer Corporation, Tailored Business Systems, Inc., and VillageEDOCS, Inc. Previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on December 7, 2009. **
2.10
Share Purchase Agreement, dated December 4, 2009, between Systems Design, Inc., and VillageEDOCS, Inc. Previously filed as Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on December 7, 2009. **
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
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. **
4.3
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. **
4.4
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. **
4.5
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. **
4.6
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. **
4.7
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. **
4.8
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. **
4.9
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. **
4.10
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. **
4.11
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. **
4.12
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. **
4.13
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. **
4.14
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. **
4.15
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. **
4.16
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. **
4.17
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. **
4.18
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. **
4.19
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. **
4.20
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. **
4.21
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. **
4.22
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. **
4.24
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. **
4.25
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. **
4.26
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. **
4.27
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. **
4.28
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. **
4.29
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. **
4.30
Notice of conversion by Barron Partners LP dated October 21, 2005. 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. **
4.31
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. **
4.32
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. **
4.33
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. **
4.34
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. **
4.35
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. **
4.36
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. **
4.37
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. **
4.38
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.**
4.39
Promissory Note of VillageEDOCS, Inc. dated August 1, 2008 for $900,000 held by Vojin Hadzi-Pavlovic and Gloria Hadzi-Pavlovic, Tenants In Common. Previously filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on August 6, 2008. **
4.40
Security Agreement dated as of August 1, 2008, by and among VillageEDOCS, Inc, Decision Management Company, Inc. d/b/a Questys Solutions, Inc. and Vojin Hadzi-Pavlovic and Gloria Hadzi-Pavlovic, Tenants In Common. Previously filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on August 6, 2008. **
4.41
Subordination Agreement dated as of August 1, 2008 by and between The Private Bank of the Peninsula and Vojin Hadzi-Pavlovic and Gloria Hadzi-Pavlovic, Tenants In Common. Previously filed as Exhibit 99.4 to the Company’s Current Report on Form 8-K filed on August 6, 2008. **
4.42
Form of Promissory Note of VillageEDOCS, Inc. dated August 1, 2008 for $300,000 held by The Silver Lake Group, LLC. Previously filed as Exhibit 99.6 to the Company’s Current Report on Form 8-K filed on August 6, 2008. **
4.43
Form of Security Agreement dated as of August 1, 2008, by and among VillageEDOCS, Inc, GoSolutions, Inc., and The Silver Lake Group LLC. Previously filed as Exhibit 99.7 to the Company’s Current Report on Form 8-K filed on August 6, 2008. **
4.44
Form of Subordination Agreement dated as of August 1, 2008 by and between The Private Bank of the Peninsula and The Silver Lake Group LLC. Previously filed as Exhibit 99.8 to the Company’s Current Report on Form 8-K filed on August 6, 2008. **
4.45
Amendment to Secured Promissory Note dated October 31, 2008 by and between VillageEDOCS, Inc. and The Silver Lake Group, LLC. Previously filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on October 31, 2008.**
4.46
Form of Loan and Security Agreement dated February 6, 2008 by and between The Private Bank of the Peninsula and each of the Registrant, MessageVision, Inc., and Tailored Business Systems, Inc. Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 11, 2008. **
4.47
First Amendment to Loan and Security Agreement dated as of February 24, 2009 by and between The Private Bank of the Peninsula and the Registrant. Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 6, 2009. **
4.48
Promissory Note by and between the Registrant and C. Alan Williams and Joan P. Williams dated May 6, 2009. Previously filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on May 11, 2009.**
4.49
Promissory Note by and between the Registrant and C. Alan Williams and Joan P. Williams dated July 30, 2009. Previously filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on August 4, 2009.**
4.50
Third Amendment to Convertible Promissory Note by and between the Registrant and C. Alan Williams and Joan P. Williams dated as of October 22, 2009.*
10.1
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. **
10.2
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. **
10.3
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. **
10.4
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. **
10.5
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. **
10.6
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. **
10.7
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. **
10.8
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. **
10.9
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. **
10.10
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. **
10.11
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. **
10.12
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. **
10.13
Employment Agreement dated as of August 1, 2008 by and between VillageEDOCS, Inc. and Andre Hadzi-Pavlovic. Previously filed as Exhibit 99.5 to the Company’s Current Report on Form 8-K filed on August 6, 2008. **
10.14
Employment Agreement dated November 13, 2008 by and between VillageEDOCS, Inc. and K. Mason Conner. Previously filed as Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2008. **
10.15
Employment Agreement dated November 13, 2008 by and between VillageEDOCS, Inc. and H. Jay Hill. Previously filed as Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2008.**
10.16
Employment Agreement dated November 13, 2008 by and between VillageEDOCS, Inc. and Michael A. Richard. Previously filed as Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2008. **
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 April 15, 2010 by K. Mason Conner, Chief Executive Officer.*
31.2
Certification Under Section 302 of The Sarbanes-Oxley Act of 2002 signed and dated April 15, 2010 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 April 15, 2010 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 April 15, 2010 by Michael A. Richard, Chief Financial Officer.***
99.1
VillageEDOCS, Inc. Consolidated Financial Statements for the Fiscal Years Ended December 31, 2009 and 2008 together with Report of Independent Registered Public Accounting Firm. *
*
Filed herewith
**
Previously filed
***
Furnished herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, VillageEDOCS, Inc. has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons below on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ K. Mason Conner
April 15, 2010
K. Mason Conner
Director, President, and
Chief Executive Officer
/s/ Michael A. Richard
April 15, 2010
Michael A. Richard
Chief Financial Officer,
Principal Accounting Officer
/s/ J. Thomas Zender
April 15, 2010
J. Thomas Zender
Director,
Chairman of the Board
/s/ Gerik M. Degner
Director,
April 15, 2010
Gerik M. Degner
/s/ Ricardo A. Salas
April 15, 2010
Ricardo A. Salas
Director
/s/ H. Jay Hill
April 15, 2010
H. Jay Hill
Executive Vice President,
Director