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, 2005
-------------
[ ] 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
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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.)
17194 Preston Rd.
Suite 102 PMB 341
Dallas, TX 75248
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(Address of Principal Executive Offices)
1-214-254-3440
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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.
N.A.
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 96,446,846 issued and outstanding shares of the registrant's
common stock, $.001 par value per share, on August 5, 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; our ability to attract and qualified
personnel; customer acceptance and satisfaction with our telecommunications
solutions; our success in undertaking anticipated product enhancements and
releases; potential legal claims against us, including, but not limited to,
intellectual property infringement claims; our ability to protect our
intellectual property; variation in forecasts of the evolving telecommunications
solutions industry; rapid technological changes in the industry; competition in
our industry and markets; general economic and business conditions, either
nationally or internationally or in the regions in which we are doing business;
the condition of the securities and capital markets; legislative or regulatory
changes that affect our business, related or supplemental industries or our
ability to ability to comply with regulatory bodies; and statements of
assumption underlying any of the foregoing, as well as any other factors set
forth in our 2005 Annual Report on Form 10-KSB, in our consolidated financial
statements contained in this report and the notes thereto, 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 otherwise 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 subsequent to the date of this
filing.
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
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAILKEY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
MAILKEY CORPORATION AND SUBSIDIARY
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
TABLE OF CONTENTS
-----------------
Condensed Consolidated Audited Financial Statements:
PAGE(S)
-------
Condensed Consolidated Balance Sheets as of June 30, 2005 and 2004 1
Condensed Consolidated Statements of Operations for
the Three Months Ended June 30, 2005 and 2004 2
Condensed Consolidated Statements of Cash Flow for
the Three Months Ended June 30, 2005 and 2004 3-4
Notes to Condensed Consolidated Financial Statements 5-18
MAILKEY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND 2004
ASSETS
------
June 30, June 30,
2005 2004
---- ----
(UNAUDITED) (UNAUDITED)
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 96,532 $ 62,680
Accounts receivable, net 509,005 724,082
Other current assets 3,469 2,539
--------------- ---------------
TOTAL CURRENT ASSETS 609,006 789,301
--------------- ---------------
Fixed assets, net of depreciation 834,131 1,061,265
--------------- ---------------
OTHER ASSETS:
Goodwill 2,079,665 2,079,665
Deposits 55,361 53,523
--------------- ---------------
TOTAL OTHER ASSETS 2,135,026 2,133,188
--------------- ---------------
TOTAL ASSETS $ 3,578,163 $ 3,983,754
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,399,777 $ 979,681
Customer deposits 155,887 188,527
Receivable financing payable 307,756 516,199
Commissions payable 179,454 92,789
Deferred revenue 792,095 1,148,629
Current portion - notes payable 465,467 264,620
--------------- ---------------
TOTAL CURRENT LIABILITIES 3,300,436 3,190,445
--------------- ---------------
LONG-TERM LIABILITIES:
Notes payable, net of current portion 261,775 896,641
--------------- ---------------
TOTAL LONG-TERM LIABILITIES 261,775 896,641
--------------- ---------------
TOTAL LIABILITIES 3,562,211 4,087,086
--------------- ---------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 Par Value, 100,000,000 shares authorized;
94,850,535 and 4,319,392 shares issued and outstanding
at June 30, 2005 and 2004 respectively 94,851 4,319
Additional paid-in capital 1,048,787 372,179
Accumulated deficit (1,127,686) (479,830)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 15,952 (103,332)
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,578,163 $ 3,983,754
=============== ===============
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
MAILKEY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
THREE MONTHS ENDED
------------------
JUNE 30, JUNE 30,
2005 2004
(UNAUDITED) (UNAUDITED)
----------- -----------
OPERATING REVENUE $1,215,479 $1,504,941
COST OF SALES 739,614 833,999
----------- -----------
GROSS PROFIT 475,865 670,942
----------- -----------
OPERATING EXPENSES
General and administrative 423,354 509,367
Selling expenses 96,328 136,842
Depreciation & amortization 68,665 65,173
Interest expense 4,925 30,265
Receivable factoring fees 28,974 33,155
----------- -----------
TOTAL OPERATING EXPENSES 622,246 774,802
----------- -----------
INCOME (LOSS) BEFORE OTHER (EXPENSE) (146,381) (103,860)
----------- -----------
OTHER (EXPENSE)
Loss on sale of investments - (38,511)
----------- -----------
TOTAL OTHER EXPENSES - (38,511)
----------- -----------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (146,381) (142,371)
PROVISION FOR INCOME TAXES - -
----------- -----------
NET LOSS APPLICABLE TO COMMON SHARES $ (146,381) $ (142,371)
=========== ===========
NET LOSS PER BASIC AND DILUTED SHARES $ (0.00) $ (0.03)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 91,947,843 4,178,856
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
MAILKEY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
THREE MONTHS ENDED
------------------
JUNE 30, JUNE 30,
2005 2004
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (146,381) $ (142,371)
----------- -----------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 68,665 65,173
Stock issued for services 54,047 -
CHANGES IN ASSETS AND LIABILITIES
(Increase) decrease in accounts receivable 11,639 (215,489)
(Increase) decrease in other current assets (1,689) 105
(Increase) in deposits 3,632 1,015
Increase in accounts payable 10,785 66,536
Increase in accrued interest 4,864 30,258
(Decrease) in customer deposits (8,225) (654)
Increase (decrease) in receivable financing payable (175,358) 201,875
Increase (decrease) in commissions payable 3,318 (9,728)
(Decrease) in deferred revenue (22,941) (42,637)
----------- -----------
Total adjustments (51,263) 96,454
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES (197,644) (45,917)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (13,745) (37,511)
=========== ===========
NET CASH (USED IN) INVESTING ACTIVITIES (13,745) (37,511)
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements
3
MAILKEY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
THREE MONTHS ENDED
------------------
June 30, JUNE 30,
2005 2004
(Unaudited) (UNAUDITED)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITES
Payments of notes payable $ (32,400) $ (52,534)
Proceeds from notes payable - 50,000
Common stock issued for cash - 119,300
Proceeds in exercise of stock options - 75
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (32,400) 116,841
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (243,789) 33,413
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 340,321 29,267
----------- -----------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 96,532 $ 62,680
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID DURING THE QUARTER FOR:
Interest expense $ 106 $ 4,714
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES:
Accounts payable converted to equity $ 12,000 $ -
=========== ===========
Accounts payable converted to debt $ - $ 50,000
=========== ===========
Conversion of notes payable to equity $ - $ 248,000
=========== ===========
Stock issued for services $ 54,047 $ -
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements
4
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements
included herein have been prepared by MailKey Corporation and Subsidiary
(the "Company") without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information
and footnote disclosures normally included in the financial statements
prepared in accordance with accounting principles generally accepted in
the United States of America have been condensed or omitted as allowed
by such rules and regulations, and the Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these financial statements be read in
conjunction with the March 31, 2005 audited financial statements and the
accompanying notes thereto. While management believes the procedures
followed in preparing these condensed financial statements are
reasonable, the accuracy of the amounts are in some respects dependent
upon the facts that will exist, and procedures that will be accomplished
by the Company later in the year.
The management of the Company believes that the accompanying unaudited
condensed consolidated financial statements contain all adjustments
(including normal recurring adjustments) necessary to present fairly the
operations, changes in stockholders' equity and cash flows for the
periods presented.
MailKey Corporation (the "Company" or "MailKey") was established as a
messaging security and management company. On March 25, 2004, pursuant
to an Agreement and Plan of Merger, Global Diversified Acquisition Corp.
("GDAC"), acquired all of the outstanding capital stock of MK Secure
Solutions Ltd ("MKSS"), a holding company incorporated on March 11,
2003, under the laws of the British Virgin Islands. The transaction was
effected by the issuance of shares such that the former MKSS
shareholders owned approximately 90% of the outstanding MailKey stock
after the transaction. GDAC then changed its name to MailKey Corporation
("MailKey").
The Company's Chairman and Chief Executive Officer resigned in September
2004 and the Company's Chief Financial Officer and member of the Board
resigned in November 2004. Both positions have been filled by the
Company's founder and deputy chairman.
5
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
In early 2005 the Company was unable to continue funding the development
of its messaging security solutions, and the rights were transferred to
the development team in return for the cancellation of most of the
liabilities which the Company owed to them. The Company retains an
interest of 20% in the messaging security solutions; however to date
there has been no commercialization of the solutions. In the first
quarter 2005 the Company sold its insolvent British Virgin Islands
subsidiary, MK Secure Solutions Limited, for $1 to a UK based accounting
firm, SS Khehar & Company. SS Khehar & Company has agreed to deal with
the winding up of the former subsidiary, for a fee of $1,800.
On November 9, 2004, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") by and among the MailKey Corporation,
MailKey Acquisition Corp., a Delaware corporation and our wholly-owned
subsidiary ("Merger Sub"), Inc., a Nevada Corporation, I-Element, Inc.
("I-Element") and Ivan Zweig, pursuant to which the Company agreed to
acquire all of the issued and outstanding shares of capital stock of
I-Element. This transaction closed in January 2005. At the closing of
the Merger, Merger Sub was merged into I-Element, at which time the
separate corporate existence of Merger Sub ceased and I-Element now
continues as the surviving company. The Share Exchange has been
accounted for as a reverse merger under the purchase method of
accounting. Accordingly, I-Element will be treated as the continuing
entity for accounting purposes and the historical financial statements
presented will be those of I-Element.
Under the terms of the Merger Agreement, MailKey issued its common
stock, $.001 par value per share, in exchange for all of the issued and
outstanding shares of capital stock of I-Element. The exchange ratio
setting forth the number of shares of MailKey common stock issued for
each issued and outstanding share of capital stock of I-Element was 3.52
shares of MailKey common stock for each issued and outstanding share of
capital stock of I-Element.
I-Element, incorporated in Nevada on December 30, 2002, is a
facilities-based nationwide communications service provider that
provides state-of-the-art telecommunications services to small and
medium sized enterprises ("SMEs"). I-Element provides broadband data,
voice and wireless services by offering integrated T-1 lines as well as
Layer 2 Private Network solutions that provide SMEs with dedicated
Internet access services, customizable business solutions for voice,
data, wireless and Internet, and secure communications channels between
the SME offices, partners, vendors, customers and employees without the
use of a firewall or encryption devices. I-Element has a network
presence in 18 major markets in the United States, including facilities
in Los Angeles, Dallas, and Chicago. The Company started business in
2003.
6
22
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
In connection with the closing of the merger, MailKey entered into a
letter of intent with Ivan Zweig and Kramerica Capital Corporation
("Kramerica"), a corporation wholly-owned by Mr. Zweig, which
contemplates that MailKey and I-Element will enter into a four year
employment agreement with Kramerica and Mr. Zweig pursuant to which Mr.
Zweig will serve as the Chief Executive Officer of MailKey and
I-Element. The letter of intent provides that Mr. Zweig will receive an
annual base salary of $300,000. In addition to his base salary, Mr.
Zweig will be entitled to annual performance bonuses with targets
ranging from $1,000,000 to $3,000,000 during the second, third and
fourth years provided I-Element achieves certain performance goals. If
Mr. Zweig is terminated without cause, MailKey is obligated to pay the
remaining salary owed to Mr. Zweig for the complete term of the
employment agreement, to pay off all notes owed to Mr. Zweig or
Kramerica, all outstanding options shall become fully vested, MailKey
shall pay all earned performance bonuses and all accrued vacation. If
Mr. Zweig is terminated for any reason other than cause, MailKey shall
pay in full the Notes owed to either Mr. Zweig or Kramerica Capital
Corporation and at least 75% of the earned bonus plan set forth by the
directors.
Effective January 24, 2005, Mr. Zweig was also appointed to the Board of
Directors of MailKey.
Ivan Zweig has served as the Chief Executive Officer of I-Element since
March 2003. Mr. Zweig is also the Chief Executive Officer, director and
sole shareholder of Kramerica, a personnel services corporation. Since
December 1998, Mr. Zweig has served as the Chief Executive Officer and
director of Integrated Communications Consultants Corp. ("ICCC"), a
nationwide data carrier specializing in high speed Internet access and
secure data transaction. ICCC provides I-Element with resold telecom
services and I-Element pays ICCC approximately $98,000 on a monthly
basis for such services. On October 1, 2004, ICCC filed for Chapter 11
bankruptcy protection in the United States Bankruptcy Court, Northern
District of Texas, Dallas Division.
Upon the consummation of the acquisition, I-Element has issued
outstanding promissory notes to, among others, Kramerica in the
aggregate amount of $120,000 (the "Notes"). I-Element has also issued
Notes in the aggregate amount to members of Mr. Zweig's immediate
family. The Notes are payable in 36 monthly installments with the first
payment commencing six months after the closing of the merger and will
continue to be secured by substantially all of the assets of I-Element.
The Company's condensed consolidated financial statements are prepared
on the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America, and have
been presented on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business.
7
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The condensed consolidated financial statements include the financial
position and results of I-Element. All significant intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and other
short-term investments with an initial maturity of three months or less
to be cash or cash equivalents.
The Company maintains cash and cash equivalents with a financial
institution which is insured by the Federal Deposit Insurance
Corporation up to $100,000. At various times throughout the year the
Company had amounts on deposit at the financial institution in excess of
federally insured limits.
REVENUE AND COST RECOGNITION
The Company records its transactions under the accrual method of
accounting whereby income is recognized when the services are provided
rather than when billed or the fees are collected, and costs and
expenses are recognized in the period they are incurred rather than paid
for.
ACCOUNTS RECEIVABLE
The Company factors 99% of its billings with an outside agency. The
Company invoices its customers approximately 34 days prior to the month
services are to be rendered with invoice amounts due on the first of the
month in which services are rendered. The Company receives 75% of the
aggregate net face value of the assigned accounts at the time of
placement with the factor.
8
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
DEFERRED REVENUE
Deferred revenue consists of customers billed in advance of revenue
being earned.
PROVISION FOR BAD DEBT
Under SOP 01-6 "Accounting for Certain Entities (including Entities with
Trade Receivables), the Company has intent and belief that all amounts
in accounts receivable are collectible. The Company has determined that
based on their collections an allowance for doubtful accounts of $8,151
and $5,761 has been recorded at June 30, 2005 and 2004, respectively.
Bad debt expense for the three months ended June 30, 2005 and 2004 was
$18,709 and $17,001, respectively.
ADVERTISING COSTS
The Company expenses the costs associated with advertising and marketing
as incurred. Advertising and marketing expenses, included in the
statements of operations for the three months ended June 30, 2005 and
2004 were $0 and $8,793, respectively.
INCOME TAXES
The income tax benefit is computed on the pretax loss based on the
current tax law. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each
year-end based on enacted tax laws and statutory tax rates. No benefit
is reflected for the three months ended June 30, 2005 and 2004,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value because of the immediate or short-term maturity
of these financial instruments. The carrying amount reported for notes
payable approximates fair value because, in general, the interest on the
underlying instruments fluctuates with market rates.
9
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
Furniture and equipment 5 Years
Telecommunications equipment 5 Years
When assets are retired or otherwise disposed of, the costs and related
accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized in income for the period. The cost
of maintenance and repairs is charged to income as incurred; significant
renewals and betterments are capitalized. Deduction is made for
retirements resulting from renewals or betterments.
(LOSS) PER SHARE OF COMMON STOCK
Historical net (loss) per common share is computed using the weighted
average number of common shares outstanding. Common stock equivalents
were not included in the computation of diluted earnings per share when
the Company reported a loss because to do so would be antidilutive for
the periods presented.
10
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
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:
THREE MONTHS ENDED
------------------
JUNE 30, JUNE 30,
2005 2004
(UNAUDITED) (UNAUDITED)
---------------- -----------------
Net Loss ($146,381) ($142,371)
Weighted-average common
shares Outstanding (Basic) 91,947,843 4,178,856
Weighted-average common
stock Equivalents
Stock Options - -
Warrants - -
---------------- -----------------
Weighted-average common
shares Outstanding (Diluted) 91,947,843 4,178,856
================ =================
The Company had no options or warrants granted during the period,
therefore there were no common stock equivalents.
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.
11
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
STOCK-BASED COMPENSATION
Employee stock awards under the Company's compensation plans are
accounted for in accordance with Accounting Principles Board Opinion No.
25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and related
interpretations. The Company provides the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS 123"), and related interpretations.
Stock-based awards to non-employees are accounted for under the
provisions of SFAS 123 and has adopted the enhanced disclosure
provisions of SFAS No. 148 "Accounting for Stock-Based Compensation-
Transition and Disclosure, an amendment of SFAS No. 123".
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic-value method. Under the intrinsic-value
method of accounting for stock-based compensation, when the exercise
price of options granted to employees is less than the estimated fair
value of the underlying stock on the date of grant, deferred
compensation is recognized and is amortized to compensation expense over
the applicable vesting period. In each of the periods presented, the
vesting period was the period in which the options were granted. All
options were expensed to compensation in the period granted rather than
the exercise date.
The Company measures compensation expense for its non-employee
stock-based compensation under the Financial Accounting Standards Board
(FASB) Emerging Issues Task Force (EITF) Issue No. 96-18, "ACCOUNTING
FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR
ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES".
The fair value of the option issued is used to measure the transaction,
as this is more reliable than the fair value of the services received.
The fair value is measured at the value of the Company's common stock on
the date that the commitment for performance by the counterparty has
been reached or the counterparty's performance is complete. The fair
value of the equity instrument is charged directly to compensation
expense and additional paid-in capital.
Net stock-based compensation for the three months ended June 30, 2005
and 2004 was $57,047 and $0, respectively.
12
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB
NO. 51". FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003.
For variable interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the first interim or
annual period beginning after June 15, 2003. The adoption of FIN 46 did
not have a significant impact on the Company' results of operations or
financial position.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised
2004), "SHARE-BASED PAYMENT" ("SFAS 123R"). SFAS 123R requires that
compensation cost related to share-based payment transactions be
recognized in the financial statements. Share-based payment transactions
within the scope of SFAS 123R include stock options, restricted stock
plans, performance-based awards, stock appreciation rights, and employee
share purchase plans.
The provisions of SFAS 123R are effective for small business issuers as
of the first interim period that begins after December 15, 2005.
Accordingly, the Company will implement the revised standard in the
first quarter of fiscal year 2006. Currently, the Company accounts for
its share-based payment transactions under the provisions of APB 25,
which does not necessarily require the recognition of compensation cost
in the financial statements. Management is assessing the implications of
this revised standard, which may materially impact the Company's results
of operations in the first quarter of fiscal year 2006 and thereafter.
13
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On December 16, 2004, FASB issued Statement of Financial Accounting
Standards No. 153, "EXCHANGES OF NON-MONETARY ASSETS, AN AMENDMENT OF
APB OPINION NO. 29, ACCOUNTING FOR NON-MONETARY TRANSACTIONS" (" SFAS
153"). This statement amends APB Opinion 29 to eliminate the exception
for non-monetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of non-monetary assets that do
not have commercial substance. Under SFAS 153, if a non-monetary
exchange of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must be
accounted for at fair value resulting in recognition of any gain or
loss. SFAS 153 is effective for non-monetary transactions in fiscal
periods that begin after June 15, 2005. The Company does not anticipate
that the implementation of this standard will have a material impact on
its financial position, results of operations or cash flow.
NOTE 3- FIXED ASSETS
Property and equipment as of June 30, 2005 and 2004 was as follows:
THREE MONTHS ENDED
------------------
JUNE 30, JUNE 30,
2005 2004
(UNAUDITED) (UNAUDITED)
---------------- -----------------
Property and Equipment $1,387,013 $1,343,532
Less Accumulated Depreciation 552,882 282,267
---------------- -----------------
Net book value $ 834,131 $1,061,265
================ =================
There was $68,665 and $65,173 charged to operations for depreciation
expense for the three months ended June 30, 2005 and 2004, respectively.
14
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
NOTE 4- NOTES PAYABLE
The Company has several notes payable at June 30, 2005. Proceeds from
the notes were utilized to finance the general working capital
requirements of the Company, purchase equipment and pay certain
liabilities assumed by the Company in the purchase of the principal
assets of Integrated Communications Consultants Corporation in March of
2003. The notes carry varying interest rates between zero and 5.75%.
Prior to the effective merger of I-Element with MailKey, certain of the
notes were converted into shares of common stock.
Accrued interest on the notes was $19,168 at June 30, 2005.
The notes payable balances at June 30, 2005 and 2004 were as follows:
JUNE 30, JUNE 30,
2005 2004
(UNAUDITED) (UNAUDITED)
----------------- -----------------
Total Notes Payable $727,242 $1,161,261
Less Current maturities 465,467 264,620
----------------- -----------------
Long Term Notes Payable $261,775 $896,641
================= =================
The amount of the principal maturities of the notes payable for the next four
years ending June 30, and in the aggregate is as follows:
2006 $465,467
2007 125,652
2008 125,652
2009 10,471
-----------------
$727,242
=================
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.
15
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
NOTE 5- OPERATING LEASES (CONTINUED)
Rental payments charged to expense for the three months ended June 30,
2005 and 2004 were $11,700 and $22,638, respectively.
NOTE 6- STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
As of June 30, 2005, the Company has 100,000,000 shares of common stock
authorized at a par value of $0.001, and 94,850,535 shares issued and
outstanding.
The following details the stock transactions for the three months ended
June 30, 2005:
The Company received 1,498,195 shares of common stock valued at $37,455
which were issued in the previous quarter for services. Upon receipt,
the common shares were canceled.
The Company issued 1,500,000 shares of common stock against the $75,000
Liability for Stock to be issued.
The Company issued 340,000 shares of common stock valued at $8,500 to a
sales agent as payment on the outstanding balance owed.
The Company issued 175,000 shares of common stock valued at $3,500 to a
consultant as payment on the outstanding balance owed.
The Company issued 300,000 shares of common stock valued at $6,000 to a
consultant for services received.
The Company issued 250,000 shares of common stock valued at $5,500 to a
consultant for services received.
The Company issued 1,000,000 shares of common stock valued at $40,000 to
an employee as a bonus.
The Company issued 1,000,000 shares of common stock valued at $40,000 to
a consultant for services received.
16
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
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 June 30, 2005, deferred tax assets consist of the following:
Net deferred tax assets $338,306
Less: valuation allowance (338,306)
---------
$ -0-
At June 30, 2005, the Company had deficits accumulated in the
approximate amount of $1,127,686, available to offset future taxable
income through 2023. The Company established valuation allowances equal
to the full amount of the deferred tax assets due to the uncertainty of
the utilization of the operating losses in future periods.
NOTE 8- GOING CONCERN
As shown in the accompanying condensed consolidated financial
statements, the Company has sustained net operating losses for the three
months ended June 30, 2005 and 2004. 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 condensed consolidated financial statements do not include any
adjustments relating to the recoverability or classification of recorded
assets and liabilities that might result should the Company be unable to
continue as a going concern.
17
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
NOTE 9- CONTINGENCIES
On April 19, 2005 KK Solutions, Inc., a California corporation d/b/a/
Three 18, Inc. ("KK"), filed a complaint against the Company and its
CEO, Ivan Zweig, individually, in the Superior Court of the State of
California, County of Los Angeles, alleging breach of contract pursuant
to a dispute regarding sales commissions due to KK. KK seeks damages in
the amount of $78,000, plus interest. The Company is vigorously
defending against this action, which is currently in the discovery phase
of the proceeding.
On April 26, 2005 Communications Plus, Inc., a California company d/b/a
Global Communications, ("Global"), filed a complaint against the Company
and its CEO, Ivan Zweig, individually, in the Superior Court of the
State of California, County of Los Angeles, alleging breach of contract
pursuant to a dispute regarding sales commissions due to Global. Global
seeks damages in the amount of $50,000, plus interest. The Company is
vigorously defending against this action, which is currently in the
discovery phase of the proceeding.
NOTE 10- SUBSEQUENT EVENTS
The Company received consent to amend the Articles of Incorporation to
increase the number of shares of common stock authorized to be issued
from 100,000,000 shares to 2,000,000,000 shares, and consented to the
authorization of 200,000,000 shares of Blank Check Preferred Stock.
There are no current plans to designate any Blank Check Preferred Stock.
On August 1, 2005, the Company filed an Information Statement in
definitive form on schedule 14C with the SEC to change its name from
MailKey Corporation to IElement Corporation. Concurrent with this name
change, the Company will receive a new stock trading symbol on the NASD
Over-the-Counter Electronic Bulletin Board.
On August 8, 2005 Tim Dean-Smith and Susan Walton resigned their
positions on the Board of Directors (the "Board") of the Company. Tim
Dean-Smith also resigned from his position as Chief Financial Officer of
the Company. The resignations of Mr. Dean-Smith and Ms. Walton were
consistent with the expectations of the parties pursuant to the
consummation of the merger between I-Element, and the Company on January
19, 2005, and do not arise from any disagreement on any matter relating
to the Company's operations, policies or practices, nor regarding the
general direction of the Company. Neither Mr. Dean-Smith nor Ms. Walton
served on any subcommittees of the Board. Ivan Zweig, the current
Chairman of the Board and Chief Executive Officer was appointed as the
Chief Financial Officer of the Company until a new Chief Financial
Officer is found.
18
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, except as required by law we assume no
obligation to update any such forward-looking statements. Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including those set forth under the caption
"Disclosure Regarding Forward-Looking Statements" and elsewhere in this report.
The following should be read in conjunction with our unaudited financial
statements and the related notes thereto contained elsewhere in this report.
The statements contained in this quarterly report that are not
historical facts are forward-looking statements that involve a number of risks
and uncertainties. Historical results should not be relied on as indicative of
trends in operating results for any future period. The actual results of the
future events described in such forward-looking statements in this quarterly
report could differ materially from those stated in such forward-looking
statements.
OUR PLAN OF OPERATION
In January of 2005, the Company closed its merger agreement with
IElement, Inc., a facilities-based nationwide telecommunications communications
service provider to small and medium sized enterprises. IElement, Inc., seeks to
provide broadband data, voice and wireless services using integrated T-1 lines
with a Layer 2 Private Network/Wide Area Network (WAN) solution to provide
dedicated Internet access services, customizable business solutions for voice,
data and Internet, and secure communications channels between our customers'
offices, partners, vendors, customers and employees without the use of a
firewall or encryption devices. In the first quarter 2005 the Company was unable
to continue funding the development of its messaging security solutions, and the
rights were transferred to the development team in return for the cancellation
of most of the liabilities that the Company owed to them. The Company retains an
interest of 20% in the messaging security solutions; however to date there has
been no commercialization of the solutions. In the first quarter 2005, the
Company sold its insolvent British Virgin Islands subsidiary, MK Secure
Solutions Limited, for $1 to a UK based accounting firm, SS Khehar & Company. SS
Khehar & Company have agreed to deal with the winding up of the former
subsidiary, for a fee of $1,800.
On July 21, 2005 and August 1, 2005, the Company filed an Information
Statement on Schedule 14C in preliminary form and in definitive form,
respectively, disclosing that, among other items, it had obtained the requisite
shareholder approval to change the Company name to
19
IElement Corporation ("IElement"), effective as soon as practicable following
August 21, 2005. We now aim to grow the business of IElement and establish it as
a leading regional added-value carrier.
IElement's focus is to become the leading regional Communication Service
Provider (CSP) from California to Florida. IElement's added value, managed
service strategy includes the potential development of additional subscription
model services such as Managed Microsoft Exchange, prepaid and postpaid cellular
services, email and network security, residential/ business based wireless, and
Managed Blackberry(tm) services. The development of these services would allow
IElement to offer Small and Medium-sized Enterprises ("SMEs") the access to
Large Enterprise type applications with little or no software purchase, hardware
investment, upgrade concerns, or full-time administration of these services.
These sell- through services should increase the Average Revenue Per Customer
("ARPC"), as well as help improve customer retention.
The Company intends to:
o Initially concentrate its resources on adding customers in the Dallas,
Los Angeles and Chicago markets, while extending its sales reach into the next
target markets.
o Build out the necessary infrastructure to sell IElement broadband
services (wireless or wireline), as well as reselling voice services over the
same T1 or wireless equivalent.
o Upsell added value managed services to our current and future customer
base to raise our ARPC. We believe that existing infrastructure can serve
multiple new markets as they are brought online in advance of the need for
additional capital expenditures or additional software licenses.
o Seek acquisitions of wireless ISPs (WISPs) and other suitable telephony
and/or data carriers in secondary and tertiary markets that can be layered onto
the Company's national backbone. We believe that such acquisitions would enable
greater economies of scale and operating efficiencies.
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.
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, 2005 we had a cash balance of $96,532.
20
In order to facilitate working cash flow, the Company factors
approximately 99% of accounts receivables for its customer billing with an
outside agency, thereby receiving 75% of the aggregate net face value of the
assigned accounts at the time of placement with the factor. We do not otherwise
maintain a line of credit or term loan with any commercial bank or other
financial institution. To date, our capital needs have been principally met
through the receipt of proceeds from factoring customer receivables and the sale
of equity and debt securities.
We believe that our current cash resources will not be sufficient to
sustain our current operations for the next twelve (12) months, and that intend
to obtain additional cash resources through sales of debt or equity securities
in order to execute our business plan. The Company anticipates, based on
currently proposed plans and assumptions relating to its operations, that it
will be essential to secure additional working capital. While we believe that
Company will be successful in obtaining additional funds, the Company currently
has no firm arrangements or understandings for additional financing and there
can be no assurance that additional financing will be available to the Company
if required. Additionally, in the event that the Company's plans change, its
assumptions prove to be inaccurate or its cash flow proves to be insufficient
(due to unanticipated expenses, inadequate revenues, difficulties, problems or
otherwise), the Company may be required to either seek further additional
financing or curtail its activities.
OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2005, we did not have any relationships with
unconsolidated entities or financial partners, such as entities often referred
to as structured finance or special purpose entities, that had been established
for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we were
engaged in such relationships.
RECENT DEVELOPMENTS
On January 19, 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.
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 iElement.
On January 24, 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.
21
On August 1, 2005 the Company filed an Information Statement Schedule
14C in definitive form disclosing that, among other items, it had obtained the
requisite shareholder approval to change the Company name to IElement
Corporation, effective as soon as practicable following August 21, 2005, as more
fully detailed in Item 4 of this Form 10-QSB.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Generally: The Voice over Internet Protocol (VoIP) and internet based
communications solutions 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 enter markets and establish a base level of customers that will
cover costs of opening and maintaining a market while seeking to expand both the
customer base and products base. 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 negatively affect the
Company's ability to effectively market and develop existing and future
products. 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 through external financing either
through the issuance of additional stock or the incurrence of debt or a
combination thereof.
RISK FACTORS
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. The following risk factors should
be considered carefully in addition to the other information presented in this
report. Factors that might cause such differences include, but are not limited
to, the following:
RISKS ASSOCIATED WITH OUR BUSINESS
IF WE ACQUIRE ANY COMPANIES OR TECHNOLOGIES IN THE FUTURE, SUCH COMPANIES AND
TECHNOLOGIES COULD PROVE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS.
We intend to acquire or make investments in complementary companies,
businesses, assets and/or technologies in the future. We have not made any
acquisitions or investments to date, and therefore, our ability to make
acquisitions or investments is unproven. Acquisitions and investments involve
numerous risks, including:
o inability to generate sufficient revenue or growth in revenue or
to offset acquisition or investment costs;
o difficulties in integrating operations, technologies, service
and personnel;
22
o diversion of financial and management resources from existing
operations;
o risk of entering new markets; and
o potential loss of key employees;
Acquisitions could also require us to record substantial amounts of
goodwill and other intangible assets. Any future impairment of such goodwill
along with the amortization of other intangible assets, would adversely affect
our operating results. In addition, if we finance acquisitions by issuing
convertible debt or equity securities our existing stockholders may be diluted,
which could affect the market price of our stock. If we finance such
acquisitions with bank debt or high yield debt, these arrangements would likely
impose substantial operating covenants on us and result in interest expense that
could adversely affect our business and operating results. As a result, if we
fail to properly evaluate and execute any future acquisitions or investments,
our business and operating results may be materially harmed.
OUR GROWTH COULD STRAIN OUR PERSONNEL AND INFRASTRUCTURE RESOURCES. IF WE ARE
UNABLE TO IMPLEMENT APPROPRIATE CONTROLS AND PROCEDURES TO MANAGE OUR GROWTH, WE
MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN.
As we implement our business plan we may experience a period of rapid
growth in our headcount and operations, which may place a significant strain on
our management, administrative, operational and financial infrastructure.
Our success will depend in part upon the ability of our senior
management to manage this growth effectively. To do so, we must continue to
hire, train and manage new employees as needed. If our new hires perform poorly,
if we are unsuccessful in hiring, training, managing and integrating these new
employees, or if we are not successful in retaining our existing employees, our
business may be harmed. To manage the expected growth of our operations and
personnel, we will need to continually improve our operational, financial and
management controls and our reporting systems and procedures. The additional
headcount and capital investments we are adding will increase our cost base,
which will make it more difficult for us to offset any future revenue shortfalls
by offsetting expense reductions in the short term. If we fail to successfully
manage our growth we will be unable to execute our business plan.
THE MARKET IN WHICH WE PARTICIPATE IS INTENSELY COMPETITIVE AND, IF WE DO NOT
COMPETE EFFECTIVELY, OUR OPERATING RESULTS COULD BE HARMED.
The market for telecommunications solutions, including local, long
distance, data and Internet products and services, is intensely competitive and
rapidly changing. Barriers to entry into this market have increased due to
regulatory changes and increased costs of doing business with the Incumbent
Local Exchange Carriers (ILECs), but these barriers have been offset by
reductions in costs for bandwidth and the subsequent development of Voice over
Internet
23
Protocol (VoIP), which has allowed new competition to arise in the telephone
services arena. Many of our competitors are larger and have more resources than
we do. With the introduction of new technologies and market entrants, we expect
competition to intensify in the future. Many of our current and potential
competitors enjoy substantial competitive advantages, such as greater name
recognition, longer operating histories, larger research, development and
marketing budgets as well as substantially greater financial, technical and
other resources. In addition, many of our current and potential competitors have
access to larger customer bases and have more extensive marketing and
distribution arrangements with resellers, distributors and OEMs than we do. As a
result, our competitors may be able to respond more quickly and effectively than
we can to new or changing opportunities, technologies, standards or customer
requirements. Furthermore, because of these advantages, even if we develop
products that are more effective than the products that our competitors offer,
potential customers might accept competitive products in lieu of purchasing our
products or services.
We face competition from businesses that develop their own VoIP and
other Internet based telecommunications services, as well as from ILECs who have
achieved regulatory relief from the Telecommunications Act of 1996, and who have
begun to charge the Company more for wholesale prices and in some cases
eliminated the wholesale opportunity based on the size of the market. Our
current and potential principal competitors include:
o Other Competitive Local Exchange (CLECs) providers who provide
many of the same telecommunications products and services that
we do. Some examples of CLECs are: XO Communications, Xspedius,
Logix Communications and McLeod Telecom; ILECs such as SBC
Communications,Verizon, Qwest and Bell South who are the largest
provider of local, long distance and Internet services to
businesses;
o VoIP providers such as Vonage, Covad and mPower who can deliver
local and long distance services over an Internet connection.
WE ARE DEPENDENT ON OUR MANAGEMENT TEAM SUCH THAT THE LOSS OF ANY KEY MEMBER OF
THIS TEAM MAY PREVENT US FROM IMPLEMENTING OUR BUSINESS PLAN IN A TIMELY MANNER.
Our success depends largely upon the continued services of our executive
officers and other key personnel. We have entered into employment agreements
with many of our employees. These agreements provide that the employees may
discontinue their employment with us after providing us with little notice of
their decision (typically one month). As a result, our employees could terminate
their employment with us at any time without penalty and go to work for one of
our competitors. We believe that we have offset this risk to some degree by
maintaining a key person life insurance policy on Ivan Zweig, the CEO of the
Company. Nonetheless, the loss of one or more of our key employees could
seriously harm our business.
OUR MANAGEMENT TEAM WAS ONLY RECENTLY FORMED, AND OUR SUCCESS DEPENDS ON ITS
ABILITY TO WORK TOGETHER EFFECTIVELY.
24
We appointed Ivan Zweig, our Chairman and Chief Executive Officer, in
January 2005. Furthermore, the majority of our senior management team has joined
us as recently as within the last 12 months. Our future success depends on the
integration of this management team and its ability to work together
effectively. If our management team fails to work together effectively, our
business could be harmed.
BECAUSE COMPETITION FOR OUR TARGET EMPLOYEES IS INTENSE, WE MAY NOT BE ABLE TO
ATTRACT AND RETAIN THE HIGHLY SKILLED EMPLOYEES WE NEED TO SUPPORT OUR PLANNED
GROWTH.
To execute our growth plan, we must attract and retain highly qualified
personnel. We may need to hire additional personnel in virtually all operational
areas, including selling and marketing, operations and technical support,
customer service and administration.. We may not be successful in attracting and
retaining qualified personnel. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications. Many of the companies with which we compete for experienced
personnel have greater resources than we have. If we fail to attract new
personnel or fail to retain and motivate our current personnel, our business and
future growth prospects could be severely harmed.
WE MAY BECOME INVOLVED IN LITIGATION, WHICH COULD BE COSTLY AND TIME CONSUMING
TO DEFEND.
We may become involved in litigation such as securities class actions,
intellectual property, employment (unfair hiring or terminations) and/ or issues
pertaining to delivering E911 services, among others. For example, we may be
subject to lawsuits by parties claiming that we did not offer E911 services that
are required by law at increasingly higher standards. Parties trying to call 911
from locations that we service may not be able to complete the call based on the
fact that a T1 is a digital service and that emergencies such as fires, power
outages, or simple equipment failure could disable the ability of a person to
dial out over our local lines. Any of these parties could potentially claim that
we are interfering with the lawful conduct of their business. Although we
believe we have properly informed our customers, given them information on
backup E911 procedures, as well as paying for backup lines to be installed, risk
of litigation cannot be entirely eliminated. Litigation involves costs in
defending the action and the risk of an adverse judgment. Any resulting
litigation, with or without merit, could result in substantial costs and divert
management's attention and resources, which could seriously harm our business
and operating results.
RISKS ASSOCIATED WITH OUR STOCK
WE INTEND TO ATTEMPT TO RAISE ADDITIONAL FUNDS IN THE FUTURE, AND SUCH
ADDITIONAL FUNDING MAY BE DILUTIVE TO STOCKHOLDERS OR IMPOSE OPERATIONAL
RESTRICTIONS.
25
We intend to attempt to raise additional capital in the future to help
fund our operations either through sales of shares of our common stock or
securities convertible into shares of our common stock, through the issuances of
debt, or some combination thereof. Such additional financing may be dilutive to
our stockholders, and debt financing, if available, may involve restrictive
covenants that may limit our operating flexibility. If additional capital is
raised through the issuances of shares of our common stock or securities
convertible into shares of our common stock, the percentage ownership of our
stockholders will be reduced. Pre-equity financing stockholders may experience
additional dilution in net book value per share and any additional equity
securities may additionally have rights, preferences and privileges senior to
those of the holders of our common stock.
THE MARKET PRICE OF OUR COMMON STOCK IS LIKELY TO BE HIGHLY VOLATILE AND SUBJECT
TO WIDE FLUCTUATIONS.
The market price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in response to a number of factors that
are beyond our control, including:
o announcements of new products or services by our competitors;
o fluctuations in revenue from our indirect sales channels.
In addition, the market price of our common stock could be subject to
wide fluctuations in response to:
o quarterly variations in our revenues and operating expenses;
o announcements of technological innovations or new products or
services by us; and
o our technological capabilities to accommodate the future growth
in our operations or those of our customers.
In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the market price of the
stock of many Internet-related companies, and that often have been unrelated or
disproportionate to the operating performance of these companies. Market
fluctuations such as these may seriously harm the market price of our common
stock. Further, securities class action suits have been filed against companies
following periods of market volatility in the price of their securities. If such
an action is instituted against us, we may incur substantial costs and a
diversion of management attention and resources, which would seriously harm our
business, financial condition and results of operations.
IF WE EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR OPERATING RESULTS OR FAIL TO
MEET REVENUE AND EARNINGS EXPECTATIONS, OUR STOCK PRICE MAY FALL.
Due to our limited operating history and the unpredictability of the
telecommunications industry we may not be able to accurately forecast our future
operating results. In addition, while
26
our expenses are to a large extent fixed in the short term, we expect that these
expenses will increase in the future. Should we incur more rapid increases in
expenses than expected we may not be able to adjust our spending quickly enough.
Factors that could cause our quarterly financial results to fluctuate include:
o the successful development of our products and implementation of
our products by organizations;
o the addition of added value products and services, and the
effect those new products will have on our ability to retain
existing customers and to win new customers;
o the introduction of competitive services and the pricing of
these services;
o reduced demand for our T1 based services;
o significant increases in expenses to drive the growth of our
business, which may not yield corresponding increases in
revenue;
o the effectiveness of future legislation in further increasing
the cost of leasing lines from the ILEC or decreasing the
ability to buy wholesale services from the ILEC ;
o changes in customer demands and needs for T1 based services; and
As a result, we may not concurrently generate significantly increased
revenues and therefore our earnings may be harmed. We believe that
period-to-period comparisons of our historical operating results may not be
meaningful, and you should not rely on them as an indication of future
performance.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our common stock.
We currently intend to retain any future profits from operations to fund growth
and do not expect to pay any dividends in the foreseeable future.
APPLICABLE SEC RULES GOVERNING THE TRADING OF "PENNY STOCKS" LIMITS THE TRADING
AND LIQUIDITY OF OUR COMMON STOCK WHICH MAY AFFECT THE TRADING PRICE OF OUR
COMMON STOCK.
Our common stock currently trades on the OTC Bulletin Board. Since our
common stock trades at a price below $5.00 per share, our common stock is
considered a "penny stock" and is subject to the rules and regulations of the
Securities and Exchange Commission that impose limitations upon the manner in
which our shares can be publicly traded. These regulations require the delivery,
prior to any transaction involving our stock, of a disclosure schedule
explaining the penny stock market and the associated risks. Under these
regulations, certain brokers who recommend our securities to persons other than
established customers or certain
27
accredited investors must make a special written suitability determination
regarding such a purchaser and receive such purchaser's written agreement to the
transaction prior to sale. These regulations may have the effect of limiting the
trading activity of our common stock and reducing the liquidity of an investment
in our common stock.
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 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
Securities and Exchange Commission.
ITEM 3. CRITICAL ACCOUNTING POLICY AND ESTIMATES
Our Management's Discussion and Analysis of Financial Condition and
Results of Operations section discusses our condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America as promulgated by the Public
Company Accounting Oversight Board. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. On an ongoing basis, management evaluates its estimates and judgments,
including those related to revenue recognition, accrued expenses, financing
operations, and contingencies and litigation. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions and conditions. The most significant
accounting estimates inherent in the preparation of our financial statements
include estimates as to the appropriate carrying value of certain assets and
liabilities which are not readily apparent from other sources. These accounting
policies are described at relevant sections in this discussion and analysis and
in the condensed consolidated financial statements included in this quarterly
report.
ITEM 4. CONTROLS AND PROCEDURES
The term " disclosure controls and procedures " is defined in Rules
13(a)-15e and 15(d) - 15(e) of the Securities Exchange Act of 1934, as amended
(the Exchange Act). Our Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of our disclosure
28
controls and procedures as of June 30, 2005. They have concluded that, as of
June 30, 2005 that our disclosures were effective to ensure that:
1) That information required to be disclosed by the Company in
reports that it files or submits under the act is recorded,
processed, summarized and reported, within the time periods
specified in the Commissions' rules and forms, and
2) Controls and procedures are designed by the Company to ensure
that information required to be disclosed by MailKey Corporation
and Subsidiary in the reports it files or submits under the Act
is accumulated and communicated to the issuer's management
including the Chief Executive Officer and the Chief Financial
Officer or persons performing similar functions, as appropriate
to allow timely decisions regarding financial disclosure.
This term refers to the controls and procedures of a Company that are designed
to ensure that information required to be disclosed by a Company in the reports
that it files under the Exchange Act is recorded, processed, summarized and
reported within the required time periods. Our Chief Executive Officer and Chief
Financial Officer have evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this quarterly report.
They have concluded that, as of June 30, 2005 our disclosure and procedures were
effective in ensuring that required information will be disclosed on a timely
basis in our reports filed under the exchange act.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On April 19, 2005 KK Solutions, Inc., a California corporation d/b/a/
Three 18, Inc. ("KK"), filed a complaint against the Company and its CEO, Ivan
Zweig, individually, in the Superior Court of the State of California, County of
Los Angeles, alleging breach of contact pursuant to a dispute regarding sales
commissions due to KK. KK seeks damages in the amount of $78,000, plus interest.
The Company is vigorously defending against this action, which is currently in
the discovery phase of the proceeding.
On April 26, 2005 Communications Plus, Inc., a California company d/b/a
Global Communications, ("Global"), filed a complaint against the Company and its
CEO, Ivan Zweig, individually, in the Superior Court of the State of California,
County of Los Angeles, alleging breach of contact pursuant to a dispute
regarding sales commissions due to Global. Global seeks damages in the amount of
$50,000, plus interest. The Company is vigorously defending against this action,
which is currently in the discovery phase of the proceeding.
29
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On April 13, 2005 the Company issued 1,500,000 shares of its common
stock to BDM Holdings, LLC, pursuant to Regulation D, Rule 506 and 4(2) of the
Securities Act of 1933 as payment for equity financing consulting services.
On May 19, 2005 the Company issued 340,000 shares of its common stock to
Trad Solutions pursuant to Regulation D, Rule 506 and 4(2) of the Securities Act
of 1933 as payment for sales commissions.
On June 7, 2005 the Company issued 175,000 shares of its common stock to
Rick Wright pursuant to Regulation D, Rule 506 and 4(2) of the Securities Act of
1933 as payment for consulting services.
On June 7, 2005 the Company issued 300,000 shares of its common stock to
Blake Martensen pursuant to Regulation D, Rule 506 and 4(2) of the Securities
Act of 1933 as payment for consulting services.
On June 20, 2005 the Company issued 250,000 shares of its common stock
to Burton Goldi pursuant to Regulation D, Rule 506 and 4(2) of the Securities
Act of 1933 as payment for consulting services.
On June 29, 2005 the Company issued 1,000,000 shares of its common stock
to Heather Walther pursuant to Regulation D, Rule 506 and 4(2) of the Securities
Act of 1933 as bonus compensation for employment services.
On June 29, 2005 the Company issued 1,000,000 shares of its common stock
to Blake Martensen pursuant to Regulation D, Rule 506 and 4(2) of the Securities
Act of 1933 as payment for consulting services.
ITEM 3. DEFAULTS ON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 21, 2005 and August 1, 2005, the Company filed an Information
Statement on Schedule 14C in preliminary form and in definitive form,
respectively, disclosing that it had obtained the requisite, majority
shareholder approval, in the form of shareholder consent of greater than 50% of
the voting capital stock, for the Company to undertake the following actions,
effective as soon as practicable following August 21, 2005:
1. The amendment to the Company's Articles of Incorporation to
change the name of the Company from Mailkey Corporation to
IElement Corporation;
30
2. The amendment to the Company's Articles of Incorporation to
increase the number of shares of common stock authorized to be
issued from 100,000,000 shares to 2,000,000,000 shares;
3. The amendment to the Company's Articles of Incorporation to
authorize the creation of 200,000,000 shares of Blank Check
Preferred Stock;
4. To approve the Restated Bylaws of the Company;
5. To authorize the Board of Directors or their authorized agent(s)
to obtain a new stock symbol on the NASD Over-the-Counter
Electronic Bulletin Board.
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).
3.1.4 Certificate of Amendment to Articles of Incorporation of the
Company (incorporated by reference to the Company's Schedule 14C
filed on Aug 1, 2005).
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
3.2.3 Bylaws of the Company (incorporated by reference to the
Company's Schedule 14C filed on Aug 1, 2005).
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.
(b) Reports on Form 8-K.
During the period ended June 30, 2005, the Company filed the following reports
on Form 8-K:
- ----------------------- --------------------------------------------------------
DATE REPORT FILED ITEMS REPORTED
- ----------------------- --------------------------------------------------------
April 5, 2005 Item 9.01, Financial Statements of I-Element, Inc. for
the Years Ended December 31, 2004 and December 31, 2005
- ----------------------- --------------------------------------------------------
April 12, 2005 Items 4.01 and 7.01
- ----------------------- --------------------------------------------------------
32
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 12, 2005 /s/ Ivan Zweig
-----------------------------------
Ivan Zweig
Chief Executive Officer
33
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).
3.1.4 Certificate of Amendment to Articles of Incorporation of the
Company (incorporated by reference to the Company's Schedule 14C
filed on Aug 1, 2005).
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).
3.2.3 Bylaws of the Company (incorporated by reference to the
Company's Schedule 14C filed on Aug 1, 2005).
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.