EXHIBIT 99
I-ELEMENT, INC.
INDEX TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
TABLE OF CONTENTS
PAGE(S)
Report of Independent Registered Public Accounting Firm 1
Balance Sheets as of December 31, 2004 and 2003 2
Statements of Operations for the Years Ended
December 31, 2004 and 2003 3
Statement of Changes in Stockholders' (Deficit) for the
Years Ended December 31, 2004 and 2003 4
Statements of Cash Flow for the Years Ended
December 31, 2004 and 2003 5-6
Notes to Financial Statements 7-23
BAGELL, JOSEPHS & COMPANY, L.L.C.
Certified Public Accountants
High Ridge Commons
Suites 400-403
200 Haddonfield Berlin Road
Gibbsboro, New Jersey 08026
(856) 346-2828 Fax (856) 346-2882
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
I-Element, Inc.
Dallas, Texas
We have audited the accompanying balance sheets of I-Element, Inc. (the
"Company") as of December 31, 2004 and 2003 and the related statements of
operations, changes in stockholders' (deficit), and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying financial statements for the years ended December 31, 2004 and
2003 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 8 to the financial statements, the Company has
sustained operating losses and capital deficits that raise substantial doubt
about its ability to continue as a going concern. Management's plan in regard to
these matters are also described in Note 8. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of I-Element, Inc. as of December
31, 2004 and 2003, and the results of its operations, changes in stockholders'
(deficit), and cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
BAGELL, JOSEPHS & COMPANY, L.L.C.
BAGELL, JOSEPHS & COMPANY, L.L.C.
Certified Public Accountants
Gibbbsboro, New Jersey
March 31, 2005
MEMBER OF: AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
NEW JERSEY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
PENNSYLVANIA INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
I-ELEMENT, INC.
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS
2004 2003
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 147,751 $ 92,869
Accounts receivable, net 588,005 747,939
Other current assets 4,250 173
----------- -----------
TOTAL CURRENT ASSETS 740,006 840,981
----------- -----------
Fixed assets, net of depreciation 952,407 985,564
----------- -----------
OTHER ASSETS:
Goodwill 2,079,665 2,079,665
Deposits 69,523 55,006
----------- -----------
TOTAL OTHER ASSETS 2,149,188 2,134,671
----------- -----------
TOTAL ASSETS $ 3,841,601 $ 3,961,216
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,004,204 $ 904,740
Customer deposits 168,990 204,000
Receivable financing payable 503,921 657,003
Commissions payable 157,725 58,731
Payroll taxes payable 17,230 -
Refunds payable 1,079 2,015
Deferred revenue 834,976 1,097,935
Current portion - notes payable 1,076,875 491,405
----------- -----------
TOTAL CURRENT LIABILITIES 3,765,000 3,415,829
----------- -----------
LONG-TERM LIABILITIES:
Notes payable, net of current portion 264,323 810,443
----------- -----------
TOTAL LONG-TERM LIABILITIES 264,323 810,443
----------- -----------
TOTAL LIABILITIES 4,029,323 4,226,272
----------- -----------
STOCKHOLDERS' (DEFICIT)
Common stock, $.001 Par Value, 30,000,000 and 1,000,000
shares authorized; 4,319,392 and 1 shares issued and
outstanding at December 31, 2004 and 2003, respectively 4,319 -
Additional paid-in capital 372,179 -
Accumulated deficit (564,220) (265,056)
----------- -----------
TOTAL STOCKHOLDERS' (DEFICIT) (187,722) (265,056)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 3,841,601 $ 3,961,216
=========== ===========
The accompanying notes are integral part of these financial statements.
2
I-ELEMENT, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
OPERATING REVENUES:
Service and hardware income, net $ 5,369,529 $ 4,535,982
Consulting income 513,335 -
Wireless and other income 71,908 16,454
------------ ------------
TOTAL OPERATING REVENUES 5,954,772 4,552,436
COST OF SALES 3,042,978 2,716,680
------------ ------------
GROSS PROFIT 2,911,794 1,835,756
------------ ------------
OPERATING EXPENSES
General and administrative 2,033,764 1,116,810
Selling expenses 519,600 518,425
Depreciation & amortization 260,806 159,070
Interest expense 138,576 122,100
Receivable factoring fees 129,021 118,504
------------ ------------
TOTAL OPERATING EXPENSES 3,081,767 2,034,909
------------ ------------
LOSS BEFORE OTHER (EXPENSE) (169,973) (199,153)
------------ ------------
OTHER (EXPENSE)
------------ ------------
Loss on sale of investments (125,068) (65,903)
------------ ------------
TOTAL OTHER EXPENSES (125,068) (65,903)
------------ ------------
NET LOSS APPLICABLE TO COMMON SHARES $ (295,041) $ (265,056)
=========== ===========
NET LOSS PER BASIC AND DILUTED SHARES $ (0.08) $ -
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,842,098 1
============ ============
The accompanying notes are integral part of these financial statements.
3
I-ELEMENT, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ---------- ----------- ------------ -----------
Balance, December 31, 2002 (Inactive) 1 $ - $ - $ - $ -
Net loss for the year - - - (265,056) (265,056)
----------- ---------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 2003 1 - - (265,056) (265,056)
Issuance of stock in exchange for redemption
of shares of Integrated Communications
Consultants Corporation ("ICCC") - recapitalization 4,082,207 4,082 - (4,082) -
Issuance of stock as 1% premium for redemption
of shares of ICCC. 40,820 41 - (41) -
Shares of common stock issued in exercise of options 7,500 7 68 - 75
Accounts payable converted to common stock 10,000 10 4,990 - 5,000
Issuance of common stock in conversion of notes payable 120,230 120 247,880 - 248,000
Shares issued for cash 58,634 59 119,241 - 119,300
Net loss for the year - - - (295,041) (295,041)
----------- ---------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 2004 4,319,392 $ 4,319 $ 372,179 $ (564,220) $ (187,722)
=========== ========== =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
4
I-ELEMENT, INC.
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (295,041) $ (265,056)
------------ ------------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 260,806 159,070
Acquisition of fixed assets in business combination - (893,611)
Debt and accrued interest assumed in business combination - 824,480
Goodwill - (2,079,665)
Loss on disposal of equipment 2,296 -
CHANGES IN ASSETS AND LIABILITIES
(Increase) decrease in accounts receivable 159,934 (747,939)
(Increase) in other current assets (4,077) (173)
(Increase) in deposits (14,517) (55,006)
Increase in accounts payable 154,463 904,740
Increase in accrued interest 77,364 56,507
Increase in payroll taxes payable 17,230 -
Increase (decrease) in customer deposits (35,010) 204,000
Increase (decrease) in receivable financing payable (153,082) 657,003
Increase (decrease) in commissions payable 98,994 58,731
Increase (decrease) in refunds payable (936) 2,015
Increase (decrease) in deferred revenue (262,959) 1,097,935
------------ ------------
Total adjustments 300,506 188,087
------------ ------------
NET CASH (USED IN) OPERATING ACTIVITIES 5,465 (76,969)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment 3,451 -
Acquisition of fixed assets (233,396) (251,023)
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES (229,945) (251,023)
------------ ------------
The accompanying notes are an integral part of these financial statements
5
I-ELEMENT, INC.
STATEMENTS OF CASH FLOW (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITES
Payments of notes payable (465,344) $ (46,193)
Proceeds from notes payable 625,331 467,054
Common stock issued for cash 119,300 -
Proceeds in exercise of stock options 75 -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 279,362 420,861
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 54,882 92,869
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR 92,869 -
------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 147,751 $ 92,869
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest expense $ 34,983 $ 6,459
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES:
Accounts payable converted to equity $ 5,000 $ -
============ ============
Accounts payable converted to debt $ 50,000 $ -
============ ============
Conversion of notes payable to equity $ 248,000 $ -
============ ============
Issuance of stock for redemption of ICCC shares $ 4,123 $ -
============ ============
The accompanying notes are an integral part of these financial statements
6
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
I-Element, Inc. (the "Company"), incorporated in Nevada on
December 30, 2002, is a facilities-based nationwide
communications service provider that provides state-of-the-art
telecommunications services to small and medium sized
enterprises ("SMEs"). I-Element provides broadband data, voice
and wireless services by offering integrated T-1 lines as well
as Layer 2 Private Network solutions that provide SMEs with
dedicated Internet access services, customizable business
solutions for voice, data, wireless and Internet, and secure
communications channels between the SME offices, partners,
vendors, customers and employees without the use of a firewall
or encryption devices. I-Element has a network presence in 18
major markets in the United States, including facilities in Los
Angeles, Dallas, and Chicago. The Company started business in
2003.
In March 2003, the Company acquired all of the principal assets
of Integrated Communications Consultants Corporation ("ICCC")
including customer contracts, fixed assets and intellectual
property in exchange for the Company's assumption of ICCC's
liabilities. Ivan Zweig served as the Chief Executive Officer of
ICCC and is also the Chief Executive Officer of the Company.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
7
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and
other short-term investments with an initial maturity of three
months or less to be cash or cash equivalents.
The Company maintains cash and cash equivalents with a financial
institution which is insured by the Federal Deposit Insurance
Corporation up to $100,000. At various times throughout the year
the Company had amounts on deposit at the financial institution
in excess of federally insured limits.
REVENUE AND COST RECOGNITION
The Company records its transactions under the accrual method of
accounting whereby income is recognized when the services are
provided rather than when billed or the fees are collected, and
costs and expenses are recognized in the period they are
incurred rather than paid for.
ACCOUNTS RECEIVABLE
The Company factors 99% of its billings with an outside agency.
The Company invoices its customers on the 28th of the month for
services to be rendered two months subsequent to the billing
date. The Company receives 75% of the aggregate net face value
of the assigned accounts at the time of placement with the
factor.
DEFERRED REVENUE
Deferred revenue consists of customers billed in advance of
revenue being earned.
8
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
PROVISION FOR BAD DEBT
Under SOP 01-6 "Accounting for Certain Entities (including
Entities with Trade Receivables), the Company has intent and
belief that all amounts in accounts receivable are collectible.
The Company has determined that based on their collections an
allowance for doubtful accounts of $6,098 and $4,496 has been
recorded at December 31, 2004 and 2003.
Bad debt expense for the years ending December 31, 2004 and 2003
was $63,498 and $52,241, respectively.
ADVERTISING COSTS
The Company expenses the costs associated with advertising and
marketing as incurred. Advertising and marketing expenses,
included in the statements of operations for the years ended
December 31, 2004 and 2003 were $24,556 and $5,901,
respectively.
INCOME TAXES
The income tax benefit is computed on the pretax loss based on
the current tax law. Deferred income taxes are recognized for
the tax consequences in future years of differences between the
tax basis of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and
statutory tax rates. No benefit is reflected for the years ended
December 31, 2004 and 2003, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate fair value because of the immediate
or short-term maturity of these financial instruments. The
carrying amount reported for notes payable approximates fair
value because, in general, the interest on the underlying
instruments fluctuates with market rates.
9
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the
assets.
Furniture and equipment 5 Years
When assets are retired or otherwise disposed of, the costs and
related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is recognized in income for the
period. The cost of maintenance and repairs is charged to income
as incurred; significant renewals and betterments are
capitalized. Deduction is made for retirements resulting from
renewals or betterments.
(LOSS) PER SHARE OF COMMON STOCK
Historical net (loss) per common share is computed using the
weighted average number of common shares outstanding. Common
stock equivalents were not included in the computation of
diluted earnings per share when the Company reported a loss
because to do so would be antidilutive for the periods
presented.
10
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(LOSS) PER SHARE OF COMMON STOCK (CONTINUED)
The following is a reconciliation of the computation for basic
and diluted EPS:
December 31, December 31,
2004 2003
------------------ -------------------
Net loss $ (295,041) $ (265,056)
------------------ -------------------
Weighted-average common shares
Outstanding (Basic) 3,842,098 1
Weighted-average common stock
Equivalents
Stock options - -
Warrants - -
------------------ -------------------
Weighted-average common shares
Outstanding (Diluted) 3,842,098 1
================== ===================
The Company had no options or warrants granted during the
period, therefore there were no common stock equivalents.
11
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued Statement No. 142 "Goodwill and
Other Intangible Assets". This Statement addresses financial
accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in
financial statements upon their acquisition. This Statement also
addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the
financial statements.
STOCK-BASED COMPENSATION
Employee stock awards under the Company's compensation plans are
accounted for in accordance with Accounting Principles Board
Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES", and related interpretations. The Company provides
the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION"
("SFAS 123"), and related interpretations. Stock-based awards to
non-employees are accounted for under the provisions of SFAS 123
and has adopted the enhanced disclosure provisions of SFAS No.
148 "Accounting for Stock-Based Compensation- Transition and
Disclosure, an amendment of SFAS No. 123".
The Company measures compensation expense for its employee
stock-based compensation using the intrinsic-value method. Under
the intrinsic-value method of accounting for stock-based
compensation, when the exercise price of options granted to
employees is less than the estimated fair value of the
underlying stock on the date of grant, deferred compensation is
recognized and is amortized to compensation expense over the
applicable vesting period. In each of the periods presented, the
vesting period was the period in which the options were granted.
All options were expensed to compensation in the period granted
rather than the exercise date.
12
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
The Company measures compensation expense for its non-employee
stock-based compensation under the Financial Accounting
Standards Board (FASB) Emerging Issues Task Force (EITF) Issue
No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO
OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH
SELLING, GOODS OR SERVICES".
The fair value of the option issued is used to measure the
transaction, as this is more reliable than the fair value of the
services received. The fair value is measured at the value of
the Company's common stock on the date that the commitment for
performance by the counterparty has been reached or the
counterparty's performance is complete. The fair value of the
equity instrument is charged directly to compensation expense
and additional paid-in capital.
Stock-based compensation for the years ended December 31, 2004
and 2003 was $0 and $0, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
On October 3, 2001, the FASB issued Statement of Financial
Accounting Standards No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS" ("SFAS 144"), that is applicable
to financial statements issued for fiscal years beginning after
December 15, 2001. The FASB's new rules on asset impairment
supersede SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," and
portions of Accounting Principles Board Opinion 30, "Reporting
the Results of Operations."
This Standard provides a single accounting model for long-lived
assets to be disposed of and significantly changes the criteria
that would have to be met to classify an asset as held-for-sale.
Classification as held-for-sale is an important distinction
since such assets are not depreciated and are stated at the
lower of fair value and carrying amount.
13
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
This Standard also requires expected future operating losses
from discontinued operations to be displayed in the period (s)
in which the losses are incurred, rather than as of the
measurement date as presently required. The adoption of SFAS No.
144 did not have an impact on the Company's results of
operations or financial position.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. This statement rescinds SFAS No. 4,
"REPORTING GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT," and an
amendment of that statement, SFAS No. 44, "ACCOUNTING FOR
INTANGIBLE ASSETS OF MOTOR CARRIERS," and SFAS No. 64,
"EXTINGUISHMENTS OF DEBT MADE TO SATISFY SINKING-FUND
REQUIREMENTS". This statement amends SFAS No. 13, "ACCOUNTING
FOR LEASES", to eliminate inconsistencies between the required
accounting for sales-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sales-leaseback transactions.
Also, this statement amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed
conditions. Provisions of SFAS No. 145 related to the
rescissions of SFAS No. 4 were effective for the Company on
November 1, 2002 and provisions affecting SFAS No. 13 were
effective for transactions occurring after May 15, 2002. The
adoption of SFAS No. 145 did not have a significant impact on
the Company's results of operations or financial position.
In June 2003, the FASB issued SFAS No. 146, "ACCOUNTING FOR
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES". This
statement covers restructuring type activities beginning with
plans initiated after December 31, 2002. Activities covered by
this standard that are entered into after that date will be
recorded in accordance with provisions of SFAS No. 146. The
adoption of SFAS No. 146 did not have a significant impact on
the Company's results of operations or financial position.
14
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In December 2002, the FASB issued Statement No. 148, "ACCOUNTING
FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, AN
AMENDMENT OF FASB STATEMENT NO. 123"("SFAS 148"). SFAS 148
amends FASB Statement No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," to provide alternative methods of transition for
an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect
to stock-based employee compensation. Finally, this Statement
amends Accounting Principles Board ("APB") Opinion No. 28,
"INTERIM FINANCIAL REPORTING", to require disclosure about those
effects in interim financial information. SFAS 148 is effective
for financial statements for fiscal years ending after December
15, 2002. The Company will continue to account for stock-based
employee compensation using the intrinsic value method of APB
Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," but
has adopted the enhanced disclosure requirements of SFAS 148.
In May 2003, the FASB issued SFAS Statement No. 150, "ACCOUNTING
FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY". This Statement establishes standards
for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some
circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities, if
applicable. It is to be implemented by reporting the cumulative
effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement
and still existing at the beginning of the interim period of
adoption. The adoption of this statement did not have a
significant impact on the Company's results of operations or
financial position.
15
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In November 2002, the FASB issued Interpretation No. 45 ("FIN
45"), "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR
GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS". FIN 45 requires a company, at the time it issues a
guarantee, to recognize an initial liability for the fair value
of obligations assumed under the guarantees and elaborates on
existing disclosure requirements related to guarantees and
warranties. The recognition requirements are effective for
guarantees issued or modified after December 31, 2002 for
initial recognition and initial measurement provisions. The
adoption of FIN 45 did not have a significant impact on the
Company's results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46
("FIN 46"), "CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN
INTERPRETATION OF ARB NO. 51". FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective for all new variable
interest entities created or acquired after January 31, 2003.
For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period beginning after June 15,
2003. The adoption of FIN 46 did not have a significant impact
on the Company' results of operations or financial position.
16
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 3- FIXED ASSETS
Property and equipment as of December 31, 2004 and 2003 were as
follows:
2004 2003
------------------ -------------------
Furniture and equipment $ 1,369,180 $ 1,142,255
Less: accumulated depreciation (416,773) (156,691)
------------------ -------------------
Net book value $ 952,407 $ 985,564
================== ===================
There was $260,806 and $159,070 charged to operations for
depreciation expense for the years ended December 31, 2004 and
2003, respectively.
NOTE 4- NOTES PAYABLE
The Company has several notes payable at December 31, 2004.
Proceeds from the notes were utilized to finance the general
working capital requirements of the Company, purchase equipment
and pay certain liabilities assumed by the Company in the
purchase of the principal assets of Integrated Communications
Consultants Corporation in March of 2003. The notes carry
varying interest rates between zero and 16%. Prior to the
effective merger of the Company with MailKey Corporation on
January 18, 2005, (see Note 9), certain of the notes were
converted into shares of the Company's common stock.
17
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 4- NOTES PAYABLE (CONTINUED)
Accrued interest on the notes is $181,165 and $103,801 at
December 31, 2004 and 2003, respectively.
The notes payable balances at December 31,
2004 and 2003 were as follows:
December 31,
2004 2003
------------ ------------
Total notes payable $1,341,198 $ 1,301,848
Less current maturities (1,076,875) (491,405)
------------ ------------
Long-term notes payable $ 264,323 $ 810,443
============ ============
The amount of principal maturities of the
notes payable for the next four years
ending December 31, and in the aggregate
is as follows:
2005 $1,076,875
2006 102,319
2007 102,319
2008 59,685
------------
$1,341,198
============
18
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 5- OPERATING LEASES
The Company leases office space under leases commencing in March
and June of 2004. The leases are payable on a month-to-month
basis. Monthly payments under the current leases are $3,900. The
Company also leased additional office space in Texas and
California. The Company ceased leasing this additional space
during the year ended December 31, 2004.
Rental payments charged to expense during the years ended
December 31, 2004 and 2003 were $82,072 and $68,750,
respectively.
NOTE 6- STOCKHOLDERS' DEFICIT
COMMON STOCK
As of December 31, 2004 and 2003, the Company has 30,000,000 and
1,000,000 shares of common stock authorized at a par value of
$0.001, and 4,319,392 and 1 shares issued and outstanding,
respectively.
The following details the stock transactions for the year ended
December 31, 2004:
The Company issued 4,123,027 shares of common stock to the
stockholders of Integegrated Communications Consultants
Corporation in exchange for the redemption of their ICCC shares.
The Company issued 7,500 shares of common stock due to the
exercise of options.
The Company issued 10,000 shares of common stock for the
conversion of accounts payable to equity valued at $5,000.
19
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 6- STOCKHOLDERS' DEFICIT (CONTINUED)
COMMON STOCK (CONTINUED)
The Company issued 120,230 shares of common stock for the
conversion of debt to equity valued at $248,000.
The Company issued 58,634 shares of common stock for $119,300
cash at a value of approximately $2.03 per share.
NOTE 7- PROVISION FOR INCOME TAXES
Deferred income taxes will be determined using the liability
method for the temporary differences between the financial
reporting basis and income tax basis of the Company's assets and
liabilities. Deferred income taxes will be measured based on the
tax rates expected to be in effect when the temporary
differences are included in the Company's tax return. Deferred
tax assets and liabilities are recognized based on anticipated
future tax consequences attributable to differences between
financial statement carrying amounts of assets and liabilities
and their respective tax bases.
At December 31, 2004, deferred tax assets consist of the
following:
Net deferred tax assets $ 169,266
Less: valuation allowance ( 169,266 )
-------------
$ -0-
At December 31, 2004, the Company had deficits accumulated in
the approximate amount of $564,220, available to offset future
taxable income through 2023. The Company established valuation
allowances equal to the full amount of the deferred tax assets
due to the uncertainty of the utilization of the operating
losses in future periods.
20
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 8- GOING CONCERN
As shown in the accompanying financial statements the Company
has sustained net operating losses for the years ended December
31, 2004 and 2003. There is no guarantee that the Company will
be able to raise enough capital or generate revenues to sustain
its operations. This raises substantial doubt about the
Company's ability to continue as a going concern.
The Company's future success is dependent upon its ability to
achieve profitable operations and generate cash from operating
activities, and upon additional financing. There is no guarantee
that the Company will be able to raise enough capital or
generate revenues to sustain its operations. Management believes
they can raise the appropriate funds needed to support their
business plan and acquire an operating, cash flow positive
company.
The financial statements do not include any adjustments relating
to the recoverability or classification of recorded assets and
liabilities that might result should the Company be unable to
continue as a going concern.
NOTE 9- SUBSEQUENT EVENTS
On January 19, 2005, the Company was acquired by MailKey
Corporation, a Nevada corporation ("MailKey"). Pursuant to the
Agreement and Plan of Merger dated November 9, 2004, as amended
by the First Amendment and Waiver to Agreement and Plan of
Merger dated December 30, 2004 (collectively, the "Merger
Agreement"), MailKey Acquisition Corp., a Delaware corporation
and wholly-owned subsidiary of MailKey ("the Merger Sub") merged
with and into I-Element and all shares of capital stock of
I-Element were automatically exchanged for shares of common
stock of MailKey. As a result of the transaction, I-Element
became a wholly-owned subsidiary of MailKey.
Under the terms of the Merger Agreement, MailKey issued an
aggregate of 47,845,836 shares of its common stock, $.001 par
vale per share, in exchange for all of the issued and
outstanding shares of capital stock of I-Element. The exchange
ratio setting forth the number of shares of MailKey common stock
issued for each issued and outstanding share of capital stock of
I-Element was 3.52 shares of MailKey common stock for each
issued and outstanding share of capital stock of I-Element.
21
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 9- SUBSEQUENT EVENTS (CONTINUED)
In connection with the closing of the merger, MailKey entered
into a letter of intent with Ivan Zweig and Kramerica Capital
Corporation ("Kramerica"), a corporation wholly-owned by Mr.
Zweig, which contemplates that MailKey and I-Element will enter
into a four year employment agreement with Kramerica and Mr.
Zweig pursuant to which Mr. Zweig will serve as the Chief
Executive Officer of MailKey and I-Element. The letter of intent
provides that Mr. Zweig will receive an annual base salary of
$300,000. In addition to his base salary, Mr. Zweig will be
entitled to annual performance bonuses with targets ranging from
$1,000,000 to $3,000,000 during the second, third and fourth
years provided I-Element achieves certain performance goals. If
Mr. Zweig is terminated without cause, MailKey is obligated to
pay the remaining salary owed to Mr. Zweig for the complete term
of the employment agreement, to pay off all notes owed to Mr.
Zweig or Kramerica, all outstanding options shall become fully
vested, MailKey shall pay all earned performance bonuses and all
accrued vacation. If Mr. Zweig is terminated for any reason
other than cause, MailKey shall pay in full the Notes owed to
either Mr. Zweig or Kramerica Capital Corporation and at least
75% of the earned bonus plan set forth by the directors.
Effective January 24, 2005, Mr. Zweig was also appointed to the
Board of Directors of MailKey.
Ivan Zweig has served as the Chief Executive Officer of
I-Element since March 2003. Mr. Zweig is also the Chief
Executive Officer, director and sole shareholder of Kramerica, a
personnel services corporation. Since December 1998, Mr. Zweig
has served as the Chief Executive Officer and director of
Integrated Communications Consultants Corp. ("ICCC"), a
nationwide data carrier specializing in high speed Internet
access and secure data transaction. ICCC provides I-Element with
resold telecom services and I-Element pays ICCC approximately
$80,000 on a monthly basis for such services. On October 1,
2004, ICCC filed for Chapter 11 bankruptcy protection in the
United States Bankruptcy Court, Northern District of Texas,
Dallas Division.
22
I-ELEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 9- SUBSEQUENT EVENTS (CONTINUED)
Upon the consummation of the acquisition, I-Element has issued
outstanding promissory notes to, among others, Kramerica in the
aggregate amount of $120,000 (the "Notes"). I-Element has also
issued Notes in the aggregate amount to members of Mr. Zweig's
immediate family. The Notes will be due 42 months after the
Closing and will continue to be secured by substantially all of
the assets of I-Element.
23