Registration No. 333-131451
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
Amendment No. 2 to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
IELEMENT CORPORATION
(Name of Small Business Issuer in its Charter)
NEVADA 7389 76-0270295
------ ---- ----------
State or other Jurisdiction Primary Standard I.R.S. Employer
of incorporation or Industrial Classification Identification No.
Organization Code Number
17194 PRESTON ROAD
SUITE 102, PMB 341
DALLAS, TX 75248
(214) 254-3440
(Address and Telephone Number of Registrant's Principal Executive Offices)
---------------
IVAN ZWEIG
CHIEF EXECUTIVE OFFICER
17194 PRESTON ROAD
SUITE 102, PMB 341
DALLAS, TX 75248
(214) 254-3440
(Name, Address and Telephone Number of Agent for Service)
---------------
COPY TO:
LAURA ANTHONY, ESQ.
LEGAL & COMPLIANCE, LLC
330 CLEMATIS STREET
WEST PALM BEACH, FLORIDA 33401
(561) 514-0936
---------------
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
(Approximate Date of Proposed Sale to the Public)
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 ("Securities Act"), check the following box.[X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
- --------------------------------------------------------------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
Common Stock,$.001 par value 82,212,048 $ 0.0575 $ 4,727,193 $ 506.00
- -----------------------------------------------------------------------------------------------------------
Common Stock underlying exercise
of stock purchase warrants 30,488,281 $ 0.10 (2) $ 3,080,234 $ 330.00
- -----------------------------------------------------------------------------------------------------------
TOTAL: 112,700,329 $ --- $ 7,807,427 $ 836.00
- -----------------------------------------------------------------------------------------------------------
(1) The proposed maximum offering price is estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(c) and 457(g) of the
Securities Act of 1933, as amended. The price per share is based on the price of
the common stock on the Over-The-Counter Bulletin Board on June 6, 2006.
(2) An aggregate of 29,441,407 of the warrants are exercisable at $0.10 per
share and 1,046,874 of the warrants are exercisable at $0.13 per share.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
Subject to completion, dated June 7, 2006
PROSPECTUS
I-ELEMENT CORPORATION
17194 PRESTON ROAD
SUITE 102, PMB 341
DALLAS, TX 75248
(214) 254-3440
112,700,329 Shares of Common Stock
We are registering for resale up to 112,700,329 shares of our common stock, of
which 82,212,048 shares are currently outstanding and 30,488,281 shares are
issuable upon the exercise of stock purchase warrants by certain selling
shareholders identified in this prospectus (the "Warrants"). We will not receive
any proceeds from this offering. We may receive proceeds from the exercise price
of the Warrants if they are exercised by the selling security holders. We will
bear all costs associated with this registration.
The shares of common stock being offered in this prospectus may be sold at fixed
prices, prevailing market prices determined at the time of sale, varying prices
determined at the time of sale or at negotiated prices. The shares of our common
stock covered by this prospectus may be sold from time to time pursuant to
various agreements between the selling shareholders and us.
Our common stock is traded on the OTC Bulletin Board under the symbol "IELM.OB."
The average of the high and low trading price of our common stock on June 6,
2006 was $0.0575.
The information in this prospectus is not complete and may be changed. These
securities may not be sold (except pursuant to a transaction exempt from the
registration requirements of the Securities Act) until the Registration
Statement filed with the Securities and Exchange Commission ("SEC") is declared
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ
THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 2 WHICH DESCRIBES CERTAIN MATERIAL RISK FACTORS YOU SHOULD
CONSIDER BEFORE INVESTING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is June 7, 2006
You should rely only on the information contained in this prospectus. We have
not, and the Selling Stockholders have not, authorized anyone to provide you
with different information. If anyone provides you with different information,
you should not rely on it. We are not, and the Selling Stockholders are not,
making an offer to sell these securities in any jurisdiction where the offer or
sale is not permitted. You should assume that the information contained in this
prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY..................................................... 1
RISK FACTORS........................................................... 3
FORWARD-LOOKING STATEMENTS............................................. 9
USE OF PROCEEDS........................................................ 10
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS............ 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.............. 11
BUSINESS............................................................... 20
MANAGEMENT............................................................. 27
DESCRIPTION OF THE PRIVATE PLACEMENT................................... 32
SELLING STOCKHOLDERS................................................... 32
DESCRIPTION OF SECURITIES.............................................. 35
PLAN OF DISTRIBUTION................................................... 36
SHARES ELIGIBLE FOR FUTURE SALE........................................ 37
WHERE YOU CAN FIND MORE INFORMATION.................................... 37
LEGAL MATTERS.......................................................... 37
EXPERTS................................................................ 38
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES........................................... 38
FINANCIAL STATEMENTS................................................... 39
PROSPECTUS SUMMARY
Unless otherwise indicated, all references to "we", "us", "our" and
similar terms, as well as references to the "Registrant", the "Company" or
"IElement" in this prospectus, refer to IElement Corporation, a Nevada
corporation and not to the selling stockholders.
THIS PROSPECTUS IS A PART OF A REGISTRATION STATEMENT THAT WE HAVE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION USING A "SHELF REGISTRATION"
PROCESS. YOU SHOULD READ THIS PROSPECTUS AND ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT, AS WELL AS ANY POST-EFFECTIVE AMENDMENTS TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART, TOGETHER WITH THE ADDITIONAL
INFORMATION DESCRIBED UNDER "AVAILABLE INFORMATION" BEFORE YOU MAKE ANY
INVESTMENT DECISION.
THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL THE INFORMATION
YOU SHOULD CONSIDER BEFORE INVESTING IN THESE SECURITIES. BEFORE MAKING AN
INVESTMENT DECISION, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING
THE "RISK FACTORS" SECTION, THE FINANCIAL STATEMENTS AND THE NOTES TO THE
FINANCIAL STATEMENTS. SOME OF THE STATEMENTS MADE IN THIS PROSPECTUS DISCUSS
FUTURE EVENTS AND DEVELOPMENTS, INCLUDING OUR FUTURE BUSINESS STRATEGY AND OUR
ABILITY TO GENERATE REVENUE, INCOME AND CASH FLOW. THESE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN THESE FORWARD-LOOKING STATEMENTS.
SEE "FORWARD LOOKING STATEMENTS."
Company Overview
IElement is a facilities-based nationwide communications service
provider that provides telecommunications services to small and medium sized
businesses ("SMBs"). As a facilities-based provider we own our own network
equipment including telephone switches. In other words, we sell local and long
distance telephone service and Internet access primarily via digital T-1
connections and tailor the particular service to the customer's needs by
regulating bandwidth, number of telephone lines, and type of service. Our Layer
2 Private Network ("L2PN") service allows businesses with multiple locations to
connect all of their locations securely without the use of firewalls or
encryption devices and without routing traffic over the internet. We have
already developed our Voice over Internet Protocols ("VoIP"s) service and
successfully tested it internally. We are in the process of installing VoIP
service for our first customer. We have a network presence in 18 major markets
in the United States, including facilities in Los Angeles, Dallas, and Chicago
and smaller facilities in ten other cities.
Historically, we have regularly incurred losses from operations such
that, as of December 31, 2005, we have generated an accumulated deficit of
$1,845,591. Inasmuch as we will continue to have operating expenses and will be
required to make significant up-front expenditures in connection with the
proposed development of our business, we may continue to incur losses for at
least the next 12 months and until such time, if ever, as we are able to
generate sufficient revenues to finance our operations and the costs of
continuing expansion. As a result of our operating losses, we have relied upon
external financing to fund operations.
The report of our independent registered public accountants on our 2005
and 2004 financial statements, as included in this Prospectus, included an
explanatory paragraph indicating that there is substantial doubt about our
ability to continue as a going concern due to recurring losses and working
capital shortages. Our ability to continue as a going concern will be determined
by our ability to obtain additional funding.
We have relied almost entirely on external financing to fund our
operations. Such financing has historically come from a combination of
borrowings from, and sale of capital stock to, third parties. We will need to
raise additional capital to fund our anticipated operating expenses and future
expansion. If we cannot obtain additional funds when needed, we may be forced to
curtail or cease our activities, which may result in the loss of all or a
substantial portion of your investment.
1
About This Offering
This prospectus relates to the resale of up to 112,700,329 shares of
our common stock, of which 82,212,048 shares are currently outstanding and
30,488,281 shares are issuable upon the exercise of stock purchase warrants by
certain selling shareholders identified in this prospectus. We will not receive
any proceeds from this offering. However, upon exercise of the Warrants by the
selling shareholders, we will receive the proceeds therefrom. We will bear all
costs associated with this registration.
Common Stock Offered.............................. 112,700,329 shares
Common Stock Outstanding at June 6, 2006(1)........ 159,035,031 shares
Use of Proceeds.................................. We will not receive any of
the proceeds from the sale
of the shares by the selling
shareholders, except upon
exercise of certain common
stock purchase warrants.
OTC Bulletin Board Ticker Symbol.................. IELM.OB
(1) Does not include (i)30,488,281 shares that are issuable upon the exercise of
outstanding warrants.
Selected Financial Information
The selected financial information presented below is derived from and
should be read in conjunction with our consolidated financial statements,
including notes thereto, appearing elsewhere in this prospectus. The information
provided for fiscal year end March 31, 2005 reflects consolidated numbers of
I-Element and MailKey. The summary financial information provided for the years
ended March 31, 2004 and 2003 reflect solely I-Element as the reverse merger
with MailKey was consummated in January 2005. See "Financial Statements."
Summary Operating Information
Fiscal Year Ended March 31,
---------------------------------------
2005 2004 2003
---- ---- ----
Net revenues ......................... $5,652,756 $5,644,343 $438,600
Income (loss) from operations ........ ($605,335) $321,094 $22,625
Net income (loss) .................... ($643,846 ($324,793) ($8,543)
Earnings (loss) per common share ..... ($0.02) ($7.60) ($8,543)
Weighted average number of common
shares outstanding
Basic ........................... 25,312,486 42,732 1
Diluted ......................... 25,312,486 42,732 1
Summary Balance Sheet Information
March 31
--------------------------
2005 2004
---- ----
Working capital deficit .............. ($2,713,235) ($3,642,946)
Total assets ......................... $3,890,454 $3,737,047
Total liabilities .................... $3,869,168 $4,075,383
Stockholders' equity deficiency ...... $21,286 $328,336
I-Element had income from operations for each of the fiscal years ended
March 31, 2004 and 2003. However, after deductions for interest,
depreciation, amortization and loss on the sale of stock, the Company produced a
net loss in each of these fiscal years.
Revenue, income from operations, net loss and net loss per weighted
average common share outstanding for the period ended March 31, 2003 was
significantly lower than the subsequent years as the Company only operated for
one month during this period from March 1, 2003 through March 31, 2003.
In the fiscal year ended March 31, 2004, the Company's total
liabilities exceeded its assets due to net losses incurred from inception to the
ends of that fiscal year.
2
RISK FACTORS
An investment in the Common Stock of the Company is highly speculative, involves
a high degree of risk and should be considered only by those persons who are
able to afford a loss of their entire investment. In evaluating the Company and
its business, prospective investors should carefully consider the following risk
factors in addition to the other information included in this Registration
Statement.
The following risk factors should be considered carefully in addition to the
other information contained in this prospectus:
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY WHICH RAISES SUBSTANTIAL DOUBT AS TO OUR
ABILITY TO SUCCESSFULLY DEVELOP PROFITABLE BUSINESS OPERATIONS
We have a limited operating history. Our prospects must be considered
in light of the risks, expenses and difficulties frequently encountered in
establishing a business in the telecommunications industry. We have yet to
generate significant revenues from operations and have been focused on
organizational, development, and market analysis and fund raising activities.
There is nothing at this time on which to base an assumption that our business
operations will prove to be successful or that we will ever be able to operate
profitably. Our future operating results will depend on many factors, including:
- our ability to raise adequate working capital;
- success of our development;
- demand for our services;
- the level of our competition;
- our ability to attract and maintain key management and employees;
and
- our ability to efficiently produce and establish facilities for
treatment in a highly competitive and speculative environment while
maintaining quality and controlling costs.
To achieve profitable operations, we must, alone or with others,
successfully execute on the factors stated above, along with continually
developing ways to enhance our production, marketing and treatment efforts, when
commenced. Despite our best efforts we may not be successful in our development
efforts or obtain required regulatory approvals.
WE HAVE HISTORICALLY INCURRED LOSSES AND LOSSES MAY CONTINUE IN THE FUTURE
We have generated an accumulated deficit of $1,845,591 at December 31,
2005. Inasmuch as we will continue to have operating expenses and will be
required to make significant up-front expenditures in connection with the
proposed development of our business, we may continue to incur losses for at
least the next 12 months and until such time, if ever, as we are able to
generate sufficient revenues to finance our operations and the costs of
continuing expansion. There can be no assurance that we will be able to generate
significant revenues or achieve profitable operations. It may be necessary to
raise capital through issuing equity which could cause dilution and/or
negatively affect the price of our common stock.
THERE IS DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DUE TO RECURRING
LOSSES AND WORKING CAPITAL SHORTAGES, WHICH MEANS THAT WE MAY NOT BE ABLE TO
CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING.
The report of our independent registered public accountants on our 2005
and 2004 financial statements, as included in this Prospectus, included an
explanatory paragraph indicating that there is substantial doubt about our
ability to continue as a going concern due to recurring losses and working
capital shortages. Our ability to continue as a going concern will be determined
by our ability to obtain additional funding. Our financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS, OUR BUSINESS
OPERATIONS WILL BE CURTAILED.
Our operations have relied almost entirely on external financing to fund
our operations, including the expansion into VoIP. Such financing has
historically come from a combination of borrowings from, and sale of capital
stock to, third parties. Although our recent private placement has provided us
with funds to operate for the next twelve months, we may in the future need to
raise additional capital to fund anticipated operating expenses and future
expansion. We anticipate receiving funds from the exercise of the Warrants by
the Selling Stockholders, however, if for some reason, the Warrants are not
exercised, we may need to curtail expansion plans. Among other things, external
financing will be required to cover our operating costs. The sale of our capital
stock to raise capital may cause dilution to our existing shareholders. Our
inability to obtain adequate financing will result in the need to curtail
business operations. Any of these events would be materially harmful to our
business and may result in a lower stock price. There can be no assurance that
we will be able to obtain additional funding when needed, or that such funding,
if available, will be available on terms we find acceptable. If we cannot obtain
additional funds when needed, we may be forced to curtail or cease our
activities, which may result in the loss of all or a substantial portion of your
investment.
3
WE ARE DEPENDENT ON THE EFFORTS OF OUR EXECUTIVE OFFICERS AND SENIOR MANAGEMENT.
Our success depends largely upon the continued services of our executive
officers and other key personnel. A small number of key management, operating
employees and consultants manage our telecommunications business. In particular,
we rely heavily on the services of our CEO, Mr. Ivan Zweig and our Chief
Technology Expert, Mr. Alex Ponnath. Mr. Ponnath is a consultant, independent
contractor who has been working with I-Element since February, 2000. Our loss of
of either gentlemen or their failure to work effectively as a team could
materially adversely impact our telecommunications business. Competition for
qualified executives in the telecommunications and data communication industries
is intense and there are a limited number of persons with applicable experience.
In addition, the remaining fourteen employees have worked together for several
years and operate well as a team. Accordingly, the loss of any of our employees
could effect the overall management of our business.
Effective January 18, 2005 we entered into an employment agreement with
Ivan Zweig, our chairman and chief executive officer. This agreement provides
that Mr. Zweig may discontinue his employment with us after providing us with
little notice of his decision (typically one month). As a result, Mr. Zweig
could terminate his employment with us at any time without penalty and go to
work for one of our competitors. We believe that we have offset this risk to
some degree by maintaining a key person life insurance policy on Ivan Zweig.
BECAUSE COMPETITION FOR OUR TARGET EMPLOYEES IS INTENSE, WE MAY NOT BE ABLE TO
ATTRACT AND RETAIN THE HIGHLY SKILLED EMPLOYEES WE NEED TO SUPPORT OUR PLANNED
GROWTH.
To execute our growth plan, we must attract and retain highly qualified
personnel. We may need to hire additional personnel in virtually all operational
areas, including selling and marketing, operations and technical support,
programming, technology, engineering, customer service and administration. We
may not be successful in attracting and retaining qualified personnel. We have
from time to time in the past experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. Although competition for highly
skilled and competent employees is a risk faced by all businesses and by our
competitors, many of our competitors have greater resources than we do and
therefore can offer more attractive compensation packages.
IF WE ACQUIRE ANY COMPANIES OR TECHNOLOGIES IN THE FUTURE, SUCH COMPANIES AND
TECHNOLOGIES COULD PROVE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE
MANAGEMENT'S TIME AND ATTENTION AND DILUTE STOCKHOLDER VALUE.
We intend to acquire or make investments in complementary companies,
businesses, assets and/or technologies in the future. We have not made any
acquisitions or investments to date, and therefore, our ability to make
acquisitions or investments is unproven. Moreover, we have not currently entered
into any material definitive agreements for acquisitions, although we have
engaged in preliminary and informal discussions. Acquisitions and investments
involve numerous risks, including:
o inability to generate sufficient revenue or growth in revenue or
to offset acquisition or investment costs;
o difficulties in integrating operations, technologies, service and
personnel;
o diversion of financial and management resources from existing
operations;
o risk of entering new markets; and
o potential loss of key employees;
o difficulties integrating the operations and personnel of acquired
companies;
o the additional financial resources required to fund the operations
of acquired companies;
o the potential disruption of our business;
o our ability to maximize our financial and strategic position by
the incorporation of acquired technology or businesses with our
product and service offerings;
o the difficulty of maintaining uniform standards, controls,
procedures and policies;
o the potential loss of key employees of acquired companies;
o the impairment of employee and customer relationships as a result
of changes in management; and
o significant expenditures to consummate acquisitions.
Acquisitions could also require us to record substantial amounts of
goodwill and other intangible assets. Any future impairment of such goodwill
along with the amortization of other intangible assets, would adversely affect
our operating results. In addition, if we finance acquisitions by issuing
convertible debt or equity securities our existing stockholders may be diluted,
which could affect the market price of our stock. If we finance such
acquisitions with bank debt or high yield debt, these arrangements would likely
impose substantial operating covenants on us and result in interest expense that
could adversely affect our business and operating results.
4
As a part of our acquisition strategy, we may engage in discussions
with various businesses respecting the potential acquisition. In connection with
these discussions, we and each potential acquired business may exchange
confidential operational and financial information, conduct due diligence
inquiries, and consider the structure, terms and conditions of the potential
acquisition. In certain cases, the prospective acquired business may agree not
to discuss a potential acquisition with any other party for a specific period of
time, may grant us certain rights in the event the acquisition is not completed,
and may agree to take other actions designed to enhance the possibility of the
acquisition. Potential acquisition discussions may take place over a long period
of time, may involve difficult business integration and other issues, and may
require solutions for numerous family relationship, management succession and
related matters.
As a result of these and other factors, potential acquisitions that
from time to time appear likely to occur may not result in binding legal
agreements and may not be consummated. Our acquisition agreements may contain
purchase price adjustments, rights of set-off and other remedies in the event
that certain unforeseen liabilities or issues arise in connection with an
acquisition. These remedies, however, may not be sufficient to compensate us in
the event that any unforeseen liabilities or other issues arise.
OUR GROWTH COULD STRAIN OUR PERSONNEL AND INFRASTRUCTURE RESOURCES, AND IF WE
ARE UNABLE TO IMPLEMENT APPROPRIATE CONTROLS AND PROCEDURES TO MANAGE OUR
GROWTH, WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN.
As we implement our business plan, we may experience a period of rapid
growth in our employee roster and operations, which may place a significant
strain on our management, administrative, operational and financial
infrastructure.
Our success will depend in part upon the ability of our senior
management to manage this growth effectively, including attracting additional
skilled personnel. If our new hires perform poorly, if we are unsuccessful in
hiring, training, managing and integrating these new employees, or if we are not
successful in retaining our existing employees, our business will likely be
harmed. To manage the expected growth of our operations and personnel, we will
need to continually improve our operational, financial and management controls
and our reporting systems and procedures. The additional headcount and capital
investments we are adding will increase our cost base, which will make it more
difficult for us to offset any future revenue shortfalls by offsetting expense
reductions in the short term. If we fail to successfully manage our growth, we
will be unable to execute our business plan.
THE MARKET IN WHICH WE PARTICIPATE IS INTENSELY COMPETITIVE, AND IF WE DO NOT
COMPETE EFFECTIVELY, OUR OPERATING RESULTS, STOCKHOLDER VALUE AND PLANNED GROWTH
WILL SUFFER.
The market for telecommunications solutions, including local, long
distance, data and Internet products and services, is intensely competitive and
rapidly changing. Barriers to entry into this market have increased due to
regulatory changes and increased costs of doing business with the Incumbent
Local Exchange Carriers (ILECs), but these barriers have been offset by
reductions in costs for bandwidth and the subsequent development of Voice over
Internet Protocol (VoIP), which has allowed new competition to arise in the
telephone services arena. Many of our competitors are larger and have more
resources than we do. With the introduction of new technologies and market
entrants, we expect competition to intensify in the future.
Many of our current and potential competitors enjoy substantial
competitive advantages, such as greater name recognition, longer operating
histories, larger research, development and marketing budgets as well as
substantially greater financial, technical and other resources. In addition,
many of our current and potential competitors have access to larger customer
bases and have more extensive marketing and distribution arrangements with
resellers, distributors and OEMs than we do. As a result, our competitors may be
able to respond more quickly and effectively than we can to new or changing
opportunities, technologies, standards or customer requirements. Furthermore,
because of these advantages, even if we develop products that are more effective
than the products that our competitors offer, potential customers might accept
competitive products in lieu of purchasing our products or services.
We face competition from businesses that develop their own VoIP and
other Internet based telecommunications services, as well as from ILECs who have
achieved regulatory relief from the Telecommunications Act of 1996, and have
begun to charge more for wholesale prices and in some cases eliminated the
wholesale opportunity based on the size of the market. Our current and potential
principal competitors include:
o Other Competitive Local Exchange (CLECs) provider who provide many
of the same telecommunications products and services that we do.
Some examples of CLECs are : XO Communications, Xspedius, Logix
Communications and McLeod Telecom; ILECs such as SBC
Communications, Verizon, Qwest and Bell South who are the largest
provider of local, long distance and Internet services to
businesses;
5
o VoIP providers such as Vonage, Covad and mPower who can deliver
local and long distance services over an Internet connection.
WE MAY BECOME INVOLVED IN LITIGATION, WHICH COULD BE COSTLY AND TIME CONSUMING
TO DEFEND.
We may become involved in litigation such as securities class actions,
intellectual property, employment (unfair hiring or terminations) and/or issues
pertaining to delivering E911 services, among others. For example, we may be
subject to lawsuits by parties claiming that we did not offer E911 services that
are required by law at increasingly higher standards. Parties trying to call 911
from locations that we service may not be able to complete the call based on the
fact that a T1 is a digital service and that emergencies such as fires, power
outages, or simple equipment failure could disable the ability of a person to
dial out over our local lines. Any of these parties could potentially claim that
we are interfering with the lawful conduct of their business. Although we
believe we have properly informed our customers, given them information on
backup E911 procedures, as well as paying for backup lines to be installed, risk
of litigation cannot be entirely eliminated. Litigation involves costs in
defending the action and the risk of an adverse judgment.
On February 14, 2006 we settled the breach of contract litigation
against Communications Plus, Inc., a California company d/b/a Global
Communications, ("Global") for a total settlement amount of $27,000 payable in
periodic payments beginning on February 14, 2006 and ending December 1, 2006.
On April 19, 2005 KK Solutions, Inc., a California corporation d/b/a
Three 18, Inc. ("KK"), filed a complaint against us and CEO Ivan Zweig,
individually, in the Superior Court of the State of California, County of Los
Angeles, alleging breach of contract pursuant to a dispute regarding sales
commissions due to KK. On May 2, 2006 we settled the litigation for a total
settlement amount of $26,500 payable in periodic payment beginning on May 2,
2006 and ending on July 2, 2006.
THE FAILURE OF OUR CUSTOMERS TO PAY THEIR BILLS ON A TIMELY BASIS COULD
ADVERSELY AFFECT OUR CASH FLOW.
Our target customers consist of residences and small businesses. We
anticipate having to bill and collect numerous relatively small customer
accounts. We may experience difficulty in collecting amounts due on a timely
basis. Although we will have the ability to discontinue services for untimely
payments some customers may have moved or may not desire continued services, in
which case collection could be very difficult. Our failure to collect accounts
receivable owed to us by our customers on a timely basis could have a material
adverse effect on our business, financial condition, results of operations and
cash flow.
As of June 2, 2006, our gross accounts receivable totaled $339,269. We
have set aside an allowance of $12,165 against that balance for uncollectible
accounts. The net amount we expect to receive is $327,104. As a
telecommunications provider, we bill for our services up front, so therefore we
have significant leverage to collect on our Accounts Receivable because, with
proper dunning, we can discontinue our customers' telephone and internet
services if they do not pay their bill.
WE MAY BE UNABLE TO ADAPT TO RAPID TECHNOLOGY TRENDS AND EVOLVING INDUSTRY
STANDARDS.
The communications industry is subject to rapid and significant changes
due to technology innovation, evolving industry standards, and frequent new
service and product introductions. New services and products based on new
technologies or new industry standards expose us to risks of technical or
product obsolescence. We will need to use technologies effectively, continue to
develop our technical expertise and enhance our existing products and services
in a timely manner to compete successfully in this industry. We may not be
successful in using new technologies effectively, developing new products or
enhancing existing products and services in a timely manner in order to compete.
In particular, it was and will continue to be a costly process to upgrade our
networks to accommodate VoIP traffic. If a more advanced technology is developed
and implemented in the telecommunications industry we may not be able to adapt
or adapt quickly enough to effectively compete.
THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY REGULATED AND AMENDMENTS TO OR REPEALS
OF EXISTING REGULATIONS OR THE ADOPTION OF NEW REGULATIONS COULD ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
Federal, state and local regulation may affect our telecommunications
business. Since regulation of the telecommunications industry in general, and
the CLEC industry in particular, is frequently changing, we cannot predict
whether, when and to what extent new regulations will affect us. The following
factors, among others, may adversely affect our business, financial condition
and results of operations:
o delays in obtaining required regulatory approvals;
o new court decisions; o the enactment of new adverse regulations;
and
o the establishment of strict regulatory requirements.
6
INDUSTRY CONSOLIDATION COULD MAKE IT MORE DIFFICULT TO COMPETE.
Companies offering Internet, data and communications services are, in
some circumstances, consolidating. We may not be able to compete successfully
with businesses that have combined, or will combine, to produce companies with
substantially greater financial, sales and marketing resources, larger client
bases, extended networks and infra-structures and more established relationships
with vendors, distributors and partners than we have.
RISKS RELATED TO OUR STOCK
WE HAVE NOT PAID DIVIDENDS TO OUR STOCKHOLDERS.
We have never paid, nor do we anticipate paying, any cash dividends on
our common stock. Future debt, equity instruments or securities may impose
additional restrictions on our ability to pay cash dividends. Individuals who
purchase our common stock from the Selling Shareholders will not receive income
on such investment from the Company paying dividends. Any potential profit on
the investment will be the result of an increased stock price, and the ability
of an investor to sell the stock at such an increased price.
THE MARKET PRICE OF OUR COMMON STOCK IS LIKELY TO BE HIGHLY VOLATILE AND SUBJECT
TO WIDE FLUCTUATIONS.
The market price of our common stock is likely to be highly volatile
and could be subject to wide fluctuations in response to a number of factors
that are beyond our control, including:
o announcements of new products or services by our competitors;
o fluctuations in revenue from our indirect sales channels.
In addition, the market price of our common stock could be subject to
wide fluctuations in response to:
o quarterly variations in our revenues and operating expenses;
o announcements of technological innovations or new products or
services by us; and
o our technological capabilities to accommodate the future growth in
our operations or those of our customers.
In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the market price of the
stock of many Internet-related companies, and that often have been unrelated or
disproportionate to the operating performance of these companies. Market
fluctuations such as these may seriously harm the market price of our common
stock. Further, securities class action suits have been filed against companies
following periods of market volatility in the price of their securities. If such
an action is instituted against us, we may incur substantial costs and a
diversion of management attention and resources, which would seriously harm our
business, financial condition and results of operations.
DISAPPOINTING QUARTERLY REVENUE OR OPERATING RESULTS COULD CAUSE THE PRICE OF
OUR COMMON STOCK TO FALL.
Our quarterly revenue and operating results are difficult to predict
and may fluctuate significantly from quarter to quarter. If our quarterly
revenue or operating results fall below the expectations of investors or
security analysts, the price of our common stock could fall substantially. Our
quarterly revenue and operating results may fluctuate as a result of a variety
of factors, many of which are outside our control, including:
o the amount and timing of expenditures relating to the rollout of
our POTS and VoIP service offerings;
o our ability to obtain, and the timing of, necessary regulatory
approvals;
o the rate at which we are able to attract customers within our
target markets and our ability to retain these customers at
sufficient aggregate revenue levels;
o our ability to deploy our network on a timely basis;
o the availability of financing to continue our expansion;
o technical difficulties or network downtime; and
o the introduction of new services or technologies by our
competitors and resulting pressures on the pricing of our service.
FUTURE SALES BY OUR STOCKHOLDERS MAY HAVE THE AFFECT OF LOWERING OUR STOCK
PRICE.
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. We
are registering for resale more than 100% of the current public float, and
accordingly, the number of shares trading in the open market will increase by
over 100%. This large increase in available common stock may have a depressive
effect on our stock price.
7
OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE
EXTENT TO WHICH A TRADING MARKET MAY DEVELOP. ACCORDINGLY INVESTORS MAY HAVE
DIFFICULTY SELLING THEIR SHARES DUE TO THE LACK OF AN ACTIVE AND LIQUID PUBLIC
MARKET FOR OUR SHARES.
Before this offering, our common stock has traded on the
Over-the-Counter Bulletin Board. Thinly traded common stock is typically
significantly more volatile than common stock trading in an active public
market.
The market price of our common stock is likely to be highly volatile as
the stock market in general, and the market for small cap and micro cap
technology companies in particular, has been highly volatile. Investors may not
be able to resell their shares of our common stock following periods of
volatility because of the market's adverse reaction to volatility. We cannot
assure you that our common stock will trade at the same levels of our stocks in
our industry or that our industry stocks in general will sustain their current
market prices. Factors that could cause such volatility may include, among other
things:
o actual or anticipated fluctuations in our quarterly operating
results
o large purchases or sales or our common stock
o announcements of technological innovations
o changes in financial estimates by securities analysts
o investor perception of our business prospects
o conditions or trends in the telecommunications industry
o changes in the market valuations of other industry-related
companies
o the acceptance of market makers and institutional investors of our
business model and our common stock; and
o worldwide economic or financial conditions.
INVESTORS IN OUR SECURITIES MAY SUFFER DILUTION. THE SELLING STOCKHOLDERS INTEND
TO SELL THEIR SHARES OF COMMON STOCK IN THE MARKET, WHICH SALES MAY CAUSE OUR
STOCK PRICE TO DECLINE.
The issuance of shares of our common stock, or shares of our common
stock underlying warrants, options or preferred stock will dilute the equity
interest of existing stockholders who do not have anti-dilution rights and could
have a significant adverse effect on the market price of our common stock. The
sale of our common stock acquired at a discount could have a negative impact on
the market price of our common stock and could increase the volatility in the
market price of our common stock. In addition, we may seek additional financing
which may result in the issuance of additional shares of our common stock and/or
rights to acquire additional shares of our common stock. The issuance of our
common stock in connection with such financing may result in substantial
dilution to the existing holders of our common stock who do not have
anti-dilution rights. Those additional issuances of our common stock would
result in a reduction of an existing holder's percentage interest in our
company.
The Selling Stockholders intend to sell in the public market the shares
of common stock being registered in this offering. To the extent the Selling
Stockholders acquired their shares or warrants at prices less than the current
trading price of our common stock, they may have an incentive to immediately
resell such shares in the market which may, in turn, cause the trading price of
our common stock to decline. Significant downward pressure on our stock price
caused by the sale of stock registered in this offering could encourage short
sales by third parties that would place further downward pressure on our stock
price.
We are registering for resale up to 112,700,329 shares of our common
stock, of which 82,212,048 shares are currently outstanding and 30,488,281
shares are issuable upon the exercise of stock purchase warrants by certain
selling shareholders identified in this prospectus. As such shares of our common
stock are resold in the public market, the supply of our common stock will
increase, which could decrease its price. Moreover, the number of shares we are
registering for resale constitutes more than 100% of the shares currently
outstanding on a fully diluted basis.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO RESELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS.
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny
stocks are stocks:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the NASDAQ automated quotation
system (NASDAQ listed stock must have a price of not less than
$5.00 per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years)
or $5.0 million (if in continuous operation for less than three
years), or with average revenues of less than $6.0 million for the
last three years.
8
Broker-dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker-dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline.
IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE
ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS. AS A RESULT, CURRENT AND
POTENTIAL STOCKHOLDERS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH
COULD HARM OUR BUSINESS AND THE TRADING PRICE OF OUR COMMON STOCK.
We are subject to reporting obligations under the U.S. securities laws.
The Securities and Exchange Commission, or the SEC, as required by Section 404
of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company
to include a management report on such company's internal controls over
financial reporting in its annual report, which contains management's assessment
of the effectiveness of the company's internal controls over financial
reporting. In addition, an independent registered public accounting firm must
attest to and report on management's assessment of the effectiveness of the
company's internal controls over financial reporting. These requirements may
first apply to our annual report on Form 10-K for the fiscal year ending March
31, 2008. Our management may conclude that our internal controls over our
financial reporting are not effective. Moreover, even if our management
concludes that our internal controls over financial reporting are effective, our
independent registered public accounting firm may still decline to attest to our
management's assessment or may issue a report that is qualified if they are not
satisfied with our controls or the level at which our controls are documented,
designed, operated or reviewed, or if it interprets the relevant requirements
differently from us. Our reporting obligations as a public company will place a
significant strain on our management, operational and financial resources and
systems for the foreseeable future. We are a young company with limited
accounting personnel and other resources with which to address our internal
controls and procedures. If we fail to timely achieve and maintain the adequacy
of our internal controls, we may not be able to conclude that we have effective
internal controls over financial reporting at a reasonable assurance level.
Moreover, effective internal controls over financial reporting are necessary for
us to produce reliable financial reports and are important to help prevent
fraud. As a result, our failure to achieve and maintain effective internal
controls over financial reporting could result in the loss of investor
confidence in the reliability of our financial statements, which in turn could
harm our business and negatively impact the trading price of our common stock.
Furthermore, we anticipate that we will incur considerable costs and use
significant management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. To the extent that
any statements made in this prospectus contain information that is not
historical, these statements are essentially forward-looking. Forward-looking
statements can be identified by the use of words such as "expects", "plans",
"will", "may", "anticipates", "believes", "should", "intends", "estimates", and
other words of similar meaning. Although we believe that the expectations
reflected in these forward-looking statements are reasonable and achievable,
these statements involve risks and uncertainties and we cannot assure you that
actual results will be consistent with these forward-looking statements.
Important factors that could cause our actual results, performance or
achievements to differ from these forward-looking statements include the
following:
o availability and adequacy of our cash flow to meet our
requirements;
o economic, competitive, demographic, business and other conditions
in our markets
o competition
o changes in our business and growth strategy (including our
acquisition strategy) or development plans
o availability of additional capital to support acquisitions and
development, and
o other factors discussed under the section entitled "Risk Factors"
or elsewhere in this prospectus
9
All forward-looking statements attributable to us are expressly
qualified by these and other factors. Information regarding market and industry
statistics contained in this prospectus is included based on information
available to us that we believe is accurate. It is generally based on academic
and other publications that are not produced for purposes of securities
offerings or economic analysis. Forecasts and other forward-looking information
obtained from these sources are subject to the same qualifications and the
additional uncertainties accompanying any estimates of future market size,
revenue and market acceptance of products and services. We do not undertake any
obligation to publicly update any forward-looking statements. As a result, you
should not place undue reliance on these forward-looking statements.
USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the sale
of the shares offered for sale by them under this prospectus. We will not
receive any proceeds from the resale of shares by the selling stockholders
covered by this prospectus. We will, however, receive proceeds from the exercise
of warrants outstanding. In that case, we could receive a maximum of $3,080,234,
which would be used for working capital and general corporate purposes
Use of proceeds from the original issuance of the shares of common
stock registered herein:
- $100,000 acquisition of as of yet unidentified smaller
complimentary entity
- $200,000 new activities--marketing in Europe, including research
reports and telemarketing; telemarketing into new markets such as
Fresno, CA and Lubbock, TX
- $203,437 monthly operations
- $79,000 capital expenditures including equipment related to VoIP
- $850,000 pay debt and bring accounts payable current
- $150,000 finder's fees
Use of proceeds from the exercise of the stock purchase Warrants. The
common stock issuable upon such exercise is being registered herein:
- $500,000 fund new full service office and sales force in Chicago,
including hiring necessary personnel and management to operate
office
- $200,000 software purchase for new equipment
- $900,000 acquisitions of as of yet unidentified telecommunications
entities
- $450,000 monthly operations and reserve for potential negative
cash flow
- $150,000 consultants & marketing expansion including in Europe,
California and Texas
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since April 2004, our common stock has been quoted on the OTC Bulletin Board
under the symbol "IELM.OB". Prior to that date, there was no active market for
our common stock. We have a March 31 fiscal year.
The following table sets forth the high and low sales prices for the periods
indicated as reported by the OTC Bulletin Board:
Fiscal Year 2005 High Low
- ---------------- ---- ---
First Quarter(beginning April 14, 2004) $3.80 $3.30
Second Quarter 3.60 0.78
Third Quarter 1.01 0.40
Fourth Quarter 0.09 0.02
Fiscal Year 2006 High Low
- ---------------- ---- ---
First Quarter $0.09 $0.01
Second Quarter 0.07 0.03
Third Quarter 0.08 0.03
Fourth Quarter 0.22 0.06
The source of these high and low prices was the OTC Bulletin Board.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not represent actual transactions. The high and low
prices listed have been rounded up to the next highest two decimal places.
The market price of our common stock is subject to significant
fluctuations in response to variations in our quarterly operating results,
general trends in the market for the products we distribute, and other factors,
over many of which we have little or no control. In addition, board market
fluctuations, as well as general economic, business and political conditions,
may adversely affect the market for our common stock, regardless of our actual
or projected performance.
10
Holders
As of June 6, 2006, there were 392 holders of record of our common
stock and approximately 530 beneficial holders.
Dividend Policy
We have never paid dividends on our common stock and do not expected to
do so in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This "Plan of Operation" and other parts of this report contain
forward-looking statements that involve risks and uncertainties. All
forward-looking statements included in this report are based on information
available to us on the date hereof and, except as required by law we assume no
obligation to update any such forward-looking statements. Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including those set forth under the caption
"Disclosure Regarding Forward-Looking Statements" and elsewhere in this report.
The following should be read in conjunction with our unaudited financial
statements and the related notes thereto contained elsewhere in this report.
The statements contained herein that are not historical facts are
forward-looking statements that involve a number of risks and uncertainties.
Historical results should not be relied on as indicative of trends in operating
results for any future period. The actual results of the future events described
in such forward-looking statements in this report could differ materially from
those stated in such forward-looking statements.
EXECUTIVE OVERVIEW
Although we have a solid, consistent, steady revenue base,
characterized by our base of customers which are under long-term contracts and
most of which have been our customers for several years, revenue attrition is a
major trend in the telecommunications industry that affects every provider and
is an area of financial concern to us. Competition between providers for
services that many small and medium sized businesses see as commodities leads
customers to change providers based largely on price. The resulting effect is
detrimental to our business model in two ways. First, our customers leave us for
other providers and second, when we do renew our customers' contracts, we do so
at rates up to 20 percent lower than they had been paying.
To combat this revenue attrition, we intend to hire a new sales force
in the coming months and we have earmarked $500,000 in cash raised through our
recent private equity placement for this purpose. This will allow us to pursue
new customers that more than replace the revenue lost to attrition. This sales
force will be based in Chicago, where the smallest of our three major customer
bases is and also where we have the most underutilized network capacity,
allowing us to turn a profit quicker than we could elsewhere and maybe within 6
months.
Our overall financial condition improved significantly with the recent
private equity placement and the increased liquidity it brought. However, we do
continue to use cash and at our current pace we would run out of cash this year
if we were not able to successfully convert the warrants issued in the private
placement, raise additional funds or acquire a cash flow positive company.
To combat this, we would be able to reduce or eliminate certain general
and administrative expense items, defer salaries or eliminate costly vendors.
These spending cuts would return the company to the break even point or result
in a net income. Because doing so would halt our growth plans, we do not intend
to make these cuts unless we are unable to continue pursuing our growth model.
We continue to incur operating losses because we have readied the
company for rapid growth "out of the gate" as soon as we convert the private
placement warrants. We have the necessary equipment, infrastructure, personnel,
experience and processes to handle a much higher volume of customers. If we cut
back on these expenses before we have a chance to utilize them we will save
money in the short term but seriously hinder our ability to grow.
Our main items of concern with our operating results are the declining
revenue that results from customer attrition as described above and the
corresponding decrease in cash flow, which was negative to begin with. These
items in tandem cause concern because the only way to remedy them is to spend
more cash on sales and retention. We currently do not have an active sales force
and only one employee dedicated to retention, so our revenue and cash flow from
operations have recently been decreasing.
11
We believe that the money we expect to receive from investors
exercising their warrants to purchase our stock will be sufficient not only to
stabilize our current revenue, but to rapidly grow our customer base and
increase our revenue, provide a positive cash flow from operations and start
earning a net income on a regular basis. If we are able to successfully convert
most of the warrants outstanding and set aside $500,000 specifically for a new
sales force in Chicago, we believe we will be able to successfully become a
profitable company within 6 months of that successful conversion. If we are
unable to successfully convert a majority of the warrants, we will be forced to
seek other debt or equity funding or to cut expenses by laying off employees or
discontinuing certain services provided by our vendors.
Our auditors have expressed doubt as to our ability to continue as a
going concern. Because of the telecommunications industry's declining revenue
trend and the fact that we cannot stabilize or increase our revenue and cash
flow without a sales force, we believe that we need to recruit, train and retain
an effective sales force. In order to do this, we need to obtain additional
funding in the minimum amount of $500,000. Our intent is to raise this cash by
calling the warrants issued in our recent private equity placement. If we are
not able to do this and cannot raise additional debt or equity financing by
other means, we may not be able to continue as a going concern. We believe that
we have a very valuable business and have no intention of discontinuing our
operations. We will do everything in our power to obtain additional financing
and continue to carry out our business model.
Market trends in our industry are shifting towards Voice over Internet
Protocol (VoIP), and we have also developed our own VoIP product offering. VoIP
has been gaining large scale acceptance as companies like Packet-8, Skype and
Vonage continue to broadly advertise their services. These pioneering companies
have paved the way for smaller, more agile companies like us by spending their
time and money developing working VoIP platforms and then exerting significant
effort to spread the word about VoIP, thereby leading to the large scale
acceptance of which we are now in the midst.
We believe that we see an excellent opportunity as a business VoIP
provider since none of the major VoIP providers are targeting businesses. Our
barrier to entry into VoIP was minimal when you consider the potential return.
Since our network consulting company, Obelix, had already done all necessary
research and development, we were able to upgrade our network to provide VoIP
for a one time cost of $79,000 in equipment, which we funded from the proceeds
of our recent private equity placement.
Another major trend in our industry is towards managed services like
managed or hosted exchange (for email), managed PBX (for call features and
routing) and data storage or disaster recovery. These services and others like
them will be a great addition to the services we already provide and will allow
our customers more freedom and options that could be added on to their existing
services. Each of these services will be very inexpensive for us to provide and
would bolster our gross margins and cash flow from operations. Theses services
will also further entrench our customers with us as they would have more
services committed to one provider, making it more likely that they will opt to
renew their contracts at the end of their terms.
Managed services will be an excellent addition to our product offerings
and we are currently researching the order in which we want to roll them out.
There are risks associated with providing these new products, and while
the monetary costs to provide these new products are not great, the time and
effort involved in providing them are substantial, especially considering our
need for a regular sales force selling our existing products. The major risks
are that we could start providing a service that nobody wants to buy, that we
are not good at selling or that other companies will be able to provide the
service at lower prices, maybe even below our cost. In any one of these three
scenarios, we would again add to our negative cash flow from operations and take
a further net loss, something we can ill afford to do.
There are very good opportunities available in our industry. Any
company with a strong sales force can profit from "traditional" telephone and
internet services, VoIP, managed services, secure wide area networks, wireless
internet access and other complimentary services. We have the infrastructure in
place to compete in the marketplace and to profit from our business model, but
we need to start with a sales force and continue to build upon it by layering on
additional services for our sales force to sell (like disaster recovery) and
allowing our service offerings to evolve with the market (like VoIP).
12
Looking retrospectively at the merger between Mailkey and IElement in
January 2005, it becomes apparent that the merged company made the correct
decision in jettisoning its old anti-spam product. Even at that time, there were
two or three companies that had already deployed a good anti-spam product and
were well on their way to achieving a dominant market share. We estimated that
the old Mailkey anti-spam product would've required an additional $1 million in
research and development costs to completely develop, and there were no
assurances that we would have ever been able to sell that product. In fact, it
seems likely that we would never have produced a product that could compete with
those already on the market. We believe that the direction we've taken IElement
with regards to winding down the anti-spam business and concentrating on the
business of providing telecommunications service is a great turnaround for the
company and one that will benefit our shareholders.
We compete with both competitive local exchange carriers (CLECs) like
ourselves, who lease certain access lines from incumbent local exchange carriers
(ILECs), and the ILECs themselves. Some examples of our ILEC competitors are
Verizon Communications and AT&T. Some examples of our CLEC competitors are XO
Communications and CBeyond Communications. We also compete with internet service
providers (ISPs), but since their product offerings are typically limited in
comparison to ours, this competition has little effect on our operations or
planning.
Most of our competitors are larger than us, both in terms of employment
and revenue. A number of telecommunications firms either went out of business
during the telecom downturn or have been acquired by larger carriers. Because of
our size, we are more agile and can quickly adapt the changes in the marketplace
and exploit our larger competitors' inability to react quickly, beating them to
market with a new product or working more closely with a particular customer to
personalize their service.
We provide our own in-house live technical support 24 hours a day, 365
days a year, many of our customers know our employees by our first names and are
much more comfortable working with a small, service-oriented company like
IElement.
OUR PLAN OF OPERATION
IElement, Inc. is a facilities-based nationwide telecommunications
communications service provider for small and medium sized enterprises.
IElement, Inc., seeks to provide broadband data, voice and wireless services
using integrated T-1 lines with a Layer 2 Private Network/Wide Area Network
(WAN) solution to provide dedicated Internet access services, customizable
business solutions for voice, data and Internet, and secure communications
channels between our customers' offices, partners, vendors, customers and
employees without the use of a firewall or encryption devices.
IElement has undertaken steps to present itself under the tradename
IElement to its customer base and target market and will continue to take steps
to notify, inform and/or promote the name of IElement. We now aim to grow the
business of IElement and establish it as a profitable national added-value
carrier.
On November 10, 2005, the Company announced its intention to enter into
the Voice Over Internet Protocol ("VOIP") market. The Company subsequently
purchased the equipment necessary to begin providing VOIP services and
identified a partner with VOIP expertise to assist in the planning and
implementation.
We purchased VoIP equipment for $80,000 and have identified Comm
Partners as a VoIP partner, an un-related entity. The costs related to further
development of our VoIP product are limited to our potential purchase of a new
platform that will handle much more capacity than we currently can handle. That
platform could cost up to 100,000 for what we would want to do.
13
We estimate the cost to enter the Chicago market to be approximately
$500,000 from May 1, 2006 through March 31, 2007 before operations there become
profitable. The $500,000 to start the sales force in Chicago covers all costs
associated with acquiring a new office, staffing, training and managing a sales
force and installation engineers, acquiring additional bandwidth or connections
to accommodate new customers there, paying commissions and agent fees. The
Company's current offices and equipment will support the Dallas and Los Angeles
service. We will however have increased overall costs for additional marketing,
including telemarketing services. Our next target markets are smaller cities in
the Midwestern region that have yet to be identified.
The Company expects that a budgeted amount of approximately $650,000
for monthly operations shall be sufficient for 18 months of operations,
including the expansion into the Dallas, Chicago and Los Angeles markets.
Upselling added value managed services will not cost a significant
amount of money and began on May 1, 2006.
The VoIP testing phase has been completed. We began aggressively
marketing VoIP on May 1, 2006.
IElement's focus is to become a profitable national Communication
Service Provider (CSP) from California to Florida. IElement's added value,
managed service strategy includes the potential development of additional
subscription model services such as Managed Microsoft Exchange(tm), prepaid and
postpaid cellular services, email and network security, residential/ business
based wireless, and Managed Blackberry(tm) services. The development of these
services would allow IElement to offer Small and Medium-sized Enterprises
("SMEs") the access to large enterprise type applications with little or no
software purchase, hardware investment, upgrade concerns, or full-time
administration of these services. These sell-through services should increase
the Average Revenue Per Customer ("ARPC"), as well as help improve customer
retention.
As an "added-value" provider we intend to provide services that enhance
our customers' ability to communicate on top of or along with basic internet
access or telephone service.
The Company intends to:
-- Initially concentrate its resources on adding customers in the
Dallas, Los Angeles and Chicago markets, while extending its sales
reach smaller as of yet unidentified cities in the Midwest region
of the United States.
-- Build out the necessary infrastructure to sell IElement broadband
services (wireless or wireline), as well as reselling voice
services over the same T1 or wireless equivalent.
-- Upsell added value managed services to our current and future
customer base to raise our ARPC. We believe that existing
infrastructure can serve multiple new markets as they are brought
online in advance of the need for additional capital expenditures
or additional software licenses. The cost associated with this
goal is minimal and our efforts are beginning immediately.
-- Seek acquisitions of wireless ISPs (WISPs) and other suitable
telephony and/or data carriers in secondary and tertiary markets
that can be layered onto the Company's current network including
equipment and lines already owned or leased. We believe that such
acquisitions would enable greater economies of scale and operating
efficiencies. The Company is continuously exploring potential
acquisitions in this regard.
-- Begin aggressively marketing VOIP to the Company's current and
potential customers. The Company is currently working diligently
to add a small VOIP customer base upon which it can use as a base
to aggressively market and expand this base. We have already begun
such efforts and will continue to do so in the future. As noted
above, we are initially concentrating on adding customers in the
Dallas, Los Angeles and Chicago markets.
14
Our focus is to become a profitable national Communication Service
Provider (CSP) from California to Florida. Our added value, managed service
strategy includes the potential development of additional subscription model
services such as Managed Microsoft Exchange, prepaid and postpaid cellular
services, email and network security, residential/ business based wireless, and
Managed Blackberry(tm) services. The development of these services would allow
us to offer SMBs access to Enterprise type applications with little or no
software purchase, hardware investment, upgrade worries, or full-time
administration of these services. These sell through services should increase
the Average Revenue Per Customer, as well as help improve customer retention.
We anticipate that the number of people who we employ may increase
substantially over the next 12 months as we continue to execute on our business
plan.
The costs of implementing our business plan will be derived both from
operating revenues and proceeds received from the exercising of warrants by the
Selling Stockholders.
The building out of I-Element's necessary infrastructure includes
purchasing or leasing new telephone switches, the cost of which is expected to
be in the range of $200,000 to $600,000 depending on whether we upgrade switches
in one market or two and what features the new switches come with. We intend to
begin building out infrastructure in May, 2006 and estimate completion by May,
2007.
RESULTS OF OPERATIONS
FISCAL YEAR END MARCH 31, 2005 AS COMPARED TO MARCH 31, 2004
REVENUES
Revenues were $5,652,756 for the fiscal year ended March 31, 2005, as
compared to $5,644,343 for the period ended March 31, 2004. This decrease in
revenue was due to customer attrition.
15
COST OF REVENUES
Cost of revenues was $2,957,407 for the fiscal year ended March 31,
2005 and $3,270,930 for the period ended March 31, 2004.
OPERATING EXPENSES
Operating expenses for the fiscal year ended March 31, 2005 were
$2,677,340 compared to $2,052,319 for the period ended March 31, 2004. The
increase in operating expenses was primarily related to expanding our market
reach, employing a sales team and items related to consummating the merger
between I-Element and MailKey.
GAIN (LOSS) FROM OPERATIONS
Loss from operations for the fiscal year ended March 31, 2005 was
($605,335) compared to a gain from operations of $321,094) for the period ended
March 31, 2004.
INTEREST EXPENSE
Interest expense was $6,992 and $31,354 for the fiscal years ended
March 31, 2005 and 2004, respectively.
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK
Net loss applicable to Common Stock was $643,846 for the fiscal year
ended March 31, 2005, compared to a loss of $324,793 for the period ended March
31, 2004. Net loss per common share was $0.02 for the fiscal year ended March
31, 2005 and $7.60 for the period ended March 31, 2004.
The losses in both years can be attributed to large interest expenses
associated with outstanding promissory notes and large factoring expenses
associated with the financing of accounts receivables. In addition, in both
periods the Company had losses associated with the sale of investment stock. In
addition for the year end March 31, 2005 the Company had a large depreciation
expense.
THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED WITH THREE MONTHS ENDED DECEMBER
31, 2004
The revenue for the three months ended December 31, 2005 has decreased
$295,376 from the same period ended December 31, 2004 for two reasons. First,
due to financial constraints, we reduced our Dallas sales force in anticipation
of redirecting it to the Chicago market. This action has caused our customer
base to decrease as customer contracts expire and are not renewed. The recent
private placement, however, has provided us with the funds to sustain a long
term effort in Chicago where our network is running the furthest below capacity.
Secondly, the prior year income statement had $128,334 and $358,001 of
non-recurring consulting revenue for the three and nine month periods ended
December 31, 2004, respectively. Comparable revenue for telecommunication
services would be $1,119,972 and $1,286,814 for the three months ended December
31, 2005 and 2004 respectively and $3,487,000 and $4,066,344 for the nine months
ended December 31, 2005 and 2004 respectively.
The general and administrative expenses for the three months ended
December 31, 2005 have increased $86,265 over the same period ended December 31,
2004. Said expenses for the last three months of 2005 increased, along with
total expenses, because we had significant one-time expenses related to
marketing our private placement Most of the expenses have decreased with the
exception of some one-time consulting fees. The non-recurring consulting revenue
for that period was related specifically to a one-time planned acquisition of
Reality Wireless The Company incurred $141,750 for consulting fees to be paid
out in stock. When these one time consulting fees are excluded, the recurring
general and administrative expenses decreased $55,485 for the three months ended
December 31, 2005 when compared to the same period ended December 31, 2004.
The cost of sales for the last three months of 2005 was actually lower
than the cost of sales in any other quarter of calendar 2005, but there was an
increase when compared with the last three months of 2004. That increase is due
to the fact that we are providing services in more markets than in 2004, so we
have a more expansive owned network.
Selling expenses have decreased $28,841 for the three months ended
December 31, 2005 due to a decrease in sales headcount, as described above, from
the same period ended December 31, 2004.
Interest expense for the three months ended December 31, 2005 has
decreased $37,667 from the same period ended December 31, 2004 reflecting that
notes payable have been renegotiated with zero percent interest.
PROFIT (LOSS) FROM OPERATIONS
Loss from operations for the three months ended December 31, 2005 was
($328,262) compared to a profit of $99,807_for the three months ended December
31, 2004.
16
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK
Net loss applicable to Common Stock was ($328,262) for the three months
ended December 31, 2005, compared to a profit of $99,807 for the three months
ended December 31, 2004. Net loss per common share was $0.00 for the three
months ended December 31, 2005 and net income per common share was $0.02 for the
three months ended December 31, 2004.
The reason for the losses in the three months ended December 31, 2005
are due in main part to one time consulting revenue in the prior period as well
as a decrease in customers and therefore revenue. The Company had a decrease of
customers due to attrition and the lack of an active sales force. In addition,
during the three months ended December 31, 2005, the Company incurred non
recurring consulting expenses related to the private placement.
NINE MONTHS ENDED DECEMBER 31, 2005 AS COMPARED TO DECEMBER 31, 2004
REVENUES
Revenues were $3,487,000 for the nine months ended December 31, 2005,
as compared to $4,424,345 for the nine months ended December 31, 2004. This
decrease in revenue was due to two reasons. First, due to financial constraints,
we reduced our Dallas sales force in anticipation of redirecting it to the
Chicago market. This action has caused our customer base to decrease as customer
contracts expire and are not renewed. Secondly, the prior year income statement
had $128,334 and $358,001 of non-recurring consulting revenue for the three and
nine month periods ended December 31, 2004, respectively.
COST OF REVENUES
Cost of revenues was $2,141,575 for the nine months ended December 31,
2005 and $2,223,222 for the nine months ended December 31, 2004.
OPERATING EXPENSES
Operating expenses for the nine months ended December 31, 2005 were
$2,209,711 compared to $2,389,373 for the nine months ended December 31, 2004.
The decrease in operating expenses was primarily related to a decrease in rental
expense and associated overhead, a decrease in sales expenses due to a decrease
in sales related employees/independent contractors, a decrease in advertising
expenses, and a decrease in interest expense.
LOSS FROM OPERATIONS
Loss from operations for the nine months ended December 31, 2005 was $864,286
compared to $188,250 for the nine months ended December 31, 2004.
INTEREST EXPENSE
Interest expense was $4,951 and $107,222 for the nine months ended
December 31, 2005 and 2004, respectively. The decrease in interest expense is
primarily related to the payoff of certain notes payable combined with a
re-negotiation of other notes payable to a zero percent interest rate.
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK
Net loss applicable to Common Stock was $864,286 for the nine months
ended December 31, 2005, compared to a loss of $226,761 for the nine months
ended December 31, 2004. Net loss per common share was $0.01 for the nine months
ended December 31, 2005 and $0.05 for the nine months ended December 31, 2004.
The reasons for the losses in the nine months ended December 31, 2005
and December 31, 2004 are due in main part to one time consulting revenue in the
prior period as well as a decrease in customers and therefore revenue. The
Company had a decrease of customers due to attrition and the lack of an active
sales force. In addition, during the three months ended December 31, 2005, the
Company incurred non recurring consulting expenses related to the private
placement.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations primarily through
private sales of equity securities and the utilization of short-term convertible
debt. As of December 31, 2005 we had a cash balance of $1,205,129.
In order to facilitate working cash flow, the Company factors or sells
approximately 99% of accounts receivables for its customer billing with an
outside agency, thereby receiving 75% of the aggregate net face value of the
assigned accounts at the time of placement with the factor. We do not otherwise
maintain a line of credit or term loan with any commercial bank or other
financial institution. To date, our capital needs have been principally met
through the receipt of proceeds from factoring customer receivables and the sale
of equity and debt securities. Factoring allows us to receive virtually
immediate cash from customer invoices. When each customer pays the third party
directly, we receive another 22.75%, so the total cost to us for the third
party's advance to us, their payment for processing and collections is 2.25%.
Factoring in this manner is a financing alternative to credit card processing.
17
The Company recently closed a private placement offering for an
aggregate sale price of $1,579,375, of which up to 10% is subject to deduction
for fees in connection with the private placement, and warrants for the purchase
of and aggregate total of 22,562,500 at a strike price of $.10 per share. The
proceeds of the private placement offering improved the Company's cash balance
and if a majority of the warrants are exercised I-Element will receive an
additional $2,256,250 which would be more than sufficient to satisfy the
Company's cash needs for its current operations. In addition, if only half of
the warrants are exercised, I-Element will be able to comfortably sustain its
current operations.
In the event that none of the warrants are exercised, or only nominal
number of the warrants are exercised, I-Element will require additional funds,
above its operating revenues, to sustain operations and grow the business. In
this event, I-Element plans to seek additional capital in the form of additional
private placements of its capital stock or short terms loans or both. In the
event that I-Element seeks additional capital through the sale of its stock,
there will be a dilutive impact on its outstanding common stock.
As of June 2, 2006, our gross accounts receivable totaled $339,269. We
have set aside an allowance of $12,165 against that balance for uncollectible
accounts. The net amount we expect to receive is $327,104. As a
telecommunications provider, we bill for our services up front, so therefore we
have significant leverage to collect on our Accounts Receivable because, with
proper dunning, we can discontinue our customers' telephone and internet
services if they do not pay their bill.
As of March 31, 2006 I-Element had total notes payable and outstanding
in the aggregate principal amount of $634,684.45 owed to 14 note holders. As of
March 31, 2006 I-Element was current in all obligations except for past due
total payments of $7500. None of the notes are interest bearing. The following
is a more detailed discussion of the 14 notes.
On January 19, 2005, I-Element issued eight (8) promissory notes to,
Kramerica, certain members of Mr. Zweig's immediate family and others in the
aggregate amount of $376,956.16 (the "Notes") with no interest. In particular,
the Notes are payable to Heather Walther ($20,000), Kramerica, Inc. (aggregate
of $120,000), Mary Francis Strait Trust ($55,611.15), Peter Walther ($30,000),
Richard Zweig ($20,000), Richard Zweig IRA ($27,500) and Strait Grandchildren
Trust ($103,845.01). Upon issuance, the Notes were payable in 36 monthly
installments with the first payment commencing six months after the closing of
the merger and were secured by substantially all of the assets of I-Element.
I-Element did not make any payments on the Notes.
On March 25, 2006 each of the eight (8) Notes were cancelled and
I-Element issued new convertible promissory notes to the same individuals in the
same principal amount of $376,956.16, again with no interest thereon. The first
payment on each of the new convertible promissory notes is due in September 2006
with a total of 36 monthly installments through August 2009. The Lender has the
right to convert all or a portion of the outstanding balance, at any time until
the notes are paid in full, into I-Element's common stock at a conversion price
of $0.035 per share. Any past due balance on the old Notes was forgiven at the
time of cancellation of the old Notes and issuance of the new convertible
promissory notes. The new convertible promissory notes are secured by
substantially all the assets of I-Element as were the original Notes.
On August 8, 2005, I-Element issued four (4) promissory notes in the
aggregate principal amount of $183,097 to Timothy Dean Smith ($53,930), Susan
Walton ($30,000), Jeremy Dean Smith ($54,603) and Dolphin Capital ($44,564),
with no interest. Upon issuance the notes were payable in 36 monthly
installments with the first payment due in February, 2006. I-Element did not
make the February, 2006 payment.
On March 25, 2006 each of the four (4) Notes were cancelled and
I-Element issued new convertible promissory notes to the same individuals in the
same principal amount of $183,097, again with no interest thereon. The first
payment on each of the new convertible promissory notes is due in September 2006
with a total of 36 monthly installments through August 2009. The Lender has the
right to convert all or a portion of the outstanding balance, at any time until
the notes are paid in full, into I-Element's common stock at a conversion price
of $0.035 per share. Any past due balance on the old Notes was forgiven at the
time of cancellation of the old Notes and issuance of the new convertible
promissory notes.
The issuance of new convertible promissory notes on March 25, 2006 in
exchange for the previous promissory notes allowed I- Element to extend the
first payment date on all twelve of these Notes from February 2006 until
September 2006 in exchange for the added conversion feature. The twelve Note
Holders would be able to collectively convert their Notes into 16,001,519 shares
of I-Element common stock at a price of $0.035 per share. This could have a
dilutive impact on the Company's outstanding common stock. If all 16,001,519
shares of common stock are converted, these shares would represent approximately
nine (9%) percent of I-Element's outstanding shares with I-Element only
receiving approximately half the market value for such shares, based on the
current market price.
18
The remaining two notes are held by Duane Morris ($34,631.29 as of June
5, 2006) and Palladian ($30,000 as of June 5, 2006). The Duane Morris note was
issued in exchange for a settlement of disputed attorneys fees on August 16,
2005 and was originally agreed to be paid in nine monthly installments beginning
on September 30, 2005 and ending May 30, 2006. As of June 5, 2006 I-Element is
past due on its payments on the Duane Morris note, but has been paying $2500 per
month and intends to continue to do so. The Palladian note was issued on August
29, 2005 and is being paid in fourteen monthly installments beginning September
5, 2005 and ending October 28, 2006. As of June 5, 2006, I-Element is past due
approximately $15,000 on the Palladian note but is making regular monthly
payments in the amount of $2500.
I-Element's total debt servicing requirements on the fourteen (14)
outstanding promissory notes over the next twelve months is approximately
$204,644. In particular, beginning in September 2006, I-Element will begin debt
service on the twelve 12) convertible promissory notes issued March 25, 2006 in
the monthly amount of $15,557. In addition, within the next twelve months
I-Element will complete payments on the remaining principal balances owed to
Duane Morris and Palladian ($64,631 as of June 5, 2006).
Although cash flow from current business operations alone would not
likely be sufficient to satisfy I-Element's current debt obligations. I-Element
intends to satisfy its debt repayment obligations through a combination of the
following. First, through cash flows from current business operations. Second,
I-Element is actively seeking acquisitions of business with positive cash flow,
which cash flow could assist in debt servicing requirements. Third, from the
proceeds from the exercise of the warrants, the stock underlying which is being
registered herein. Fourth, renegotiating the terms of the debt obligations and
in particular the debt obligations to Mr. Zweig and his family. Finally,
I-Element would not be required to make cash payments on those debt obligations
which are converted. Twelve of the Notes may be converted at $.035 per share,
which is currently half of the market price.
On February 14, 2006 we settled the breach of contract litigation
against Communications Plus, Inc., a California company d/b/a Global
Communications, ("Global") for $27,000 payable to Global Communications in
periodic payments beginning February 14, 2006 and ending December 1, 2006.
On April 19, 2005 KK Solutions, Inc., a California corporation d/b/a
Three 18, Inc. ("KK"), filed a complaint against us and CEO Ivan Zweig,
individually, in the Superior Court of the State of California, County of Los
Angeles, alleging breach of contract pursuant to a dispute regarding sales
commissions due to KK. On May 2, 2006 we settled the litigation for a total
settlement amount of $26,500 payable in periodic payments beginning on May 2,
2006 and ending on July 2, 2006.
As of June 5, 2006, IElement has issued all stock payable due and owing
as of December 31, 2005 as reflected in our notes to financial statements.
IElement is not aware of any undisclosed actual or contingent
liabilities.
CRITICAL ACCOUNTING POLICY AND ESTIMATES
Our Management's Discussion and Analysis of Financial Condition and
Results of Operations section discusses our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, accrued expenses,
financing operations, and contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. The most
significant accounting estimates inherent in the preparation of our financial
statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources. These
accounting policies are described at relevant sections in this discussion and
analysis and in the notes to the consolidated financial statements included in
this Annual Report.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2005, we did not have any relationships with
unconsolidated entities or financial partners, such as entities often referred
to as structured finance or special purpose entities, that had been established
for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we were
engaged in such relationships.
19
BUSINESS
IElement (f/k/a Global Diversified Acquisitions Corp f/k/a MK Secure
Solutions Ltd.) was established as a messaging security and management company.
A messaging security and management company is one that seeks to provide its
customers with protection from spam, viruses, hackers and thieves that attack
electronically and in particular through e-mail. On March 25, 2004, pursuant to
an Agreement and Plan of Merger, Global Diversified Acquisition Corp. ("GDAC"),
acquired all of the outstanding capital stock of MK Secure Solutions Ltd
("MKSS"), a holding company incorporated on March 11, 2003, under the laws of
the British Virgin Islands. The transaction was effectuated by the issuance of
shares such that the former MKSS shareholders owned approximately 90% of the
outstanding MailKey Corporation stock after the transaction. GDAC then changed
its name to MailKey Corporation ("MailKey"). Pursuant to the terms of the Merger
Agreement, GDCA issued 26,246,000 shares of its common stock to the MailKey
Shareholders, representing approximately ninety-four percent (94%) of GDCA's
outstanding Common Stock.
Pursuant to the terms of the Merger Agreement, at the Effective Time,
MailKey: (i) received a letter of resignation from Andrew J. Kacic as a member
of its board of directors, which resignation became effective at 12:00 noon
eastern standard time on March 26, 2004, (ii) appointed Graham Norton-Standen
and Tim Dean-Smith to serve as directors of the Company, which appointments
became effective at the Effective Time, and (iii) received letters of
resignation from John W. Shaffer and Raymond J. Bills, constituting all of the
remaining members of the Company's board of directors as it existed immediately
prior to the Effective Time. Susan Walton subsequently became a director of
MailKey. The Agreement and Plan of Merger and First Amendment thereto are filed
herewith as Exhibits 2.1 and 2.2.
MailKey, had offices in the United States, Europe and Asia, and was a
messaging security company that provided a suite of applications and
technologies to manage and control messages and limit the dangers posed by the
rapid growth of electronic communication. MailKey protected companies from
intrusive or dangerous messages, whether they be e-mail, short messaging service
(SMS) or multimedia messaging service (MMS) messages, and helps protects
businesses from the most important threats inherent in electronic communication
- - spam, viruses, identity theft, mail abuse and lapses in enforcing company
security policy. MailKey's applications analyzed and applied rules to all
incoming and outgoing messages on a company's network. In so doing, MailKey's
technology was designed to put control back into the hands of a company's
information technology department.
On November 9, 2004, MailKey Corporation agreed to merge with and into
IElement, Inc., a Nevada corporation pursuant to which MailKey acquired all of
the issued and outstanding shares of capital stock of IElement. On January 19,
2005, Mailkey consummated the acquisition of IElement. Pursuant to the Agreement
and Plan of Merger dated November 9, 2004, as amended by the First Amendment and
Waiver to Agreement and Plan of Merger dated December 30, 2004, Mailkey issued
an aggregate of 47,845,836 shares of its common stock in exchange for all of the
issued and outstanding shares of capital stock of I-Element at an exchange ratio
of 3.52 shares of Mailkey for each outstanding share of common stock of
I-Element. The Agreement and Plan of Merger and First Amendment thereto are
filed herewith as Exhibits 2.3 and 2.4.
IElement is a facilities-based nationwide communications service
provider that provides telecommunications services to small and medium sized
enterprises ("SMEs"). IElement utilizes high-speed Internet T-1 lines,
integrated T-1 lines for voice and data, wireless Internet/data services, and a
Layer 2 Private Network solution to provide SMEs with dedicated Internet access
services, customizable business solutions for voice, data and Internet, and
secure communications channels between the SMEs' offices, partners, vendors,
customers and employees without the use of a firewall or encryption devices.
IElement has a network presence in 18 major markets in the United States,
including facilities in Los Angeles, Dallas, and Chicago. IElement started
business in 2003.
In connection with the closing of the merger, the Company entered into
a letter of intent with Ivan Zweig and Kramerica Capital Corporation
("Kramerica"), a corporation wholly-owned by Mr. Zweig, which contemplates that
IElement will enter into a four year employment agreement pursuant to which Mr.
Zweig will serve as the Chief Executive Officer of MailKey and IElement. The
letter of intent provided that Mr. Zweig will receive an annual base salary of
$300,000. In addition to his base salary, Mr. Zweig will be entitled to annual
performance bonuses with targets ranging from $1,000,000 to $3,000,000 during
the second, third and fourth years provided IElement achieves certain
performance goals. If Mr. Zweig is terminated without cause, the Company is
obligated to pay the remaining salary owed to Mr. Zweig for the complete term of
the employment agreement, to pay off all notes owed to Mr. Zweig or Kramerica,
all outstanding options shall become fully vested, the Company shall pay all
earned performance bonuses and all accrued vacation. If Mr. Zweig is terminated
for any reason other than cause, the Company shall pay in full the Notes owed to
either Mr. Zweig or Kramerica Capital Corporation and at least 75% of the earned
bonus plan set forth by the directors.
20
On August 1, 2005, we filed with the SEC an Information Statement on
Schedule 14C to change our name from MailKey Corporation to IElement
Corporation. Concurrent with this name change, we received a new stock trading
symbol (IELM.OB) on the NASD Over-the-Counter Electronic Bulletin Board. The
Company received consent to amend the Articles of Incorporation to increase the
number of shares of common stock authorized to be issued from 100,000,000 shares
to 2,000,000,000 shares, and consented to the authorization of 200,000,000
shares of Blank Check Preferred Stock. There are no current plans to designate
any Blank Check Preferred Stock.
Consistent with the expectations of the parties, on August 3, 2005 Tim
Dean Smith and Susan Walton resigned from all positions and as Directors with
the Company leaving Ivan Zweig as the sole officer and director. On March 4,
2006 Lance K. Stovall and Ken A Willey joined the Board of Directors.
Again, IElement is a facilities-based nationwide communications service
provider that provides telecommunications services to small and medium sized
enterprises ("SMEs"). IElement utilizes high-speed Internet T-1 lines,
integrated T-1 lines for voice and data, wireless Internet/data services, and a
Layer 2 Private Network solution to provide SMEs with dedicated Internet access
services, customizable business solutions for voice, data and Internet, and
secure communications channels between the SMEs' offices, partners, vendors,
customers and employees without the use of a firewall or encryption devices.
IElement employees its own installation technicians that install the Company's
services and equipment in the Dallas/Fort Worth, Texas market as well as the Los
Angeles/Orange County, California markets. In most other markets the Company
contracts to third parties to perform such installations and to service
customers on an as needed basis.
The Company competes with both competitive local exchange carriers
(CLEC's) who lease access lines from incumbent local exchange carriers (ILEC's),
as well as the ILEC's themselves. Some examples of ILEC competitors are Verizon
Communications and AT&T. Some examples of CLEC competitors are XO Communications
and CBeyond Communications. In addition, IElement competes with internet service
providers (ISP's) to some extent. However, most ISP's are limited in their
product line and do not offer telephone of VOiP services and thus are not
considered major competitors to us.
The Company is of course dependent on its customer base for continued
revenue, however, its customer base is diversified and consists of many smaller
customers as opposed to a few larger customers. The Company can generally
quickly replace a lost customer with a new customer without a significant impact
on revenue and operations. However, at present, IElement has a drastically
reduced sales force and accordingly, the loss of customers would have a greater
impact than at other times. IElement intends to use proceeds from the private
placement and the exercise of warrants to build its sales force, including in
the Chicago area.
Other than the IElement logo, the Company has no trademarks. The
Company does not own any patents or significant intellectual property rights.
In the first quarter 2005 the Company was unable to continue funding
the development of its messaging security solutions and the rights to
development and commercialization of the messaging security solutions were
transferred to Tehshi Inc., in return for 20% of the common stock (2,640,000
shares of common stock) of Tehshi, Inc., issued to IElement, and for the
cancellation of $76,107 in total debt that the Company owed to the development
team of the messaging security solutions, Charles Ashley and Isaac de la Pena,
who hold a combined 80% of the common stock of Tehshi, Inc.
In the first quarter 2005 we sold our insolvent British Virgin Islands
subsidiary, MK Secure Solutions Limited, for $1.00 to a UK based accounting
firm, SS Khehar & Company. SS Khehar & Company has agreed to deal with the
winding up of the former subsidiary, for a fee of $1,800. We sold the business
to relieve our management and staff of the responsibility of administratively
winding up and administratively dissolving MK Secure, which at that time had no
revenues, assets or liabilities. In addition, the sale of the business relieved
us of the accounting responsibilities and expenses of reporting a net zero
entity on a consolidated basis.
Effective January 24, 2005, Ivan Zweig was appointed to the Board of
Directors of MailKey. He has served as the Chief Executive Officer of IElement
since March 2003. Mr. Zweig is also the Chief Executive Officer, director and
sole shareholder of Kramerica, an entity utilized by Mr. Zweig for asset
ownership and payment of certain compensation. Since December 1998, Mr. Zweig
has served as the Chief Executive Officer and director of Integrated
Communications Consultants Corp. ("ICCC"), a nationwide voice and data carrier
specializing in high speed Internet access and secure data transaction. ICCC
provides us with resold telecom services for approximately $100,000 on a
monthly basis for such services. On October 1, 2004, ICCC filed for Chapter 11
bankruptcy protection in the United States Bankruptcy Court, Northern District
of Texas, Dallas Division.
21
The cost of services is approximately $100,000 per month and fluctuates
with the amount of services being provided in that month. ICCC earns a
commercially reasonable margin for their services. ICCC has interconnection
agreements and other resources including existing account managers and business
relationships already in place. We are not dependant on the services that ICCC
is reselling to us in that we would be able to make a transition away from this
resale agreement, but ICCC is already providing these services and it would be
cost prohibitive (approximately $35,000) to change providers or perform the
services in-house. We estimate that it would take 24 months to recover the new
installation costs. ICCC had a confirmation hearing to approve its plan of
reorganization on April 26, 2006 whereat the Plan was approved. Our arrangement
with ICCC allows either party to terminate the relationship at any time upon 30
days notice. Except for the cost of the change, IElement could quickly and
easily move its business away from ICCC and to a different provider in the event
such a move was necessary or the contract was cancelled for any reason.
As of June 5, 2006 IElement consists of IElement Corporation, a Nevada
corporation, which is the registrant and parent corporation. IElement, Inc. is a
wholly owned subsidiary without separate operations. The Company intends to file
a short form merger to merge IElement, Inc. into IElement corporation and
terminate it as a separate entity. In addition, we have two operating
subsidiaries. IElement Telephone of California was formed on November 14, 2005
to acquire and administer a telecommunications license in the state of
California. IElement Telephone of Arizona was formed on March 13, 2006 to
acquire and administer a telecommunications license in the state of Arizona.
REGULATORY OVERVIEW
OVERVIEW
We are subject to regulation by federal, state and local government
agencies. Historically, the FCC had jurisdiction over interstate long distance
services and international services, while state regulatory commissions had
jurisdiction over local and intrastate long distance services. The
Telecommunications Act of 1996, or the "Telecom Act" fundamentally changed the
way telecommunications is regulated in this country. The FCC was given a major
role in writing and enforcing the rules under which new competitors could
compete in the local marketplace. Those rules, coupled with additional rules and
decisions promulgated by the various state regulatory commissions, form the core
of the regulatory framework under which we operate in providing our services.
With a few limited exceptions, the FCC continues to retain exclusive
jurisdiction over the provision of interstate and international long distance
service, and the state regulatory commissions regulate our provision of
intrastate local and long distance service. Additionally, municipalities and
other local government agencies may regulate limited aspects of our business,
such as use of government-owned rights-of-way, and may require permits such as
zoning approvals and building permits.
The Telecom Act and the related rules governing competition issued by
the FCC, as well as pro-competitive policies already developed by state
regulatory commissions, have enabled new entrants like IElement to capture a
portion of the ILECs' market share of local services. However, there have been
numerous attempts to limit the pro-competitive policies in the local exchange
services market through a combination of proposed federal legislation, adoption
of new rules by the FCC, and ILEC challenges to existing and proposed
regulations. To date, the ILECs have succeeded in eliminating some of the
market-opening regulations adopted by the FCC and the states through numerous
court challenges. In particular, the ILECs appealed, and won partial reversals
of, a series of FCC orders defining the ILEC facilities -- known as unbundled
network elements or "UNEs" -- that ILECs must lease to competitors at cost-based
rates. We expect the ILEC's efforts to scale back the benefits of the Telecom
Act and local service competition to continue. However, while the FCC has
eliminated certain UNEs, the basic framework of local competition, including the
UNE regime itself, has remained intact. The successful implementation of our
business plan is predicated on the assumption that the basic competitive
framework and pro-competitive safeguards will remain in place.
The passage of the Telecom Act largely preceded the explosive growth of
the Internet and IP communications. Congress is currently considering whether to
further amend the Telecom Act to, among other things, directly address IP
communications. It is possible that any such amendment to the Telecom Act could
eliminate or materially alter the market-opening regulatory framework of the
Telecom Act in general, and the UNE regime in particular. Such a result could
adversely affect IElement's business. It is not possible to predict if, when, or
how the Telecom Act will be amended.
FEDERAL REGULATION
The FCC exercises jurisdiction over our telecommunications facilities
and services. We have authority from the FCC for the installation, acquisition
and operation of our wireline network facilities to provide facilities-based
domestic interstate and international services. Because IElement is not dominant
in any of its markets, unlike ILECs, we are not currently subject to price cap
or rate of return regulation. Thus, our pricing policies for interstate end user
services are only subject to the federal guidelines that charges for such
services be just, reasonable, and non-discriminatory.
22
IMPLEMENTATION OF THE TELECOM ACT
THE TELECOM ACT'S LOCAL COMPETITION FRAMEWORK
One of the key goals of the Telecom Act is to encourage competition in
the provision of local telephone service. To do this, the Telecom Act provides
three means by which CLECs such as IElement can enter the local telephone
service market. The three modes of entry are as follows:
o ACCESS TO UNES. ILECs are required to lease to CLECs various
elements in their network that are used individually or in
combination with each other to provide local telephone service. As
discussed in more detail below, the FCC determines which
facilities must be made available by the ILECs as UNEs. The ILECs
must make UNEs available at rates that are based on their
forward-looking economic costs, a pricing regime known as
"TELRIC," short for Total Element Long Run Incremental Cost. For
IElement, the most critical UNEs are local loops and transport,
which enable us to connect our customers to our network.
o CONSTRUCTION OF NEW FACILITIES. CLECs may also enter the local
service market by building entirely new facilities. The ILECs are
required to allow CLECS to interconnect their facilities with the
ILECs' facilities in order to reach all customers.
o RESALE. ILECs are required to permit CLECs to purchase their
services for resale to the public at a wholesale rate that is less
than the rate charged by the ILECs to their retail customers.
To facilitate competitors' entry into local telephone markets using one
or more of these three methods, the Telecom Act imposes on the ILECs the
obligation to open their networks and markets to competition. When requested by
competitors, ILECs are required to negotiate, in good faith, agreements that set
forth terms governing the interconnection of their network, access to UNEs, and
resale.
The following is a summary of the interconnection and other rights
granted by the Telecom Act that are important for effective local service
competition and our belief as to the effect of those requirements, if properly
implemented:
o interconnection with the networks of incumbents and other
carriers, which permits our customers to exchange traffic with
customers connected to other networks;
o requirements that the ILECs make available access to their
facilities for our local loops and transport needs, thereby
enabling us to serve customers not directly connected to our
networks;
o compensation obligations, which mandate reciprocal payment
arrangements for local traffic exchange between us and both
incumbent and other competitive carriers and compensation for
terminating local traffic originating on other carriers' networks;
o requirements concerning local number portability, which allows
customers to change local carriers without changing telephone
numbers, thereby removing a significant barrier for a potential
customer to switch to our local voice services;
o access to assignment of telephone numbers, which enables us to
provide telephone numbers to new customers on the same basis as
incumbent carriers; and
o collocation rights allowing us to place telecommunications
equipment in ILEC central offices, which enables us to have direct
access to local loops and other network elements.
Although the rights established in the Telecom Act are a necessary
prerequisite to the introduction of full local competition, they must be
properly implemented and enforced to permit competitive telephone companies like
IElement to compete effectively with the incumbent carriers. Discussed below are
several FCC and court proceedings relating to the application of certain FCC
rules and policies that are significant to and directly impact our operations
and costs as well as the nature and scope of industry competition.
UNBUNDLING OF INCUMBENT NETWORK ELEMENTS
In a series of orders and related court challenges that date back to
1996, the FCC has promulgated rules implementing the market-opening provisions
of the Telecom Act, including the requirement that the ILECs lease UNEs to
competitors at cost-based rates. At the core of the series of FCC orders is the
FCC's evolving effort to define which ILEC network facilities must be made
available as UNEs. Initially, the FCC defined a broad list of UNEs, consisting
of most of the elements of the ILECs' networks. Under pressure from the ILECs,
the FCC has subsequently reduced the list, while preserving access to those
network elements critical to the operation of IElement's business.
23
The current list of UNEs was promulgated by the FCC in two orders. The
first is the Triennial Review Order, or "TRO", which was released on August 21,
2003. Several carriers and other entities appealed the FCC's TRO decision. On
March 2, 2004, the U.S. Court of Appeals for the D.C. Circuit issued its opinion
in United States Telecom Association v. FCC, No. 00-1012 ("USTA II Decision").
In the USTA II Decision, the court reversed and overturned many of the
conclusions of the TRO. In the aftermath of the USTA II Decision, the FCC
released the second of its two currently controlling orders, the TRO Remand
Order or "TRRO", on February 4, 2005. It is expected that various parties will
appeal the TRRO. It is not possible to predict the outcome of those appeals. It
is possible that portions of the order could be overturned and that the FCC will
issue new rules in their place that further restrict access to UNEs.
As of March 11, 2005, the effective date of the TRRO, the ILECs are
obligated to provide as UNEs the following network facilities used by IElement
to serve its customers:
UNE LOOPS
DS0 LOOPS. A DS0 loop is a single, voice-grade channel. Typically,
individual business lines are DS0 loops. The ILECs must make DS0 loops available
at UNE rates on an unlimited basis.
DS1 LOOPS. A DS1 loop is a digital loop with a total speed of 1.544
megabytes per second, which is the equivalent of 24 DS0s. Multiple voice lines
and Internet access can be provided to a customer over a single DS1 loop. We
serve most of our customers with DS1 loops. The ILECs must provide DS1 loops at
UNE rates at the majority of their central offices. Competitors, however, are
limited to no more than 10 DS1 loops to any particular building.
DS3 LOOPS. A DS3 loop is a digital loop with a total speed of 44.736
megabytes per second. In some cases, I-Element serves its large business
customers with DS3 loops. ILECs must provide DS3 loops at UNE rates at the
majority of their central offices. Competitors, however, are limited to no more
than one DS3 loop to any particular building.
As of the TRRO, ILECs are not required to provide optical capacity
loops or dark fiber loops as UNEs. Optical capacity loops, referred to as OCn
loops, are very high-capacity digital loops ranging in capacity from OC3 loops,
which are the equivalent of three DS3s to OC192. This will not impact our costs.
The ILECs are also not required to provide certain mass market
broadband loop facilities and functionality as UNEs. Under the TRO, the ILECs
are not required to make newly-deployed fiber-to-the-home or FTTH loops
available as UNEs and are only required to provide the equivalent of DS0
capacity on any FTTH loop built over an existing copper loop. These recent FCC
orders should only limit availability for those specific network elements, which
are not material to us. It is possible, however, that the ILECs will seek
additional broadband regulatory relief in future proceedings.
UNE TRANSPORT
DS1 TRANSPORT. Whether transport is available as a UNE is determined on
a route-by-route basis. ILECs must make transport at UNE rates available at DS1
capacity levels between any two ILEC central offices unless both central offices
either (1) serve more than 38,000 business lines or (2) have four or more
fiber-based collocators. On routes where DS1 transport must be made available,
each individual competitor is limited to no more than 10 DS1 transport circuits
per route.
DS3 TRANSPORT. Access to DS3 capacity-level transport is more limited
than access to DS1 transport. ILECs must make transport at UNE rates available
at DS3 capacity levels between any two ILEC central offices unless both central
offices either (1) serve more than 24,000 business lines or (2) have three or
more fiber-based collocators. On routes where DS3 transport must be made
available, each individual competitor is limited to no more than 12 DS1
transport circuits per route.
DARK FIBER TRANSPORT. Dark fiber transport is available under the same
conditions as DS3 transport.
ILECs are not required to provide access to transport at greater-than
DS3 capacity levels. ILECs are also not required to provide transport at any
capacity level to connect an ILEC central office with a competitor's facilities.
TRANSITIONAL AVAILABILITY WHERE ELEMENTS ARE NO LONGER AVAILABLE AS
UNES
For DS1, DS3, and dark fiber loops and transport that do not meet the
criteria for availability set forth above, the FCC established a transitional
period during which the ILECs must continue to make the elements available at
UNE rates to serve existing customers. For DS1 and DS3 loops and transport, the
ILECs must make the elements available at 115% of the TELRIC rate for one year
beginning on March 11, 2005. For dark fiber loops and transport, the ILECs must
make the elements available at 115% of the TELRIC rate for 18 months beginning
on March 11, 2005.
24
Although these rules adopted by the FCC in the TRRO became effective on
March 11, 2005, many of the requirements imposed by the FCC in the TRO and TRRO
were not self-executing. Accordingly, the FCC made clear that carriers must
follow the change of law procedures in their applicable interconnection
agreements with ILECs to implement any TRO requirements that are not
self-executing and that carriers must follow the procedures set forth in section
252(b) of the Telecom Act to modify interconnection agreements that are silent
as to implementation of changes in law.
ADDITIONAL FEDERAL REGULATIONS
The following discussion summarizes some additional specific areas of
federal regulation that directly affect our business.
VOIP. Like a growing number of carriers, we utilize IP technology for
the transmission of a portion of our network traffic. The regulatory status and
treatment of IP-enabled services is unresolved. In particular, there is
uncertainty as to the imposition of access charges, Universal Service fund
contributions, and other taxes, fees, and surcharges on VoIP services. In a
recent order, the FCC held that Vonage's VoIP services and similar offerings by
other providers are subject to the FCC's interstate jurisdiction, preempting
state efforts to regulate VoIP providers as intrastate telecommunications
providers. Four separate state commissions have appealed this ruling and the
case is currently pending. The FCC, however, left open the question of whether
VoIP providers provide "telecommunications" -- i.e., basic transmission services
- -- or enhanced "information services." Under the Communications Act, those are
mutually exclusive categories. Generally, telecommunications carriers, including
traditional local and long distance telecommunications companies are regulated
under the Communications Act; information service providers are generally
unregulated. The FCC has initiated a rulemaking proceeding to address the
classification of VoIP and other IP-enabled service offerings. It is not
possible to predict the outcome of that proceeding or its effect on IElement's
operations.
AT&T DECLARATORY RULING RE: VOIP. On April 21, 2004, the FCC released
an order denying AT&T's request that the FCC find that VoIP services are exempt
from switched access charges, the AT&T Order. The FCC held that an interexchange
service that uses ordinary customer premises equipment that originates and
terminates on the PSTN, that provides no enhanced functionality, and that
undergoes no net protocol conversion, is a telecommunications service and
subject to switched access charges. The order apparently places interexchange
services similar to those VoIP services offered by AT&T in the same regulatory
category as traditional telecommunications services and, therefore, potentially
subjects such VoIP services to access charges and other regulatory obligations
including Universal Service fees. Although the FCC did not rule on the
applicability of access charges for services provided prior to April 21, 2004,
the ILECs may attempt to assert claims against other telecommunications
companies including us for the retroactive payment of access charges.
ILEC PROVISION OF BROADBAND TELECOMMUNICATIONS SERVICES AND INFORMATION
SERVICES. Currently, the ILECs, as dominant carriers, are subject to a
relatively high degree of regulation with respect to their broadband serving
offerings. The FCC, however, has initiated a rulemaking proceeding in which it
is considering deregulating, or applying a lower degree of regulation to, ILEC
broadband offerings. If the ILECs are largely freed from dominant carrier
regulation, they will have much greater pricing flexibility and will pose a
greater competitive threat to IElement. In a second, related rulemaking, the FCC
is considering whether to eliminate certain requirements it imposes on the ILECs
with respect to their broadband Internet access services. Currently, where the
ILECs offer Internet access or other information services over broadband
facilities, they must (1) purchase the underlying broadband transmission
facilities from themselves at tariffed rates and (2) make the underlying
facilities available to competitors on a non-discriminatory basis. If the FCC
were to eliminate these requirements, it could result in an increase to our
network costs. To date, these deregulatory trends have been directed towards
facilities used primarily by residential customers, and not by business
customers.
INTERCARRIER COMPENSATION REFORM. Currently, telecommunications
carriers are required to pay other carriers for interstate access charges and
local reciprocal compensation charges. These two forms of intercarrier
compensation have been under review by the FCC since 2001. The FCC continues to
consider a broad order reforming the intercarrier compensation system.
STATE AND LOCAL REGULATION
In general, state regulatory commissions have regulatory jurisdiction
over us when our facilities and services are used to provide local and other
intrastate services. Under the Telecom Act, state commissions continue to set
the requirements for providers of local and intrastate services, including
quality of services criteria. State regulatory commissions also can regulate the
rates charged by CLECs for intrastate and local services and can set prices for
interconnection by new telecommunications service providers with the ILEC
networks, in accordance with guidelines set by the FCC. In addition, state
regulatory commissions in many instances have authority under state law to adopt
additional regulations governing local competition and consumer protection, so
long as the state's actions are not inconsistent with federal law or regulation.
25
Most state regulatory commissions require companies that wish to
provide intrastate common carrier services to register or be certified to
provide these services. These certifications generally require a showing that
the carrier has adequate financial, managerial and technical resources to offer
the proposed services in a manner consistent with the public interest. We are
certified in all of the states in which we conduct business. In most states, we
are also required to file tariffs setting forth the terms, conditions and prices
for services that are classified as intrastate, and to update or amend our
tariffs as rates change or new products are added. We may also be subject to
various reporting and record-keeping requirements.
Where we choose to deploy our own transmission facilities, we may be
required, in some cities, to obtain street opening and construction permits,
permission to use rights-of-way, zoning variances and other approvals from
municipal authorities. We also may be required to obtain a franchise to place
facilities in public rights of way. In some areas, we may be required to pay
license or franchise fees for these approvals. We cannot assure you that fees
will remain at current levels, or that our competitors will face the same
expenses, although the Telecom Act requires that any fees charged by
municipalities be reasonable and non-discriminatory among telecommunications
carriers.
RECENT FEDERAL RULEMAKING. Effective as of March 11, 2005, the Federal
Communications Commission's, or FCC's, Triennial Review Remand Order, or TRRO,
altered a number of significant federal regulations applicable to the provision
of competitive telecommunications services in a manner favorable to incumbent
carriers. The TRRO established new standards for when CLECs obtain cost-based
rates from ILECs when leasing unbundled network elements, or UNEs, which connect
a customer's location with the applicable communications network end office,
commonly referred to as "loops". This aspect of the TRRO will result in an
increase to our overall costs of service in 2005.
The TRRO also curtailed the ability of CLECs to obtain cost-based UNE
rates for network elements linking central offices in which they have located
their own equipment, but between which they do not own proprietary fiber lines.
Fiber lines between central offices is referred to in our industry as "local
transport". This aspect of the TRRO will not have a material impact on us as we
own or lease under long-term agreements nearly all of the local transport that
we use to connect central offices in which we own equipment. This aspect of the
TRRO could, however present opportunities for us to sell our own network
capacity to telecommunications companies that are negatively impacted by the
TRRO ruling on local transport.
The TRRO also severely curtailed the ability of CLECs to lease
switching capacity from ILECs at cost-based rates, which practice is known in
the telecommunications industry as unbundled network element platform, or UNE-P.
We are not materially impacted by this aspect of the TRRO as we own all of the
switching facilities we use in our business. We anticipate that one of the
results of the TRRO will be that many CLECs that are substantially dependent on
UNE-P will need to either acquire their own switches, seek a facilities-based
partner to switch their customers' traffic, or find other strategic alternatives
to their current business models. One possible result of the TRRO on UNE-P
dependent carriers is additional consolidation of existing telecommunications
carriers.
INDUSTRY CONSOLIDATION. On January 31, 2005, SBC Communications, Inc.
and AT&T Corp. announced their intention to enter into a business combination.
In February 2005, Verizon Communications, Inc. and MCI, Inc. announced an
agreement to enter into a business combination, and Qwest Communications
International, Inc. announced a bid to compete with Verizon's purchase offer.
Such transactions, if consummated, would result in substantial consolidation of
U.S. wireline telecommunications resources and revenue. In addition, as
reflected by XO's acquisition of the CLEC businesses of Allegiance Telecom, Inc.
and the acquisitions of Cable and Wireless USA, Inc. by Savvis Communications,
Inc., Focal Communications, Inc. by Broadwing Corporation, and KMC Telecom Corp.
by CenturyTel, Inc., substantial consolidation has also taken place among CLECs.
While it is not certain what the effects of this
industry consolidation will be, we believe that one possible result could be
that prices for telecommunications services would stabilize due to reduced
competition.
RESEARCH AND DEVELOPMENT
IElement does not engage in research and development.
For more information about us visit our website at www.ielement.com
26
ENGAGE IN STRATEGIC ACQUISITIONS AND JOINT VENTURES
We intend to acquire, where appropriate, telecommunication companies,
companies with technologies that we believe are complimentary to our existing
technologies, as well as to acquire wireless broadband Internet service
providers with strategically located networks that will enable the expansion of
our national coverage area. In addition, we intend to acquire companies,
businesses and assets that we believe are complementary to our business. We may
seek to form joint ventures and seek joint venture partners in order to reduce
our investment in a particular project and to help promote the development and
sale of our products.
We intend to finance this acquisition strategy with proceeds from our
private placement, the exercise of the warrants issued therein and, depending on
the size of the acquisition, our common stock. Any acquisition we consummate
should include a cash payment, a stock payment or a combination of the two. We
have met preliminarily with some companies to discuss a possible acquisition and
each of them are either: (a) similar businesses from which we could realize cost
reductions and improve net income or (b) complimentary businesses from which we
could expand our current range of services to improve gross margins and net
income. No definitive agreements have been signed with any potential
acquisition.
PRINCIPAL EXECUTIVE OFFICES
Our corporate headquarters and principal offices are located at 17194
Preston Road Suite 102, PMB 341, Dallas, TX 75248 where we lease this office
space on a month-to-month basis. The monthly payment under the current lease is
$3,284. The Company also leased additional office space in Texas and California.
The Company ceased leasing this additional space during the year ended December
31, 2004. We believe that this office space is adequate to support our current
operations.
EMPLOYEES
As of June 5, 2006, we had 13 full-time and 3 part-time employees. We
enjoy good employee relations. None of our employees are members of any labor
union and we are not a party to any collective bargaining agreement.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information as of June 5, 2006 regarding the
members of our board of directors and our executive officers. All directors hold
office until the next annual meeting of shareholders and the election and
qualification of their successors. Officers are elected annually by the board of
directors and serve at the discretion of the board.
Name Age Position Since
- ---- --- -------- -----
Ivan Zweig 33 CEO and Chairman January 2005
Interim CFO August 2005
Lance K. Stovall 37 Director March 2006
Ken A. Willey 31 Director March 2006
Alex Ponnath 38 Chief Technology Officer(1) January 2005
(1) Although Mr. Ponnath is referred to as Chief Technology Officer, he is an
independent contractor and not an employee of I-Element.
IVAN ZWEIG (age 33). Mr. Zweig has been our Chairman and Chief
Executive Officer since January 2005, and has been interim Chief Financial
Officer since August 2005. Mr. Zweig is also the Chief Executive Officer,
director and sole shareholder of Kramerica, a personnel services corporation.
Since December 1998, Mr. Zweig has served as the Chief Executive Officer and
director of Integrated Communications Consultants Corp. ("ICCC"), a nationwide
data carrier specializing in high speed Internet access and secure data
transaction. From February 1998 until March 1999 Mr. Zweig was the Western
Region Dedicated Sales Manager of NET-tel Communications. He was responsible for
Internet sales for 52 reps in the Western Region. Previously he employed by
MidCom Communications, where he was a Sales Manager after being an Account
Executive for a short time. Despite his association with ICCC Mr. Zweig devotes
a minimum of forty hours per week to IElement.
MidCom was purchased by Winstar whereupon all of the management team
migrated over to NET-tel. Before Midcom, Mr. Zweig helped form a joint venture
of five individuals who invested over $500,000 to fund a health food and
nutrition franchise called Smoothie King. He purchased the rights to build 18
stores in the San Francisco Bay Area and sold his interest after building the
first two. Additionally, in 1995 he started a city magazine called
Dallas/Ft.Worth Lifestyles. This was Mr. Zweig's first employment venture after
college and a brief stint of playing professional baseball. He attended Tulane
University and was a member of Team USA in 1991, which played in Cuba for the
Pan American Games. He was also a two-time All-American pitcher while at Tulane.
Mr. Zweig left Tulane before earning a degree.
27
Resignations. On August 3, 2005 we accepted the resignations of Timothy
Dean-Smith and Susan Walton from their positions on the Board of Directors. Mr.
Dean-Smith also resigned from his position as Chief Financial Officer of the
Company. The resignations of Mr. Dean-Smith and Ms. Walton are consistent with
the expectations of the parties pursuant to the consummation of the merger
between iElement, Inc. and Mailkey Corporation (the merged entity currently
known as IElement Corporation) on January 19, 2005.
We have begun searching for individuals to fill the vacant positions on
the Board and who will serve until the next elections are held for these
positions. Additionally, Ivan Zweig, our current Chairman of the Board and Chief
Executive Officer of, has accepted our appointment as the Chief Financial
Officer until such time as a new Chief Financial Officer is appointed.
On March 4, 2006 Ivan Zweig, then our sole board member, appointed two
additional members to the Board of Directors to serve until the next annual
election of directors by shareholders in accordance with Article III, Section 3
of our By-laws. The new directors are:
LANCE K. STOVALL (age 37). Mr. Stovall attended Texas Christian
University from 1987 to 1991 where he earned a B.S. in Neuroscience. From
September 2005 to the present Mr. Stovall has been the President of Lone Star
Valet in Dallas, Texas. From October 2003 through September 2005, Mr. Stovall
was Vice President of Business Development of IElement. Mr. Stovall left his
employ with IElement for personal reasons and not as a result of any
disagreement with the Company. From October 1999 through September 2003, Mr.
Stovall worked for and was a co-founder of Zone Communications in Los Angeles,
California. In 1998 and 1999 Mr. Stovall was Director of Operations of Lone Star
Valet in Dallas, Texas. From 1993 to 1998 Mr. Stovall was founder and Vice
President of Operations for Excel Student Services in Arlington, Texas.
Mr. Stovall entered into a Directors Agreement with IElement whereby he
agreed to maintain the confidentiality of our trade secrets and proprietary
information and to refrain from soliciting our employees or customers for a
period of two years following the term of the Director's Agreement. We agreed to
hold Mr. Stovall harmless and indemnify him in his position as a Director, where
he has acted in good faith in the performance of his duties. Finally we agreed
to compensate Mr. Stovall with 250,000 stock options exercisable at $.01 per
share and vesting 62,500 each on June 4, 2006, September 4, 2006, December 4,
2006 and March 4, 2007.
KEN A. WILLEY (age 31). From 2005 through the present, Mr. Willey has
been employed with Noble Royalties, Inc. From 2004 through 2005 Mr. Willey was
regional director of McLeod USA. From 2000 through 2004 Mr. Willey was District
Sales Manager at Logix. From 1997 through 2000 Mr. Willey was District Sales
Manager for Verizon and from 1992 through 1997 Mr. Willey worked in various
capacities at Circuit City.
Mr. Willey entered into a Directors Agreement with IElement whereby he
agreed to maintain the confidentiality of our trade secrets and proprietary
information and to refrain from soliciting our employees or customers for a
period of two years following the term of the Director's Agreement. We agreed to
hold Mr. Stovall harmless and indemnify him in his position as a Director, where
he has acted in good faith in the performance of his duties. Finally we agreed
to compensate Mr. Stovall with 250,000 stock options exercisable at $.01 per
share and vesting 62,500 each on June 4, 2006, September 4, 2006, December 4,
2006 and March 4, 2007.
ALEX PONNATH (age 38). Mr. Ponnath attended the University of Munich in
Munich, Germany where he earned a degree in Communications, then moved to the
United States in 1993. In 1990 Mr. Ponnath was a founding partner of Outdoor
Advertising and Sports Marketing Firm, which later he sold to Germany's largest
outdoor advertiser. He moved to the United States in 1993. From 1996 through
1999 he worked for the Los Angeles based interconnect firm Nextcom and assumed
the roll of Senior Network Engineer. From 1999 through 2000 Mr. Ponnath was a
shareholder and Chief Technology Officer for NKOB Networks, a Los Angeles ISP.
Mr. Ponnath has worked for ICCC, a related party of I-Element as Chief
Technology Officer since February 2000, and then I-Element, as Chief Technology
Officer since January 2005. Mr. Ponnath is an independent contractor.
BOARD OF DIRECTORS
Our Board of Directors serves until the next annual meeting of
shareholders or until their respective successor is duly elected and qualified.
Directors are elected at the annual meeting of shareholders or by written
consent of the shareholders, and each Director holds office until his successor
is duly elected and qualified or he resigns, unless sooner removed. Officers are
elected annually by our Board of Directors and serve at the discretion of the
Board.
During the fiscal year ended March 31, 2005, the Board of Directors
held one meeting. One action of the Board of Directors was taken by written
consent, which action approved the merger between Mailkey and IElement
Corporation.
SHAREHOLDER COMMUNICATIONS
In light of the limited operations we conduct and the limited number of
record and beneficial shareholders that we have, we have not implemented any
formal procedures for shareholder communication with our Board of Directors. Any
matter intended for the Board, or for any individual member or members of the
Board, should be directed to our corporate secretary at 17194 Preston Rd., Suite
102 PMB 341, Dallas, TX 75248. In general, all shareholder communication
delivered to the corporate secretary for forwarding to the Board or specified
Board members will be forwarded in accordance with the shareholder's
instructions. However, the corporate secretary reserves the right to not forward
to Board members any abusive, threatening or otherwise inappropriate materials.
28
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 21, 2005 and August 1, 2005, the Company filed an Information
Statement on Schedule 14C in preliminary form and in definitive form,
respectively, disclosing that, among other items, it had obtained the requisite
shareholder approval to change the Company's name to IElement Corporation. As of
August 21, 2005, Mailkey Corporation formally changed its name to IElement
Corporation ("IElement"). Subsequently, IElement has undertaken steps to inform
present itself as IElement to its customer base and target market and will
continue to take steps to notify, inform and/or promote the name of IElement. We
now aim to grow the business of IElement and establish it as a leading regional
added-value carrier.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has not created a standing audit committee of
the Board. Instead, our full Board of Directors acts as our audit committee.
The Board of Directors determined that our internal controls are
adequate to insure that financial information is recorded, processed, summarized
and reported in a timely and accurate manner in accordance with applicable rules
and regulations of the Securities and Exchange Commission. Accordingly, our
Board of Directors concluded that the benefits of retaining an individual who
qualifies as an "audit committee financial expert," as that term is defined in
Item 401(e) of Regulation S-B promulgated under the Securities Act, would be
outweighed by the costs of retaining such a person. As a result, no member of
our Board of Directors is an "audit committee financial expert."
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers, and persons who own 10% or more of our common
stock, to file reports of ownership and changes in ownership with the SEC.
Officers, directors and greater than 10% stockholders are required to furnish us
with copies of all Section 16(a) forms they file. Based solely on our review of
the copies of such forms received by us or written representations from such
persons that no other reports were required for such persons, we believe that
during the fiscal year ended March 31, 2005, the Section 16(a) filing
requirements applicable to our officers, directors and ten percent (10%)
stockholders were not satisfied in a timely fashion. In particular, Mr. Zweig
did not timely meet the Section 16(a) filing requirements. However, as of the
date of this registration statement, the filing requirements of Mr. Zweig have
been satisfied. In addition, Mr. Barry Brault received 2,258,013 shares of
common stock in the merger with IElement on January 19, 2005, and on the same
date received 8,784,669 shares of common stock in exchange for debt for a total
of 11,042,682 which at the time represented in excess of 10% of the outstanding
common shares. Mr. Brault has not made any filings pursuant to Section 16(a). As
of the date of this registration statement Mr. Brault owns less than 10% of the
outstanding common shares.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a Code of Business Conduct and Ethics that applies to
our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. Our
Code of Business Conduct and Ethics is designed to deter wrongdoing and promote:
(i) honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
(ii) full, fair, accurate, timely and understandable disclosure in reports and
documents that we file with, or submit to, the SEC and in our other public
communications; (iii) compliance with applicable governmental laws, rules and
regulations; (iv) the prompt internal reporting of violations of the code to an
appropriate person or persons identified in the code; and (v) accountability for
adherence to the Code of Ethics.
EXECUTIVE COMPENSATION
(a) Compensation.
The following table sets forth compensation awarded to, earned by or
paid to the Company's Chief Executive Officer and the four other most highly
compensated executive officers with compensation in excess of $100,000 for the
fiscal years ended March 31, 2005, 2004 and 2003 (collectively, the "Named
Executive Officers").
29
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
Securities
Restricted Underlying All other
Name and Principal Salary Bonus Stock Options/ compensation
Position Year ($) ($) Award(s) Warrants ($)
- ------------------------------------------------------------------------------------------------------
Ivan Zweig, CEO* 2005 300,000 45,000 85,000 0 0
2004 75,000 15,000 0 0 0
2003 180,000 0 0 0 0
Timothy Dean-Smith** 2005 137,448 0 0 0 0
2004 136,500 0 0 0 0
2003 14,606 0 0 0 0
Graham Norton-Standen*** 2004 7,182 0 0
* Includes payments made to Kramerica, Inc.
** On August 8, 2005 Timothy Dean-Smith resigned as Chief Financial Officer. Mr.
Dean-Smith was a former officer and director of MailKey.
*** Former Chief Executive Officer and Secretary of MailKey
OPTION GRANTS DURING 2005
-------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION
NAME OFFERING 2005 SHARE DATE
---- -------- ---- ----- ----
Debra Chase 50,000 16.39% $0.01 09/08/15
Albert Marrero 50,000 16.39% $0.01 09/08/15
Brett Jensen 30,000 9.84% $0.01 09/08/15
Eric Mason 5,000 1.64% $0.01 09/08/15
Mark Mooney 20,000 6.56% $0.01 09/08/15
Alex Nelson 40,000 13.11% $0.01 09/08/15
Heather Walther 40,000 13.11% $0.01 09/08/15
Peter Walther 50,000 16.39% $0.01 09/08/15
Jeff Wilson 20,000 6.56% $0.01 09/08/15
TOTALS 305,000 100.00%
EMPLOYMENT CONTRACTS
On January 18, 2005 we entered into an Employment Agreement with Mr.
Zweig in the form of a Binding Letter of Intent. Pursuant to the Agreement Mr.
Zweig is the Chief Executive Officer of the Company. The terms of the agreement
are as follows. Mr. Zweig's base salary in the amount of $25,000.00 per month is
to be paid to Kramerica Capital Corporation, a company for which Mr. Zweig is
the sole shareholder, officer and director. Mr. Zweig receives benefits offered
to other employees of the Company and is to receive 4 weeks of vacation per
year. Mr. Zweig's reasonable expenses are to be reimbursed. Upon termination
without cause, all Notes due and owing to Mr. Zweig or his entities are to be
paid in full, all outstanding options are to accelerate and fully vest and be
paid in full, all earned performance bonuses must be paid in full, and all
accrued vacation pay and other outstanding benefits are to be paid in full. If
Mr. Zweig is terminated for cause, all Notes and other obligations are to be
paid within 60 days. In addition, the Agreement provides for bonus payments
following the end of the 12th month as follows: for months 13 through 24, a
$1,000,000 bonus calculated on the closing average revenue number and EDITDA for
months 22 through 24 which revenue number must be $1,250,000 ($15,000,000
annualized) per month and EBITDA of 15%; for months 25-36 a $2,000,000 bonus if
actual revenue during months 25-36 reaches $22,500,000 and EBITDA of 18%; and
for months 37-48 a $3,000,000 bonus if actual revenue during months 37-48
reaches $30,000,000 and EBITDA of 21%. Bonuses are payable in promissory notes.
The term of the Agreement is 48 months, provided however, that the Agreement may
be immediately terminated if the Notes due to Mr. Zweig are declared in default.
Although the Notes are 6 months behind, Mr. Zweig has not declared a default or
terminated the employment agreement. Clause 10 to the employment contract
inadvertently stated "intentionally omitted" rather than "reserved for future
use".
We do not have an employment contract with any other executive officer.
We may in the future create retirement, pension, profit sharing and medical
reimbursement plans covering our Executive Officers and Directors.
30
Directors Compensation
Our former Director Susan Walton received compensation of $30,000
during the fiscal year end March 31, 2005 and $20,000 during the fiscal year end
March, 2006 for serving on the Board of Directors of the Company. No other
director received compensation for serving on the Board of Directors during year
end March 31, 2005.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 5, 2006, the number of
outstanding common shares of the Company beneficially owned by (i) each person
known to us to beneficially own more than 5% of its outstanding common shares,
(ii) each director, (iii) each nominee for director, (iv) each executive officer
listed in the Summary Compensation Table, and (iv) all executive officers and
directors as a group.
- --------------------------------- ------------------------- --------------------
Owner Common Shares(2) Percentage
- --------------------------------- ------------------------- --------------------
Ivan Zweig(1) 18,967,576(1) 11.95%
- --------------------------------- ------------------------- --------------------
Barry Brault(3) 11,042,682 6.96%
- --------------------------------- ------------------------- --------------------
Gerd Weger(4) 15,000,000 9.45%
- --------------------------------- ------------------------- --------------------
Officers and directors as a
group (1 persons) 23,967,576 28.36%
- --------------------------------- ------------------------- --------------------
(1) An officer and director. Comprised of 85,000 shares of common stock owned by
Mr. Zweig individually; 18,685,966 shares of common stock owned by Kramerica
Corporation, an entity in which Mr. Zweig is the sole shareholder, officer and
director; and 196,610 shares of common stock owned by Mr. Zweig's spouse.
(2) Includes common shares underlying warrants and vested options and warrants
and options which shall become exercisable or vest within 60 days from the date
of this prospectus.
(3) A beneficial owner of more than 5% of outstanding common shares
(4) A beneficial owner of more than 5% of outstanding common shares
Barry Brault's address is 7742 Paseo Del Rey #7 in Playa Del Rey, CA 90293.
Gerd Weger's address is Alter Henkhauser Weg 50 in Hagen, Germany 58119.
There are no family relationships among our directors and executive
officers. Except as set forth below, no director or executive officer has been a
director or executive officer of any business which has filed a bankruptcy
petition or had a bankruptcy petition filed against it. No director or executive
officer has been convicted of a criminal offense or is the subject of a pending
criminal proceeding. No director or executive officer has been the subject of
any order, judgment or decree of any court permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any type of
business, securities or banking activities. No director or officer has been
found by a court to have violated a federal or state securities or commodities
law.
Certain Relationships and Related Transactions
None of our directors or executive officers or their respective
immediate family members or affiliates is indebted to us. As of the date of this
prospectus, there is no material proceeding to which any of our directors,
executive officers or affiliates is a party or has a material interest adverse
to us.
Mr. Zweig is also the Chief Executive Officer, director and sole
shareholder of Kramerica, a personnel services corporation. Since December 1998,
Mr. Zweig has served as the Chief Executive Officer and director of Integrated
Communications Consultants Corp. ("ICCC"), a nationwide voice and data carrier
specializing in high speed Internet access and secure data transaction. ICCC
provides I-Element with resold telecom services and I-Element pays ICCC
approximately $100,000 on a monthly basis for such services. On October 1, 2004,
ICCC filed for Chapter 11 bankruptcy protection in the United States Bankruptcy
Court, Northern District of Texas, Dallas Division. ICCC's plan of
reorganization was approved by the Bankruptcy Court on April 26, 2006.
31
On January 19, 2005, I-Element issued promissory notes to, Kramerica,
certain members of Mr. Zweig's immediate family and others in the aggregate
amount of $376,956.16 (the "Notes") with no interest. Upon issuance, the Notes
were payable in 36 monthly installments with the first payment commencing six
months after the closing of the merger and were secured by substantially all of
the assets of I-Element. I-Element did not make any payments on the Notes.
On March 25, 2006 each of the Notes were cancelled and I-Element issued
new convertible promissory notes to the same individuals in the same principal
amount of $376,956.16, again with no interest thereon. In particular, both the
January 19, 2005 Notes and the amended March 25, 2006 convertible promissory
notes were issued to: Heather Walther, Mr. Zweig's wife ($20,000); Kramerica,
Inc., Mr. Zweig's personal use corporation ($120,000); Mary Francis Trait Trust,
Mr. Zweig's deceased grandmother's trust for which Mr. Zweig's mother, Heather
Zweig serves as trustee ($55,611.15); Peter Walther, Mr. Zweig's brother in law
($30,000); Richard Zweig and Richard Zweig IRA, Mr. Zweig's father (aggregate of
$47,500); and Strait Grandchildren Trust, Mr. Zweig's deceased grandmother's
trust for which Mr. Zweig's mother, Heather Zweig serves as trustee
($103,845.01). The first payment on each of the new convertible promissory notes
is due in September 2006 with a total of 36 monthly installments through August
2009. The Lender has the right to convert all or a portion of the outstanding
balance, at any time until the notes are paid in full, into I-Element's common
stock at a conversion price of $0.035 per share. Any past due balance on the old
Notes was forgiven at the time of cancellation of the old Notes and issuance of
the new convertible promissory notes. The new convertible promissory notes are
secured by substantially all the assets of I-Element as were the original Notes.
DESCRIPTION OF THE PRIVATE PLACEMENT
In August 2005, the Company has entered into an agreement with Vista
Capital, S.A. ("Vista") whereby Vista assisted in raising capital through the
sale of units of Company stock and warrants. Each unit contains 500,000 shares
of common stock at $0.035 and warrants to purchase an additional 250,000 shares
of common stock at $0.10. The warrants can be called by the Company after the
Company's closing share price is equal to or exceeds $0.12 for ten consecutive
trading days and only if the underlying shares are registered. Each unit was
sold for $17,500. As of December 31, 2005, the Company had sold 87.75 units for
cash totaling $1,535,625 plus accepted services for 0.50 units totaling $8,750
and had 2 units outstanding on stock subscriptions receivable totaling $35,000,
which units have since been issued. The Company closed the private placement
offering on December 30, 2005 raising $1,579,375 in exchange for 45,125,000
shares of common stock and 22,562,500 shares of common stock issuable upon
exercise of warrants. The 45,125,000 shares of common stock and 22,562,500
shares of common stock underlying the warrants are included in this registration
statement. As part of the offering, the company paid 10% of the funds raised to
Vista for fund raising fees. As part of its compensation Vista Capital received
1,000,000 shares of common stock, warrants for 1,046,874 shares of common stock
at an exercise price of $0.13 per share and warrants for 2,878,907 shares of
common stock at an exercise price of $0.10.
The Securities were not registered under applicable securities laws and
were sold in reliance on an exemption from such registration. Each of the
investors is an "accredited investor" and the Company believes that the issuance
and sale of the Convertible Notes qualified for an exemption from registration
pursuant to Section 4(2) of the Securities Act of 1933.
SELLING STOCKHOLDERS
The following table sets forth the shares beneficially owned, as of the
date of this prospectus, by the selling stockholders prior to the offering
contemplated by this prospectus, the number of shares each selling stockholder
is offering by this prospectus and the number of shares which each selling
stockholder would own beneficially if all such offered shares are sold. None of
the selling stockholders is known to us to be a registered broker-dealer or an
affiliate of a registered broker-dealer
We and the Selling Stockholder will be subject to applicable provisions
of the Exchange Act and the rules and regulations promulgated under it,
including without limitation, Regulation M. Regulation M restricts certain
activities of the Selling Stockholder and may limit the timing of purchases and
sales of any of the shares by the Selling Stockholder or any other person. Also,
Regulation M may restrict the ability of any person engaged in the distribution
of the shares to engage in market-making activities with respect to the
particular shares being distributed for a period of up to five business days
prior to the commencement of a distribution. All of these limitations may affect
the marketability of our shares and the ability of any person or entity to
engage in market-making activities with respect to our shares.
Each of the selling stockholders has acquired his, her or its shares
solely for investment and not with a view to or for resale or distribution of
such securities. Beneficial ownership is determined in accordance with SEC rules
and includes voting or investment power with respect to the securities.
32
SELLING STOCKHOLDERS
SHARES SHARES PERCENTAGE
OF COMMON BENEFICIAL OF COMMON OF COMMON
STOCK INCLUDED OWNERSHIP STOCK OWNED STOCK OWNED
IN THE BEFORE THE AFTER THE AFTER THE
INVESTOR OFFERING(1) OFFERING(2) OFFERING(3) OFFERING;
- ------------------------------------- ------------ ------------ ------------ ------------
AK Asset Management 1,500,000 1,500,000 0 0
(through Andre Kossinger)
Amaltea SA 750,000 750,000 0 0
(through Vittorio Boeri)
Annette Bohmer 750,000 750,000 0 0
Barry Brault 8,784,669 11,042,682 2,258,013 1.42%
BDM Holdings, LLC
c/o Palladian Advisors, 1,500,000 1,500,000 0 0
(through Carl Glaeser and Jon Gordon)
Bellano Family Trust 450,000 450,000 0 0
(through Bob Bellano)
Benjamin S. Eichholz, 2,250,000 3,800,000 1,550,000 0.97%
Brett Jensen 200,000 200,000 0 0
Calder Capital Inc. 750,000 750,000 0 0
(through Georg Kieber)
Chet Zalesky 1,601,930 1,601,930 0 0
Christiane Loeberbauer 375,000 375,000 0 0
Clarence V. Keck Jr 225,000 225,000 0 0
Derrick Stilwell 500,000 500,000 0 0
Dolphin Capital 1,680,000 1,680,000 0 0
(through Jeremy Dean-Smith)
Donald Kennedy 20,000 20,000 0 0
Duane Morris, LLP 880,000 880,000 0 0
(through Vince Vietti)
Film and Music
Entertainment, Inc. 1,500,000 1,500,000 0 0
(through Caspter von Winterfeldt)
Frank A. Davis 300,000 300,000 0 0
Fred J. Matulka 750,000 750,000 0 0
Fred Schmitz 7,500,000 7,500,000 0 0
General Research GMBH 750,000 750,000 0 0
(through Georg Hochwimmer)
Gerd Weger 15,000,000 15,000,000 0 0
Glenn L. Jensen 4,500,000 4,500,000 0 0
Global Equity Trading
& Finance LTD 4,000,000 4,000,000 0 0
(through Tracey Casari)
Hendrik Paulus 750,000 750,000 0 0
Holger Pfeiffer 375,000 375,000 0 0
Isaac de la Pena 150,000 150,000 0 0
Jeff Wilson 714,286 714,286 0 0
Jeffery Brault 1,050,000 1,050,000 0 0
Jeremy Dean-Smith 2,900,000 2,900,000 0 0
Jerome Niedfelt 450,000 450,000 0 0
John Fox 100,000 100,000 0 0
John Niedfelt 300,000 300,000 0 0
Jonathan Lowenthal 750,000 750,000 0 0
Jorn Follmer 750,000 750,000 0 0
Jurgen Popp 3,250,000 3,250,000 0 0
Kenneth J. Meyer 1,500,000 1,500,000 0 0
Laurence B. Straus 450,000 450,000 0 0
March Enterprises
Defined Benefit Plan 1,601,930 1,601,930 0 0
(through Dennis Zweig)
Marianne Issels 375,000 375,000 0 0
Matthias Graeve 375,000 375,000 0 0
Michael Bloch 3,000,200 5,034,200 2,034,200 1.28%
Michael D. Melson 750,000 750,000 0 0
Misty Starke 500,000 500,000 0 0
Oscar Greene Jr 750,000 750,000 0 0
Palladian Capital
Advisors 2,500,000 2,500,000 0 0
(through Carl Glaeser and Jon Gordon)
Quality Sound
Communications
dba Telcombrokers 1,795,210 1,626,530 168,680 0
(through Dominic Antonini)
Raymond R. Dunwoodie 750,000 750,000 0 0
Red Giant
Productions, Inc. 750,000 750,000 0 0
(through John Daley)
Richard R. Crose 750,000 750,000 0 0
Robert A. Flaster 300,000 300,000 0 0
Robert A. Smith 450,000 450,000 0 0
33
Robert H. Gillman 750,000 750,000 0 0
Robert R. Rowley 750,000 750,000 0 0
Robert Zweig 275,000 275,000 0 0
Ryan Cornelius 2,250,000 2,250,000 0 0
Rockwell Capital
Ventures 4,000,000 4,000,000 0
(through Todd Poindexter)
Sat Paul Dewan 450,000 450,000 0 0
Stefan Muller 1,750,000 1,750,000 0 0
Stonegate Ventures 1,000,000 1,000,000 0 0
(through Al Del Favero)
Susan Walton 400,000 400,000 0 0
Terrence Byrne 2,712,703 2,712,703 0 0
Thomas Allen Piscula 750,000 750,000 0 0
Thomas W. Barrett 300,000 300,000 0 0
Thomas Weiss Dr. 375,000 375,000 0 0
Tim Dean-Smith 1,800,000 1,800,000 0 0
Timothy M. Broder 750,000 750,000 0 0
Trad Solutions 340,000 340,000 0 0
(through Dart Forst)
Trey Investments, LLP 225,000 225,000 0 0
(through William Cail)
Ulrich Nusser 375,000 375,000 0 0
Veronica Kristi Prenn 2,250,000 4,636,000 2,386,000 1.50%
Vista Capital 4,925,781 4,925,781 0 0
(through Todd Poindexter)
Wayne P. Schoenmakers 150,000 150,000 0 0
William G. Cail 37,500 37,500 0 0
William Harner 225,000 225,000 0 0
William M. Goatley
Revocable Trust FBO
William M Goatley
DTD 5/9/89 375,000 375,000 0 0
Yock Investments 1,000,000 1,000,000 0 0
(through Al Del Favero)
TOTALS 112,700,329 120,928,542
(1) Includes the shares issuable upon conversion of the warrants.
(2) This column represents the actual shares of common stock offered in this
prospectus, and included in the registration statement of which this prospectus
is a part, the additional number of shares of common stock as may be issued or
issuable upon conversion of the warrants and any additional shares of common
stock owned by the Selling Stockholder which common stock is not offered in this
prospectus, and included in the registration statement of which this prospectus
is a part.
(3) Assumes that all securities registered will be sold
MATERIAL RELATIONSHIPS WITH CERTAIN SELLING STOCKHOLDERS
TIM DEAN-SMITH was the Chief Financial Officer and director from the closing of
the merger in January of 2005. He joined I-Element March 2004 following the
merger with MK Secure Solutions Limited, which Mr. Dean-Smith founded. Mr.
Dean-Smith resigned from all positions with the Company on August 3, 2005.
Dennis Zweig is Ivan Zweig's uncle.
Susan Walton was a director of the Company until she resigned her position on
August 3, 2005.
Vista Capital has acted as a consultant for I-Element and its predecessor
MailKey for several years. Most recently Vista Capital assisted in the Private
Placement Offering for which I-Element is registering shares in this
registration statement.
Rockwell Capital Ventures, Global Trading Equity & Finance and Jurgen Popp have
acted as consultants for I-Element and its predecessor MailKey.
Stefan Muller and Fred Schmitz have recently agreed to act as an informal
international advisory board whereby in exchange for 100,000 options each they
have agreed to be available for consulting services and input on an as needed
basis. The options have not yet vested.
Isaac de la Pena, together with another individual, owns a majority of Tehshi,
Inc. IElement owns a twenty percent (20%) interest of Tehshi, Inc. which it
received in the first quarter 2005 in a transaction whereby IElement transferred
the rights to development and commercialization of its messaging security
solutions operations and Mr. de la Pena, together with his partner, cancelled a
debt owed by IElement in the amount of $76,107. In addition Mr. de la Pena is a
former employee of MailKey.
34
DESCRIPTION OF SECURITIES
We are authorized to issue 2,000,000,000 shares of common stock, par
value $0.001 per share, and 200,000,000 shares of blank check preferred stock.
As of June 5, 2006, there were 159,035,031 shares of common stock and -0- shares
of preferred stock issued and outstanding. There are no current plans to
designate any Blank Check Preferred Stock.
COMMON STOCK
Subject to any prior rights to receive dividends to which the holders
of shares of any series of the preferred stock may be entitled, the holders of
shares of common stock shall be entitled to receive dividends, if and when
declared payable from time to time by the board of directors, from funds legally
available for payment of dividends.
In the event of any dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, after there shall have been paid to
the holders of shares of preferred stock the full amounts to which they shall be
entitled, the holders of the then outstanding shares of common stock shall be
entitled to receive, pro rata, any remaining assets of the Company available for
distribution to our shareholders. The board of directors may distribute in kind
to the holders of the shares of common stock such remaining assets of the
Company or may sell, transfer or otherwise dispose of all or any part of such
remaining assets to any other corporation trust or entity and receive payment in
cash, stock or obligations of such other corporation, trust or entity or any
combination of such cash, stock, or obligations, and may sell all or any part of
the consideration so received, and may distribute the consideration so received
or any balance or proceeds of it to holders of the shares of common stock. The
voluntary sale, conveyance, lease, exchange or transfer of all or substantially
all the property or assets of the Company (unless in connection with that event
the dissolution, liquidation or winding up of the Company is specifically
approved), or the merger or consolidation of the Company into or with any other
corporation, or the merger of any other corporation into it, or any purchase or
redemption of shares of stock of the Company of any class, shall not be deemed
to be a dissolution, liquidation or winding up of the Company.
Except as provided by law or this certificate of incorporation with
respect to voting by class or series, each outstanding share of common stock
shall entitle the holder of that share to one vote on each matter submitted to a
vote at a meeting of shareholders.
Such numbers of shares of common stock as may from time to time be
required for such purpose shall be reserved for issuance (i) upon conversion of
any shares of preferred stock or any obligation of the Company convertible into
shares of common stock and (ii) upon exercise of any options or warrants to
purchase shares of common stock.
PREFERRED STOCK
The board of directors is expressly authorized to adopt, from time to
time, a resolution or resolutions providing for the issue of preferred stock in
one or more series, to fix the number of shares in each such series and to fix
the designations and the powers, preferences and relative, participating,
optional and other special rights and the qualifications, limitations and
restrictions of such shares, of each such series. The authority of the board of
directors with respect to each such series shall include a determination of the
following, which may vary as between the different series of preferred stock:
(a) The number of shares constituting the series and the distinctive
designation of the series;
(b) The dividend rate on the shares of the series, the conditions and
dates upon which dividends on such shares shall be payable the extent, if any,
to which dividends on such shares shall be cumulative, and the relative rights
of preference, if any, of payment of dividends on such shares;
(c) Whether or not the shares of the series are redeemable and, if
redeemable, the time or times during which they shall be redeemable and the
amount per share payable on redemption of such shares, which amount may, but
need not, vary according to the time and circumstances of such redemption;
(d) The amount payable in respect of the shares of the series, in the
event of any liquidation, dissolution or winding up of this corporation, which
amount may, but need not, vary according to the time or circumstances of such
action, and the relative rights of preference, if any, of payment of such
amount;
(e) Any requirement as to a sinking fund for the shares of the series,
or any requirement as to the redemption, purchase or other retirement by the
Company of the shares of the series;
(f) The right, if any, to exchange or convert shares of the series into
other securities or property, and the rate or basis, time, manner and condition
of exchange or conversion;
(g) The voting rights, if any, to which the holders of shares of the
series shall be entitled in addition to the voting rights provided by law, and
35
(h) Any other terms, conditions or provisions with respect to the
series not inconsistent with the provisions of the articles of incorporation or
any resolution adopted by the board of directors pursuant thereto.
The number of authorized shares of preferred stock may be increased or
decreased by the affirmative vote of the holders of a majority of the stock of
the Company entitled to vote at a meeting of shareholders. No holder of shares
of preferred stock of the Company shall, by reason of such holding have any
preemptive right to subscribe to any additional issue of any stock of any class
or series nor to any security convertible into such stock.
TRADING INFORMATION
Our common stock is currently quoted on the OTC Bulletin Board under
the trading symbol IELM.OB. The transfer agent for our common stock is Madison
Stock Transfer, P.O. Box 145, Brooklyn, NY 11229; (718) 627-4453.
PLAN OF DISTRIBUTION
We are registering an aggregate of 112,700,329 shares of our common
stock covered by this prospectus on behalf of the selling stockholders. The
selling stockholders and any of their donees, pledgees, assignees and
successors-in-interest may, from time to time, offer and sell any and all of
their shares of common stock on any stock exchange, market, or trading facility
on which such shares are traded. The selling stockholders will act independently
of us and each other in making decisions with respect to the timing, manner and
size of each such sale. Sales may be made at fixed or negotiated or market
prices. The shares may be sold by way of any legally available means, including
in one or more of the following transactions:
o a block trade in which a broker-dealer engaged by a selling
stockholder attempts to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the
transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which a
broker-dealer solicits purchasers; and
o privately negotiated transactions.
Transactions under this prospectus may or may not involve brokers or
dealers. The selling stockholders may sell shares directly to purchasers or to
or through broker-dealers, who may act as agents or principals. Broker-dealers
engaged by the selling stockholders may arrange for other broker-dealers to
participate in selling shares. Broker-dealers or agents may receive compensation
in the form of commissions, discounts or concessions from the selling
stockholders in amounts to be negotiated in connection with the sale.
Broker-dealers or agents also may receive compensation in the form of discounts,
concessions, or commissions from the purchasers of shares for whom the
broker-dealers may act as agents or to whom they sell as principal, or both. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Selling stockholders
and any broker-dealers and any other participating broker-dealers who execute
sales for the selling stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
discounts and commissions under the Securities Act. If the selling stockholders
are deemed to be underwriters, they may be subject to certain statutory and
regulatory liabilities, including liabilities imposed pursuant to Sections 11,
12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act.
To the extent required, the number of shares to be sold, the name of
the selling stockholder, the purchase price, the name of any agent or broker and
any applicable commissions, discounts or other compensation to such agents or
brokers and other material facts with respect to a particular offering will be
set forth in a prospectus supplement as required by the Rules and Regulations
under the Securities Act.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act if available, rather than pursuant to this prospectus.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdictions, if required, only
through registered or licensed brokers or dealers. In addition, in certain
states the shares may not be sold unless the shares have been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and complied with. The anti-manipulative provisions
of Regulation M promulgated under the Exchange Act may apply to sales of the
shares offered by the selling stockholders.
We are required to pay all fees and expenses incident to the
registration of the shares. Otherwise, all discounts, commissions or fees
incurred in connection with the sale of our common stock offered hereby will be
paid by the selling stockholders.
36
SHARES ELIGIBLE FOR FUTURE SALE
As of June 5, 2006, we had outstanding an aggregate of 159,035,031
shares of our common stock, assuming no exercises of our outstanding Stock
Purchase Warrants. All shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
they are purchased by our "affiliates," as that term is defined in Rule 144
promulgated under the Securities Act.
PUBLIC FLOAT
As of June 5, 2006, the public float for our common stock consisted of
24,071,140 shares. These shares are freely tradable without restriction or
further registration under the Securities Act, unless they are purchased by our
"affiliates," as that term is defined in Rule 144 promulgated under the
Securities Act.
RULE 144
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year, including
the holding period of prior owners other than affiliates, is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
o 1% of the number of shares of our common stock then outstanding or
o the average weekly trading volume of our common stock on the OTC
Bulletin Board during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner-of-sale provisions,
notice requirements and the availability of current public information about us.
In order to effect a Rule 144 sale of our common stock, our transfer agent will
require an opinion from legal counsel. We may charge a fee to persons requesting
sales under Rule 144 to obtain the necessary legal opinions.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale and who has
beneficially owned shares for at least two years, including the holding period
of certain prior owners other than affiliates, is entitled to sell those shares
without complying with the manner-of-sale, public information, volume limitation
or notice provisions of Rule 144. Our transfer agent will require an opinion
from legal counsel to effect a Rule 144(k) transaction. We may charge a fee to
persons requesting transactions under Rule 144(k) to obtain the necessary legal
opinions. No shares of our common stock currently outstanding will be eligible
for sale pursuant to Rule 144(k) until June 24, 2007.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, and other information
with the SEC. Our filings are available to the public at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
Public Reference Room, 100 F. Street, NE, Washington, D.C. 20549. Further
information on the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
We have filed a registration statement on Form SB-2 with the SEC under
the Securities Act for the common stock offered by this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement, certain parts of which have been omitted in accordance with the rules
and regulations of the SEC. For further information, reference is made to the
registration statement and its exhibits. Whenever we make references in this
prospectus to any of our contracts, agreements or other documents, the
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for the copies of the actual contract,
agreement or other document.
LEGAL MATTERS
The validity of the securities being offered by this prospectus have
been passed upon for us by Laura Anthony, Esq., Legal & Compliance, LLC, 330
Clematis Street, Suite 217, West Palm Beach, Florida 33401. Telephone (561)
514-0936
On April 19, 2005 KK Solutions, Inc., a California corporation d/b/a/
Three 18, Inc. ("KK"), filed a complaint against the Company and its CEO, Ivan
Zweig, individually, in the Superior Court of the State of California, County of
Los Angeles, alleging breach of contract pursuant to a dispute regarding sales
commissions due to KK. On May 2, 2006 we settled the litigation for a total
settlement amount of $26,500 payable in periodic payments beginning on May 2,
2006 and ending on July 2, 2006.
37
On April 26, 2005 Communications Plus, Inc., a California company d/b/a
Global Communications, ("Global"), filed a complaint against the Company and its
CEO, Ivan Zweig, individually, in the Superior Court of the State of California,
County of Los Angeles, alleging breach of contract pursuant to a dispute
regarding sales commissions due to Global. Global seeks damages in the amount of
$50,000, plus interest. On February 14, 2006 the Company settled the matter for
$27,000 payable in periodic installments the first of which was on February 14,
2006 and the last of which is due December 1, 2006.
EXPERTS
The financial statements of the Company as of December 31, 2005
appearing in this prospectus have been so included in reliance on the report of
Bagell, Josephs & Levine, CPA's, an independent registered public accounting
firm, given on the authority of said firm as experts in accounting and auditing.
The financial statements as of March 30, 2005 and 2004 included in this
prospectus have been so included in reliance on the report of Bagell, Josephs &
Levine, CPA's, an independent certified public accounting firm, given on the
authority of said firm as experts in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or persons controlling us, we
have been advised that it is the SEC's opinion that such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
38
I-ELEMENT CORPORATION
FINANCIAL STATEMENTS
Index to Financial Statements
FISCAL YEAR END 2004, 2005
AND NINE MONTHS ENDED DECEMBER 31, 2005
39
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003
40
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003
TABLE OF CONTENTS
Consolidated Audited Financial Statements:
PAGE(S)
-------
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheet as of March 31, 2005 F-2
Consolidated Statements of Operations for the Three
Months Ended March 31, 2005 and 2004 and the Years
Ended December 31, 2004 and 2003 F-3
Consolidated Statement of Changes in Stockholders'
(Deficit) for the Period March 11, 2003 (Inception)
to March 31, 2005 F-4
Consolidated Statements of Cash Flow for the Three
Months Ended March 31, 2005 and 2004 and the Years
Ended December 31, 2004 and 2003 F-5
Notes to Consolidated Financial Statements. F-7
41
BAGELL, JOSEPHS & COMPANY, L.L.C.
Certified Public Accountants
High Ridge Commons
Suites 400-403
200 Haddonfield Berlin Road
Gibbsboro, New Jersey 08026
(856) 346-2828 Fax (856) 346-2882
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
MailKey Corporation and Subsidiary
Dallas, Texas
We have audited the accompanying consolidated balance sheet of MailKey
Corporation and Subsidiary (the "Company") as of March 31, 2005 and the related
statements of operations and cash flow for the three months ended March 31, 2005
and 2004, the years ended December 31, 2004 and 2003 and the related statement
of stockholders' equity (deficit) from March 11, 2003 (inception) to March 31,
2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying consolidated financial statements for the three months ended
March 31, 2005 and 2004 and for the years ended December 31, 2004 and 2003 have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 8 to the consolidated financial statements, the Company has
sustained operating losses and capital deficits that raise substantial doubt
about its ability to continue as a going concern. Management's plan in regard to
these matters are also described in Note 8. The consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MailKey Corporation
and Subsidiary as of March 31, 2005 and the results of its operations and cash
flow for the three months ended March 31, 2005 and 2004 and the years ended
December 31, 2004 and 2003 and changes in stockholders' equity (deficit) from
March 11, 2003 (inception) to March 31, 2005 in conformity with accounting
principles generally accepted in the United States of America.
As noted in Note 9, the Company has restated its previously issued consolidated
financial statements for the three months ended March 31, 2005 and 2004 and the
years ended December 31, 2004 and 2003. The effect of this restatement was to
retroactively restate the Consolidated Statement of Changes in Stockholders'
Equity (Deficit) to January 1, 2004 for the effect of the share exchange between
the Company and Ielement as a result of the reverse merger and to recalculate
the weighted average common shares outstanding. The Consolidated Statements of
Cash Flow have been restated to separately present bad debt expense and to
restate the cash flow for the year ended December 31, 2003 for non-cash items
related to the acquisition of ICCC. These changes had no effect on net income
for the three months ended March 31, 2005 and 2004 and for the years ended
December 31, 2004 and 2003 or the financial position of the Company for the
respective years and periods.
MEMBER OF: BAGELL, JOSEPHS & COMPANY, L.L.C.
AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS NEW JERSEY SOCIETY OF CERTIFIED PUBLIC
ACCOUNTANTS PENNSYLVANIA INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS
/s/ BAGELL, JOSEPHS & COMPANY, L.L.C.
- -------------------------------------
Certified Public Accountants
Gibbsboro, New Jersey
June 28, 2005
F-1
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
AUDITED
ASSETS
MARCH 31,
2005
-----------
CURRENT ASSETS:
Cash and cash equivalents $ 340,321
Accounts receivable, net 520,644
Other current assets 1,780
-----------
TOTAL CURRENT ASSETS 862,745
-----------
Fixed assets, net of depreciation 889,051
-----------
OTHER ASSETS:
Goodwill 2,079,665
Deposits 58,993
-----------
TOTAL OTHER ASSETS 2,138,658
-----------
TOTAL ASSETS $ 3,890,454
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,400,992
Customer deposits 164,112
Receivable financing payable 483,114
Commissions payable 176,136
Liability for stock to be issued 75,000
Deferred revenue 815,036
Current portion - notes payable 461,590
-----------
TOTAL CURRENT LIABILITIES 3,575,980
-----------
LONG-TERM LIABILITIES:
Notes payable, net of current portion 293,188
-----------
TOTAL LONG-TERM LIABILITIES 293,188
-----------
TOTAL LIABILITIES 3,869,168
-----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 Par Value, 100,000,000 shares authorized;
91,783,730 shares issued and outstanding at March 31, 2005 91,783
Additional paid-in capital 921,198
Accumulated deficit (991,695)
-----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 21,286
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,890,454
===========
F-2
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
THREE MONTHS ENDED YEARS ENDED
---------------------------- ----------------------------
RESTATED RESTATED RESTATED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
2005 2004 2004 2003
(AUDITED) (UNAUDITED) (AUDITED) (AUDITED)
------------ ------------ ------------ ------------
OPERATING REVENUE:
Service income $ 1,228,411 $ 1,530,427 $ 5,954,772 $ 4,552,436
OPERATING EXPENSES
Cost of Services Exclusive of
Depreciation and Amortization 736,275 819,756 3,042,978 2,716,680
General and administrative 687,928 458,311 2,033,764 1,116,810
Selling expenses 116,263 109,240 519,600 518,425
Depreciation & amortization 68,164 60,403 260,806 159,070
Interest expense 6,992 31,354 138,576 122,100
Receivable factoring fees 29,874 33,085 129,021 118,504
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 909,221 692,393 3,081,767 2,034,909
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE OTHER (EXPENSE) (417,085) 18,278 (169,973) (199,153)
------------ ------------ ------------ ------------
OTHER (EXPENSE)
Loss on sale of investments -- (86,558) (125,068) (65,903)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES -- (86,558) (125,068) (65,903)
------------ ------------ ------------ ------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (417,085) (68,280) (295,041) (265,056)
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON SHARES $ (417,085) $ (68,280) $ (295,041) $ (265,056)
============ ============ ============ ============
NET LOSS PER BASIC AND DILUTED SHARES $ (0.01) $ (0.40) $ (0.03) $ --
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 56,697,484 171,863 11,344,053 1
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - AUDITED
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 AND FOR THE THREE MONTHS ENDED MARCH 31, 2005
RESTATED RESTATED RESTATED RESTATED
ADDITIONAL
COMMON STOCK PAID - IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 (Inactive) 1 $ - $ - $ - $ -
Net loss for the year ended December 31, 2003 - - - (265,056) (265,056)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 - - - (265,056) (265,056)
------------ ------------ ------------ ------------ ------------
Issuance of stock in exchange for redemption
of shares of Integrated Communications
Consultants Corporation ("ICCC") - recapitalization 14,369,368 14,369 - (14,369) -
Issuance of stock as 1% premium for redemption
of shares of ICCC 143,687 144 - (144) -
Shares of common stock issued in exercise of options 26,400 26 49 - 75
Accounts payable converted to common stock 35,200 35 4,965 - 5,000
Issuance of common stock in conversion of notes payable 423,209 423 247,577 - 248,000
Shares issued for cash 206,391 206 119,094 - 119,300
Net loss for the year - - - (295,041) (295,041)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 15,204,255 15,203 371,685 (574,610) (187,722)
------------ ------------ ------------ ------------ ------------
Shares of common stock issued in exercise of options 16,115,345 16,115 29,667 - 45,782
Issuance of common stock in conversion of
notes payable 16,526,236 16,527 809,785 - 826,312
Effects of reverse merger 34,726,355 34,726 (511,014) - (476,288)
Issuance of shares at $0.025 per share
for services 7,487,587 7,488 179,701 - 187,189
Issuance of shares at $0.025 per share
in conversion of accounts payable 693,280 693 16,639 - 17,332
Issuance of shares at $0.025 per share
in conversion of debt to equity 1,030,672 1,031 24,735 - 25,766
Net loss for the three months ended March 31, 2005 - - - (417,085) (417,085)
------------ ------------ ------------ ------------ ------------
Balance March 31, 2005 91,783,730 $ 91,783 $ 921,198 $ (991,695) $ 21,286
============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
F-4
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
THREE MONTHS ENDED YEARS ENDED
-------------------------- --------------------------
RESTATED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
2005 2004 2004 2003
(AUDITED) (UNAUDITED) (AUDITED) (AUDITED)
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (417,085) $ (68,280) $ (295,041) $ (265,056)
----------- ----------- ----------- -----------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 68,164 60,403 260,806 159,070
Bad Debt Expense 4,821 17,626 63,498 52,241
Stock issued for services 187,189 -- -- --
Loss on disposal of equipment 1,877 -- 2,296 --
CHANGES IN ASSETS AND LIABILITIES
(Increase) decrease in accounts receivable 62,540 221,720 96,436 (800,180)
(Increase) decrease in other current assets 2,470 (2,471) (4,077) (173)
(Increase) decrease in deposits 10,530 468 (14,517) (40,006)
Increase (decrease) in accounts payable 294,777 (19,316) 154,463 (1,259,056)
Increase in accrued interest -- 17,289 77,364 56,507
Increase (decrease) in payroll taxes payable (17,230) 27,232 17,230 --
Increase (decrease) in customer deposits (4,878) (14,819) (35,010) 204,000
Increase (decrease) in receivable financing payable (20,807) (342,679) (153,082) 657,003
Increase in commissions payable 18,411 43,786 98,994 58,731
Increase (decrease) in refunds payable (1,079) (1,526) (936) 2,015
Increase (decrease) in deferred revenue (19,940) 93,331 (262,959) 1,097,935
----------- ----------- ----------- -----------
Total adjustments 586,845 101,044 300,506 188,087
----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 169,760 32,764 5,465 (76,969)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment 2,800 -- 3,451 --
Acquisition of fixed assets (9,485) (163,766) (233,396) (251,023)
----------- ----------- ----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (6,685) (163,766) (229,945) (251,023)
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements
F-5
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
THREE MONTHS ENDED YEARS ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
2005 2004 2004 2003
(AUDITED) (UNAUDITED) (AUDITED) (AUDITED)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITES
Payments of notes payable $ (32,909) $ (32,600) $ (465,344) $ (46,193)
Proceeds from notes payable 22,450 100,000 625,331 467,054
Common stock issued for cash -- -- 119,300 --
Proceeds in exercise of stock options 39,954 -- 75 --
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,495 67,400 279,362 420,861
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 192,570 (63,602) 54,882 92,869
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR / PERIOD 147,751 92,869 92,869 --
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR / PERIOD $ 340,321 $ 29,267 $ 147,751 $ 92,869
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest expense $ 2,563 $ 3,890 $ 34,983 $ 6,459
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accounts payable converted to equity $ 17,332 $ 5,000 $ 5,000 $ --
=========== =========== =========== ===========
Accounts payable converted to debt $ 70,000 $ -- $ 50,000 $ --
=========== =========== =========== ===========
Conversion of notes payable to equity $ 852,078 $ -- $ 248,000 $ --
=========== =========== =========== ===========
Issuance of stock for redemption of ICCC shares $ -- $ 4,123 $ 4,123 $ --
=========== =========== =========== ===========
Debt converted to accounts payable $ 126,000 $ -- $ -- $ --
=========== =========== =========== ===========
Debt converted in exercise of options $ 5,828 $ -- $ -- $ --
=========== =========== =========== ===========
Accounts payable and accrued expenses
acquired in reverse merger $ 63,343 $ -- $ -- $ --
=========== =========== =========== ===========
Debt acquired in reverse merger $ 337,945 $ -- $ -- $ --
=========== =========== =========== ===========
Stock issued for services $ 187,189 $ -- $ -- $ --
=========== =========== =========== ===========
Goodwill recorded in acquisition $ -- $ -- $ -- $ 2,079,665
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements
F-6
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
MK Secure Solutions Ltd. was established as a messaging security and
Management company. On March 25, 2004, pursuant to an Agreement and Plan
of Merger, Global Diversified Acquisition Corp. ("GDAC"), acquired all of
the outstanding capital stock of MK Secure Solutions Ltd ("MKSS"), a
holding company incorporated on March 11, 2003, under the laws of the
British Virgin Islands. The transaction was effected by the issuance of
shares such that the former MKSS shareholders owned approximately 90% of
the outstanding MailKey stock after the transaction. GDAC then changed
its name to MailKey Corporation ("MailKey").
The Company's Chairman and Chief Executive Officer resigned in September
2004 and the Company's Chief Financial Officer and member of the Board
resigned in November 2004. Both positions have been filled by the
Company's founder and deputy chairman.
In the first quarter of 2005 the Company was unable to continue funding
the development of its messaging security solutions, and the rights were
transferred to the development team in return for the cancellation of
most of the liabilities which the Company owed to them. The Company
retains an interest of 20% in the messaging security solutions; however
to date there has been no commercialization of the solutions. In the
first quarter 2005 the Company sold its insolvent British Virgin Islands
subsidiary, MK Secure Solutions Limited, for $1 to a UK based accounting
firm, SS Khehar & Company. SS Khehar & Company has agreed to deal with
the winding up of the former subsidiary, for a fee of $1,800.
On November 9, 2004, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") by and among the MailKey Corporation,
MailKey Acquisition Corp., a Delaware corporation and our wholly-owned
subsidiary ("Merger Sub"), Inc., a Nevada Corporation, I-Element, Inc.
("I-Element") and Ivan Zweig, pursuant to which the Company agreed to
acquire all of the issued and outstanding shares of capital stock of
I-Element. This transaction closed in January 2005. At the closing of the
Merger, Merger Sub was merged into I-Element, at which time the separate
corporate existence of Merger Sub ceased and I-Element now continues as
the surviving company. The Share Exchange has been accounted for as a
reverse merger under the purchase method of accounting. Accordingly,
I-Element will be treated as the continuing entity for accounting
purposes and the historical financial statements presented will be those
of I-Element.
F-10
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
Under the terms of the Merger Agreement, MailKey issued its common stock,
$.001 par value per share, in exchange for all of the issued and
outstanding shares of capital stock of I-Element. The exchange ratio
setting forth the number of shares of MailKey common stock issued for
each issued and outstanding share of capital stock of I-Element was 3.52
shares of MailKey common stock for each issued and outstanding share of
capital stock of I-Element.
I-Element, incorporated in Nevada on December 30, 2002, is a
facilities-based nationwide communications service provider that provides
state-of-the-art telecommunications services to small and medium sized
enterprises ("SMEs"). I-Element provides broadband data, voice and
wireless services by offering integrated T-1 lines as well as Layer 2
Private Network solutions that provide SMEs with dedicated Internet
access services, customizable business solutions for voice, data,
wireless and Internet, and secure communications channels between the SME
offices, partners, vendors, customers and employees without the use of a
firewall or encryption devices. I-Element has a network presence in 18
major markets in the United States, including facilities in Los Angeles,
Dallas, and Chicago. The Company started business in 2003.
In connection with the closing of the merger, MailKey entered into a
letter of intent with Ivan Zweig and Kramerica Capital Corporation
("Kramerica"), a corporation wholly-owned by Mr. Zweig, which
contemplates that MailKey and I-Element will enter into a four year
employment agreement with Kramerica and Mr. Zweig pursuant to which Mr.
Zweig will serve as the Chief Executive Officer of MailKey and I-Element.
The letter of intent provides that Mr. Zweig will receive an annual base
salary of $300,000. In addition to his base salary, Mr. Zweig will be
entitled to annual performance bonuses with targets ranging from
$1,000,000 to $3,000,000 during the second, third and fourth years
provided I-Element achieves certain performance goals. If Mr. Zweig is
terminated without cause, MailKey is obligated to pay the remaining
salary owed to Mr. Zweig for the complete term of the employment
agreement, to pay off all notes owed to Mr. Zweig or Kramerica, all
outstanding options shall become fully vested, MailKey shall pay all
earned performance bonuses and all accrued vacation. If Mr. Zweig is
terminated for any reason other than cause, MailKey shall pay in full the
F-11
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
Notes owed to either Mr. Zweig or Kramerica Capital Corporation and at
least 75% of the earned bonus plan set forth by the directors. Effective
January 24, 2005, Mr. Zweig was also appointed to the Board of Directors
of MailKey.
Ivan Zweig has served as the Chief Executive Officer of I-Element since
March 2003. Mr. Zweig is also the Chief Executive Officer, director and
sole shareholder of Kramerica, a personnel services corporation. Since
December 1998, Mr. Zweig has served as the Chief Executive Officer and
director of Integrated Communications Consultants Corp. ("ICCC"), a
nationwide data carrier specializing in high speed Internet access and
secure data transaction. ICCC provides I-Element with resold telecom
services and I-Element pays ICCC approximately $97,000 on a monthly basis
for such services. On October 1, 2004, ICCC filed for Chapter 11
bankruptcy protection in the United States Bankruptcy Court, Northern
District of Texas, Dallas Division.
On January 19, 2005, upon the consummation of the acquisition, I-Element
issued eight (8) promissory notes to, Kramerica, certain members of Mr.
Zweig's immediate family and others in the aggregate amount of
$376,956.16 (the "Notes") with no interest. Upon issuance, the Notes were
payable in 36 monthly installments with the first payment commencing six
months after the closing of the merger and were secured by substantially
all of the assets of I-Element. I-Element did not make any payments on
the Notes. On March 25, 2006 each of the Notes were cancelled and
I-Element issued new convertible promissory notes to the same individuals
in the same principal amount of $376,956.16, again with no interest
thereon. The first payment on each of the new convertible promissory
notes is due in September 2006 with a total of 36 monthly installments
through August 2009. The Lender has the right to convert all or a portion
of the outstanding balance, at any time until the notes are paid in full,
into I-Element's common stock at a conversion price of $0.035 per share.
Any past due balance on the old Notes was forgiven at the time of
cancellation of the old Notes and issuance of the new convertible
promissory notes. The new convertible promissory notes are secured by
substantially all the assets of I-Element as were the original Notes. ,
The aggregate of the Kramerica notes are $120,000 and were issued for
services rendered prior to issuance. The $50,000 note was originally
issued on June 1, 2004 for services prior to that date and was restated
subsequent to the merger on January 19, 2005. The remaining $70,000 note
was issued on January 19, 2005 for services rendered prior to that date.
The Company's consolidated financial statements are prepared on the
accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America, and have been
presented on a going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business.
F-12
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the financial position and
results of I-Element. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS.
The Company considers all highly liquid debt instruments and other
short-term investments with an initial maturity of three months or less
to be cash or cash equivalents.
The Company maintains cash and cash equivalents with a financial
institution which is insured by the Federal Deposit Insurance Corporation
up to $100,000. At various times throughout the year the Company had
amounts on deposit at the financial institution in excess of federally
insured limits.
REVENUE AND COST RECOGNITION
The Company records its transactions under the accrual method of
accounting whereby income is recognized when the services are provided
rather than when billed or the fees are collected, and costs and expenses
are recognized in the period they are incurred rather than paid for. In
determining when to recognize revenue the Company relies on Staff
Accounting Bulletin Topic 13. The Company uses 4 criteria in determining
when revenue is realized or realizable and earned. First, the Company
must have persuasive evidence of the existing of an arrangement. The
Company utilizes written contracts with its customers to meet this
criterion. Second, delivery must have occurred or services must have been
rendered. The Company defers revenue from the date invoiced, usually the
28th day of the month 2 months prior to completion of rendering services,
to the month services are deemed completely rendered, thereby satisfying
this criterion. Third, the price must be fixed and determinable. The
Company delivers invoices to every customer stating the exact amount due
for services, thereby satisfying this criterion. Fourth, collectibility
must be reasonably assured. The Company invoices prior to rendering
services and can thereby recognize a problem in payment prior to
providing services. When the Company recognizes such a problem or
potential problem, the Company will not record the amount in question as
revenue until the cash is collected from that customer. The Company
immediately writes down bad debt and the Company utilizes an allowance
for doubtful receivables, thereby satisfying this criterion.
F-13
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
ACCOUNTS RECEIVABLE
The Company factors 99% of its billings with an outside agency. The
Company invoices its customers on the 28th of the month for services to
be rendered two months subsequent to the billing date. The Company
receives 75% of the aggregate net face value of the assigned accounts at
the time of placement with the factor.
DEFERRED REVENUE
Deferred revenue consists of customers billed in advance of revenue being
earned.
PROVISION FOR BAD DEBT
Under SOP 01-6 "Accounting for Certain Entities (including Entities with
Trade Receivables), the Company has intent and belief that all amounts in
accounts receivable are collectible. The Company has determined that
based on their collections an allowance for doubtful accounts of $6,673
and $6,098 has been recorded at March 31, 2005 and December 31, 2004.
Bad debt expense for the three months ended March 31, 2005 and 2004 was
$4,821 and $17,626, respectively and for the years ending December 31,
2004 and 2003 was $63,498 and $52,241, respectively.
ADVERTISING COSTS
The Company expenses the costs associated with advertising and marketing
as incurred. Advertising and marketing expenses, included in the
statements of operations for the three months ended March 31, 2005 and
2004 were $660 and $9,216, respectively, and for the years ended December
31, 2004 and 2003 were $24,556 and $5,901, respectively.
F-14
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME TAXES
The income tax benefit is computed on the pretax loss based on the
current tax law. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each
year-end based on enacted tax laws and statutory tax rates. No benefit is
reflected for the three months ended March 31, 2005 and 2004 and for the
years ended December 31, 2004 and 2003, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value because of the immediate or short-term maturity of
these financial instruments. The carrying amount reported for notes
payable approximates fair value because, in general, the interest on the
underlying instruments fluctuates with market rates.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
Furniture and equipment 5 Years
Telecommunications equipment 5 Years
When assets are retired or otherwise disposed of, the costs and related
accumulated depreciation are removed from the accounts, and any resulting
gain or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to income as incurred; significant
renewals and betterments are capitalized. Deduction is made for
retirements resulting from renewals or betterments.
F-15
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(LOSS) PER SHARE OF COMMON STOCK
Historical net (loss) per common share is computed using the weighted
average number of common shares outstanding. Common stock equivalents
were not included in the computation of diluted earnings per share when
the Company reported a loss because to do so would be antidilutive for
the periods presented.
(LOSS) PER SHARE OF COMMON STOCK (CONTINUED)
The following is a reconciliation of the computation for basic and
diluted EPS:
THREE MONTHS ENDED YEARS ENDED
---------------------------- ---------------------------
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
2005 2004 2004 2003
(AUDITED) (UNAUDITED) (AUDITED) (AUDITED)
------------ ------------ ------------ ------------
Net loss $ (417,085) $ (68,280) $ (295,041) $ (265,056)
------------ ------------ ------------ ------------
Weighted-average common
shares Outstanding (Basic) 38,143,835 48,825 3,222,743 1
Weighted-average common
stock Equivalents
Stock options -- -- -- --
Warrants -- -- -- --
------------ ------------ ------------ ------------
Weighted-average common
shares Outstanding (Diluted) 38,143,835 48,825 3,222,743 1
------------ ------------ ------------ ------------
There were no options or warrants outstanding to purchase stock for the
three months ended March 31, 2005 and 2004 and for the years ended
December 31, 2004 and 2003.
F-16
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued Statement No. 142 "Goodwill and Other
Intangible Assets". This Statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. It addresses how
intangible assets that are acquired individually or with a group of other
assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. This
Statement also addresses how goodwill and other intangible assets should
be accounted for after they have been initially recognized in the
financial statements.
STOCK-BASED COMPENSATION
Employee stock awards under the Company's compensation plans are
accounted for in accordance with Accounting Principles Board Opinion No.
25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and related
interpretations. The Company provides the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS 123"), and related interpretations.
Stock-based awards to non-employees are accounted for under the
provisions of SFAS 123 and has adopted the enhanced disclosure provisions
of SFAS No. 148 "Accounting for Stock-Based Compensation- Transition and
Disclosure, an amendment of SFAS No. 123".
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic-value method. Under the intrinsic-value
method of accounting for stock-based compensation, when the exercise
price of options granted to employees is less than the estimated fair
value of the underlying stock on the date of grant, deferred compensation
is recognized and is amortized to compensation expense over the
applicable vesting period. In each of the periods presented, the vesting
period was the period in which the options were granted. All options were
expensed to compensation in the period granted rather than the exercise
date.
F-17
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
The Company measures compensation expense for its non-employee
stock-based compensation under the Financial Accounting Standards Board
(FASB) Emerging Issues Task Force (EITF) Issue No. 96-18, "ACCOUNTING FOR
EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING,
OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES".
The fair value of the option issued is used to measure the transaction,
as this is more reliable than the fair value of the services received.
The fair value is measured at the value of the Company's common stock on
the date that the commitment for performance by the counterparty has been
reached or the counterparty's performance is complete. The fair value of
the equity instrument is charged directly to compensation expense and
additional paid-in capital.
Stock-based compensation for the three months ended March 31, 2005 and
2004 was $187,189 and $0, respectively and for the years ended December
31, 2004 and 2003 was $0 and $0, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS" ("SFAS 144"), that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The
FASB's new rules on asset impairment supersede SFAS 121, "ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF," and portions of Accounting Principles Board Opinion 30,
"Reporting the Results of Operations."
This Standard provides a single accounting model for long-lived assets to
be disposed of and significantly changes the criteria that would have to
be met to classify an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are not
depreciated and are stated at the lower of fair value and carrying
amount.
F-18
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
This Standard also requires expected future operating losses from
discontinued operations to be displayed in the period (s) in which the
losses are incurred, rather than as of the measurement date as presently
required. The adoption of SFAS No. 144 did not have an impact on the
Company's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This statement rescinds SFAS No. 4, "REPORTING
GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT," and an amendment of that
statement, SFAS No. 44, "ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR
CARRIERS," and SFAS No. 64, "EXTINGUISHMENTS OF DEBT MADE TO SATISFY
SINKING-FUND REQUIREMENTS". This statement amends SFAS No. 13,
"ACCOUNTING FOR LEASES", to eliminate inconsistencies between the
required accounting for sales-leaseback transactions and the required
accounting for certain lease modifications that have economic effects
that are similar to sales-leaseback transactions.
Also, this statement amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe
their applicability under changed conditions. Provisions of SFAS No. 145
related to the rescissions of SFAS No. 4 were effective for the Company
on November 1, 2002 and provisions affecting SFAS No. 13 were effective
for transactions occurring after May 15, 2002. The adoption of SFAS No.
145 did not have a significant impact on the Company's results of
operations or financial position.
In June 2003, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES". This statement covers
restructuring type activities beginning with plans initiated after
December 31, 2002. Activities covered by this standard that are entered
into after that date will be recorded in accordance with provisions of
SFAS No. 146. The adoption of SFAS No. 146 did not have a significant
impact on the Company's results of operations or financial position.
F-19
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In December 2002, the FASB issued Statement No. 148, "ACCOUNTING FOR
STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB
STATEMENT NO. 123"("SFAS 148"). SFAS 148 amends FASB Statement No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION," to provide alternative methods
of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It also
amends the disclosure provisions of that Statement to require prominent
disclosure about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends Accounting Principles Board
("APB") Opinion No. 28, "INTERIM FINANCIAL REPORTING", to require
disclosure about those effects in interim financial information. SFAS 148
is effective for financial statements for fiscal years ending after
December 15, 2002. The Company will continue to account for stock-based
employee compensation using the intrinsic value method of APB Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," but has adopted the
enhanced disclosure requirements of SFAS 148.
In May 2003, the FASB issued SFAS Statement No. 150, "ACCOUNTING FOR
CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES
AND EQUITY". This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). This statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities, if applicable. It
is to be implemented by reporting the cumulative effect of a change in an
accounting principle for financial instruments created before the
issuance date of the Statement and still existing at the beginning of the
interim period of adoption. The adoption of this statement
F-20
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
did not have a significant impact on the Company's results of operations
or financial position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF Others". FIN 45 requires
a company, at the time it issues a guarantee, to recognize an initial
liability for the fair value of obligations assumed under the guarantees
and elaborates on existing disclosure requirements related to guarantees
and warranties. The recognition requirements are effective for guarantees
issued or modified after December 31, 2002 for initial recognition and
initial measurement provisions. The adoption of FIN 45 did not have a
significant impact on the Company's results of operations or financial
position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB
NO. 51". FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003.
For variable interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the first interim or
annual period beginning after June 15, 2003. The adoption of FIN 46 did
not have a significant impact on the Company' results of operations or
financial position.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised
2004), "SHARE-BASED PAYMENT" ("SFAS 123R"). SFAS 123R requires that
compensation cost related to share-based payment transactions be
recognized in the financial statements. Share-based payment transactions
within the scope of SFAS 123R include stock options, restricted stock
plans, performance-based awards, stock appreciation rights, and employee
share purchase plans.
F-21
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
The provisions of SFAS 123R are effective for small business issuers as
of the first interim period that begins after December 15, 2005.
Accordingly, the Company will implement the revised standard in the first
quarter of fiscal year 2006. Currently, the Company accounts for its
share-based payment transactions under the provisions of APB 25, which
does not necessarily require the recognition of compensation cost in the
financial statements. Management is assessing the implications of this
revised standard, which may materially impact the Company's results of
operations in the first quarter of fiscal year 2006 and thereafter.
On December 16, 2004, FASB issued Statement of Financial Accounting
Standards No. 153, "EXCHANGES OF NON-MONETARY ASSETS, AN AMENDMENT OF APB
OPINION NO. 29, ACCOUNTING FOR NON-MONETARY TRANSACTIONS" (" SFAS 153").
This statement amends APB Opinion 29 to eliminate the exception for
non-monetary exchanges of similar productive assets and replaces it with
a general exception for exchanges of non-monetary assets that do not have
commercial substance. Under SFAS 153, if a non-monetary exchange of
similar productive assets meets a commercial-substance criterion and fair
value is determinable, the transaction must be accounted for at fair
value resulting in recognition of any gain or loss. SFAS 153 is effective
for non-monetary transactions in fiscal periods that begin after June 15,
2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results
of operations or cash flow.
ACCOUNTING POLICY AS TO GOODWILL IMPAIRMENT:
At December 31, 2005 and March 31, 2005 our balance sheet included
goodwill with a total carrying value of $2,079,665, representing 45.7%
and 53.4% of total assets, respectively. This goodwill has been recorded
in connection with the acquisition of substantially all of the assets of
Integrated Communications Consultants Corporation ("ICCC") in March 2003.
Generally accepted accounting principles require that we assess the fair
value of the acquired entity at least annually in order to identify any
impairment in the values. However, on a quarterly basis, we are alert for
events or circumstances that would indicate, more likely than not, that
the fair value of the acquired entity has been reduced below its carrying
amount. If we determine that the fair value of the entity is less than
the net assets of the entity, including goodwill, an impairment loss
would be identified and recorded at that time.
F-22
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 3 - FIXED ASSETS
Property and equipment as of March 31, 2005 was as follows:
MARCH 31,
2005
---------------
Property and equipment $1,373,268
Less: accumulated depreciation (484,217)
---------------
Net book value $ 889,051
===============
There was $68,164 and $60,403 charged to operations for depreciation
expense for the three months ended March 31, 2005 and 2004, respectively
and $260,806 and $156,691 was charged to operations for depreciation
expense for the years ended December 31, 2004 and 2003, respectively.
NOTE 4 - NOTES PAYABLE
The Company has several notes payable at March 31, 2005. Proceeds from
the notes were utilized to finance the general working capital
requirements of the Company, purchase equipment and pay certain
liabilities assumed by the Company in the purchase of the principal
assets of Integrated Communications Consultants Corporation in March of
2003. The notes carry varying interest rates between zero and 5.75%.
Prior to the effective merger of I-Element with MailKey, certain of the
notes were converted into shares of common stock.
F-23
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 4 - NOTES PAYABLE (CONTINUED)
Accrued interest on the notes is $4,767 at March 31, 2005.
The notes payable balances at March 31, 2005 were as follows:
March 31,
2005
----------------
Total notes payable $ 754,778
Less current maturities (461,590)
----------------
Long-term notes payable $ 293,188
================
The amount of principal maturities of the notes payable for the next four
years ending March 31, and in the aggregate is as follows:
2006 $ 461,590
2007 125,652
2008 125,652
2009 41,884
----------------
$ 754,778
================
F-24
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 5 - OPERATING LEASES
The Company leases office space under leases commencing in March and June
of 2004. The leases are payable on a month-to-month basis. Monthly
payments under the current leases are $3,900. The Company also leased
additional office space in Texas and California. The Company ceased
leasing this additional space during the year ended December 31, 2004.
Rental payments charged to expense for the three months ended March 31,
2005 and 2004 were $11,700 and $15,050, respectively and during the years
ended December 31, 2004 and 2003 were $82,072 and $68,750, respectively.
NOTE 6 - STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
As of March 31, 2005, the Company has 100,000,000 shares of common stock
authorized at a par value of $0.001, and 91,783,730 shares issued and
outstanding.
The following details the stock transactions for the three months ended
March 31, 2005:
The Company issued 4,578,223 shares of common stock due to the exercise
of options.
The Company issued 4,694,953 shares of common stock for the conversion of
debt to equity valued at $826,312.
The Company issued 7,487,587 shares of common stock for services valued
at $187,189.
The Company issued 693,280 shares of common stock in conversion of
accounts payable to equity valued at $17,332.
The Company issued 1,030,672 shares of common stock for the conversion of
debt to equity valued at $25,766.
In connection with the recapitalization, there were $337,945 in notes
payable and $63,343 in liabilities assumed by the new company.
F-25
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 7 - PROVISION FOR INCOME TAXES
Deferred income taxes will be determined using the liability method for
the temporary differences between the financial reporting basis and
income tax basis of the Company's assets and liabilities. Deferred income
taxes will be measured based on the tax rates expected to be in effect
when the temporary differences are included in the Company's tax return.
Deferred tax assets and liabilities are recognized based on anticipated
future tax consequences attributable to differences between financial
statement carrying amounts of assets and liabilities and their respective
tax bases.
At March 31, 2005, deferred tax assets consist of the following:
Net deferred tax assets $ 294,392
Less: valuation allowance (294,392)
---------
$ -0-
=========
At March 31, 2005, the Company had deficits accumulated in the
approximate amount of $981,305, available to offset future taxable income
through 2023. The Company established valuation allowances equal to the
full amount of the deferred tax assets due to the uncertainty of the
utilization of the operating losses in future periods.
NOTE 8 - GOING CONCERN
As shown in the accompanying consolidated financial statements the
Company has sustained net operating losses for the three months ended
March 31, 2005 and 2004 and the years ended December 31, 2004 and 2003.
There is no guarantee that the Company will be able to raise enough
capital or generate revenues to sustain its operations. This raises
substantial doubt about the Company's ability to continue as a going
concern.
The Company's future success is dependent upon its ability to achieve
profitable operations and generate cash from operating activities, and
upon additional financing. There is no guarantee that the Company will be
able to raise enough capital or generate revenues to sustain its
operations. Management believes they can raise the appropriate funds
needed to support their business plan and acquire an operating, cash flow
positive company.
F-26
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 8 - GOING CONCERN
The consolidated financial statements do not include any adjustments
relating to the recoverability or classification of recorded assets and
liabilities that might result should the Company be unable to continue as
a going concern.
NOTE 9 - RESTATEMENT
The Company has restated its previously issued consolidated financial
statements for the three months ended March 31, 2005 and 2004 and the
years ended December 31, 2004 and 2003. The effect of this restatement
was to retroactively restate the Consolidated Statement of Changes in
Stockholders' Equity (Deficit) to January 1, 2004 for the effect of the
share exchange between the Company and Ielement as a result of the
reverse merger and to recalculate the weighted average common shares
outstanding. The Consolidated Statements of Cash Flow have been restated
to separately present bad debt expense and to restate the cash flow for
the year ended December 31, 2003 for non-cash items related to the
acquisition of ICCC. These changes had no effect on net income for the
three months ended March 31, 2005 and 2004 and for the years ended
December 31, 2004 and 2003 or the financial position of the Company for
the respective years and periods.
F-27
IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
TABLE OF CONTENTS
-----------------
Condensed Consolidated Financial Statements:
PAGE(S)
-------
Condensed Consolidated Balance Sheet as of December 31, 2005 F-29
Condensed Consolidated Statements of Operations for
the Three Months Ended December 31, 2005 and 2004 and
the Nine Months Ended December 31, 2005 and 2004 F-30
Condensed Consolidated Statements of Cash Flow for
the Nine Months Ended December 31, 2005 and 2004 F-31
Notes to Condensed Consolidated Financial Statements F-33
F-28
IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
ASSETS
------
December 31,
2005
(UNAUDITED)
-----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,205,129
Accounts receivable, net 474,647
Other current assets 1,159
-----------
TOTAL CURRENT ASSETS 1,680,935
-----------
Fixed assets, net of depreciation 733,433
-----------
OTHER ASSETS:
Goodwill 2,079,665
Deposits 56,821
-----------
TOTAL OTHER ASSETS 2,136,486
-----------
TOTAL ASSETS $ 4,550,854
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,076,982
Customer deposits 139,121
Receivable financing payable 405,338
Commissions payable 167,225
Liability for stock to be issued 2,297,875
Deferred revenue 712,998
Current portion - notes payable 336,257
-----------
TOTAL CURRENT LIABILITIES 5,135,796
-----------
LONG-TERM LIABILITIES:
Notes payable, net of current portion 315,928
-----------
TOTAL LONG-TERM LIABILITIES 315,928
-----------
TOTAL LIABILITIES 5,451,724
-----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 Par Value, 2,000,000,000 shares authorized;
96,477,065 shares issued and outstanding 96,477
Preferred stock, $.001 Par Value, 200,000,000 shares authorized;
Zero shares issued and outstanding --
Additional paid-in capital 717,687
Additional paid-in capital - Warrants 177,757
Stock subscription receivable (35,000)
Unearned compensation expense (12,200)
Accumulated deficit (1,845,591)
-----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (900,870)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 4,550,854
===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-29
IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
OPERATING REVENUE $ 1,119,772 $ 1,415,148 $ 3,487,000 $ 4,424,345
COST OF SALES EXCLUSIVE OF DEPRECIATION AND AMORTIZATION 689,185 573,732 2,141,575 2,223,222
------------ ------------ ------------ ------------
GROSS PROFIT 430,587 841,416 1,345,425 2,201,123
------------ ------------ ------------ ------------
OPERATING EXPENSES
General and administrative 580,397 494,132 1,598,893 1,575,452
Selling expenses 82,307 111,148 314,844 410,360
Depreciation & amortization 69,934 67,976 207,986 200,403
Interest expense -- 37,667 4,951 107,222
Receivable factoring fees 26,211 30,686 83,037 95,936
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 758,849 741,609 2,209,711 2,389,373
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE OTHER (EXPENSE) (328,262) 99,807 (864,286) (188,250)
------------ ------------ ------------ ------------
OTHER (EXPENSE)
Loss on sale of investments -- -- -- (38,511)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES -- -- -- (38,511)
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (328,262) 99,807 (864,286) (226,761)
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ (328,262) $ 99,807 $ (864,286) $ (226,761)
============ ============ ============ ============
NET INCOME (LOSS) PER BASIC AND AND DILUTED SHARES $ (0.00) $ 0.02 $ (0.01) $ (0.05)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 96,477,065 4,319,392 94,817,400 4,272,887
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-30
IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NINE MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
2005 2004
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (864,286) $ (226,761)
----------- -----------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 207,986 200,403
Stock issued for services 33,498 --
Stock to be issued for services 236,750 --
Gain on sale of equipment -- (894)
Fixed asset write off -- 3,190
CHANGES IN ASSETS AND LIABILITIES
(Increase) decrease in accounts receivable 45,997 (79,412)
(Increase) decrease in other current assets 621 (1,606)
(Increase) decrease in deposits 2,172 (14,985)
Increase in accounts payable and accrued expenses 190,568 109,368
Increase in accrued interest 4,872 107,069
(Decrease) in customer deposits (24,991) (20,191)
Increase (decrease) in receivable financing payable (77,776) 189,597
Increase (decrease) in commissions payable (8,911) 55,208
(Decrease) in deferred revenue (102,038) (356,290)
----------- -----------
Total adjustments 508,748 191,457
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES (355,538) (35,304)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (52,368) (69,632)
Proceeds from sale of fixed assets -- 3,453
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (52,368) (66,179)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of notes payable $ (46,349) $ (134,429)
Proceeds from notes payable -- 235,021
Common stock issued for cash -- 119,300
Cash received for common stock to be issued 1,535,625 --
Fund raising fees charged to paid in capital (216,562) --
Proceeds in exercise of stock options -- 75
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,272,714 219,967
----------- -----------
The accompanying notes are an integral part of these condensed consolidated financial statements
F-31
IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NINE MONTHS ENDED
------------------------
December 31, DECEMBER 31,
2005 2004
(Unaudited) (UNAUDITED)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 864,808 118,484
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 340,321 29,267
---------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $1,205,129 $ 147,751
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest expense $ 114 $ 26,631
========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accounts payable converted to equity $ 85,194 $ --
========== ==========
Accounts payable converted to debt $ 177,884 $ 59,000
========== ==========
Accounts payable converted to liability for stock to be issued $ 251,500 $ --
========== ==========
Notes payable converted to equity $ -- $ 248,000
========== ==========
Notes payable converted to liability for stock to be issued $ 239,000 $ --
========== ==========
Stock issued for services $ 33,498 $ --
========== ==========
Stock to be issued for services $ 236,750 $ --
========== ==========
Fixed asset write off $ -- $ 3,190
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements
F-32
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements
included herein have been prepared by IElement Corporation and Subsidiary
(the "Company") without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information
and footnote disclosures normally included in the financial statements
prepared in accordance with accounting principles generally accepted in
the United States of America have been condensed or omitted as allowed by
such rules and regulations, and the Company believes that the disclosures
are adequate to make the information presented not misleading. It is
suggested that these financial statements be read in conjunction with the
March 31, 2005 audited financial statements and the accompanying notes
thereto. While management believes the procedures followed in preparing
these condensed financial statements are reasonable, the accuracy of the
amounts are in some respects dependent upon the facts that will exist,
and procedures that will be accomplished by the Company later in the
year.
The management of the Company believes that the accompanying unaudited
condensed consolidated financial statements contain all adjustments
(including normal recurring adjustments) necessary to present fairly the
operations and cash flows for the periods presented.
IElement Corporation (the "Company" or "IElement") was established as a
messaging security and management company. On March 25, 2004, pursuant to
an Agreement and Plan of Merger, Global Diversified Acquisition Corp.
("GDAC"), acquired all of the outstanding capital stock of MK Secure
Solutions Ltd ("MKSS"), a holding company incorporated on March 11, 2003,
under the laws of the British Virgin Islands. The transaction was
effected by the issuance of shares such that the former MKSS shareholders
owned approximately 90% of the outstanding MailKey Corporation stock
after the transaction. GDAC then changed its name to MailKey Corporation
("MailKey").
The Company's Chairman and Chief Executive Officer resigned in September
2004 and the Company's Chief Financial Officer and member of the Board
resigned in November 2004. Both positions have been filled by the
Company's founder and deputy chairman.
F-33
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
In early 2005 the Company was unable to continue funding the development
of its messaging security solutions, and the rights were transferred to
the development team in return for the cancellation of most of the
liabilities which the Company owed to them. The Company retains an
interest of 20% in the messaging security solutions; however to date
there has been no commercialization of the solutions. In the first
quarter 2005 the Company sold its insolvent British Virgin Islands
subsidiary, MK Secure Solutions Limited, for $1 to a UK based accounting
firm, SS Khehar & Company. SS Khehar & Company has agreed to deal with
the winding up of the former subsidiary, for a fee of $1,800.
On November 9, 2004, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") by and among the MailKey Corporation,
MailKey Acquisition Corp., a Delaware corporation and our wholly-owned
subsidiary ("Merger Sub"), Inc., a Nevada Corporation, I-Element, Inc.
("I-Element") and Ivan Zweig, pursuant to which the Company agreed to
acquire all of the issued and outstanding shares of capital stock of
I-Element. This transaction closed in January 2005. At the closing of the
Merger, Merger Sub was merged into I-Element, at which time the separate
corporate existence of Merger Sub ceased and I-Element now continues as
the surviving company. The Share Exchange has been accounted for as a
reverse merger under the purchase method of accounting. Accordingly,
I-Element will be treated as the continuing entity for accounting
purposes and the historical financial statements presented will be those
of I-Element.
Under the terms of the Merger Agreement, MailKey issued its common stock,
$.001 par value per share, in exchange for all of the issued and
outstanding shares of capital stock of I-Element. The exchange ratio
setting forth the number of shares of MailKey common stock issued for
each issued and outstanding share of capital stock of I-Element was 3.52
shares of MailKey common stock for each issued and outstanding share of
capital stock of I-Element.
I-Element, incorporated in Nevada on December 30, 2002, is a
facilities-based nationwide communications service provider that provides
state-of-the-art telecommunications services to small and medium sized
enterprises ("SMEs"). I-Element provides broadband data, voice and
wireless services by offering integrated T-1 lines as well as Layer 2
Private Network solutions that provide SMEs with dedicated Internet
access services, customizable business solutions for voice, data,
wireless and Internet, and secure communications channels between the SME
offices, partners, vendors, customers and employees without the use of a
firewall or encryption devices. I-Element has a network presence in 18
major markets in the United States, including facilities in Los Angeles,
Dallas, and Chicago. The Company started business in 2003.
F-34
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
In connection with the closing of the merger, MailKey entered into a
letter of intent with Ivan Zweig and Kramerica Capital Corporation
("Kramerica"), a corporation wholly-owned by Mr. Zweig, which
contemplates that MailKey and I-Element will enter into a four year
employment agreement with Kramerica and Mr. Zweig pursuant to which Mr.
Zweig will serve as the Chief Executive Officer of MailKey and I-Element.
The letter of intent provides that Mr. Zweig will receive an annual base
salary of $300,000. In addition to his base salary, Mr. Zweig will be
entitled to annual performance bonuses with targets ranging from
$1,000,000 to $3,000,000 during the second, third and fourth years
provided I-Element achieves certain performance goals. If Mr. Zweig is
terminated without cause, MailKey is obligated to pay the remaining
salary owed to Mr. Zweig for the complete term of the employment
agreement, to pay off all notes owed to Mr. Zweig or Kramerica, all
outstanding options shall become fully vested, MailKey shall pay all
earned performance bonuses and all accrued vacation. If Mr. Zweig is
terminated for any reason other than cause, MailKey shall pay in full the
Notes owed to either Mr. Zweig or Kramerica Capital Corporation and at
least 75% of the earned bonus plan set forth by the directors.
Effective January 24, 2005, Mr. Zweig was also appointed to the Board of
Directors of MailKey.
Ivan Zweig has served as the Chief Executive Officer of I-Element since
March 2003. Mr. Zweig is also the Chief Executive Officer, director and
sole shareholder of Kramerica, a personnel services corporation. Since
December 1998, Mr. Zweig has served as the Chief Executive Officer and
director of Integrated Communications Consultants Corp. ("ICCC"), a
nationwide data carrier specializing in high speed Internet access and
secure data transaction. ICCC provides I-Element with resold telecom
services and I-Element pays ICCC approximately $100,000 on a monthly
basis for such services. On October 1, 2004, ICCC filed for Chapter 11
bankruptcy protection in the United States Bankruptcy Court, Northern
District of Texas, Dallas Division.
Upon the consummation of the acquisition, I-Element has issued
outstanding promissory notes to, among others, Kramerica in the aggregate
amount of $120,000 (the "Notes"). I-Element has also issued promissory
notes to members of Mr. Zweig's immediate family. The promissory notes
are payable in 36 monthly installments with the first payment commencing
six months after the closing of the merger and will continue to be
secured by substantially all of the assets of I-Element.
F-35
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
The Company received consent to amend the Articles of Incorporation to
increase the number of shares of common stock authorized to be issued
from 100,000,000 shares to 2,000,000,000 shares, and consented to the
authorization of 200,000,000 shares of Blank Check Preferred Stock. There
are no current plans to designate any Blank Check Preferred Stock.
On August 1, 2005, the Company filed an Information Statement in
definitive form on schedule 14C with the SEC to change its name from
MailKey Corporation to IElement Corporation. Concurrent with this name
change, the Company received a new stock trading symbol (IELM.OB) on the
NASD Over-the-Counter Electronic Bulletin Board.
On August 8, 2005 Tim Dean-Smith and Susan Walton resigned their
positions on the Board of Directors (the "Board") of the Company. Tim
Dean-Smith also resigned from his position as Chief Financial Officer of
the Company. The resignations of Mr. Dean-Smith and Ms. Walton were
consistent with the expectations of the parties pursuant to the
consummation of the merger between I-Element, and the Company on January
19, 2005, and do not arise from any disagreement on any matter relating
to the Company's operations, policies or practices, nor regarding the
general direction of the Company. Neither Mr. Dean-Smith nor Ms. Walton
served on any subcommittees of the Board. Ivan Zweig, the current
Chairman of the Board and Chief Executive Officer was appointed as the
Chief Financial Officer of the Company until a new Chief Financial
Officer is found.
The Company's condensed consolidated financial statements are prepared on
the accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America, and have been
presented on a going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business.
F-36
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The condensed consolidated financial statements include the financial
position and results of I-Element. All significant intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and other
short-term investments with an initial maturity of three months or less
to be cash or cash equivalents.
The Company maintains cash and cash equivalents with a financial
institution which is insured by the Federal Deposit Insurance Corporation
up to $100,000. At various times throughout the year the Company had
amounts on deposit at the financial institution in excess of federally
insured limits.
REVENUE AND COST RECOGNITION
The Company records its transactions under the accrual method of
accounting whereby income is recognized when the services are provided
rather than when billed or the fees are collected, and costs and expenses
are recognized in the period they are incurred rather than paid for.
ACCOUNTS RECEIVABLE
The Company factors 99% of its billings with an outside agency. The
Company invoices its customers approximately 34 days prior to the month
services are to be rendered with invoice amounts due on the first of the
month in which services are rendered. The Company receives 75% of the
aggregate net face value of the assigned accounts at the time of
placement with the factor.
F-37
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
DEFERRED REVENUE
Deferred revenue consists of customers billed in advance of revenue being
earned.
PROVISION FOR BAD DEBT
Under SOP 01-6 "Accounting for Certain Entities (including Entities with
Trade Receivables), the Company has intent and belief that all amounts in
accounts receivable are collectible. The Company has determined that
based on their collections an allowance for doubtful accounts of $12,165
has been recorded at September 30, 2005.
Bad debt expense for the three months ended December 31, 2005 and 2004
was $20,711 and $26,243, respectively and for the nine months ending
December 31, 2005 and 2004 was $67,943 and $45,872, respectively.
ADVERTISING COSTS
The Company expenses the costs associated with advertising and marketing
as incurred. Advertising and marketing expenses, included in the
statements of operations for the three months ended December 31, 2005 and
2004 were $2,445 and $4,308, respectively and for the nine months ending
December 31, 2005 and 2004 was $6,034 and $15,340, respectively.
INCOME TAXES
The income tax benefit is computed on the pretax loss based on the
current tax law. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each
year-end based on enacted tax laws and statutory tax rates. No benefit is
reflected for the three months ended December 31, 2005 and 2004,
respectively and for the nine months ended December 31, 2005 and 2004,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value because of the immediate or short-term maturity of
these financial instruments. The carrying amount reported for notes
payable approximates fair value because, in general, the interest on the
underlying instruments fluctuates with market rates.
F-38
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
Furniture and equipment 5 Years
Telecommunications equipment 5 Years
When assets are retired or otherwise disposed of, the costs and related
accumulated depreciation are removed from the accounts, and any resulting
gain or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to income as incurred; significant
renewals and betterments are capitalized. Deduction is made for
retirements resulting from renewals or betterments.
(LOSS) PER SHARE OF COMMON STOCK
Historical net (loss) per common share is computed using the weighted
average number of common shares outstanding. Common stock equivalents
were not included in the computation of diluted earnings per share when
the Company reported a loss because to do so would be antidilutive for
the periods presented.
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued Statement No. 142 "Goodwill and Other
Intangible Assets". This Statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. It addresses how
intangible assets that are acquired individually or with a group of other
assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. This
Statement also addresses how goodwill and other intangible assets should
be accounted for after they have been initially recognized in the
financial statements.
F-39
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
STOCK-BASED COMPENSATION
Employee stock awards under the Company's compensation plans are
accounted for in accordance with Accounting Principles Board Opinion No.
25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and related
interpretations. The Company provides the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS 123"), and related interpretations.
Stock-based awards to non-employees are accounted for under the
provisions of SFAS 123 and has adopted the enhanced disclosure provisions
of SFAS No. 148 "Accounting for Stock-Based Compensation- Transition and
Disclosure, an amendment of SFAS No. 123".
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic-value method. Under the intrinsic-value
method of accounting for stock-based compensation, when the exercise
price of options granted to employees is less than the estimated fair
value of the underlying stock on the date of grant, deferred compensation
is recognized and is amortized to compensation expense over the
applicable vesting period. In each of the periods presented, the vesting
period was the period in which the options were granted. All options were
expensed to compensation in the period granted rather than the exercise
date.
The Company measures compensation expense for its non-employee
stock-based compensation under the Financial Accounting Standards Board
(FASB) Emerging Issues Task Force (EITF) Issue No. 96-18, "ACCOUNTING FOR
EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING,
OR IN CONJUNCTION WITH SELLING, GOODS OR Services".
The fair value of the option issued is used to measure the transaction,
as this is more reliable than the fair value of the services received.
The fair value is measured at the value of the Company's common stock on
the date that the commitment for performance by the counterparty has been
reached or the counterparty's performance is complete. The fair value of
the equity instrument is charged directly to compensation expense and
additional paid-in capital.
Employee net stock-based compensation for the three months ended December
31, 2005 and 2004 was $17,497 and $0, respectively and for the nine
months ended December 31, 2005 and 2004 was $54,497 and $0, respectively.
On September 8, 2005, the Company issued 325,000 stock options to its
employees. The options have an exercise price of $0.01 and vest over 3
years.
F-40
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB
NO. 51". FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003.
For variable interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the first interim or
annual period beginning after June 15, 2003. The adoption of FIN 46 did
not have a significant impact on the Company' results of operations or
financial position.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised
2004), "SHARE-BASED PAYMENT" ("SFAS 123R"). SFAS 123R requires that
compensation cost related to share-based payment transactions be
recognized in the financial statements. Share-based payment transactions
within the scope of SFAS 123R include stock options, restricted stock
plans, performance-based awards, stock appreciation rights, and employee
share purchase plans.
The provisions of SFAS 123R are effective for small business issuers as
of the first interim period that begins after December 15, 2005.
Accordingly, the Company will implement the revised standard in the first
quarter of fiscal year 2006. Currently, the Company accounts for its
share-based payment transactions under the provisions of APB 25, which
does not necessarily require the recognition of compensation cost in the
financial statements. Management is assessing the implications of this
revised standard, which may materially impact the Company's results of
operations in the first quarter of fiscal year 2006 and thereafter.
F-41
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On December 16, 2004, FASB issued Statement of Financial Accounting
Standards No. 153, "EXCHANGES OF NON-MONETARY ASSETS, AN AMENDMENT OF APB
OPINION NO. 29, ACCOUNTING FOR NON-MONETARY TRANSACTIONS" (" SFAS 153").
This statement amends APB Opinion 29 to eliminate the exception for
non-monetary exchanges of similar productive assets and replaces it with
a general exception for exchanges of non-monetary assets that do not have
commercial substance. Under SFAS 153, if a non-monetary exchange of
similar productive assets meets a commercial-substance criterion and fair
value is determinable, the transaction must be accounted for at fair
value resulting in recognition of any gain or loss. SFAS 153 is effective
for non-monetary transactions in fiscal periods that begin after June 15,
2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results
of operations or cash flow.
NOTE 3 - FIXED ASSETS
Property and equipment as of December 31, 2005 was as follows:
Property and equipment $1,425,637
Less accumulated depreciation 692,204
----------
Net book value $ 733,433
==========
There was $69,934 and $67,976 charged to operations for depreciation
expense for the three months ended December 31, 2005 and 2004,
respectively and $207,986 and $200,403 charged to operations for
depreciation expense for the nine months ended December 31, 2005 and
2004, respectively.
NOTE 4 - LIABILITY FOR STOCK TO BE ISSUED
The Company has signed agreements with vendors and former directors to
convert $251,500 of accounts payable and $239,000 of notes payable into
equity. During the three months ended December 31, 2005, the Company also
agreed to issue stock for $236,750 of services received. As of December
31, 2005, the shares have not been issued.
F-42
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 4 - LIABILITY FOR STOCK TO BE ISSUED - (CONTINUED)
In August 2005, the Company has entered into an agreement with Vista
Capital, S.A. ("Vista") whereby Vista raised capital through the sale of
units of Company stock and warrants. Each unit contains 500,000 shares of
common stock at $0.035 and warrants to purchase an additional 250,000
shares of common stock at $0.10. The warrants can be called by the
Company after the Company's closing share price is equal to or exceeds
$0.12 for ten consecutive trading days. Each unit was sold for $17,500.
As of December 31, 2005, the Company had sold 87.75 units for cash
totaling $1,535,625 plus accepted the services for 0.50 units totaling
$8,750 and had 2 units outstanding on stock subscriptions receivable
totaling $35,000. The Company closed the private placement offering on
December 30, 2005 raising $1,579,375. As part of the offering, the
company paid 10% of the funds raised to Vista for fund raising fees.
The Company is currently working to register and issue all 59,469,286 of
the shares of common stock.
NOTE 5 - NOTES PAYABLE
The Company has several notes payable at December 31, 2005. Proceeds from
the notes were utilized to finance the general working capital
requirements of the Company, purchase equipment and pay certain
liabilities assumed by the Company in the purchase of the principal
assets of Integrated Communications Consultants Corporation in March of
2003. Prior to the effective merger of I-Element with MailKey, certain of
the notes were converted into shares of common stock. Several notes have
been partially converted into equity with the remaining balances restated
at zero percent interest. All outstanding notes at December 31, 2005 have
zero percent interest rate. Accrued interest on the notes was $0 at
December 31, 2005.
The notes payable balances at December 31, 2005 were as follows:
Total notes payable $652,185
Less current maturities 336,257
--------
Long term notes payable $315,928
========
F-43
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 5 - NOTES PAYABLE - (CONTINUED)
The amount of principal maturities of the notes payable for the next 3
years ending December 31, and in the aggregate is as follows:
2006 $336,257
2007 186,684
2008 129,244
--------
$652,185
========
As of December 31, 2005, the Company has not made payments on the notes
totaling $85,277 which were due between August and December 2005.
NOTE 6 - OPERATING LEASES
The Company leases office space on a month-to-month basis. The monthly
payment under the current lease is $3,284. The Company also leased
additional office space in Texas and California. The Company ceased
leasing this additional space during the year ended December 31, 2004.
Rental payments charged to expense for the three months ended December
31, 2005 and 2004 was $9,852 and $21,675, respectively and for the nine
months ended December 31, 2005 and 2004 was $32,020 and $67,022,
respectively.
NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
As of December 31, 2005, the Company has 2,000,000,000 shares of common
stock authorized at a par value of $0.001, and 96,477,065 shares issued
and outstanding. The company also has 200,000,000 shares of Blank Check
Preferred Stock authorized. There are no current plans to designate any
Blank Check Preferred Stock.
The following details the stock transactions for the nine months ended
December 31, 2005:
The Company received 1,498,195 shares of common stock valued at $37,455
which were issued in the previous quarter for services. Upon receipt, the
common shares were canceled.
F-43
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
COMMON STOCK (CONTINUED)
The Company issued 1,500,000 shares of common stock valued at $75,000
against the Liability for stock to be issued.
The Company issued 340,000 shares of common stock valued at $8,500 to a
sales agent as payment on the outstanding balance owed.
The Company issued 175,000 shares of common stock valued at $3,500 to a
consultant as payment on the outstanding balance owed.
The Company issued 300,000 shares of common stock valued at $6,000 to a
consultant for services received.
The Company issued 250,000 shares of common stock valued at $5,500 to a
consultant for services received.
The Company issued 1,000,000 shares of common stock valued at $40,000 to
an employee as a bonus.
The Company issued 1,000,000 shares of common stock valued at $40,000 to
a consultant for services received.
The Company issued 1,626,530 shares of common stock valued at $73,194 to
a sales agent as payment on the outstanding balance owed and as payment
for current services.
The Company is currently working to register and issue 59,469,286 shares
of common stock to meet the $2,297,875 Liability for stock to be issued
balance.
F-44
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 8 - PROVISION FOR INCOME TAXES
Deferred income taxes will be determined using the liability method for
the temporary differences between the financial reporting basis and
income tax basis of the Company's assets and liabilities. Deferred income
taxes will be measured based on the tax rates expected to be in effect
when the temporary differences are included in the Company's tax return.
Deferred tax assets and liabilities are recognized based on anticipated
future tax consequences attributable to differences between financial
statement carrying amounts of assets and liabilities and their respective
tax bases.
At December 31, 2005, deferred tax assets consist of the following:
Net deferred tax assets $553,677
Less: valuation allowance (553,677)
--------
$ -0-
At December 31, 2005, the Company had deficits accumulated in the
approximate amount of $1,845,591, available to offset future taxable
income through 2023. The Company established valuation allowances equal
to the full amount of the deferred tax assets due to the uncertainty of
the utilization of the operating losses in future periods.
NOTE 9 - GOING CONCERN
As shown in the accompanying condensed consolidated financial statements,
the Company has sustained net operating losses for the three months ended
December 30, 2005 and for the nine months ended December 31, 2005 and
2004. Although the Company recently raised funds, there is no guarantee
that the Company will be able to generate enough revenues or raise enough
additional capital to sustain its operations in the long term. This
raises substantial doubt about the Company's ability to continue as a
going concern.
The Company's future success is dependent upon its ability to achieve
profitable operations and generate cash from operating activities, and
upon additional financing. Management believes they have raised
sufficient funds to support their business plan and acquire an operating
cash flow positive company.
The condensed consolidated financial statements do not include any
adjustments relating to the recoverability or classification of recorded
assets and liabilities that might result should the Company be unable to
continue as a going concern.
F-45
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 10 - CONTINGENCIES
On April 19, 2005 KK Solutions, Inc., a California corporation d/b/a/
Three 18, Inc. ("KK"), filed a complaint against the Company and its CEO,
Ivan Zweig, individually, in the Superior Court of the State of
California, County of Los Angeles, alleging breach of contract pursuant
to a dispute regarding sales commissions due to KK. KK seeks damages in
the amount of $78,000, plus interest. The Company is vigorously defending
against this action, which is currently in the discovery phase of the
proceeding.
On April 26, 2005 Communications Plus, Inc., a California company d/b/a
Global Communications, ("Global"), filed a complaint against the Company
and its CEO, Ivan Zweig, individually, in the Superior Court of the State
of California, County of Los Angeles, alleging breach of contract
pursuant to a dispute regarding sales commissions due to Global. Global
seeks damages in the amount of $50,000, plus interest. The Company is
vigorously defending against this action, which is currently in the
discovery phase of the proceeding.
F-46
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Nevada corporation law provides that:
o a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of the corporation,
by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good
faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful;
o a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him
in connection with the defense or settlement of the action or suit if
he acted in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to
which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable
to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the
action or suit was brought or other court of competent jurisdiction
determines upon application that in view of all the circumstances of
the case, the person is fairly and reasonably entitled to indemnity for
such expenses as the court deems proper; and
o to the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding, or in defense of any claim, issue or
matter therein, the corporation shall indemnify him against expenses,
including attorneys' fees, actually and reasonably incurred by him in
connection with the defense.
Our Certificate of Incorporation provide that no director or officer
shall be personally liable to our company or any of its stockholders for damages
for breach of fiduciary duty as a director or officer involving any act or
omission of such director or officer unless a final adjudication establishes
that such acts or omissions involve: (i) intentional misconduct , (ii) fraud, or
(iii) a knowing violation of the law that was material to the cause of action.
Our Bylaws provide we have the power to indemnify, to the greatest
allowable extent permitted under the General Corporate Laws of Nevada, directors
or officers of our company for any duties or obligations arising out of any acts
or conduct of the officer or director performed for or on behalf of our company.
We will reimburse each such person for all legal and other expenses reasonably
incurred by him in connection with any such claim or liability, including power
to defend such persons from all suits or claims as provided for under the
provisions of the General Corporate Law of Nevada.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of our
company under Nevada law or otherwise, we have been advised the opinion of the
Securities and Exchange Commission is that such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event a claim for indemnification against such liabilities
(other than payment by us for expenses incurred or paid by a director, officer
or controlling person of our company in successful defense of any action, suit,
or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction, the question of whether such indemnification
by it is against public policy in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
II-1
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We will pay all expenses in connection with the registration and sale of our
common stock. All amounts shown are estimates except for the registration fee.
EXPENSES AMOUNT
Registration Fee $ 1,375.00
Costs of Printing and Engraving $ 3,900.00
Legal Fees $ 15,000.00
Accounting Fees $ 2,000.00
Miscellaneous $ 650.00
---------------
TOTAL $ 22,925.00
==============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
As of December 31, 2005, the Company has 2,000,000,000 shares of common stock
authorized at a par value of $0.001, and as of June 5, 2006 159,035,031 shares
issued and outstanding. The company also has 200,000,000 shares of Blank Check
Preferred Stock authorized. There are no current plans to designate any Blank
Check Preferred Stock.
On March 23, 2006, I-Element issued 400,000 shares of common stock to Susan
Walton in exchange for payment of a debt in the amount of $200,000. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On March 23, 2006, I-Element issued 1,600,000 shares of common stock to Tim Dean
Smith in exchange for payment of a debt in the amount of $80,000. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On March 23, 2006, I-Element issued 1,800,000 shares of common stock to Jeremy
Dean Smith in exchange for payment of a debt in the amount of $90,000. The
shares were issued in reliance on Section 4(2) of the Securities Act and contain
a restrictive legend in accordance with Rule 144.
On March 23, 2006, I-Element issued 2,900,000 shares of common stock to Dolphin
Capital in exchange for payment of a debt in the amount of $145,000. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On March 23, 2006, I-Element issued 150,000 shares of common stock to Isaac de
la Pena in exchange for payment of a debt in the amount of $7,500. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On March 22, 2006, I-Element issued 80,000 shares of common stock to Tim Dean
Smith in exchange for payment of a debt in the amount of $4,000. The shares were
issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On February 1, 2006, I Element issued 168,680 shares of common stock to Quality
Sound Communications in exchange for the cancellation of a debt owed to Quality
by IElement in the amount of $18,554.85 for sales commissions owed. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 250,000 shares of common stock to Stefan
Muller in exchange for consulting services rendered in the amount of $8.750. The
shares were issued in reliance on Section 4(2) of the Securities Act and contain
a restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 1,000,000 shares of common stock to Stefan
Muller in exchange for consulting services rendered in the amount of $60,000.
The shares were issued in reliance on Section 4(2) of the Securities Act and
contain a restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 1,000,000 shares of common stock to Jurgen
Popp in exchange for consulting services rendered in the amount of $60,000. The
shares were issued in reliance on Section 4(2) of the Securities Act and contain
a restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 20,000 shares of common stock to Donald
Kennedy in exchange for consulting services rendered in the amount of $1,000.
The shares were issued in reliance on Section 4(2) of the Securities Act and
contain a restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 100,000 shares of common stock to John Fox
in exchange for consulting services rendered in the amount of $5,000. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
II-2
On February 1, 2006, I-Element issued 1,000,000 shares of common stock to Vista
Capital in exchange for consulting services rendered in the amount of $70,000.
The shares were issued in reliance on Section 4(2) of the Securities Act and
contain a restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 500,000 shares of common stock to Misty
Starke in exchange for consulting services rendered in the amount of $20,000.
The shares were issued in reliance on Section 4(2) of the Securities Act and
contain a restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 250,000 shares of common stock to Global
Equity Trading in exchange for consulting services rendered in the amount of
$10,000. The shares were issued in reliance on Section 4(2) of the Securities
Act and contain a restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 1,000,000 shares of common stock to Yock
Investment in exchange for consulting services rendered in the amount of
$60,000. The shares were issued in reliance on Section 4(2) of the Securities
Act and contain a restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 1,000,000 shares of common stock to
Stonegate Ventures in exchange for consulting services rendered in the amount of
$60,000. The shares were issued in reliance on Section 4(2) of the Securities
Act and contain a restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 200,000 shares of common stock to Brett
Jenson in exchange for employee compensation in the amount of $7,000. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 714,286 shares of common stock to Jeff
Wilson in exchange for employee compensation in the amount of $25,000. The
shares were issued in reliance on Section 4(2) of the Securities Act and contain
a restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 2,500,000 shares of common stock to
Palladian Advisors in exchange for the settlement of a claim in the amount of
$100,000. The shares were issued in reliance on Section 4(2) of the Securities
Act and contain a restrictive legend in accordance with Rule 144.
On February 1, 2006, I-Element issued 880,000 shares of common stock to Duanne
Morris in exchange for the settlement of a claim in the amount of $44,000. The
shares were issued in reliance on Section 4(2) of the Securities Act and contain
a restrictive legend in accordance with Rule 144.
On January 12, 2006, I-Element issued 1,000,000 shares of common stock to Yock
Investment in exchange for consulting services rendered in the amount of
$60,000. The shares were issued in reliance on Section 4(2) of the Securities
Act and contain a restrictive legend in accordance with Rule 144.
On January 12, 2006, I-Element issued 1,000,000 shares of common stock to
Stonegate Ventures in exchange for consulting services rendered in the amount of
$60,000. The shares were issued in reliance on Section 4(2) of the Securities
Act and contain a restrictive legend in accordance with Rule 144.
On January 9, 2006, I-Element issued 250,000 shares of common stock to Global
Equity Trading in exchange for services rendered in the amount of $10,000. The
shares were issued in reliance on Section 4(2) of the Securities Act and contain
a restrictive legend in accordance with Rule 144.
On January 9, 2006, I-Element issued 500,000 shares of common stock to Misty
Starke in exchange for services rendered in the amount of $20,000. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
The Board of Directors approved the delivery of the shares to each of the
following recipients on January 23, 2006, except for the shares issued to John
Fox, Donald Kennedy and Stefan Muller which were approved for issuance on
December 27, 2005. The shares were issued in exchange for services rendered and
as compensation. The securities were issued in reliance on Section 4(2) of the
Securities Act. All shares are restricted pursuant to Rule 144.
SHARES ISSUED TO: PER SHARE NUMBER OF AGGREGATE VALUE OF
VALUE SHARES ISSUED SHARES ISSUED
- ---------------------------------- --------- ------------- ------------------
Duane Morris, LLP $.050 880,000 $44,000.00
Palladian Capital Partners,LLC $.040 2,200,000 $88,000.00
Palladian Capital Partners,LLC $.040 300,000 $12,000.00
Tim Dean-Smith $.050 1,600,000 $84,000.00
Susan Walton $.050 400,000 $20,000.00
Jeremy Dean-Smith $.050 1,800,000 $90,000.00
Dolphin Capital $.050 2,900,000 $145,000.00
Isaac de la Pena $.050 150,000 $7,500.00
Misty Starke $.040 500,000 $20,000.00
Brett Jensen $.035 200,000 $7,000.00
Jeff Wilson $.035 714,286 $25,000.01
Vista Capital $.070 1,000,000 $70,000.00
Stonegate Ventures $.060 1,000,000 $60,000.00
Yock Investments $.060 1,000,000 $60,000.00
Jurgen Popp $.060 1,000,000 $60,000.00
Global Equity Trading & Finance, Ltd. $.040 250,000 $10,000.00
John Fox $.050 100,000 $5,000.00
Donald Kennedy $.050 20,000 $1,000.00
Stefan Muller $.060 1,000,000 $60,000.00
--------------- --------------
TOTAL 17,014,286 $868,500.01
=============== ==============
II-3
On December 30, 2005, the Company confirmed the sale of unregistered
securities sold in units consisting of, in the aggregate, 45,125,000 shares of
common stock at a purchase price of $0.035 per share, for an aggregate purchase
price of $1,579,375 and warrants for the purchase of and aggregate total of
22,562,500 at a strike price of $0.10 per share (the "Warrants"). The securities
were sold to accredited investors in reliance on an exemption provided in
Regulation D, Rule 506 and 4(2) under the Securities Act. The Company may call
the Warrants at any time after both the (1) closing bid price for the common
stock of the Company has been equal to or greater than $0.12 per share for ten
(10) consecutive trading days, and (2) the shares underlying the warrants have
been included on an SB-2 Registration Statement, or other substantially
equivalent registration statement, that has been filed by the Company and then
active or declared effective by the SEC and shall expire upon the earlier of
forty-five (45) days from the date the Warrant is called or on December 31,2007.
The following is a complete list of share recipients:
PURCHASER AGGREGATE SHARES OF COMMON NUMBER OF SHARES
PURCHASE PRICE STOCK PURCHASED ISSUABLE UPON
CONVERSION OF
WARRANT
- ------------------------------- -------------- ---------------- ----------------
Michael Bloch $70,000 2,000,000 1,000,000
Jonathan Lowenthal $17,500 500,000 250,000
Wayne Schoenmakers $3,500 100,000 50,000
Thomas Barrett $7,000 200,000 100,000
Wm Goatley Revocable Trust $8,750 250,000 125,000
Richard Crose $17,500 500,000 250,000
Robert Gillman $17,500 500,000 250,000
Timothy Broder $17,500 500,000 250,000
Thomas Allen Piscula $17,500 500,000 250,000
Raymond Dunwoodle $17,500 500,000 250,000
Fred Matulka $17,500 500,000 250,000
Michael Melson $17,500 500,000 250,000
Oscar Greene Jr $17,500 500,000 250,000
Robert Rowley $17,500 500,000 250,000
Trey Investments, LLP $5,250 150,000 75,000
William Cail $875 25,000 12,500
Kenneth Meyer $35,000 1,000,000 500,000
Frank Davis $7,000 200,000 100,000
Holger Pfeiffer $8,750 250,000 125,000
Bellano Family Trust $10,500 300,000 150,000
Calder Capital, Inc. $17,500 500,000 250,000
Ulrich Nusser $8,750 250,000 125,000
Sat Paul Dewan $10,500 300,000 150,000
Thomas Weiss $8,750 250,000 125,000
Marianne Issels $8,750 250,000 125,000
Stefan Muller $17,500 500,000 250,000
Annette Bohmer $17,500 500,000 250,000
Hendrik Paulus $17,500 500,000 250,000
Robert Flaster $7,000 200,000 100,000
William Harner $5,250 150,000 75,000
Veronica Kristi Prenn $52,500 1,500,000 750,000
Ryan Cornelius $52,500 1,500,000 750,000
Jurgen Popp $52,500 1,500,000 750,000
Robert Smith $10,500 300,000 150,000
Gerd Weger $350,000 10,000,000 5,000,000
Christiane Loberbauer $8,750 250,000 125,000
Fred Schmitz $175,000 5,000,000 2,500,000
Glenn Jensen $105,000 3,000,000 1,500,000
Laurence Straus $10,500 300,000 150,000
General Research GMBH $17,500 500,000 250,000
AK Asset Management $35,000 1,000,000 500,000
Benjamin Eichholz $52,500 1,500,000 750,000
Amaltea SA $17,500 500,000 250,000
Clarence Keck Jr $5,250 150,000 75,000
Jorn Follmer $17,500 500,000 250,000
Mattias Graeve $8,750 250,000 125,000
Jerome Niedfelt $10,500 300,000 150,000
John Niedfelt $7,000 200,000 100,000
Global Equity Trading & Finance, Ltd. $17,500 500,000 250,000
Global Equity Trading & Finance, Ltd. $70,000 2,000,000 1,000,000
Film & Music Entertainment, Inc. $35,000 1,000,000 500,000
Red Giant Productions, Inc. $17,500 500,000 250,000
-------------- -------------- --------------
TOTAL $1,579,375 45,125,000 22,562,500
============== ============== ==============
II-4
On March 8, 2005 the Company issued 1,693,334 shares of common stock to
Lance K. Stovall in exchange for services rendered as a sales agent, which
services were valued at $42,333. On June 6, 2005 Mr. Stovall returned 1,498,195
shares of common stock valued at $37,455. Upon receipt, the common shares were
canceled. The shares were issued in reliance on Section 4(2) of the Securities
Act and contain a restrictive legend in accordance with Rule 144.
On April 8, 2005 the Company issued 1,500,000 shares of common stock to
BDM Holdings, LLC against the $75,000 liability for Stock to be issued. The
shares were issued in reliance on Section 4(2) of the Securities Act and contain
a restrictive legend in accordance with Rule 144.
On May 19, 2005, the Company issued 340,000 shares of common stock to
Trad Solutions valued at $8,500 as a sales agent as payment on the outstanding
balance owed. The shares were issued in reliance on Section 4(2) of the
Securities Act and contain a restrictive legend in accordance with Rule 144.
On June 7, 2005 the Company issued 175,000 shares of common stock to
Rick Wright valued at $3,500 to a consultant as payment on the outstanding
balance owed. The shares were issued in reliance on Section 4(2) of the
Securities Act and contain a restrictive legend in accordance with Rule 144.
On March 10, 2005, the Company issued 200,000 shares of common stock
valued at $5,000 to Blake Martensen, a consultant, for services received. On
June 7, 2005 the Company issued 300,000 shares of common stock to Blake
Martensen valued at $6,000 as a consultant for services received. On June 29,
2005 the Company issued 1,000,000 shares of common stock valued at $40,000 to
Blake Martensen, a consultant for services received. The shares were issued in
reliance on Section 4(2) of the Securities Act and contain a restrictive legend
in accordance with Rule 144.
On June 20, 2005, the Company issued 250,000 shares of common stock to
Burton Goldi valued at $5,500 as a consultant for services received. On March 8,
2005 the Company issued 1,030,672 shares of common stock valued at $25,767 to
Mr. Goldi for consulting services received. The shares were issued in reliance
on Section 4(2) of the Securities Act and contain a restrictive legend in
accordance with Rule 144.
On June 29, 2005 the Company issued 1,000,000 shares of common stock
valued at $40,000 to Heather Walther as a bonus. On March 8, 2005 the Company
issued 1,220,637 shares of common stock valued at $30,516 to Ms. Walther for
employee compensation. The shares were issued in reliance on Section 4(2) of the
Securities Act and contain a restrictive legend in accordance with Rule 144.
On July 28, 2005 and August 8, 2005 the Company issued 1,596,311 and
30,219 respectively shares of common stock valued at $73,194 to Quality Sound
Communications, a sales agent as payment on the outstanding balance owed and as
payment for current services. The shares were issued in reliance on Section 4(2)
of the Securities Act and contain a restrictive legend in accordance with Rule
144.
On March 14, 2005, the Company issued 2,229,374 shares of common stock
valued at $111,469 to Obelix for consulting services received. The shares were
issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On March 14, 2005 the Company issued 2,018,000 shares of common stock
valued at $50,450 to Claudette Milan for consulting services received. The
shares were issued in reliance on Section 4(2) of the Securities Act and contain
a restrictive legend in accordance with Rule 144.
On March 10, 2005 and December 8, 2004 the Company issued 150,000 and
150,000 respectively shares of common stock valued at $3,750 and $9,000 to Jon A
Gordon for consulting services received. The shares were issued in reliance on
Section 4(2) of the Securities Act and contain a restrictive legend in
accordance with Rule 144.
On March 10, 2005 and December 31, 2005 the Company issued 150,000 and
150,000 respectively shares of common stock valued at $3,750 and_$9,000 to Carl
D. Glaeser for consulting services received. The shares were issued in reliance
on Section 4(2) of the Securities Act and contain a restrictive legend in
accordance with Rule 144.
On March 8, 2005 and March 28, 2005, the Company issued 192,308 and
192,308 respectively shares of common stock valued at $4,808 and $4,808 to Brian
Lebrecht for legal services received. The shares were issued in reliance on
Section 4(2) of the Securities Act and contain a restrictive legend in
accordance with Rule 144.
On March 8, 2005, the Company issued 1,000,000 shares of common stock
valued at $25,000 to David Otto for legal services received. The shares were
issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
II-5
On March 8, 2005 the Company issued 693,280 shares of common stock
valued at $17,332 to Rick Wright for consulting services received. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On March 8, 2005 the Company issued 2,018,000 shares of common stock
valued at $50,450 to Alex Ponnath for technology services received. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On March 8, 2005 the Company issued 1,680,000 shares of common stock
valued at $42,000 to Jeff Wilson for employee compensation. The shares were
issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On January 19, 2005, Mailkey Corporation, consummated the acquisition
of I-Element, Inc. Under the terms of the Merger Agreement dated November 9,
2004, the Company issued an aggregate of 47,845,836 shares of its common stock,
$.001 par vale per share, in exchange for all of the issued and outstanding
shares of capital stock of I-Element and in exchange for the cancellation of
certain debt outstanding on the date of closing. The Agreement and Plan of
Merger and First Amendment thereto are filed herewith as Exhibits 2.1 and 2.2.
On December 8, 2004, the Company issued 400,000 shares of common stock
valued at $68,000 to Brad Van Siclen for services received. The shares were
issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On December 8, 2004, the Company issued 95,000 shares of common stock
valued at $16,150 to Eric A Farrow for services received. The shares were issued
in reliance on Section 4(2) of the Securities Act and contain a restrictive
legend in accordance with Rule 144.
On December 8, 2004, the Company issued 8,333 shares of common stock
valued at $1,417 to Brad B Schwall, Jr for services received. The shares were
issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On December 8, 2004, the Company issued 100,000 shares of common stock
valued at $17,000 to Charles Ashley for services received. The shares were
issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On December 8, 2004, the Company issued 60,500 shares of common stock
valued at $10,285 to Donald B Schwall, Jr. for services received. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On November 11, 2004, the Company issued 1,000,000 shares of common
stock valued at $262,000 to Terrence Byrne for services received. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On November 11, 2004, the Company issued 315,000 shares of common stock
valued at $126,000 to Brad Van Siclen for services received. The shares were
issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On November 11, 2004, the Company issued 400,000 shares of common stock
valued at $160,000 to Willian Grimes for services received. The shares were
issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On November 5, 2004, the Company issued 37,500 shares of common stock
valued at $26,250 to Donald B. Schwall, Jr. for services received. The shares
were issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On November 5, 2004, the Company issued 385,000 shares of common stock
valued at $154,000 to Ivan Zweig for services received. The shares were issued
in reliance on Section 4(2) of the Securities Act and contain a restrictive
legend in accordance with Rule 144.
On October 5, 2004, the Company issued 500,000 shares of common stock
valued at $350,000 to Roger B. Ponting for services received. The shares were
issued in reliance on Section 4(2) of the Securities Act and contain a
restrictive legend in accordance with Rule 144.
On October 5, 2004, the Company issued 28,750 shares of common stock
valued at $20,125 to Susan Walton for services received. The shares were issued
in reliance on Section 4(2) of the Securities Act and contain a restrictive
legend in accordance with Rule 144.
On September 7, 2004 the Company issued an aggregate of 1,388,072
shares of its common stock to its existing shareholders upon the exercise of
outstanding warrants. The shares were issued in reliance on Section 4(2) of the
Securities Act and contain a restrictive legend in accordance with Rule 144.
II-6
On July 20, 2004, the Company issued an aggregate of 291,944 shares of
its common stock to its existing shareholders upon the exercise of outstanding
warrants. The shares were issued in reliance on Section 4(2) of the Securities
Act and contain a restrictive legend in accordance with Rule 144.
On June 13, 2004, the Company issued 60,005 shares of common stock
valued at $210,018 to Scott Peters upon the exercise of an outstanding warrant.
The shares were issued in reliance on Section 4(2) of the Securities Act and
contain a restrictive legend in accordance with Rule 144.
On March 25, 2004 MailKey Corporation consummated the reverse merger
transaction with Global Diversified Acquisition Corp. In accordance with the
terms of the Merger Agreement dated February 20, 2004 as amended March 24, 2004,
the Company issued an aggregate of 26,246,000 shares of its common stock to the
holders of MailKey capital stock in exchange for all the issued and outstanding
capital stock of MailKey. A detailed description of the Merger Agreement and
Plan of Merger, as amended, are set forth on Form 8-K, and Exhibits filed
therewith, filed on April 9, 2004.
Also on March 25, 2004 the Company issued an additional 2,590,013
shares of common stock to certain service providers in association with the
consummation of the reverse merger transaction with Global Diversified
Acquisition Corp.
On March 18, 2004 the Company issued 200,000 shares of common stock
valued at $606,000 to Corporate Communications Network, Inc. for consulting
services received. The shares were issued in reliance on Section 4(2) of the
Securities Act and contain a restrictive legend in accordance with Rule 144.
ITEM 27. EXHIBITS.
Exhibit
Number Description
- ------ -----------
5.1 Legal Opinion
2.1 Agreement and Plan of Merger, dated February 20, 2004, by and
among Global Diversified Acquisition Corp., G.D. Acquisition
Corp., MK Secure Solutions Limited and Westvale Consulting
Limited.
2.2 First Amendment to Agreement and Plan of Merger, dated March 23,
2004, by and among Global Diversified Acquisition Corp., G.D.
Acquisition Corp., MK Secure Solutions Limited and Westvale
Consulting Limited.
2.3 Agreement and Plan of Merger, dated November 9, 2004, by and
among Mailkey Corporation, Mailkey Acquisition Corp., I-Element,
Inc. and Ivan Zweig.
2.4 First Amendment and Waiver to Agreement and Plan of Merger,
dated December 30, 2004, by and among Mailkey Corporation,
Mailkey Acquisition Corp., I-Element, Inc. and Ivan Zweig.
3(i).1 Articles of Incorporation.
3(i).2 Amendment to Articles of Incorporation
3(i).3 Amendment to Articles of Incorporation
3(i).4 Amendment to Articles of Incorporation
3(i).5 Certificate of Correction
3(i).6 Amended Articles of Incorporation of Mailey Corporation dated
August 1, 2005.
3(ii) Restated By-Laws of I-Element
10.1 Employment Agreement with Ivan Zweig in the form of Binding
Letter of Intent dated January 18, 2005
10.2 Form of Warrant
10.3 Form of Amended and Restated Convertible Secured Promissory
Notes dated March 25, 2006
10.4 Integrated Communications Consultants Corporation Master
Services Agreement by and between Integrated Communications
Consultants Corporation and IElement, Inc. dated April 30, 2003.
10.5 Lease Agreement between IElement, Inc. and 13714 Gamma, Ltd
dated June 9, 2005.
10.6 Form of Vista Capital warrant
21.0 List of Subsidiaries
23.1 Consent of Auditor
23.2 Consent of Attorney (within Exhibit 5.1)
II-7
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration Statement;
(iii) Include any additional or changed information on the plan of
distribution.
(2) For determining liability under the Securities Act, the Registrant will
treat each such post-effective amendment as a new registration statement of the
securities offered, and the offering of such securities at that time to be the
initial bona fide offering.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) For determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned small business issuer undertakes that in a primary offering of
securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
i. Any preliminary prospectus or prospectus of the undersigned small
business issuer relating to the offering required to be filed pursuant to Rule
424;
ii. Any free writing prospectus relating to the offering prepared by or
on behalf of the undersigned small business issuer or used or referred to by the
undersigned small business issuer;
iii. The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned small
business issuer; and
iv. Any other communication that is an offer in the offering made by
the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described under Item 24 above, or otherwise, the
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities, other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding, is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-8
Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
II-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas on June 7, 2006.
IELEMENT CORPORATION:
By: /s/ Ivan Zweig
------------------------------
Name: Ivan Zweig
Title: Chief Executive Officer,
Chairman and Principal Accounting Officer
IVAN ZWEIG
/s/ Ivan Zweig
- ------------------------------
Name: Ivan Zweig
Title: Chief Executive Officer,
Chairman and Principal Accounting Officer
Director
LANCE K. STOVALL
/s/ Lance K. Stovall
- -------------------------------
Name: Lance K. Stovall
Title: Director
II-10