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: December 31, 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
MAILKEY CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 76-0270295
- --------------------------------------- -------------------------------------
(State or Other Jurisdiction of IRS Employer
Incorporation or Organization) Identification No.)
17194 Preston Rd.
Suite 102 PMB 341
Dallas, TX 75248
-----------------------------------------------------------------
(Address of Principal Executive Offices)
1-214-254-3440
-----------------------------------------------------------------
(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 34,726,355 issued and outstanding shares of the registrant's common
stock, $.001 par value per share, on February 16, 2005.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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.
3
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TABLE OF CONTENTS
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of
December 31, 2004 and 2003
Condensed Consolidated Statements of Operations for the
Nine Months Ended December 31, 2004 and for the period
from March 11, 2003 (Inception) to December 31, 2003
(with Cumulative Totals Since Inception)
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 2004 and for the period from
March 11, 2003 (Inception) to December 31, 2003
(with Cumulative Totals Since Inception)
Notes to Condensed Consolidated Financial Statements
4
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS
2004 2003
-------------- --------------
Current Assets:
Cash $ 2,361 $ 68,282
Prepaid expenses 102,530 13,262
-------------- --------------
Total Current Assets 104,891 81,544
-------------- --------------
Property and equipment, net - 34,816
-------------- --------------
Other Assets
Loan receivable - long-term 100,000 -
-------------- --------------
TOTAL ASSETS $ 204,891 $ 116,360
============== ==============
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
Current Liabilities:
Short-term loans payable - related parties $ 333,255 $ 61,660
Short-term loans payable 70,159 -
Accrued liabilities 797,020 203,728
-------------- --------------
Total Current Liabilities 1,200,434 265,388
-------------- --------------
SHAREHOLDERS' (DEFICIT)
Common shares $0.001 par, 100,000,000 and 470,000,000
shares authorized; 34,726,355 and 21,895,000 issued and
outstanding at 2004 and 2003, respectively 35,226 21,895
Additional paid-in capital 8,400,306 1,977,481
Accumulated foreign exchange translation adjustment 53,645 9,251
Deficit accumulated during the development stage (9,484,720) (2,157,655)
-------------- --------------
Total Shareholders' (Deficit) (995,543) (149,028)
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 204,891 $ 116,360
============== ==============
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS AND THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(WITH CUMULATIVE TOTALS SINCE INCEPTION)
(UNAUDITED)
March 11, 2003
Nine Months Ended Three Months Ended (Inception)
December 31, December 31, to
2004 2003 2004 2003 December 31, 2004
-------------- -------------- -------------- -------------- -----------------
REVENUES $ 1,329 $ - $ 1,143 $ - $ 1,329
OPERATING EXPENSES
Software development and
other compensation 2,856,953 1,474,195 1,648,542 655,937 5,938,709
Consulting fees - related party 444,143 246,637 33,000 168,580 951,310
Legal and professional fees 461,022 227,446 41,956 134,772 934,805
Other selling, general and
administrative 807,387 210,541 239,317 109,896 1,343,248
-------------- -------------- -------------- -------------- -----------------
Total Operating Expenses 4,569,505 2,158,819 1,962,815 1,069,185 9,168,072
-------------- -------------- -------------- -------------- -----------------
LOSS BEFORE OTHER INCOME (EXPENSE) (4,568,176) (2,158,819) (1,961,672) (1,069,185) (9,166,743
OTHER INCOME (EXPENSE)
Interest expense (210,484) - (2,328) - (281,089
Interest and other income, net 1,227 753 (4,615) 434 2103
Loss on disposition of fixed assets (39,402) - (39,402) - (39,402
-------------- -------------- -------------- -------------- -----------------
Total Other Income (Expense) (248,659) 753 (46,345) 434 (318,388
-------------- -------------- -------------- -------------- -----------------
LOSS BEFORE MINORITY INTEREST (4,816,835) (2,158,066) (2,008,017) (1,068,751) (9,485,131
MINORITY INTEREST IN LOSS OF SUBSIDIARIES - 411 - 411 411
NET LOSS APPLICABLE TO COMMON SHARES ($4,816,835) ($2,157,655) ($2,008,017) ($1,068,340) ($9,484,720
NET LOSS PER BASIC AND DILUTED SHARES $ 0.16 $ 0.15 $ 0.06 $ 0.05 $ 0.45
============== ============== ============== ============== =================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 30,549,560 13,992,463 32,637,262 21,526,033 21,875,375
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(WITH CUMULATIVE TOTALS SINCE INCEPTION)
(UNAUDITED)
March 11,
(Inception) to
2004 2003 December 31, 2004
------------------- ----------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,816,835) $ (2,157,655) $ (9,484,720)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 13,184 9,785 28,096
Loss on disposal of equipment 39,402 - 39,402
Common stock issued for services 1,209,102 - 1,209,102
Fixed assets exchanged for services 17,795 - 17,795
Subscription receivable written-off 102,500 - 102,500
Deferred compensation written-off 145,389 - 145,389
Amortization of debt discount and beneficial
conversion feature 184,299 - 246,727
Amortization of deferred compensation 477,382 - 641,270
Amortization of deferred
compensation - related party 35,000 - 35,000
Stock-based compensation - 658,522 1,628,722
Interest expense settled by stock issuance (16,016) (16,016)
Minority interest share in loss of subsidiaries - (411) (411)
Changes in assets and liabilities
(Increase) in prepaid assets (44,589) (13,262) (102,530)
Increase in accounts payable and accrued liabilities 261,439 203,728 844,120
------------------- ----------------- -------------------
Total adjustments 2,424,887 858,362 4,819,166
------------------- ----------------- -------------------
Net cash (used in) operating activities (2,391,948) (1,299,293) (4,665,554)
------------------- ----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment on loan receivable (100,000) - (100,000)
Acquisition of property and equipment (7,122) (44,601) (85,293)
------------------- ----------------- -------------------
Net cash (used in) investing activities (107,122) (44,601) (185,293)
------------------- ----------------- -------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(WITH CUMULATIVE TOTALS SINCE INCEPTION)
(UNAUDITED)
March 11,
(Inception) to
2004 2003 December 31, 2004
------------------- ----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of short-term loans payable - related party 340,168 61,660 421,685
Repayment of proceeds of short-term loans payable -
related party (50,000) - (88,430)
Payment of short-term loans payable (109,613) (109,613)
Issuance of subsidiary shares to minority interests 411 411
Issuance of common share capital 1,184,019 1,490,644 3,517,163
Collection of stock subscriptions receivable 563,000 - 563,000
Payment of offering costs (114,897) (149,790) (358,443)
Proceeds from short-term debt 203,790 - 853,790
------------------- ----------------- -------------------
Net cash provided by financing activities 2,016,467 1,402,925 4,799,563
------------------- ----------------- -------------------
Effect of Exchange Rate Changes on Cash 47,441 9,251 53,645
------------------- ----------------- -------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (435,162) 68,282 2,361
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 437,523 - -
------------------- ----------------- -------------------
CASH AND CASH EQUIVALENTS -
END OF PERIOD 2,361 68,282 2,361
=================== ================= ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest expense $ 1,818 $ - $ 1,818
=================== ================= ===================
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES
Common stock issued for services $ 1,209,102 $ - $ 1,209,102
=================== ================= ===================
Fixed assets exchanged for services $ 17,795 $ - $ 17,795
=================== ================= ===================
Subscription receivable written off $ 102,500 $ - $ 102,500
=================== ================= ===================
Deferred compensation written off $ 145,389 $ - $ 145,389
=================== ================= ===================
Revaluation of options issued to consultants $ 1,264,864 $ - $ 1,264,864
=================== ================= ===================
Common stock issued in conversion of bridge loan $ 674,018 $ - $ 674,018
=================== ================= ===================
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
MAILKEY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
MailKey is a messaging security and management company. It is developing
its "Envoy" technology platforms to enable scaleable filtration, control and
management of messages through a central management point.
MailKey anticipates acquiring additional technologies, businesses and
related assets that we believe are complimentary to either our existing
technologies developmental stage technologies or technologies that we may
attempt to develop in the future. In addition to any potential acquisitions of
complimentary technologies, we also plan to review opportunities to acquire
companies, businesses and assets that may lead us into new areas of business
activity.
The accompanying unaudited condensed consolidated financial statements
have been prepared 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 as
promulgated by the Public Company Accounting Oversight Board. 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 nine months ended and since inception through December 31,
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.
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") and now MailKey,
conducts its principal administrative, research and development operations in
the United Kingdom through a wholly - owned subsidiary.
Management has been in the process of designing and developing its
products, raising
9
capital, hiring personnel and obtaining customers. Accordingly, as 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.
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. The positions have been filled by the Company's deputy
chairman and founder, respectively.
On November 9, 2004, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") by and among the MailKey Corporation (the
"Company"), MailKey Acquisition Corp., a Delaware corporation and our
wholly-owned subsidiary ("Merger Sub"), Inc., a Nevada Corporation ("iElement")
and Ivan Zweig, pursuant to which we agreed to acquire all of the issued and
outstanding shares of capital stock of iElement, Inc. This transaction closed in
January 2005. At the closing of the Merger, Merger Sub was merged into iElement,
at which time the separate corporate existence of Merger Sub ceased and iElement
now continues as the surviving company, as a wholly owned subsidiary of the
Company.
NOTE 2- NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
REVENUE RECOGNITION
As of the balance sheet date, the Company had not delivered product or
provided services to customers that provide the Company with revenue. The
Company will recognize revenue in accordance with Statement of Position ("SOP")
97-2 "SOFTWARE REVENUE RECOGNITION," and SOP 98-9 - Modification Of SOP 97-2,
"SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS" to its
specific business.
BASIS OF CONSOLIDATION
The consolidated financial statements include the financial position and
results of MailKey Corporation, and its 100%-owned subsidiary, MK Secure
Solutions Ltd, a company incorporated under the laws of the British Virgin
Islands, and its 100%-owned subsidiary, MK Secure Solutions Ltd (UK), a company
incorporated under the laws of the United Kingdom. The consolidated financial
statements exclude all intercompany balances and transactions.
10
PROPERTY AND EQUIPMENT
Property and equipment, consisting of furniture, fixtures and equipment,
are stated at cost less accumulated depreciation. Depreciation is provided by
the straight-line methods over the estimated useful lives of three to five
years.
Each subsidiary within the Company files its own separate corporate tax
returns as required by law in the jurisdiction of incorporation of each
subsidiary. Income taxes are recorded in the period in which the related
transactions are recognized in the financial statements, net of valuation
allowances, which have been recorded against deferred tax assets. Deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Net deferred tax
assets and liabilities are recognized for future tax benefits such as net
operating loss and credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on the deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. A valuation reserve has been recorded against deferred tax assets because
management has determined it is more likely than not that the deferred tax
assets will not be realized. No provision has been made for the United States
income tax effects of undistributed earnings or unrealized losses of non-US
subsidiaries as management expects these earnings to be reinvested indefinitely
or received substantially free of additional tax.
(i) Earnings (Loss) Per Share of Common Stock
Historical net income (loss) per common share is computed using the
weighted average number of common shares outstanding. Diluted earnings
per share (EPS) includes additional dilution from common stock
equivalents, such as stock issuable pursuant to the exercise of stock
options and warrants.
The following is a reconciliation of the computation for basic and
diluted EPS:
DECEMBER 31
2004 2003
---- ----
Net loss $(4,816,835) $(2,157,655)
Weighted-average common shares
Outstanding (Basic) 30,549,560 13,992,463
Weighted-average common stock
Equivalents:
Stock options - -
Warrants 925,500 2,085,500
Weighted-average common shares
Outstanding (Diluted) 30,549,560 13,992,463
========== ==========
11
(ii) Earnings (Loss) Per Share of Common Stock (Continued)
Common stock equivalents were not included in the computation of diluted
earnings per share at December 31, 2004 and 2003 when the Company
reported a loss because to do so would be anti-dilutive for the periods
presented.
RECLASSIFICATIONS
Certain amounts for the nine months ended December 31, 2004 have been
reclassified to conform with the presentation of the December 31, 2003 amounts.
The reclassifications have no effect on net income for the nine months ended
December 31, 2004.
STOCK BASED COMPENSATION
The Company follows the provisions of SFAS No. 123 - "ACCOUNTING FOR
STOCK BASED COMPENSATION". As permitted under SFAS No. 123, the Company 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 nine month period
ended December 31, 2004 and the period from March 11, 2003 (inception) to
December 31, 2003 been determined under the fair value provisions of SFAS No.
123, as amended by SFAS No. 148.
NOTE 3- RECAPITALIZATION TRANSACTION
On March 25, 2004, pursuant to an Agreement and Plan of Merger between
Global Diversified Acquisition Corp ("GDAC"), G.D. Acquisition Corp ("GD Corp"),
a subsidiary of GDAC, MK Secure Solutions, Ltd ("MKSS") and Westvale
Consultants, Ltd. ("Westvale"), a principal shareholder of MKSS, GD Corp was
merged with and into MKSS, with MKSS remaining as the surviving entity and
becoming a wholly-owned subsidiary of GDAC.
Pursuant to the terms of the merger agreement,
(i) GDAC issued 26,246,000 shares of its common stock to the holders of
MKSS's capital stock, in exchange for all of the issued and outstanding
shares of MKSS's capital stock, representing approximately 90% of the
then total issued and outstanding stock of GDAC.
(ii) GDAC's incumbent board members agreed to resign as directors of
GDAC.
(iii) MKSS received the right to appoint new members of GDAC's board.
(iv) All of the MKSS outstanding warrants, options and loan units,
became convertible into options, warrants and loan units of GDAC
adjusted at the rate of one hundred for one and the strike prices for
the individual options, warrants and loan units
12
were adjusted at a rate of one hundredth of the original strike prices.
As a result of the terms of the merger agreement as stated above, the
merger is deemed to have involved a change in control of GDAC. The combination
of MKSS and GDAC is being treated as a recapitalization of MKSS. GDAC is the
legal acquirer in the merger. The Company is the accounting acquirer since their
shareholders acquired a majority ownership interest in GDAC. Consequently, the
financial statements of MKSS have become those of GDAC. GDAC subsequently
changed its name to MailKey Corporation.
NOTE 4- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2004
and 2003:
December 31 December 31
2004 2003
----------- -----------
Office equipment $ - $13,652
Computer equipment - 30,949
----------- -----------
- 44,601
Less: Accumulated depreciation - 9,785
----------- -----------
$ - $34,816
=========== ===========
Depreciation expense for the nine months ending December 31, 2004 and
the period ended December 31, 2003 was $13,184, before disposition, and $9,785,
respectively.
NOTE 5- LOAN RECEIVABLE - LONG TERM
The Company has a $100,000 loan receivable from iElement, a wholly-owned
subsidiary of the Company effective in January 2005. The loan is non-interest
bearing.
NOTE 6- SHORT-TERM LOANS PAYABLE - RELATED PARTIES
The short-term loans payable from related parties represent advances
from both (i) a company controlled by a family member of one of the Group's
directors and also (ii) a family member of one of the Group's directors. Total
loans outstanding to the related parties at December 31, 2004 and 2003 were
$333,255 and $61,660, respectively. The note bears interest at the base rate of
Barclays bank + 1%. The due date of the note has been extended to March 31,
2005.
13
NOTE 7- SHORT-TERM LOANS PAYABLE
During the nine months ended December 31, 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
nine months ended December 31, 2004 resulting in interest expense of $190,566.
During the nine months ended December 31, 2004, the Company borrowed
$200,000 pursuant to a short-term note for the purpose of financing insurance
premiums. At December 31, 2004, a balance of $70,159 was due in three monthly
installments of $22,610, including interest at 4.172%
NOTE 8- 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:
December 31 December 31
2004 2003
------------ ------------
Exercise price $0.50, expiration October 2005 - 1,653,000
Exercise price $1.00, expiration October 2005 275,000 432,500
Exercise price $2.00, expiration March 2005 650,500 -
------------ ------------
Total 925,500 2,085,500
NOTE 9- STOCKHOLDERS' (DEFICIT)
COMMON STOCK
The Company has 100,000,000 and 470,000,000 shares of common stock
authorized at December 31, 2004 and 2003, respectively, at a par value of
$0.001. At December 31, 2004 and 2003 34,726,355 and 21,895,000 shares were
issued and outstanding, respectively.
The following details the stock transactions for the nine months ended
December 31, 2004:
14
The Company issued 792,962 shares of common stock for the conversion of
a bridge loan and related interest.
The Company issued 1,415,019 shares of common stock due to the exercise
of warrants.
The Company issued 3,601,333 shares of common stock for services valued
at $1,209,102.
The following details the stock transactions for the nine months ended
December 31, 2003:
The Company issued 3,306,000 shares of common stock for cash of
$826,500.
The Company issued 1,230,585 shares of common stock for cash of
$236,272.
The Company issued 490,000 shares of common stock for cash of $245,000.
The Company issued 230,000 shares of common stock for cash of $89,216.
The Company issued 375,000 shares of common stock for cash of $318,750.
The Company issued 7,570,515 shares of common stock for cash of
$379,039.
NOTE 10- 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 consolidated 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, 2004, deferred tax assets consist of the following:
Net operating loss carryforwards $3,129,958
Less: valuation allowance (3,129,958)
--------------
$ -0-
==============
At December 31, 2004, the company had an accumulated deficit in the
approximate amount of $9,484,720 available to offset future taxable income
through 2024. 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.
15
NOTE 11- GOING CONCERN
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company incurred a net loss of
$4,816,835 and had minimal revenue for the nine months ended December 31, 2004,
and, as of that date, had a shareholder's deficit of $9,484,720. 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.
As of the nine months ended December 31, 2004, the Company estimated its
cash on hand was insufficient to cover one month of operations and has increased
its borrowing on the short-term related-party loan by approximately $35,000 to
finance operations.
Management plans to raise additional capital during the remainder of
fiscal 2004. These funds, in addition to its cash held at December 31, 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
raising capital through debt and equity financing. There can be no assurance
that the Company will successfully raise the required future financing on terms
desirable to the Company. If the Company does not obtain the needed funds, 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.
NOTE 12- SUBSEQUENT EVENTS
In January 2005, the Company sold its insolvent UK subsidiary, MK Secure
Solutions Limited, for $1 to a UK based accounting firm, SS Khehar & Company. SS
Khehar & Company have agreed to deal with the winding up of the subsidiary, and
the finalization of UK filing requirements for the subsidiary, for a fee of
$1,800.
The merger with iElement, referred to in Note 1, became effective in
January 2005. As a result of the merger, the Company will issue approximately
47,850,000 shares of its common stock to iElement stockholders. As of the date
of this report, the issuance of the shares is still pending.
ITEM 2. 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 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"
16
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
Further to the recent acquisition of iElement (see "Recent Developments"
below) we intend to grow our sales of telecommunications services to small and
medium sized enterprises ("SMEs"). We intend to grow the sales both organically,
and also by acquisitions of other companies and/or customer bases. iElement
currently provides broadband data, voice and wireless services using integrated
T-1 lines with a Layer 2 Private Network solution to provide SMEs with dedicated
internet access services, customizable business solutions for voice, data,
wireless and internet, and secure communications channels between the SMEs'
offices, partners, vendors, customers and employees without the use of a
firewall or encryption devices.
We intend to continue developing the Java-based Envoy platform, with the
goal of becoming a leading messaging security solutions provider and
communications services 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 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 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 and businesses
located in the United States 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.
17
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 31st, 2004, we had a cash balance of $2,361.
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 equity or debt securities. The sale of additional equity or convertible
debt securities would result in dilution to our shareholders. The issuance of
debt securities could subject us to increased expenses and 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 our
plans to develop our messaging security solutions or acquire complementary
companies, businesses, assets or technologies.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 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.
RECENT DEVELOPMENTS
On January 19th 2005, we completed the acquisition of iElement Inc.
("iElement"). iElement is now a wholly owned subsidiary of the Company. Under
the terms of the Merger Agreement, the Company authorized the issuance of an
aggregate of approximately 47,850,000 shares of its common stock, $.001 par vale
per share, to the former shareholders of iElement in exchange for all of the
issued and outstanding shares of capital stock of I-Element. A majority of
iElement shareholders as of the record date of December 30, 2004, consented to
the transaction as approved by the board of directors of iElement.
18
The exchange ratio setting forth the number of shares of Company common
stock issued for each issued and outstanding share of capital stock of iElement
was 3.52 shares of Company common stock for each issued and outstanding share of
capital stock of I-Element.
iElement is a facilities-based nationwide communications service
provider that provides state-of-the-art telecommunications services to small and
medium sized enterprises ("SMEs"). iElement provides broadband data, voice and
wireless services using integrated T-1 lines with 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.
On January 24th 2005, we appointed Mr. Zweig, the founder and Chief
Executive Officer of iElement, to the board of the Company; and Mr. Zweig
replaced Mr. Dean-Smith as the Chief Executive Officer of the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Competition: The broadband internet access industry is highly
competitive and requires constant investment in research and development
expenditures in order to keep pace with technology and competitors' products.
The success of the Company depends upon its ability to go into markets and
establish a base level of customers that will cover costs of opening and
maintaining a market. If the Company is unable to compete effectively or acquire
additional financing to fund future research and development and deployment
expenditures, it would have a materially adverse effect on the company's
business operations and the Company would not be unable to continue marketing
and developing products Dependence Upon External Financing: The Company has been
building its business through revenues generated from operations supplemented by
the sale of its common stock. The ability of the Company to continue its growth
and expand its business is dependent upon the ability of the Company to raise
additional financing either through the issuance of additional stock or the
incurrence of debt.
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information presented in this report. This report contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, the following:
IF WE CAN NOT OBTAIN ADDITIONAL FUNDS WHEN NEEDED OR ACHIEVE PROFITABILITY WE
MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN
The Company requires additional capital to execute its business plan.
However, there can be no assurance that financing will be available to the
Company in the future, or available on terms and conditions acceptable to the
Company. It is unlikely, given the current financial
19
condition and limited operating history of the Company, that any bank or
financial institution would provide a conventional loan.
Additionally, if the Company is unable to obtain a written term sheet or
letter of intent for $1,500,00 of equity or debt financing by March 1, 2005, the
secured creditor of the Company's wholly owned subsidiary, iElement, will have
the right to declare outstanding notes in default and enforce their security
interests against substantially all of the assets in iElement that the Company
obtained through the merger with iElement.
THE RECENT MERGER OF THE COMPANY WITH IELEMENT CREATES NEW RISK
Merger and integration of the Company and iElement has required, and
will continue to require, significant time and expense in coordinating, among
other things, research, marketing, accounting and management. This integration
might prove more difficult than expected and, even if successful, does not
guarantee either synergy or cost savings.
WE DO NOT HAVE A LONG OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE
OUR BUSINESS
Because limited historical information is available on our revenue
trends and operations, it will be difficult for you to evaluate our business.
Our prospects must be considered in light of the substantial risks, expenses,
uncertainties and difficulties encountered by any emerging technology.
THE COMPANY EXISTS WITHIN A HIGHLY COMPETITIVE INDUSTRY
The broadband internet access industry is highly competitive and
requires constant investment in research and development expenditures in order
to keep pace with technology and competitors' products. The success of the
Company depends upon its ability to go into markets and establish a base level
of customers that will cover costs of opening and maintaining a market.
Furthermore, the ability of the Company to experience growth and expand its
business is dependent upon the ability of the Company to raise additional
financing either through the issuance of additional stock or the incurrence of
debt.
WE HAVE A HISTORY OF LOSSES
We have never been profitable, and we have had operating losses since
our inception. To date, we have engaged primarily in research and development
efforts. The further development and commercialization of our products will
require substantial development, regulatory, sales and marketing, manufacturing
and other expenditures. We have only generated limited revenues from product
sales. Our accumulated deficit was about $995,543 at December 31, 2004.
Cautionary Statement:
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. These statements include statements
regarding intent, belief or current expectations of
20
the Company and its management. These forward-looking statements are not
guarantees of future performance and involve a number of risks and uncertainties
that may cause the Company's actual results to differ materially from the
results discussed in these statements. Factors that might cause such differences
include, but are not limited to, those described under the heading, "Critical
Accounting Policies and Estimates" herein, or and other factors described in the
Company's future filings with the SEC. The above referenced sections do not
apply to our company.
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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The company is not currently engaged in any material legal proceedings
and to our knowledge, no such proceedings are threatened or contemplated.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On December 7th 2004 the Company issued 60,500 shares of our common
stock to Donald Schwall in return for services to the Company.
In connection with the Company's acquisition of I-Element, on January
19, 2005 the Company authorized the issuance of an aggregate of approximately
47,850,000 shares of common stock to the I-Element shareholders. The shares will
be issued in exchange for 100% of the issued and outstanding shares of capital
stock of I-Element pursuant to the Merger Agreement. The shares will be issued
in a private placement to a limited number of persons without registration under
the Securities Act of 1933, as amended, in reliance upon Section 4(2) of the
Securities Act thereunder.
ITEM 3. DEFAULTS ON SENIOR SECURITIES.
21
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On January 19th 2005, we completed the acquisition with iElement
and authorized the issuance of an aggregate of approximately 47,850,000 shares
of its common stock, $.001 par vale per share, to the former shareholders of
iElement in exchange for all of the issued and outstanding shares of capital
stock of I-Element. A majority of iElement shareholders as of the record date of
December 30, 2004, consented to the transaction as approved by the board of
directors of iElement.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this report.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1.1 Articles of Incorporation of the Company (incorporated by
reference to the Company's Registration Statement on Form 10-SB
12G/A filed on February 3, 2000).
3.1.2 Certificate of Amendment to Articles of Incorporation of the
Company (incorporated by reference to the Company's Schedule 14A
filed on October 9, 2001).
3.1.3 Certificate of Amendment to Articles of Incorporation of the
Company (incorporated by reference to the Company's Schedule 14C
filed on March 26, 2003).
3.2.1 Bylaws of the Company (incorporated by reference to the
Company's Registration Statement on Form 10-SB 12G/A filed on
February 3, 2000).
3.2.2 Amendment to Bylaws of the Company (incorporated by reference to
the Company's Schedule 14A filed on February 1, 2001).
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
22
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
(b) Reports on Form 8-K.
On October 6, 2004, we filed a report on Form 8-K under Item 13 or 15(d)
with the SEC disclosing that Mr Graham Norton-Standen had resigned from the
board of directors of the Company and from the position of Chief Executive
Officer, and that Mr Tim Dean-Smith had been appointed as Chief Executive
Officer.
On January 6, 2005, we filed a report on Form 8-K under Item 13 or 15(d)
with the SEC disclosing the Company's entry in the First Amendment and Waiver to
Agreement and Plan of Merger between the Company and iElement.
On January 25, 2005, we filed a report on Form 8-K under Item 13 or
15(d) with the SEC disclosing consummation of the merger between the Company and
iElement, the resignation of Tim Dean-Smithy as Chief Executive Officer of the
Company, the appointment of Ivan Zweig as Chief Executive Officer of the
Company, the appointment of Ivan Zweig to the Board of Directors, and the
issuance of unregistered common stock in the Company in connection with the
merger between the Company and iElement.
On February 4, 2005, we filed a report on Form 8-K under Item 13 or
15(d) with the SEC disclosing the change in the Company's certifying
accountants.
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: February 14, 2004 /s/ Ivan Zweig
------------------------
Ivan Zweig
Chief Executive Officer
24
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
3.1.1 Articles of Incorporation of the Company (incorporated by
reference to the Company's Registration Statement on Form 10-SB
12G/A filed on February 3, 2000).
3.1.2 Certificate of Amendment to Articles of Incorporation of the
Company (incorporated by reference to the Company's Schedule 14A
filed on October 9, 2001).
3.1.3 Certificate of Amendment to Articles of Incorporation of the
Company (incorporated by reference to the Company's Schedule 14C
filed on March 26, 2003).
3.2.1 Bylaws of the Company (incorporated by reference to the
Company's Registration Statement on Form 10-SB 12G/A filed on
February 3, 2000).
3.2.2 Amendment to Bylaws of the Company (incorporated by reference to
the Company's Schedule 14A filed on February 1, 2001).
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