UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: June 30, 2004
-------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act of 1934
For the transition period from __________ to __________
Commission File No. 000-29331
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MAILKEY CORPORATION
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 76-0270295
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
130 Shaftesbury Avenue
London, England W1D 5EU
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(Address of Principal Executive Offices)
011-44-2070-310821
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
There were 29,658,200 issued and outstanding shares of the registrant's common
stock, $.001 par value per share, on August 3, 2004.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page(s)
-----------
Condensed Consolidated Balance Sheets (Unaudited) 3
Condensed Consolidated Statements of Operations (Unaudited) 4
Condensed Consolidated Statements of Comprehensive Loss (Unaudited) 5
Condensed Consolidated Statements of Cash Flows (Unaudited) 6
Condensed Consolidated Statements of Shareholders' Deficit (Unaudited) 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 13
ITEM 2. PLAN OF OPERATION
Our Plan of Operation 19
Liquidity and Capital Resources 20
Off-Balance Sheet Arrangements 20
ITEM 3. CONTROLS AND PROCEDURES 21
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Balance Sheets
ASSETS
(Unaudited)
June 30, March 31,
2004 2004
--------------- ---------------
Current Assets
Cash $ 599,792 $ 437,523
Prepaid assets 301,738 57,941
Subscription receivable-collected April 2004 - 403,000
--------------- ---------------
Total Current Assets 901,530 898,464
Property and equipment, net 64,006 63,259
--------------- ---------------
Total Assets $ 965,536 $ 961,723
=============== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Short-term loan payable - related party $ 42,518 $ 43,087
Short-term loans payable 178,085 465,701
Accounts payable and accrued liabilities 789,146 582,681
--------------- ---------------
Total Current Liabilities 1,009,749 1,091,469
--------------- ---------------
Commitments and Contingencies
Shareholders' Equity
Minority interest - -
Common shares; $0.001 par; 100,000,000 shares authorized,
June 30, 2004: issued and outstanding 29,355,251, issuable - 1,147,008;
March 31, 2004: issued and outstanding - 28,865,238 30,502 28,865
Additional paid-in capital 7,647,818 6,688,205
Accumulated foreign exchange translation adjustment 26,295 6,204
Deficit accumulated during the development stage (6,208,713) (4,667,885)
Deferred compensation (1,437,615) (1,922,635)
Subscriptions receivable (102,500) (262,500)
--------------- ---------------
Total Shareholders' Deficit (44,213) (129,746)
--------------- ---------------
Total Liabilities and Shareholders' Deficit $ 965,536 $ 961,723
=============== ===============
See notes to condensed consolidated financial statements.
3
MAILKEY CORPORATIONAND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, March 11, 2003
------------------------------- (Inception) to
2004 2003 June 30, 2004
--------------- --------------- ---------------
Revenues $ - $ - $ -
Operating Expenses
Software development and other compensation 623,701 107,501 3,705,457
Consulting fees - related party 218,330 17,478 725,497
Legal and professional fees 169,207 22,637 642,990
Other selling, general and administrative 322,730 33,908 858,591
--------------- --------------- ---------------
Total Operating Expenses 1,333,968 181,524 5,932,535
--------------- --------------- ---------------
Loss from Operations (1,333,968) (181,524) (5,932,535)
Interest expense (207,033) - (277,638)
Interest income 173 29 1,049
--------------- --------------- ---------------
Loss Before Minority Interest (1,540,828) (181,495) (6,209,124)
Minority Interest in Losses of Subsidiaries - - 411
--------------- --------------- ---------------
Net Loss $ (1,540,828) $ (181,495) $ (6,208,713)
=============== =============== ===============
Basic and Diluted Loss Per Share $ (0.05) $ (0.02) $ (0.34)
=============== =============== ===============
Weighted Average Shares Outstanding 29,126,872 8,692,900 18,482,924
See notes to condensed consolidated financial statements.
4
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
Three Months Ended June 30, March 11, 2003
------------------------------- (Inception) to
2004 2003 June 30, 2004
--------------- --------------- ---------------
Net loss $ (1,540,828) $ (181,495) $ (6,208,713)
Foreign Currency Translation Adjustments 20,091 (1,546) 26,295
--------------- --------------- ---------------
Comprehensive Loss $ (1,520,737) $ (183,041) $ (6,182,418)
=============== =============== ===============
See notes to condensed consolidated financial statements.
5
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended June 30, March 11, 2003
------------------------------- (Inception) to
2004 2003 June 30, 2004
--------------- --------------- ---------------
Cash Flows from Operating Activities
Net loss $ (1,540,828) $ (181,495) $ (6,208,713)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 6,375 149 21,287
Amortization of debt discount and beneficial
conversion feature 184,299 - 246,727
Amortization of deferred compensation 136,937 - 300,825
Stock-based compensation - - 1,628,722
Interest expense settled by stock issuance 16,016 - 16,016
Minority interest share in losses of subsidiaries - - (411)
Increase (decrease) in cash flows due to changes in
operating assets and liabilities:
Prepaid assets (43,797) (2,729) (101,738)
Accounts payable and accrued liabilities 214,467 108,765 797,148
--------------- --------------- ---------------
Net Cash Used in Operating Activities (1,026,531) (75,310) (3,300,137)
--------------- --------------- ---------------
Cash Flows from Investing Activities
Acquisition of property and equipment (7,122) (2,989) (85,293)
--------------- --------------- ---------------
Net Cash Used in Investing Activities (7,122) (2,989) (85,293)
--------------- --------------- ---------------
Cash Flows from Financing Activities
Proceeds of short-term loans - related party - - 81,517
Repayment of short-term loans - related party (569) - (38,999)
Payment of short-term loans payable (21,915) 126,889 (21,915)
Issuance of subsidiary shares to minority interests - - 411
Issuance of common share capital 690,559 869 3,023,703
Collections of stock subscriptions receivable 563,000 - 563,000
Payment of offering costs (55,244) - (298,790)
Proceeds from short-term debt and related warrants - - 650,000
--------------- --------------- ---------------
Net Cash Provided by Financing Activities 1,175,831 127,758 3,958,927
--------------- --------------- ---------------
Effect of Exchange Rate Changes on Cash 20,091 (1,547) 26,295
--------------- --------------- ---------------
Net Increase in Cash 162,269 47,912 599,792
Cash, Beginning of period 437,523 - -
--------------- --------------- ---------------
Cash, End of period $ 599,792 $ 47,912 $ 599,792
=============== =============== ===============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest 695 - -
=============== =============== ===============
Income Tax - - -
=============== =============== ===============
See notes to condensed consolidated financial statements.
6
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Shareholders' Deficit
Common Shares
Minority --------------------------------
Interest Shares Amount
-------------- --------------- ----------------
Balance at March 11, 2003
(Date of Inception) $ - - $ -
Issuance of "founders" shares
at $0.001 per share - March - 8,692,900 8,693
Issuance of shares at $0.05 per share
for $0.001 cash and $0.0499 services - October - 5,110,397 5,110
Issuance of shares at $0.05 per share
for cash - October - 1,976,318 1,976
Issuance of shares at $0.05 per share
for services - October - 483,800 484
Issuance of shares and warrants at $0.25
per share plus 1/2 of a warrant - June - August - 3,306,000 3,306
Issuance of shares valued at $0.1919
per share for services - June - August - 1,230,585 1,231
Issuance of shares and warrants at $0.50
per share plus 1/2 of a warrant - August - November - 490,000 490
Issuance of shares valued at $0.3878
per share for services - August - November - 230,000 230
Issuance of shares and warrants at $0.85
for one share plus 1/2 of a warrant - November - - 375,000 375
December
Consulting fees paid in conjunction
with 2003 share issuances - - -
Options issued for services - - -
Issuance of minority interest in
subsidiary 411 - -
Foreign currency translation
adjustments - - -
Minority interest in loss (411) - -
Net loss - - -
-------------- --------------- ----------------
Balance, December 31, 2003 $ - 21,895,000 $ 21,895
-------------- --------------- ----------------
See notes to condensed consolidated financial statements.
7
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Shareholders' Deficit
Accumulated Deficit
Foreign Accumulated
Additional Exchange During the
Paid-in Translation Development
Capital Adjustment Stage Total
--------------- ------------- --------------- --------------
Balance at March 11, 2003
(Date of Inception) $ - $ - $ - $ -
Issuance of "founders" shares
at $0.001 per share - March (7,824) - - 869
Issuance of shares at $0.05 per share
for $0.001 cash and $0.0499 services - October 250,921 - - 256,031
Issuance of shares at $0.05 per share
for cash - October 96,845 - - 98,821
Issuance of shares at $0.05 per share
for services - October 23,703 - - 24,187
Issuance of shares and warrants at $0.25
for one share plus 1/2 of a warrant - June - August 823,194 - - 826,500
Issuance of shares valued at $0.1919 per
share for services - June - August 235,041 - - 236,272
Issuance of shares and warrants at $0.50
per share plus 1/2 of a warrant - August - November 244,510 - - 245,000
Issuance of shares valued at $0.3878 per
share for services - August - November 88,986 - - 89,216
Issuance of shares and warrants at 0.85
for one share plus 1/2 of a warrant - November - 318,375 - - 318,750
December
Consulting fees paid in conjunction
with 2003 share issuances (149,790) - - (149,790)
Options issued for services 53,520 - - 53,520
Issuance of minority interest in
subsidiary - - - 411
Foreign currency translation
adjustments - 9,251 - 9,251
Minority interest in loss - - - (411)
Net loss - - (2,157,655) (2,157,655)
--------------- ------------- --------------- --------------
Balance, December 31, 2003 $ 1,977,481 $ 9,251 $ (2,157,655) $ (149,028)
--------------- ------------- --------------- --------------
See notes to condensed consolidated financial statements.
8
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Shareholders' Deficit
Common Shares
Minority ------------------------------------
Interest Shares Amount
------------- ---------------- ----------------
Balance at December 31, 2003 $ - 21,895,000 $ 21,895
Transfer of shares $0.6468 per share
to Employee Benefit Trust - 1,500,000 1,500
650,000 warrants issued in connection
with notes payable of $650,000
beneficial conversion feature on
notes payable - January 23 to
February 23, 2004 - - -
Issuance of shares at $0.85 per share
for cash - March 24 - 950,000 950
Issuance of shares on exercise of
warrants at $0.50 - March 24 - 1,001,000 1,001
Issuance of shares on exercise of
warrants at $1 - March 24 - 100,000 100
Issuance of shares on exercise of
options at $0.125 - March 24 - 800,000 800
Consulting fees incurred in conjunction
with 2004 share issuances - - -
Options issued to consultants in
connection with services in
January 2004 - - -
Amortization of options issued to
consultants - - -
Shares deemed issued in recapitalization
transaction - March 25, 2004 - 2,619,238 2,619
Foreign currency translation adjustments - - -
Net loss - - -
------------- ---------------- ----------------
Balance, March 31, 2004 $ - 28,865,238 $ 28,865
------------- ---------------- ----------------
See notes to condensed consolidated financial statements.
9
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Shareholders' Deficit
Accumulated Deficit
Foreign Accumulated
Additional Exchange During the
Paid-in Subscription Deferred Translation Development
Capital Receivable Compensation Adjustment Stage Total
------------- -------------- -------------- ------------ ------------- --------------
Balance at December 31, 2003 $ 1,977,481 $ - $ - $ 9,251 $ (2,157,655) $ (149,028)
Transfer of shares $0.6468 per share
to Employee Benefit Trust 968,700 - - - - 970,200
650,000 warrants issued in connection
with notes payable of $650,000
beneficial conversion feature on notes
payable - January 23 to
February 26, 2004 246,727 - - - - 246,727
Issuance of shares at $0.85 per share
for cash - March 24 806,550 (212,500) - - - 595,000
Issuance of shares on exercise of
warrants for $0.50 - March 24 499,499 - - - - 500,500
Issuance of shares on exercise of
warrants at $1 - March 24 99,900 (50,000) - - - 50,000
Issuance of shares on exercise of
options at $0.125 - March 24 99,200 - - - - 100,000
Consulting fees incurred in conjunction
with 2004 share issuances (93,756) - - - - (93,756)
Options issued to consultants in
conjunction with services in
January 2004 2,086,523 - (2,086,523) - - -
Amortization of options issued to
consultants - - 163,888 - - 163,888
Shares deemed issued in recapitalization
transaction - March 25, 2004 (2,619) - - - - -
Foreign currency translation
adjustments - - - (3,047) - (3,047)
Net loss - - - - (2,510,230) (2,510,230)
------------- -------------- -------------- ------------ ------------- --------------
Balance, March 31, 2004 $ 6,688,205 $ (262,500) $ (1,922,635) $ 6,204 $ (4,667,885) $ (129,746)
------------- -------------- -------------- ------------ ------------- --------------
See notes to condensed consolidated financial statements.
10
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Shareholders' Deficit
(Unaudited)
Common Shares
------------------------------
Shares Amount
-------------- --------------
Balance at March 31, 2004 carryforward 28,865,238 $ 28,865
Conversion of Bridge Loan at $0.85 per share,
470,588 shares issued (294,118 issuable at
June 30, 2004) - June 764,706 765
Conversion of Bridge Loan interest at $0.85
per share, 19,425 shares issued (8,831
issuable at June 30, 2004) - June 28,256 28
Provision for issuance of shares at $0.50
per share in connection with exercise of
warrants, (issuable at June 30, 2004) - June 307,000 307
Provision for issuance of shares at $1.00
per share in connection with exercise of
warrants, (issuable at June 30, 2004) - June 537,059 537
Offering costs incurred in conjunction
with June 2004 warrant conversions - -
Stock subscriptions received - -
Revalue options issued to consultants in
conjunction with services in
December 2003 and January 2004 - -
Amortization of expense for options issued
to consultants - -
Foreign currency translation - -
Net loss - -
-------------- ---------------
Balance, June 30, 2004 30,502,259 $ 30,502
============== ===============
See notes to condensed consolidated financial statements.
11
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Shareholders' Deficit
(Unaudited)
Accumulated Deficit
Foreign Accumulated
Additional Exchange During the
Paid-in Subscription Deferred Translation Development
Capital Receivable Compensation Adjustment Stage Total
------------- -------------- -------------- ------------ ------------- --------------
Balance at March 31, 2004 carryforward $ 6,688,205 $ (262,500) $ (1,922,635) $ 6,204 $ (4,667,885) $ (129,746)
Conversion of Bridge Loan at $0.85 per
share, 470,588 shares issued (294,118
issuable at June 30, 2004) - June 649,235 - - - - 650,000
Conversion of Bridge Loan interest at
$0.85 per share, 19,425 shares issued
(8,831 issuable at June 30, 2004) - June 23,990 - - - - 24,018
Provision for issuance of shares
at $0.50 per share in connection
with exercise of warrants,
(issuable at June 30, 2004) - June 153,193 - - - - 153,500
Provision for issuance of shares
at $1.00 per share in connection
with exercise of warrants,
(issuable at June 30, 2004) - June 536,522 - - - - 537,059
Offering costs incurred in conjunction
with June 2004 warrant conversions (55,244) - - - - (55,244)
Stock subscriptions received - 160,000 - - - 160,000
Revalue options issued to consultants
in conjunction with services in
December 2003 and January 2004 (348,083) - 348,083 - - -
Amortization of expense for options
issued to consultants - - 136,937 - - 136,937
Foreign currency translation - - - 20,091 - 20,091
Net loss - - - - (1,540,828) (1,540,828)
------------- -------------- -------------- ------------ ------------- --------------
Balance, June 30, 2004 $ 7,647,818 $ (102,500) $ (1,437,615) $ 26,295 $ (6,208,713) $ (44,213)
============= ============== ============== ============ ============= ==============
See notes to condensed consolidated financial statements.
12
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by the management of MailKey Corporation and
subsidiaries (the "Company" or "Group"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Accordingly, pursuant to such rules and regulations, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America ("US GAAP") for complete
financial statements. The financial statements reflect all adjustments that
are, in the opinion of management, necessary to fairly present such
information. All such adjustments are of a normal recurring nature. These
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements of MailKey Corporation and
subsidiaries, as of March 31, 2004, and the notes thereto contained in the
Form 10-KSB filed by the Company. The results of operations for the three
months ended and since inception through June 30, 2004, are not necessarily
indicative of the results that may be expected for the fiscal year ending
March 31, 2005.
The company's 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.
Since the inception of the Company, management has been in the process
of designing and developing its products, raising capital, hiring personnel
and obtaining customers. Accordingly, the Company is a development stage
enterprise, as defined in Statement of Financial Accounting Standards
("SFAS") No. 7, Accounting and Reporting for Development Stage Enterprises.
Under SFAS No. 7, certain additional financial information is required to
be included in the financial statements for the period from inception of
the company to the current balance sheet.
USE OF ESTIMATES
The preparation of 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 amounts
reported in the financial statements and the accompanying notes. Actual
results could differ from those estimates.
RESEARCH AND DEVELOPMENT
Research and development costs relating principally to the design and
development of products are expensed as incurred. The Company incurred
approximately $412,000 and $124,000 of research and development expense for
the three month periods ended June 30, 2004 and 2003, respectively.
LOSS PER SHARE
Loss per common share is calculated in accordance with SFAS No. 128,
Earnings Per Share. Basic loss per common share is computed based upon the
weighted average number of shares of common stock outstanding for the
period and excludes any potential dilution. Shares associated with the
3,214,167 stock options and 2,298,295 warrants outstanding at June 30, 2004
were not included because their inclusion would be antidilutive (i.e.
reduce the net loss per share). There were no options or warrants
outstanding at June 30, 2003.
13
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK BASED COMPENSATION
The Group follows the provisions of SFAS No. 123 - "ACCOUNTING FOR STOCK
BASED COMPENSATION". As permitted under SFAS No. 123, the Group has
continued to utilize APB 25 "Accounting For Stock Issued To Employees", and
related interpretations, in accounting for its stock-based compensation to
employees and directors. Had compensation expense for the three month
periods ended June 30, 2004 and 2003 been determined under the fair value
provisions of SFAS No. 123, as amended by SFAS No. 148 - "AN ACCOUNTING FOR
STOCK BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF SFAS
123," the Group net loss and net loss per share would have differed as
follows:
June 30, 2004 June 30, 2003
---------------- ----------------
Net loss, as reported $ (1,540,828) $ (181,495)
Add: Stock-based employee compensation expense included
in reported net income determined under APB No. 25,
net of related tax effects 11,904 -
Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all awards,
net of related tax effects (126,276) -
---------------- ----------------
Pro forma net income $ (1,655,200) $ (181,495)
---------------- ----------------
Earnings per share:
Basic and diluted - as reported $ (0.05) $ (0.02)
Basic and diluted - pro forma $ (0.03) $ (0.02)
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period and additional options may be issued in future
years. The estimated fair value of each option granted was calculated using
the Black-Scholes option pricing model. The following summarizes the
weighted average of the assumption used in the model.
2004 2003
----------- -----------
Risk free rate 3.0% N/A
Expected years until exercise 5.0 N/A
Expected stock volatility 150% N/A
Dividend yield - N/A
2. DESCRIPTION OF BUSINESS
The group is developing, and intends to sell and support an integrated
software product called "Mailkey Message Manager," that is a multi device
platform that is being designed to enable network administrators and
network operators to protect their individual users through filtration from
unwanted electronic mail.
14
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. GOING CONCERN
The accompanying financial statements have been prepared assuming that
the Group will continue as a going concern. The Group incurred a net loss
of $1,540,828 and had no revenue during the three months ended June 30,
2004. Those conditions raise substantial doubt about the Group's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Management plans to raise additional capital during the remainder of
fiscal 2004. These funds, in addition to its cash and subscription
receivables held at June 30, 2004, will be needed in order to finance the
Company's currently anticipated operating and capital expenditures for the
remainder of fiscal 2004.
The Company's ability to continue as a going concern is dependent upon
the Company raising additional capital. There can be no assurance that the
Company will successfully raise the necessary capital on terms desirable to
the Company. If the Company does not obtain the necessary capital, it will
likely be required to delay development of its products, alter its business
plan, or in the extreme situation, cease operations. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
4. DEPRECIATION
Depreciation expense for the three months ending June 30, 2004 and 2003
was $6,375 and $149, respectively.
5. SHORT-TERM LOANS PAYABLE
During the three months ended June 30, 2004, short-term loans payable
with a face value of $650,000 were converted to 764,706 shares of common
stock at $0.85 per share. Accrued interest of $24,018 was also converted
into 28,256 shares of common stock at $0.85 per share
The remaining discount on the short-term loans was amortized during the
three months ended June 30, 2004 resulting in interest expense of $184,299.
During the three months ended June 30, 2004, the Company borrowed
$200,000 pursuant to a short-term note for the purpose of financing
insurance premiums. At June 30, 2004, a balance of $178,085 was due in
eight monthly installments of $22,610, including interest at 4.172%.
6. SHORT-TERM LOAN PAYABLE - RELATED PARTY
The short-term loan payable from a related party represents an advance
from a company controlled by a family member of one of the Group's
directors. The loan has a maximum borrowing amount of 35,500 pounds
Sterling ($64,379 at June 30, 2004) of which $42,518 was outstanding at
June 30, 2004 and $43,087 was outstanding as of March 31, 2004. The note
bears interest at the base rate of Barclays bank + 1%. The due date of the
note has been extended to September 30, 2004.
15
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. WARRANTS
Each warrant entitles the holder to purchase one common share at a
stated exercise price any time through a stated expiration date. The
warrants outstanding were as follows:
June 30, March 31,
2004 2004
---------------- ----------------
Exercise price $0.50, expiration October 2005 345,000 652,000
Exercise price $1.00, expiration October 2005 1,302,795 1,839,854
Exercise price $2.00, expiration March 2005 650,500 650,500
---------------- ----------------
Total 2,298,295 3,142,354
================ ================
During the three months ended June 30, 2004, 537,059 warrants with an
exercise price of $1.00 and 307,000 warrants with an exercise price of
$0.50 were exercised resulting in the issuance of 844,059 additional
shares.
8. COMMITMENTS
As of June 30, 2004, the Group had commitments under operating leases
that required aggregate minimum payment that approximates $28,000 through
March 31, 2005. Rent expense for the three months ended June 30, 2004 and
2003 was $37,722 and $13,750, respectively.
It has come to the attention of management that the company has not
filed US tax returns for the past several years. Management is in the
process of rectifying this matter and believes there is no material tax
liability owed to the taxing authorities.
9. STOCK OPTIONS
Stock option activity during the periods indicated is as follows:
Weighted-
Number of Average
Shares Exercise Price
----------------- -----------------
Balance at March 31, 2004 3,375,000 $ 0.75
Granted - -
Cancelled (160,833) 0.85
Exercised - -
----------------- -----------------
Balance at June 30, 2004 3,214,167 $ 0.74
================= =================
16
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. STOCK OPTIONS (Continued)
The following table summarizes information about stock options
outstanding as of June 30, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ------------------------------
Outstanding Weighted Weighted Number Weighted
Range of at Average Average Exercisable at Average
Exercise June 30, Remaining Exercise June 30, Exercise
Prices 2004 Contract Life Price 2004 Price
------------------- ------------------- --------------- --------------- ------------- --------------
$ 0.25 -
$ 0.85 3,214,167 4.5 years $ 0.74 317,975 $ 0.85
10. CONSULTING FEES - RELATED PARTY
The Company's Chief Executive Officer and the Company's Deputy Chairman
provide their services to the Company through outside consulting firms. The
aggregate cost of these services approximated $144,000 and $17,000,
respectively for the three month periods ended June 30, 2004 and 2003,
respectively.
The minority interest holder in Mailkey Asia PTE, Ltd. controls a
company that provides consulting services to the Company. The costs of
these services approximated $75,000 and $0 for the three month periods
ended June 30, 2004 and 2003, respectively.
11. SUBSEQUENT EVENTS
On July 19, 2004, the Company signed a non-binding letter of intent to
acquire a European company that develops and markets internet security
software. There can be no assurance that the parties will enter into a
binding agreement or, if they do, that the above acquisition will be
completed.
17
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included or incorporated by reference in this
report, including, without limitation, statements regarding our future financial
position, business strategy, budgets, projected revenues, projected costs and
plans and objectives of management for future operations, are forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology, such as "may," "will," "expects,"
"intends," "plans," "projects," "estimates," "anticipates," or "believes" or the
negative thereof or any variation thereon or similar terminology or expressions.
These forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from results proposed in
such statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to be correct. Important factors that could cause actual
results to differ materially from our expectations include, but are not limited
to: our ability to fund future growth and implement our business strategy; our
ability to integrate the operations of any businesses we may acquire; our
ability to attract and retain customers and qualified personnel; customer
acceptance and satisfaction with our electronic messaging security solutions;
anticipated product enhancements and releases; defects in our products and
services; legal claims against us, including, but not limited to, intellectual
property infringement claims; our ability to protect our intellectual property;
forecasts of Internet usage and the growth and acceptance of the messaging
security solutions industry; rapid technological changes in the messaging
security solutions industry; competition in our industry and markets; general
economic and business conditions, either nationally or internationally or in the
jurisdictions in which we are doing business; the condition of the securities
and capital markets; legislative or regulatory changes; and statements of
assumption underlying any of the foregoing, as well as any other factors set
forth in our 2004 Annual Report on Form 10-KSB or under the caption "Plan of
Operation" under Item 2 of this report.
All subsequent written and oral forward-looking statements attributable
to us, or persons acting on our behalf, are expressly qualified in their
entirety by the foregoing. Except as required by law, we assume no duty to
update or revise our forward-looking statements based on changes in internal
estimates or expectations or otherwise.
Unless otherwise indicated or the context otherwise requires, all
references to "MailKey," the "Company," "we," "us" or "our" and similar terms
refer to MailKey Corporation and its subsidiaries.
18
ITEM 2. 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 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.
OUR PLAN OF OPERATION
We intend to become a leading messaging security solutions provider
focused on the provision of business services through a number of integrated
technology solutions. We anticipate achieving this objective by becoming a
market driven business solutions company focused on offering value propositions
and the delivery of full service business solutions we are developing internally
as well as solutions we may acquire through strategic acquisitions and
partnerships.
We intend to market our products and services through a combination of
indirect sales channels, including distributors, resellers, business outsourcing
and hosted service providers, large global systems integrators, original
equipment manufacturers and appliance vendors, as well as through the efforts of
a direct sales force. We are designing our software with the intention that it
be capable of supporting numerous hardware configurations, operating systems and
messaging applications and infrastructure, and to be deliverable as stand-alone
software, as an integrated part of the appliance solutions of distribution
partners or as a hosted service.
Our research and development activities are focused on the enhancement
of our current electronic messaging security solutions and on the development of
next-generation technologies in the messaging security solutions market. We
anticipate that the majority of our research and development efforts will be
devoted to the internal development of complimentary technologies that we intend
to acquire from external sources, and that the remainder of such efforts will be
devoted to the internal development of our own proprietary technologies.
We anticipate acquiring additional technologies, businesses and related
assets that we believe are complimentary to either our existing technologies or
technologies that we are developing or may attempt to develop in the future. In
addition to any potential acquisitions of complimentary technologies described
above, we also plan to review opportunities to acquire companies, businesses and
assets that may lead us into new areas of business activity.
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.
19
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 June 30, 2004, we had a cash balance of $599,792.
In June 2004, our wholly-owned subsidiary, MK Secure Solutions Limited,
completed the round of convertible loan financing that it had initiated in early
2004 and for which it had received aggregate cash proceeds of $650,000. As of
June 30, 2004, all of the loans made thereunder and accrued interest thereon had
been converted into shares of our common stock by the holders thereof. The
proceeds were raised through the issuance by MK Secure Solutions Limited, our
wholly-owned subsidiary, of loans convertible into shares of our common stock
and warrants to acquire 650,000 shares of our common stock earlier this year.
These securities were sold in loan units comprised of one (1) loan in the amount
of $50,000 and one (1) warrant. The loans had a maturity date of July 31, 2004
and accrued interest at an annualized rate of 10%. The loans and any accrued
interest thereon were convertible into shares of our common stock at a
conversion price of $0.85 per share, and the warrants are exercisable into
50,000 shares of our common stock at an exercise price of $1.00 per share.
We do not currently 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 sales of our equity
and debt securities.
We believe that our current cash resources will not be sufficient to
sustain our current operations for the next twelve (12) months, and that we will
need to raise additional capital to execute our business plan. We intend to
obtain additional cash resources within the next twelve (12) months through
sales of debt or equity securities. The sale of additional equity or convertible
debt securities would result in dilution to our shareholders. The issuance of
additional debt would result in increased expenses and could subject us to
covenants that may have the effect of restricting our operations. We have not
made arrangements to obtain additional financing and we can provide no assurance
that financing will be available in amount or on terms acceptable to us, if at
all. If we are unable to obtain additional funds when they are needed or if such
funds cannot be obtained on terms favorable to us, we may be required to delay
or scale back any plans we may have to develop our messaging security solutions
or acquire complementary companies, businesses, assets or technologies.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2004, 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 had
engaged in such relationships.
20
ITEM 3. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of our "disclosure controls and
procedures" (as such term is defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried
out by us under the supervision and with the participation of our Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based upon that
evaluation, our CEO and CFO concluded that, as of the end of the period covered
by this quarterly report, our disclosure controls and procedures were effective
to provide reasonable assurance that information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. There has been no change in our internal
control over financial reporting identified in connection with that evaluation
that occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this report.
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated April 9, 2004, by and
between the Company and GD Merger Corp.
3.1 Articles of Incorporation (incorporated by reference to Exhibit
3.1(1) to the Company's Registration Statement on Form 10-SB
filed with the SEC on February 3, 2000 (the "Registration
Statement"))
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the
Registration Statement)
3.3 Articles of Amendment to Articles of Incorporation (incorporated
by reference to Exhibit 3.1(2) to the Registration Statement)
3.4 Articles of Amendment to Articles of Incorporation (incorporated
by reference to Exhibit 3.1(3) to the Company's Annual Report on
Form 10-KSB for the year ended March 31, 2003)
3.5 Certificate of Correction to Articles of Amendment to Articles
of Incorporation (incorporated by reference to Exhibit 3.1(4) to
the Company's Annual Report on Form 10-KSB for the year ended
March 31, 2003)
4.1 Specimen Stock Certificate (incorporated by reference to Exhibit
4.1 to the Registration Statement)
10.1 Stock Purchase and Sale Agreement, dated as of February 5, 2003,
by and between MailKey Corporation (f/k/a/ Sutton Trading
Solutions, Inc.) and Link Investment Holdings Inc. Limited
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December
31, 2002)
31.1 Certification of Chief Executive Officer of the Company required
by Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended
31.2 Certification of Chief Financial Officer of the Company required
by Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended
32.1 Certification of Chief Executive Officer and Chief Financial
Officer of the Company required by Rule 13a-14(b) under the
Securities Exchange Act of 1934, as amended
22
(b) Reports on Form 8-K.
1. On April 9, 2004, we filed a report on Form 8-K with the SEC under Items
1, 2 and 7 disclosing our acquisition of MK Secure Solutions on March 25, 2004.
2. On June 8, 2004, we filed an amendment to the report on Form 8-K that we
previously filed with the SEC on April 9, 2004 under Item 7 to provide the
financial statements and pro forma financial information required in connection
with our acquisition of MK Secure Solutions on March 25, 2004.
3. On July 13, 2004, we filed a report on Form 8-K with the SEC disclosing
our dismissal of Spicer Jeffries LLP as our independent accountant and the
engagement of L J Soldinger Associates, LLC as our new independent accountant.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAILKEY CORPORATION
Date: August 9, 2004 /s/ Graham Norton-Standen
---------------------------------------
Graham Norton-Standen
Chairman and Chief Executive Officer
Date: August 9, 2004 /s/ Roger B. Ponting
---------------------------------------
Roger B. Ponting
Chief Financial Officer
Date: August 9, 2004 /s/ Tim Dean-Smith
---------------------------------------
Tim Dean-Smith
Deputy Chairman
24
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated April 9, 2004, by and
between the Company and GD Merger Corp.
31.1 Certification of Chief Executive Officer of the Company required
by Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended
31.2 Certification of Chief Financial Officer of the Company required
by Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended
32.1 Certification of Chief Executive Officer and Chief Financial
Officer of the Company required by Rule 13a-14(b) under the
Securities Exchange Act of 1934, as amended