UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: December 31, 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
IELEMENT CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 76-0270295
- ------------------------------------- -------------------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
17194 Preston Rd.
Suite 102 PMB 341
Dallas, TX 75248
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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 [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
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 96,477,065 issued and outstanding shares of the registrant's common
stock, $.001 par value per share, on JANUARY 17, 2006.
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; customer acceptance and satisfaction
with our telecommunications solutions; our success in undertaking anticipated
product enhancements and releases; our ability to attract and qualified
personnel; 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 and 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 "IElement," the "Company," "we," "us" or "our" and similar terms
refer to IElement Corporation and its subsidiaries.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
TABLE OF CONTENTS
-----------------
Condensed Consolidated Financial Statements:
PAGE(S)
-------
Condensed Consolidated Balance Sheet as of December 31, 2005 1
Condensed Consolidated Statements of Operations for
the Three Months Ended December 31, 2005 and 2004 and
the Nine Months Ended December 31, 2005 and 2004 2
Condensed Consolidated Statements of Cash Flow for
the Nine Months Ended December 31, 2005 and 2004 3-4
Notes to Condensed Consolidated Financial Statements 5-19
IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
ASSETS
DECEMBER 31,
2005
(UNAUDITED)
------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,205,129
Accounts receivable, net 474,647
Other current assets 1,159
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TOTAL CURRENT ASSETS 1,680,935
------------
Fixed assets, net of depreciation 733,433
------------
OTHER ASSETS:
Goodwill 2,079,665
Deposits 56,821
------------
TOTAL OTHER ASSETS 2,136,486
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TOTAL ASSETS $ 4,550,854
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,076,982
Customer deposits 139,121
Receivable financing payable 405,338
Commissions payable 167,225
Liability for stock to be issued 2,297,875
Deferred revenue 712,998
Current portion - notes payable 336,257
------------
TOTAL CURRENT LIABILITIES 5,135,796
------------
LONG-TERM LIABILITIES:
Notes payable, net of current portion 315,928
------------
TOTAL LONG-TERM LIABILITIES 315,928
------------
TOTAL LIABILITIES 5,451,724
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STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 Par Value, 2,000,000,000 shares authorized;
96,477,065 shares issued and outstanding 96,477
Preferred stock, $.001 Par Value, 200,000,000 shares authorized;
Zero shares issued and outstanding -
Additional paid-in capital 895,444
Stock subscription receivable (35,000)
Unearned compensation expense (12,200)
Accumulated deficit (1,845,591)
------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (900,870)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 4,550,854
============
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- -------------- -------------- --------------
OPERATING REVENUE $ 1,119,772 $ 1,415,148 $ 3,487,000 $ 4,424,345
COST OF SALES 689,185 573,732 2,141,575 2,223,222
-------------- -------------- -------------- --------------
GROSS PROFIT 430,587 841,416 1,345,425 2,201,123
-------------- -------------- -------------- --------------
OPERATING EXPENSES
General and administrative 580,397 494,132 1,598,893 1,575,452
Selling expenses 82,307 111,148 314,844 410,360
Depreciation & amortization 69,934 67,976 207,986 200,403
Interest expense - 37,667 4,951 107,222
Receivable factoring fees 26,211 30,686 83,037 95,936
-------------- -------------- -------------- --------------
TOTAL OPERATING EXPENSES 758,849 741,609 2,209,711 2,389,373
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE OTHER (EXPENSE) (328,262) 99,807 (864,286) (188,250)
-------------- -------------- -------------- --------------
OTHER (EXPENSE)
Loss on sale of investments - - - (38,511)
-------------- -------------- -------------- --------------
TOTAL OTHER EXPENSES - - - (38,511)
-------------- -------------- -------------- --------------
NET INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (328,262) 99,807 (864,286) (226,761)
PROVISION FOR INCOME TAXES - - - -
-------------- -------------- -------------- --------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHARES $ (328,262) $ 99,807 $ (864,286) $ (226,761)
============== ============== ============== ==============
NET INCOME (LOSS) PER BASIC AND
AND DILUTED SHARES $ (0.00) $ 0.02 $ (0.01) $ (0.05)
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 96,477,065 4,319,392 94,817,400 4,272,887
============== ============== ============== ==============
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NINE MONTHS ENDED
-----------------
DECEMBER 31, DECEMBER 31,
2005 2004
(UNAUDITED) (UNAUDITED)
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (864,286) $ (226,761)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 207,986 200,403
Stock issued for services 33,498 -
Stock to be issued for services 236,750 -
Gain on sale of equipment - (894)
Fixed asset write off - 3,190
CHANGES IN ASSETS AND LIABILITIES
(Increase) decrease in accounts receivable 45,997 (79,412)
(Increase) decrease in other current assets 621 (1,606)
(Increase) decrease in deposits 2,172 (14,985)
Increase in accounts payable and accrued expenses 190,568 109,368
Increase in accrued interest 4,872 107,069
(Decrease) in customer deposits (24,991) (20,191)
Increase (decrease) in receivable financing payable (77,776) 189,597
Increase (decrease) in commissions payable (8,911) 55,208
(Decrease) in deferred revenue (102,038) (356,290)
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Total adjustments 508,748 191,457
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NET CASH (USED IN) OPERATING ACTIVITIES (355,538) (35,304)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (52,368) (69,632)
Proceeds from sale of fixed assets - 3,453
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NET CASH (USED IN) INVESTING ACTIVITIES (52,368) (66,179)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of notes payable $ (46,349) $ (134,429)
Proceeds from notes payable - 235,021
Common stock issued for cash - 119,300
Cash received for common stock to be issued 1,535,625 -
Fund raising fees charged to paid in capital (216,562) -
Proceeds in exercise of stock options - 75
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,272,714 219,967
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The accompanying notes are an integral part of these condensed consolidated financial statements
3
IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NINE MONTHS ENDED
-----------------
DECEMBER 31, DECEMBER 31,
2005 2004
(UNAUDITED) (UNAUDITED)
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (864,286) $ (226,761)
NET INCREASE IN CASH AND
CASH EQUIVALENTS 864,808 118,484
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 340,321 29,267
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CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 1,205,129 $ 147,751
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest expense $ 114 $ 26,631
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES:
Accounts payable converted to equity $ 85,194 $ -
============= =============
Accounts payable converted to debt $ 177,884 $ 59,000
============= =============
Accounts payable converted to liability for stock to be issued $ 251,500 $ -
============= =============
Notes payable converted to equity $ - $ 248,000
============= =============
Notes payable converted to liability for stock to be issued $ 239,000 $ -
============= =============
Stock issued for services $ 33,498 $ -
============= =============
Stock to be issued for services $ 236,750 $ -
============= =============
Fixed asset write off $ - $ 3,190.00
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements
4
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial
statements included herein have been prepared by IElement
Corporation and Subsidiary (the "Company") without audit,
pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America have been
condensed or omitted as allowed by such rules and regulations,
and the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested
that these financial statements be read in conjunction with the
March 31, 2005 audited financial statements and the accompanying
notes thereto. While management believes the procedures followed
in preparing these condensed financial statements are
reasonable, the accuracy of the amounts are in some respects
dependent upon the facts that will exist, and procedures that
will be accomplished by the Company later in the year.
The management of the Company believes that the accompanying
unaudited condensed consolidated financial statements contain
all adjustments (including normal recurring adjustments)
necessary to present fairly the operations and cash flows for
the periods presented.
IElement Corporation (the "Company" or "IElement") was
established as a messaging security and management company. On
March 25, 2004, pursuant to an Agreement and Plan of Merger,
Global Diversified Acquisition Corp. ("GDAC"), acquired all of
the outstanding capital stock of MK Secure Solutions Ltd
("MKSS"), a holding company incorporated on March 11, 2003,
under the laws of the British Virgin Islands. The transaction
was effected by the issuance of shares such that the former MKSS
shareholders owned approximately 90% of the outstanding MailKey
Corporation stock after the transaction. GDAC then changed its
name to MailKey Corporation ("MailKey").
The Company's Chairman and Chief Executive Officer resigned in
September 2004 and the Company's Chief Financial Officer and
member of the Board resigned in November 2004. Both positions
have been filled by the Company's founder and deputy chairman.
5
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
In early 2005 the Company was unable to continue funding the
development of its messaging security solutions, and the rights
were transferred to the development team in return for the
cancellation of most of the liabilities which the Company owed
to them. The Company retains an interest of 20% in the messaging
security solutions; however to date there has been no
commercialization of the solutions. In the first quarter 2005
the Company sold its insolvent British Virgin Islands
subsidiary, MK Secure Solutions Limited, for $1 to a UK based
accounting firm, SS Khehar & Company. SS Khehar & Company has
agreed to deal with the winding up of the former subsidiary, for
a fee of $1,800.
On November 9, 2004, the Company entered into an Agreement and
Plan of Merger (the "Merger Agreement") by and among the MailKey
Corporation, MailKey Acquisition Corp., a Delaware corporation
and our wholly-owned subsidiary ("Merger Sub"), Inc., a Nevada
Corporation, I-Element, Inc. ("I-Element") and Ivan Zweig,
pursuant to which the Company agreed to acquire all of the
issued and outstanding shares of capital stock of I-Element.
This transaction closed in January 2005. At the closing of the
Merger, Merger Sub was merged into I-Element, at which time the
separate corporate existence of Merger Sub ceased and I-Element
now continues as the surviving company. The Share Exchange has
been accounted for as a reverse merger under the purchase method
of accounting. Accordingly, I-Element will be treated as the
continuing entity for accounting purposes and the historical
financial statements presented will be those of I-Element.
Under the terms of the Merger Agreement, MailKey issued its
common stock, $.001 par value per share, in exchange for all of
the issued and outstanding shares of capital stock of I-Element.
The exchange ratio setting forth the number of shares of MailKey
common stock issued for each issued and outstanding share of
capital stock of I-Element was 3.52 shares of MailKey common
stock for each issued and outstanding share of capital stock of
I-Element.
I-Element, incorporated in Nevada on December 30, 2002, is a
facilities-based nationwide communications service provider that
provides state-of-the-art telecommunications services to small
and medium sized enterprises ("SMEs"). I-Element provides
broadband data, voice and wireless services by offering
integrated T-1 lines as well as Layer 2 Private Network
solutions that provide SMEs with dedicated Internet access
services, customizable business solutions for voice, data,
wireless and Internet, and secure communications channels
between the SME offices, partners, vendors, customers and
employees without the use of a firewall or encryption devices.
I-Element has a network presence in 18 major markets in the
United States, including facilities in Los Angeles, Dallas, and
Chicago. The Company started business in 2003.
6
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
In connection with the closing of the merger, MailKey entered
into a letter of intent with Ivan Zweig and Kramerica Capital
Corporation ("Kramerica"), a corporation wholly-owned by Mr.
Zweig, which contemplates that MailKey and I-Element will enter
into a four year employment agreement with Kramerica and Mr.
Zweig pursuant to which Mr. Zweig will serve as the Chief
Executive Officer of MailKey and I-Element. The letter of intent
provides that Mr. Zweig will receive an annual base salary of
$300,000. In addition to his base salary, Mr. Zweig will be
entitled to annual performance bonuses with targets ranging from
$1,000,000 to $3,000,000 during the second, third and fourth
years provided I-Element achieves certain performance goals. If
Mr. Zweig is terminated without cause, MailKey is obligated to
pay the remaining salary owed to Mr. Zweig for the complete term
of the employment agreement, to pay off all notes owed to Mr.
Zweig or Kramerica, all outstanding options shall become fully
vested, MailKey shall pay all earned performance bonuses and all
accrued vacation. If Mr. Zweig is terminated for any reason
other than cause, MailKey shall pay in full the Notes owed to
either Mr. Zweig or Kramerica Capital Corporation and at least
75% of the earned bonus plan set forth by the directors.
Effective January 24, 2005, Mr. Zweig was also appointed to the
Board of Directors of MailKey.
Ivan Zweig has served as the Chief Executive Officer of
I-Element since March 2003. Mr. Zweig is also the Chief
Executive Officer, director and sole shareholder of Kramerica, a
personnel services corporation. Since December 1998, Mr. Zweig
has served as the Chief Executive Officer and director of
Integrated Communications Consultants Corp. ("ICCC"), a
nationwide data carrier specializing in high speed Internet
access and secure data transaction. ICCC provides I-Element with
resold telecom services and I-Element pays ICCC approximately
$100,000 on a monthly basis for such services. On October 1,
2004, ICCC filed for Chapter 11 bankruptcy protection in the
United States Bankruptcy Court, Northern District of Texas,
Dallas Division.
Upon the consummation of the acquisition, I-Element has issued
outstanding promissory notes to, among others, Kramerica in the
aggregate amount of $120,000 (the "Notes"). I-Element has also
issued promissory notes to members of Mr. Zweig's immediate
family. The promissory notes are payable in 36 monthly
installments with the first payment commencing six months after
the closing of the merger and will continue to be secured by
substantially all of the assets of I-Element.
7
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
The Company received consent to amend the Articles of
Incorporation to increase the number of shares of common stock
authorized to be issued from 100,000,000 shares to 2,000,000,000
shares, and consented to the authorization of 200,000,000 shares
of Blank Check Preferred Stock. There are no current plans to
designate any Blank Check Preferred Stock.
On August 1, 2005, the Company filed an Information Statement in
definitive form on schedule 14C with the SEC to change its name
from MailKey Corporation to IElement Corporation. Concurrent
with this name change, the Company received a new stock trading
symbol (IELM.OB) on the NASD Over-the-Counter Electronic
Bulletin Board.
On August 8, 2005 Tim Dean-Smith and Susan Walton resigned their
positions on the Board of Directors (the "Board") of the
Company. Tim Dean-Smith also resigned from his position as Chief
Financial Officer of the Company. The resignations of Mr.
Dean-Smith and Ms. Walton were consistent with the expectations
of the parties pursuant to the consummation of the merger
between I-Element, and the Company on January 19, 2005, and do
not arise from any disagreement on any matter relating to the
Company's operations, policies or practices, nor regarding the
general direction of the Company. Neither Mr. Dean-Smith nor Ms.
Walton served on any subcommittees of the Board. Ivan Zweig, the
current Chairman of the Board and Chief Executive Officer was
appointed as the Chief Financial Officer of the Company until a
new Chief Financial Officer is found.
The Company's condensed consolidated financial statements are
prepared on the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of
America, and have been presented on a going concern basis which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
8
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The condensed consolidated financial statements include the
financial position and results of I-Element. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of condensed consolidated financial statements
in conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the condensed consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and
other short-term investments with an initial maturity of three
months or less to be cash or cash equivalents.
The Company maintains cash and cash equivalents with a financial
institution which is insured by the Federal Deposit Insurance
Corporation up to $100,000. At various times throughout the year
the Company had amounts on deposit at the financial institution
in excess of federally insured limits.
REVENUE AND COST RECOGNITION
The Company records its transactions under the accrual method of
accounting whereby income is recognized when the services are
provided rather than when billed or the fees are collected, and
costs and expenses are recognized in the period they are
incurred rather than paid for.
ACCOUNTS RECEIVABLE
The Company factors 99% of its billings with an outside agency.
The Company invoices its customers approximately 34 days prior
to the month services are to be rendered with invoice amounts
due on the first of the month in which services are rendered.
The Company receives 75% of the aggregate net face value of the
assigned accounts at the time of placement with the factor.
9
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
DEFERRED REVENUE
Deferred revenue consists of customers billed in advance of
revenue being earned.
PROVISION FOR BAD DEBT
Under SOP 01-6 "Accounting for Certain Entities (including
Entities with Trade Receivables), the Company has intent and
belief that all amounts in accounts receivable are collectible.
The Company has determined that based on their collections an
allowance for doubtful accounts of $12,165 has been recorded at
September 30, 2005.
Bad debt expense for the three months ended December 31, 2005
and 2004 was $20,711 and $26,243, respectively and for the nine
months ending December 31, 2005 and 2004 was $67,943 and
$45,872, respectively.
ADVERTISING COSTS
The Company expenses the costs associated with advertising and
marketing as incurred. Advertising and marketing expenses,
included in the statements of operations for the three months
ended December 31, 2005 and 2004 were $2,445 and $4,308,
respectively and for the nine months ending December 31, 2005
and 2004 was $6,034 and $15,340, respectively.
INCOME TAXES
The income tax benefit is computed on the pretax loss based on
the current tax law. Deferred income taxes are recognized for
the tax consequences in future years of differences between the
tax basis of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and
statutory tax rates. No benefit is reflected for the three
months ended December 31, 2005 and 2004, respectively and for
the nine months ended December 31, 2005 and 2004, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate fair value because of the immediate
or short-term maturity of these financial instruments. The
carrying amount reported for notes payable approximates fair
value because, in general, the interest on the underlying
instruments fluctuates with market rates.
10
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the
assets.
Furniture and equipment 5 Years
Telecommunications equipment 5 Years
When assets are retired or otherwise disposed of, the costs and
related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is recognized in income for the
period. The cost of maintenance and repairs is charged to income
as incurred; significant renewals and betterments are
capitalized. Deduction is made for retirements resulting from
renewals or betterments.
(LOSS) PER SHARE OF COMMON STOCK
Historical net (loss) per common share is computed using the
weighted average number of common shares outstanding. Common
stock equivalents were not included in the computation of
diluted earnings per share when the Company reported a loss
because to do so would be antidilutive for the periods
presented.
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued Statement No. 142 "Goodwill and
Other Intangible Assets". This Statement addresses financial
accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in
financial statements upon their acquisition. This Statement also
addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the
financial statements.
11
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
STOCK-BASED COMPENSATION
Employee stock awards under the Company's compensation plans are
accounted for in accordance with Accounting Principles Board
Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES", and related interpretations. The Company provides
the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION"
("SFAS 123"), and related interpretations. Stock-based awards to
non-employees are accounted for under the provisions of SFAS 123
and has adopted the enhanced disclosure provisions of SFAS No.
148 "Accounting for Stock-Based Compensation- Transition and
Disclosure, an amendment of SFAS No. 123".
The Company measures compensation expense for its employee
stock-based compensation using the intrinsic-value method. Under
the intrinsic-value method of accounting for stock-based
compensation, when the exercise price of options granted to
employees is less than the estimated fair value of the
underlying stock on the date of grant, deferred compensation is
recognized and is amortized to compensation expense over the
applicable vesting period. In each of the periods presented, the
vesting period was the period in which the options were granted.
All options were expensed to compensation in the period granted
rather than the exercise date.
The Company measures compensation expense for its non-employee
stock-based compensation under the Financial Accounting
Standards Board (FASB) Emerging Issues Task Force (EITF) Issue
No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO
OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH
SELLING, GOODS OR SERVICES".
The fair value of the option issued is used to measure the
transaction, as this is more reliable than the fair value of the
services received. The fair value is measured at the value of
the Company's common stock on the date that the commitment for
performance by the counterparty has been reached or the
counterparty's performance is complete. The fair value of the
equity instrument is charged directly to compensation expense
and additional paid-in capital.
Employee net stock-based compensation for the three months ended
December 31, 2005 and 2004 was $17,497 and $0, respectively and
for the nine months ended December 31, 2005 and 2004 was $54,497
and $0, respectively.
On September 8, 2005, the Company issued 325,000 stock options
to its employees. The options have an exercise price of $0.01
and vest over 3 years.
12
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46
("FIN 46"), "CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN
INTERPRETATION OF ARB NO. 51". FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective for all new variable
interest entities created or acquired after January 31, 2003.
For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period beginning after June 15,
2003. The adoption of FIN 46 did not have a significant impact
on the Company' results of operations or financial position.
On December 16, 2004, the Financial Accounting Standards Board
("FASB") published Statement of Financial Accounting Standards
No. 123 (Revised 2004), "SHARE-BASED PAYMENT" ("SFAS 123R").
SFAS 123R requires that compensation cost related to share-based
payment transactions be recognized in the financial statements.
Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based
awards, stock appreciation rights, and employee share purchase
plans.
The provisions of SFAS 123R are effective for small business
issuers as of the first interim period that begins after
December 15, 2005. Accordingly, the Company will implement the
revised standard in the first quarter of fiscal year 2006.
Currently, the Company accounts for its share-based payment
transactions under the provisions of APB 25, which does not
necessarily require the recognition of compensation cost in the
financial statements. Management is assessing the implications
of this revised standard, which may materially impact the
Company's results of operations in the first quarter of fiscal
year 2006 and thereafter.
13
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On December 16, 2004, FASB issued Statement of Financial
Accounting Standards No. 153, "EXCHANGES OF NON-MONETARY ASSETS,
AN AMENDMENT OF APB OPINION NO. 29, ACCOUNTING FOR NON-MONETARY
TRANSACTIONS" (" SFAS 153"). This statement amends APB Opinion
29 to eliminate the exception for non-monetary exchanges of
similar productive assets and replaces it with a general
exception for exchanges of non-monetary assets that do not have
commercial substance. Under SFAS 153, if a non-monetary exchange
of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must
be accounted for at fair value resulting in recognition of any
gain or loss. SFAS 153 is effective for non-monetary
transactions in fiscal periods that begin after June 15, 2005.
The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position,
results of operations or cash flow.
NOTE 3 - FIXED ASSETS
Property and equipment as of December 31, 2005 was as follows:
Property and equipment $1,425,637
Less accumulated depreciation 692,204
----------
Net book value $ 733,433
==========
There was $69,934 and $67,976 charged to operations for
depreciation expense for the three months ended December 31,
2005 and 2004, respectively and $207,986 and $200,403 charged to
operations for depreciation expense for the nine months ended
December 31, 2005 and 2004, respectively.
NOTE 4 - LIABILITY FOR STOCK TO BE ISSUED
The Company has signed agreements with vendors and former
directors to convert $251,500 of accounts payable and $239,000
of notes payable into equity. During the three months ended
December 31, 2005, the Company also agreed to issue stock for
$236,750 of services received. As of December 31, 2005, the
shares have not been issued.
14
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 4 - LIABILITY FOR STOCK TO BE ISSUED - (CONTINUED)
In August 2005, the Company has entered into an agreement with
Vista Capital, S.A. ("Vista") whereby Vista raised capital
through the sale of units of Company stock and warrants. Each
unit contains 500,000 shares of common stock at $0.035 and
warrants to purchase an additional 250,000 shares of common
stock at $0.10. The warrants can be called by the Company after
the Company's closing share price is equal to or exceeds $0.12
for ten consecutive trading days. Each unit was sold for
$17,500. As of December 31, 2005, the Company had sold 87.75
units for cash totaling $1,535,625 plus accepted the services
for 0.50 units totaling $8,750 and had 2 units outstanding on
stock subscriptions receivable totaling $35,000. The Company
closed the private placement offering on December 30, 2005
raising $1,579,375. As part of the offering, the company paid
10% of the funds raised to Vista for fund raising fees.
The Company is currently working to register and issue all
59,469,286 of the shares of common stock.
NOTE 5 - NOTES PAYABLE
The Company has several notes payable at December 31, 2005.
Proceeds from the notes were utilized to finance the general
working capital requirements of the Company, purchase equipment
and pay certain liabilities assumed by the Company in the
purchase of the principal assets of Integrated Communications
Consultants Corporation in March of 2003. Prior to the effective
merger of I-Element with MailKey, certain of the notes were
converted into shares of common stock. Several notes have been
partially converted into equity with the remaining balances
restated at zero percent interest. All outstanding notes at
December 31, 2005 have zero percent interest rate. Accrued
interest on the notes was $0 at December 31, 2005.
The notes payable balances at December 31, 2005 were as follows:
Total notes payable $ 652,185
Less current maturities 336,257
---------
Long term notes payable $ 315,928
=========
15
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 5 - NOTES PAYABLE - (CONTINUED)
The amount of principal maturities of the notes payable for the
next 3 years ending December 31, and in the aggregate is as
follows:
2006 $336,257
2007 186,684
2008 129,244
--------
$652,185
========
As of December 31, 2005, the Company has not made payments on
the notes totaling $85,277 which were due between August and
December 2005.
NOTE 6 - OPERATING LEASES
The Company leases office space on a month-to-month basis. The
monthly payment under the current lease is $3,284. The Company
also leased additional office space in Texas and California. The
Company ceased leasing this additional space during the year
ended December 31, 2004.
Rental payments charged to expense for the three months ended
December 31, 2005 and 2004 was $9,852 and $21,675, respectively
and for the nine months ended December 31, 2005 and 2004 was
$32,020 and $67,022, respectively.
NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
As of December 31, 2005, the Company has 2,000,000,000 shares of
common stock authorized at a par value of $0.001, and 96,477,065
shares issued and outstanding. The company also has 200,000,000
shares of Blank Check Preferred Stock authorized. There are no
current plans to designate any Blank Check Preferred Stock.
The following details the stock transactions for the nine months
ended December 31, 2005:
The Company received 1,498,195 shares of common stock valued at
$37,455 which were issued in the previous quarter for services.
Upon receipt, the common shares were canceled.
16
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
COMMON STOCK (CONTINUED)
The Company issued 1,500,000 shares of common stock valued at
$75,000 against the Liability for stock to be issued.
The Company issued 340,000 shares of common stock valued at
$8,500 to a sales agent as payment on the outstanding balance
owed.
The Company issued 175,000 shares of common stock valued at
$3,500 to a consultant as payment on the outstanding balance
owed.
The Company issued 300,000 shares of common stock valued at
$6,000 to a consultant for services received.
The Company issued 250,000 shares of common stock valued at
$5,500 to a consultant for services received.
The Company issued 1,000,000 shares of common stock valued at
$40,000 to an employee as a bonus.
The Company issued 1,000,000 shares of common stock valued at
$40,000 to a consultant for services received.
The Company issued 1,626,530 shares of common stock valued at
$73,194 to a sales agent as payment on the outstanding balance
owed and as payment for current services.
The Company is currently working to register and issue
59,469,286 shares of common stock to meet the $2,297,875
Liability for stock to be issued balance.
17
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 8 - PROVISION FOR INCOME TAXES
Deferred income taxes will be determined using the liability
method for the temporary differences between the financial
reporting basis and income tax basis of the Company's assets and
liabilities. Deferred income taxes will be measured based on the
tax rates expected to be in effect when the temporary
differences are included in the Company's tax return. Deferred
tax assets and liabilities are recognized based on anticipated
future tax consequences attributable to differences between
financial statement carrying amounts of assets and liabilities
and their respective tax bases.
At December 31, 2005, deferred tax assets consist of the
following:
Net deferred tax assets $553,677
Less: valuation allowance (553,677)
--------
$ -0-
At December 31, 2005, the Company had deficits accumulated in
the approximate amount of $1,845,591, available to offset future
taxable income through 2023. The Company established valuation
allowances equal to the full amount of the deferred tax assets
due to the uncertainty of the utilization of the operating
losses in future periods.
NOTE 9 - GOING CONCERN
As shown in the accompanying condensed consolidated financial
statements, the Company has sustained net operating losses for
the three months ended December 30, 2005 and for the nine months
ended December 31, 2005 and 2004. Although the Company recently
raised funds, there is no guarantee that the Company will be
able to generate enough revenues or raise enough additional
capital to sustain its operations in the long term. This raises
substantial doubt about the Company's ability to continue as a
going concern.
The Company's future success is dependent upon its ability to
achieve profitable operations and generate cash from operating
activities, and upon additional financing. Management believes
they have raised sufficient funds to support their business plan
and acquire an operating cash flow positive company.
The condensed consolidated financial statements do not include
any adjustments relating to the recoverability or classification
of recorded assets and liabilities that might result should the
Company be unable to continue as a going concern.
18
IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND
THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004
NOTE 10 - CONTINGENCIES
On April 19, 2005 KK Solutions, Inc., a California corporation
d/b/a/ Three 18, Inc. ("KK"), filed a complaint against the
Company and its CEO, Ivan Zweig, individually, in the Superior
Court of the State of California, County of Los Angeles,
alleging breach of contract pursuant to a dispute regarding
sales commissions due to KK. KK seeks damages in the amount of
$78,000, plus interest. The Company is vigorously defending
against this action, which is currently in the discovery phase
of the proceeding.
On April 26, 2005 Communications Plus, Inc., a California
company d/b/a Global Communications, ("Global"), filed a
complaint against the Company and its CEO, Ivan Zweig,
individually, in the Superior Court of the State of California,
County of Los Angeles, alleging breach of contract pursuant to a
dispute regarding sales commissions due to Global. Global seeks
damages in the amount of $50,000, plus interest. The Company is
vigorously defending against this action, which is currently in
the discovery phase of the proceeding.
19
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 to development
and commercialization of the messaging security solutions were transferred to
Tehshi Inc., in return for 20% of the common stock (2,640,000 shares of common
stock) of Tehshi, Inc., issued to the Company, and for the cancellation of
$76,107 in total debt that the Company owed to the development team of the
messaging security solutions, Charles Ashley and Isaac de la Pena, who hold a
combined 80% of the common stock of Tehshi, Inc.
In the first quarter 2005, 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.
20
On July 21, 2005 and August 1, 2005, the Company filed an Information
Statement on Schedule 14C in preliminary form and in definitive form,
respectively, disclosing that, among other items, it had obtained the requisite
shareholder approval to change the Company's name to IElement Corporation. As of
August 21, 2005, Mailkey Corporation formally changed its name to IElement
Corporation ("IElement"). Subsequently, IElement has undertaken steps to inform
its customer base and target market and will continue to take steps to notify,
inform and/or promote the name of IElement. We now aim to grow the business of
IElement and establish it as a leading regional added-value carrier.
On November 10, 2005, the Company announced its intent to enter the
Voice over Internet Protocol (VoIP) market. The Company subsequently purchased
the network equipment necessary to begin providing VoIP services and identified
a partner with VoIP expertise to assist in the planning and implementation.
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(tm), prepaid and postpaid
cellular services, email and network security, residential/ business based
wireless, and Managed Blackberry(tm) services. The development of these services
would allow IElement to offer Small and Medium-sized Enterprises ("SMEs") the
access to large enterprise type applications with little or no software
purchase, hardware investment, upgrade concerns, or full-time administration of
these services. These sell-through services should increase the Average Revenue
Per Customer ("ARPC"), as well as help improve customer retention.
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.
o Complete VOIP testing phase and begin aggressively marketing VoIP to its
current and potential customers.
21
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.
RESULTS OF OPERATIONS
The revenue for the three months ended December 31, 2005 has decreased
$295,376 from the same period ended December 31, 2004 for two reasons. First,
the Company has cut back on its sales force in anticipation of redirecting it to
another market which has allowed the customer base to decrease as customer
contracts expire and are not renewed. Secondly, the prior year income statement
had $128,334 and $358,001 of non-recurring consulting revenue for the three and
nine month periods ended December 31, 2004, respectively. Comparable revenue for
telecommunication services would be $1,119,972 and $1,286,814 for the three
months ended December 31, 2005 and 2004 respectively and $3,487,000 and
$4,066,344 for the nine months ended December 31, 2005 and 2004 respectively.
The general and administrative expenses for the three months ended
December 31, 2005 have increased $86,265 over the same period ended December 31,
2004. Most of the expenses have decreased with the exception of some one time
consulting fees. The Company incurred $141,750 for consulting fees to be paid
out in stock. When these one time consulting fees are excluded, the recurring
general and administrative expenses decreased $55,485 for the three months ended
December 31, 2005 when compared to the same period ended December 31, 2004.
Selling expenses have decreased $28,841 for the three months ended
December 31, 2005 due to a decrease in sales headcount, as described above, from
the same period ended December 31, 2004.
Interest expense for the three months ended December 31, 2005 has
decreased $37,667 from the same period ended December 31, 2004 reflecting that
notes payable have been renegotiated with zero percent interest.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations primarily through
private sales of equity securities and the utilization of short-term convertible
debt. As of December 31, 2005 we had a cash balance of $1,205,129.
In order to facilitate working cash flow, the Company factors
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.
The Company recently closed a private placement offering for an
aggregate sale price of $1,579,375, of which up to 10% is subject to deduction
for fees in connection with the private placement, and warrants for the purchase
of and aggregate total of 22,562,500 at a strike price of $.10 per share
(further detailed in the subsection entitled "Recent Developments" and in Item
2,
22
below). Therefore, we believe that our current cash resources will be sufficient
to sustain our current operations and we further expect to be able to fund the
expansion of operations over the next twelve (12) months. In the event that the
Company develops an opportunity to enter a significant business combination or
other agreement with an entity deemed complementary to our business plan, then
the Company may at such point need to seek additional funding. Additionally, in
the event that the Company's plans change, that 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 December 31, 2005, we did not have any relationships with
unconsolidated entities or financial partners, such as entities often referred
to as structured finance or special purpose entities, that had been established
for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we were
engaged in such relationships.
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 iElement. 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, replacing Mr.
Dean-Smith as Chairman and Chief Executive Officer.
On August 1, 2005 the Company filed an Information Statement on Schedule
14C in definitive form disclosing that, among other items, it had obtained the
requisite shareholder approval to change the Company's name to IElement
Corporation. As of August 21, 2005, Mailkey Corporation formally changed its
name to IElement Corporation ("IElement").
On August 3, 2005 the Company accepted the resignations of Tim
Dean-Smith and Susan Walton from their positions on the Board of Directors. Tim
Dean-Smith also resigned from his position as Chief Financial Officer of the
Company. The resignations of Mr. Dean-Smith and Ms. Walton are consistent with
the expectations of the parties pursuant to the consummation of the merger
between iElement, Inc. and Mailkey Corporation (the merged entity currently
known as IElement Corporation) on January 19, 2005. The Company has begun
searching for
23
individuals to fill the vacant positions on the Board and who will serve until
the next elections are held for these positions. Additionally, Ivan Zweig, the
current Chairman of the Board and Chief Executive Officer of the Company, has
accepted the Company's appointment as the Chief Financial Officer of the
Company, until a new Chief Financial Officer is appointed.
On December 30, 2005, the Company confirmed the sale of unregistered
securities sold in units consisting of, in the aggregate, 45,125,000 shares of
common stock at a purchase price of $0.035 per share, for an aggregate purchase
price of $1,579,375 and warrants for the purchase of and aggregate total of
22,562,500 at a strike price of $.10 per share (the "Warrants"). The securities
were sold to accredited investors in reliance on an exemption provided in
Regulation D, Rule 506 and 4(2) under the Securities Act. The Company may call
the Warrants at any time after both the (1) closing bid price for the common
stock of the Company has been equal to or greater than $0.12 per share for ten
(10) consecutive trading days, and (2) the shares underlying the warrants have
been included on an SB-2 Registration Statement, or other substantially
equivalent registration statement, that has been filed by the Company and then
active or declared effective by the SEC and shall expire upon the earlier of
forty-five (45) days from the date the Warrant is called or on December 31,
2007. The Company plans to use these proceeds to fund the expansion of
operations and to continue the implementation of its Plan of Operation, as
detailed above.
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 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 sufficient to 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 to
obtain 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 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 to effectively market and develop existing and future
products is dependent Company's ability to raise additional funds 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
24
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;
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
25
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 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 and development budgets
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 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 competitors' 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.
26
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.
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 operations
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
27
and divert management's attention and resources, which could seriously harm our
business and operating results.
RISKS ASSOCIATED WITH OUR STOCK
WE MAY ATTEMPT TO RAISE ADDITIONAL FUNDS IN THE FUTURE TO SUPPORT STRATEGIC
GROWTH AND/OR EXPANSION OF OUR BUSINESS; SUCH ADDITIONAL FUNDING MAY BE DILUTIVE
TO STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS.
We may attempt to raise additional capital in the future to help fund
our strategic growth and/or expansion of 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 adversely affect 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
28
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 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 significant increases in expenses dedicated to drive the growth
of our Company, which may not yield corresponding increases in
revenue;
o changes in customer demands and needs for T1 based services;
o the introduction of competitive services and competitive pricing
of these services;
o reduced demand for our T1 based services;
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;
As a result, we may not concurrently generate significantly increased
revenues and therefore our earnings may be harmed. You should not rely on
period-to-period comparisons of our historical operating results as an
indication of future performance, stability or volatility.
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 accredited investors must make a special
written suitability determination regarding such a
29
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.
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 3. 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
30
controls and procedures as of December 31, 2005. They have concluded that, as of
December 31, 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 IElement Corporation and its
subsidiary, iElement Inc., 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 December 31, 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.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On July 28, 2005 the Company issued 1,596,311 shares of its common stock
at a price of $.045 per share to Quality Sound Communications, Inc. ("QSC"),
pursuant to Regulation D, Rule 506 and 4(2) of the Securities Act of 1933 as
payment against an Accounts Payable balance $71,834 in arising from sales
commissions owed to QSC.
On August 8, 2005 the Company issued 30,219 shares of its common stock
at a price of $.045 per share to QSC pursuant to Regulation D, Rule 506 and 4(2)
of the Securities Act of 1933 as payment against an Accounts Payable balance
$1,360 in arising from sales commissions owed to QSC.
On September 8, 2005 the Company issued options for the right to
purchase 325,000 shares of its common stock to employees of the Company,
pursuant to Regulation D, Rule 506 and 4(2) of the Securities Act of 1933, as
compensation. The options have an exercise price of $.01 and vest regularly over
a period of three years.
31
On December 30, 2005, the Company confirmed the closing of the sale of
unregistered securities sold in units consisting of, in the aggregate,
45,125,000 shares of common stock at a purchase price of $0.035 per share, for
an aggregate purchase price of $1,579,375 and warrants for the purchase of and
aggregate total of 22,562,500 at a strike price of $.10 per share (the
"Warrants"), to the following individuals (or entities):
Name Total Purchase Price Shares Warrants
---- -------------------- ------ --------
o Michael Bloch $70,000 2,000,000 1,000,000
o Jonathan Lowenthal $17,500 500,000 250,000
o Wayne Schoenmakers $3,500 100,000 50,000
o Thomas Barrett $7,000 200,000 100,000
o Wm Goatley Revocable Trust $8,750 250,000 125,000
o Richard Crose $17,500 500,000 250,000
o Robert Gillman $17,500 500,000 250,000
o Timothy Broder $17,500 500,000 250,000
o Thomas Allen Piscula $17,500 500,000 250,000
o Raymond Dunwoodle $17,500 500,000 250,000
o Fred Matulka $17,500 500,000 250,000
o Michael Melson $17,500 500,000 250,000
o Oscar Greene Jr $17,500 500,000 250,000
o Robert Rowley $17,500 500,000 250,000
o Trey Investments, LLP $5,250 150,000 75,000
o William Cail $875 25,000 12,500
o Kenneth Meyer $35,000 1,000,000 500,000
o Frank Davis $7,000 200,000 100,000
o Holger Pfeiffer $8,750 250,000 125,000
o Bellano Family Trust $10,500 300,000 150,000
o Calder Capital, Inc. $17,500 500,000 250,000
o Ulrich Nusser $8,750 250,000 125,000
o Sat Paul Dewan $10,500 300,000 150,000
o Thomas Weiss $8,750 250,000 125,000
o Marianne Issels $8,750 250,000 125,000
o Stefan Muller $17,500 500,000 250,000
o Annette Bohmer $17,500 500,000 250,000
o Hendrik Paulus $17,500 500,000 250,000
o Robert Flaster $7,000 200,000 100,000
o William Harner $5,250 150,000 75,000
o Veronica Kristi Prenn $52,500 1,500,000 750,000
o Ryan Cornelius $52,500 1,500,000 750,000
o Jurgen Popp $52,500 1,500,000 750,000
o Robert Smith $10,500 300,000 150,000
o Gerd Weger $350,000 10,000,000 5,000,000
o Christiane Loberbauer $8,750 250,000 125,000
o Fred Schmitz $175,000 5,000,000 2,500,000
o Glenn Jensen $105,000 3,000,000 1,500,000
o Laurence Straus $10,500 300,000 150,000
o General Research GMBH $17,500 500,000 250,000
o AK Asset Management $35,000 1,000,000 500,000
o Benjamin Eichholz $52,500 1,500,000 750,000
o Amaltea SA $17,500 500,000 250,000
o Clarence Keck Jr $5,250 150,000 75,000
o Jorn Follmer $17,500 500,000 250,000
o Mattias Graeve $8,750 250,000 125,000
o Jerome Niedfelt $10,500 300,000 150,000
o John Niedfelt $7,000 200,000 100,000
o Global Equity Trading & Finance, Ltd. $87,500 2,500,000 1,250,000
o Film & Music Entertainment, Inc. $35,000 1,000,000 500,000
o Red Giant Productions, Inc. $17,500 500,000 250,000
32
The securities were sold to accredited investors in reliance on an exemption
provided in Regulation D, Rule 506 and 4(2) under the Securities Act as well as
to non U.S. persons in reliance on Regulation S.
The Company may call the Warrants at any time after both the (1) closing bid
price for the common stock of the Company has been equal to or greater than
$0.12 per share for ten (10) consecutive trading days, and (2) the shares
underlying the warrants have been included on an SB-2 Registration Statement, or
other substantially equivalent registration statement, that has been filed by
the Company and then active or declared effective by the SEC and shall expire
upon the earlier of forty-five (45) days from the date the Warrant is called or
on December 31, 2007.
ITEM 3. DEFAULTS ON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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).
33
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 Amendment to 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 December 31, 2005, the Company filed the following
reports on Form 8-K:
- -------------------------------------- -----------------------------------------
Date of Event Reported Items Reported
- ---------------------- --------------
- -------------------------------------- -----------------------------------------
January 5, 2006 Item 3.02
- -------------------------------------- -----------------------------------------
34
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.
IELEMENT CORPORATION
Date: January 17, 2006 /s/ Ivan Zweig
-----------------------------------
Ivan Zweig
Chief Executive Officer
35