Registration No. 333-__________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
IELEMENT CORPORATION
(Name of Small Business Issuer in its Charter)
NEVADA 7389 76-0270295
------ ---- ----------
State or other Jurisdiction Primary Standard I.R.S. Employer
of incorporation or Industrial Classification Identification No.
Organization Code Number
17194 PRESTON ROAD
SUITE 102, PMB 341
DALLAS, TX 75248
(214) 254-3440
(Address and Telephone Number of Registrant's Principal Executive Offices)
---------------
IVAN ZWEIG
CHIEF EXECUTIVE OFFICER
17194 PRESTON ROAD
SUITE 102, PMB 341
DALLAS, TX 75248
(214) 254-3440
(Name, Address and Telephone Number of Agent for Service)
---------------
COPY TO:
LAURA ANTHONY, ESQ.
LEGAL & COMPLIANCE, LLC
330 CLEMATIS STREET
WEST PALM BEACH, FLORIDA 33401
(561) 514-0936
---------------
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
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(Approximate Date of Proposed Sale to the Public)
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 ("Securities Act"), check the following box.[X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- --------------------------------------------------------------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE (1) OFFERING PRICE REGISTRATION FEE
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Common Stock, $.001 par value 82,212,048 $ 0.105 $ 8,632,265 $ 1,016.00
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Common Stock underlying exercise
of stock purchase warrants 30,488,281 $ 0.10 (2) $ 3,080,234 $ 330.00
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TOTAL: 112,700,329 $ --- $ 11,712,796 $ 1,346.00
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(1) The proposed maximum offering price is estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(c) and 457(g) of the
Securities Act of 1933, as amended. The price per share is based on the price of
the common stock on the Over-The-Counter Bulletin Board on January 27, 2006.
(2) An aggregate of 29,441,407 of the warrants are exercisable at $0.10 per
share and 1,046,874 of the warrants are exercisable at $.0.13 per share.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
ii
Subject to completion, dated January 30, 2006
PROSPECTUS
I-ELEMENT CORPORATION
17194 PRESTON ROAD
SUITE 102, PMB 341
DALLAS, TX 75248
(214) 254-3440
112,700,329 Shares of Common Stock
We are registering up to 112,700,329 shares of our common stock, of which
82,212,048 shares are currently outstanding and 30,488,281 shares are issuable
upon the exercise of stock purchase warrants by certain selling shareholders
identified in this prospectus (the "Warrants"). We will not receive any proceeds
from this offering. We may receive proceeds from the exercise price of the
Warrants if they are exercised by the selling security holders. We will bear all
costs associated with this registration.
The shares of common stock being offered in this prospectus may be sold at fixed
prices, prevailing market prices determined at the time of sale, varying prices
determined at the time of sale or at negotiated prices. The shares of our common
stock covered by this prospectus may be issued from time to time pursuant to
various agreements between the selling shareholders and us. We will receive
proceeds upon the exercise of the Warrants, but we will not receive any of the
proceeds from the resale of shares by the selling stockholders.
Our common stock is traded on the OTC Bulletin Board under the symbol "IELM.OB."
The average of the high and low trading price of our common stock on January 19,
2006 was $0.08.
We will not receive any of the proceeds from the sale of these shares by the
selling stockholders. However, we will receive proceeds from the exercise of the
Warrants if they are exercised by the selling stockholders. See "Use of
Proceeds."
Pursuant to registration rights granted by us to the selling stockholders, we
are obligated to register the shares held by the selling stockholders. We will
bear all costs relating to the registration of our common stock, other than any
selling stockholder's legal or accounting costs or commissions.
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The information in this prospectus is not complete and may be changed. These
securities may not be sold (except pursuant to a transaction exempt from the
registration requirements of the Securities Act) until the Registration
Statement filed with the Securities and Exchange Commission ("SEC") is declared
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ
THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 2 WHICH DESCRIBES CERTAIN MATERIAL RISK FACTORS YOU SHOULD
CONSIDER BEFORE INVESTING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is January 30, 2006
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You should rely only on the information contained in this prospectus. We have
not, and the Selling Stockholders have not, authorized anyone to provide you
with different information. If anyone provides you with different information,
you should not rely on it. We are not, and the Selling Stockholders are not,
making an offer to sell these securities in any jurisdiction where the offer or
sale is not permitted. You should assume that the information contained in this
prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY 1
RISK FACTORS 2
FORWARD-LOOKING STATEMENTS 15
USE OF PROCEEDS 16
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 17
BUSINESS 21
MANAGEMENT 27
DESCRIPTION OF THE PRIVATE PLACEMENT 34
SELLING STOCKHOLDERS 35
DESCRIPTION OF SECURITIES 37
PLAN OF DISTRIBUTION 40
SHARES ELIGIBLE FOR FUTURE SALE 41
WHERE YOU CAN FIND MORE INFORMATION 43
LEGAL MATTERS 43
EXPERTS 44
v
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 44
FINANCIAL STATEMENTS 45
INFORMATION NOT REQUIRED IN PROSPECTUS II-1
SIGNATURES II-7
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PROSPECTUS SUMMARY
Unless otherwise indicated, all references to "we", "us", "our" and similar
terms, as well as references to the "Registrant", the "Company" or "IElement" in
this prospectus, refer to IElement Corporation, a Nevada corporation and not to
the selling stockholders.
THIS PROSPECTUS IS A PART OF A REGISTRATION STATEMENT THAT WE HAVE FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION USING A "SHELF REGISTRATION" PROCESS. YOU
SHOULD READ THIS PROSPECTUS AND ANY ACCOMPANYING PROSPECTUS SUPPLEMENT, AS WELL
AS ANY POST-EFFECTIVE AMENDMENTS TO THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART, TOGETHER WITH THE ADDITIONAL INFORMATION DESCRIBED UNDER
"AVAILABLE INFORMATION" BEFORE YOU MAKE ANY INVESTMENT DECISION.
THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD
CONSIDER BEFORE INVESTING IN THESE SECURITIES. BEFORE MAKING AN INVESTMENT
DECISION, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK
FACTORS" SECTION, THE FINANCIAL STATEMENTS AND THE NOTES TO THE FINANCIAL
STATEMENTS. SOME OF THE STATEMENTS MADE IN THIS PROSPECTUS DISCUSS FUTURE EVENTS
AND DEVELOPMENTS, INCLUDING OUR FUTURE BUSINESS STRATEGY AND OUR ABILITY TO
GENERATE REVENUE, INCOME AND CASH FLOW. THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE CONTEMPLATED IN THESE FORWARD-LOOKING STATEMENTS. SEE "FORWARD
LOOKING STATEMENTS."
COMPANY OVERVIEW
IElement is a facilities-based nationwide communications service provider that
provides state-of-the-art telecommunications services to small and medium sized
businesses ("SMBs"). We provide broadband data, voice and wireless services by
offering integrated T-1 lines as well as a Layer 2 Private Network and Voice
over Internet Protocol ("VoIP") services. These services provide SMBs with
dedicated Internet access, customizable business solutions for voice, data,
wireless, Internet, and secure communications channels between the SMB offices,
partners, vendors, customers and employees without the use of a firewall or
encryption device. We have a network presence in 18 major markets in the United
States, including facilities in Los Angeles, Dallas, and Chicago.
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RISK FACTORS
An investment in the Common Stock of the Company is highly speculative, involves
a high degree of risk and should be considered only by those persons who are
able to afford a loss of their entire investment. In evaluating the Company and
its business, prospective investors should carefully consider the following risk
factors in addition to the other information included in this Registration
Statement.
The following risk factors should be considered carefully in addition to the
other information contained in this prospectus:
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY.
We have a very limited operating history upon which an evaluation of our
future performance and prospects can be made. Our prospects must be considered
in light of the risks, expenses, delays, problems and difficulties frequently
encountered in the establishment of a new business in an emerging and evolving
industry. As such, we face risks and uncertainties relating to our ability to
successfully implement our business plan.
WE HAVE HISTORICALLY INCURRED LOSSES AND LOSSES MAY CONTINUE IN THE FUTURE
We have generated an accumulated deficit of $1,845,591 at December 31,
2005. Inasmuch as we will continue to have operating expenses and will be
required to make significant up-front expenditures in connection with the
proposed development of our business, we may continue to incur losses for at
least the next 12 months and until such time, if ever, as we are able to
generate sufficient revenues to finance our operations and the costs of
continuing expansion. There can be no assurance that we will be able to generate
significant revenues or achieve profitable operations. It may be necessary to
raise capital through issuing equity which could cause dilution and/or
negatively affect the price of our common stock.
THERE IS DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DUE TO RECURRING
LOSSES AND WORKING CAPITAL SHORTAGES, WHICH MEANS THAT WE MAY NOT BE ABLE TO
CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING.
2
The report of our independent registered public accountants on our 2005
and 2004 financial statements, as included in this Prospectus, included an
explanatory paragraph indicating that there is substantial doubt about our
ability to continue as a going concern due to recurring losses and working
capital shortages. Our ability to continue as a going concern will be determined
by our ability to obtain additional funding. Our financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS, OUR BUSINESS
OPERATIONS WILL BE CURTAILED.
Our operations have relied almost entirely on external financing to fund
our operations. Such financing has historically come from a combination of
borrowings from, and sale of capital stock to, third parties. We will need to
raise additional capital to fund our anticipated operating expenses and future
expansion. Among other things, external financing will be required to cover our
operating costs. The sale of our capital stock to raise capital may cause
dilution to our existing shareholders. Our inability to obtain adequate
financing will result in the need to curtail business operations. Any of these
events would be materially harmful to our business and may result in a lower
stock price. There can be no assurance that we will be able to obtain additional
funding when needed, or that such funding, if available, will be available on
terms we find acceptable. If we cannot obtain additional funds when needed, we
may be forced to curtail or cease our activities, which may result in the loss
of all or a substantial portion of your investment.
WE ARE DEPENDENT ON THE EFFORTS OF OUR EXECUTIVE OFFICERS AND SENIOR MANAGEMENT
AND ON OUR ABILITY TO HIRE AND RETAIN QUALIFIED MANAGEMENT PERSONNEL.
Our success depends largely upon the continued services of our executive
officers and other key personnel. A small number of key management, operating
employees and consultants manage our telecommunications business. Our loss of
such employees or consultants or their failure to work effectively as a team
could materially adversely impact our telecommunications business. Competition
for qualified executives in the telecommunications and data communication
industries is intense and there are a limited number of persons with applicable
experience. We believe that our future success in the telecommunications
business significantly depends on our ability to attract and retain highly
skilled and qualified telecommunications personnel.
3
Effective January 18, 2005 we entered into an employment agreement with
Ivan Zweig, our chief executive officer. This agreement provides that Mr. Zweig
may discontinue his employment with us after providing us with little notice of
his decision (typically one month). As a result, Mr. Zweig could terminate his
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. Nonetheless, the
loss of one or more of our key employees could seriously harm our business.
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.
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;
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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, AND 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 employee roster 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.
5
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, 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 have
begun to charge 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) provider 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
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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 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.
THE FAILURE OF OUR CUSTOMERS TO PAY THEIR BILLS ON A TIMELY BASIS COULD
ADVERSELY AFFECT OUR CASH FLOW.
Our target customers consist of residences and small businesses. We
anticipate having to bill and collect numerous relatively small customer
accounts. We may experience difficulty in collecting amounts due on a timely
basis. Our failure to collect accounts receivable owed to us by our customers on
a timely basis could have a material adverse effect on our business, financial
condition, results of operations and cash flow.
ACQUISITIONS COULD DIVERT MANAGEMENT'S TIME AND ATTENTION, DILUTE THE VOTING
POWER OF EXISTING SHAREHOLDERS AND HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
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As part of our growth strategy, we may continue to acquire complementary
businesses and assets. Acquisitions that we may make in the future could result
in the diversion of time and personnel from our business. We also may issue
shares of common stock or other securities in connection with acquisitions,
which could result in the dilution of the voting power of existing shareholders
and could dilute earnings per share. Any acquisitions would be accompanied by
other risks commonly encountered in such transactions, including the following:
o difficulties integrating the operations and personnel of acquired
companies;
o the additional financial resources required to fund the operations of
acquired companies;
o the potential disruption of our business;
o our ability to maximize our financial and strategic position by the
incorporation of acquired technology or businesses with our product and service
offerings;
o the difficulty of maintaining uniform standards, controls, procedures
and policies;
o the potential loss of key employees of acquired companies;
o the impairment of employee and customer relationships as a result of
changes in management; and
o significant expenditures to consummate acquisitions.
As a part of our acquisition strategy, we may engage in discussions with
various businesses respecting the potential acquisition. In connection with
these discussions, we and each potential acquired business may exchange
confidential operational and financial information, conduct due diligence
inquiries, and consider the structure, terms and conditions of the potential
acquisition. In certain cases, the prospective acquired business may agree not
to discuss a potential acquisition with any other party for a specific period of
time, may grant us certain rights in the event the acquisition is not completed,
and may agree to take other actions designed to enhance the possibility of the
acquisition. Potential acquisition discussions may take place over a long period
of time, may involve difficult business integration and other issues, and may
require solutions for numerous family relationship, management succession and
related matters.
As a result of these and other factors, potential acquisitions that from
time to time appear likely to occur may not result in binding legal agreements
and may not be consummated. Our acquisition agreements may contain purchase
price adjustments, rights of set-off and other remedies in the event that
certain
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unforeseen liabilities or issues arise in connection with an acquisition. These
remedies, however, may not be sufficient to compensate us in the event that any
unforeseen liabilities or other issues arise.
WE MAY BE UNABLE TO ADAPT TO RAPID TECHNOLOGY TRENDS AND EVOLVING INDUSTRY
STANDARDS.
The communications industry is subject to rapid and significant changes
due to technology innovation, evolving industry standards, and frequent new
service and product introductions. New services and products based on new
technologies or new industry standards expose us to risks of technical or
product obsolescence. We will need to use technologies effectively, continue to
develop our technical expertise and enhance our existing products and services
in a timely manner to compete successfully in this industry. We may not be
successful in using new technologies effectively, developing new products or
enhancing existing products and services in a timely manner or that any new
technologies or enhancements used by us or offered to our customers will achieve
market acceptance.
THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY REGULATED AND AMENDMENTS TO OR REPEALS
OF EXISTING REGULATIONS OR THE ADOPTION OF NEW REGULATIONS COULD ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
Federal, state and local regulation may affect our telecommunications
business. Since regulation of the telecommunications industry in general, and
the CLEC industry in particular, is frequently changing, we cannot predict
whether, when and to what extent new regulations will affect us. The following
factors, among others, may adversely affect our business, financial condition
and results of operations:
o delays in obtaining required regulatory approvals;
o new court decisions;
o the enactment of new adverse regulations; and
o the establishment of strict regulatory requirements.
INDUSTRY CONSOLIDATION COULD MAKE IT MORE DIFFICULT TO COMPETE.
Companies offering Internet, data and communications services are, in
some circumstances, consolidating. We may not be able to compete successfully
with businesses that have combined, or will combine, to produce companies with
substantially greater financial, sales and marketing resources, larger client
bases,
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extended networks and infra-structures and more established relationships with
vendors, distributors and partners than we have. With these heightened
competitive pressures, there is a risk that our financial performance could be
adversely impacted and the value of our common stock could decline.
RISKS RELATED TO 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.
We intend to attempt to raise additional capital in the future to help
fund our operations through sales of shares of our capital stock or securities
convertible into shares of our common stock, as well as issuances of debt. Such
additional financing may be dilutive to our stockholders, and debt financing, if
available, may involve restrictive covenants which 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. These stockholders may
experience additional dilution in net book value per share and any additional
equity securities may have rights, preferences and privileges senior to those of
the holders of our common stock.
WE HAVE NOT PAID DIVIDENDS TO OUR STOCKHOLDERS.
We have never paid, nor do we anticipate paying, any cash dividends on
our common stock. Future debt, equity instruments or securities may impose
additional restrictions on our ability to pay cash dividends.
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:
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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, our expenses are to a large extent fixed
in the short term, and we expect that these expenses will increase in the
future. We may not be able to adjust our spending quickly enough if our expenses
exceed our expectations.
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
acquire new customers;
o the introduction of competitive services and the pricing of these
services;
o reduced demand for our T1 based services;
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o significant increases in expenses to drive the growth of our business,
which may not yield corresponding increases in revenue; and
o changes in customer demands and needs for T1 based services.
As a result, we may not generate significantly increased revenues, and
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.
DISAPPOINTING QUARTERLY REVENUE OR OPERATING RESULTS COULD CAUSE THE PRICE OF
OUR COMMON STOCK TO FALL.
Our quarterly revenue and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenue or
operating results fall below the expectations of investors or security analysts,
the price of our common stock could fall substantially. Our quarterly revenue
and operating results may fluctuate as a result of a variety of factors, many of
which are outside our control, including:
o the amount and timing of expenditures relating to the rollout of our
POTS and VoIP service offerings;
o our ability to obtain, and the timing of, necessary regulatory
approvals;
o the rate at which we are able to attract customers within our target
markets and our ability to retain these customers at sufficient aggregate
revenue levels;
o our ability to deploy our network on a timely basis;
o the availability of financing to continue our expansion;
o technical difficulties or network downtime; and
o the introduction of new services or technologies by our competitors and
resulting pressures on the pricing of our service.
FUTURE SALES BY OUR STOCKHOLDERS MAY HAVE THE AFFECT OF LOWERING OUR STOCK
PRICE.
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all.
12
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE.
The Selling Stockholders intend to sell in the public market the shares
of common stock being registered in this offering. To the extent the Selling
Stockholders acquired their shares or warrants at prices less than the current
trading price of our common stock, they may have an incentive to immediately
resell such shares in the market which may, in turn, cause the trading price of
our common stock to decline. Significant downward pressure on our stock price
caused by the sale of stock registered in this offering could encourage short
sales by third parties that would place further downward pressure on our stock
price.
OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE
EXTENT TO WHICH A TRADING MARKET MAY DEVELOP.
Before this offering, our common stock has traded on the
Over-the-Counter Bulletin Board. Thinly traded common stock is typically
significantly more volatile than common stock trading in an active public
market.
INVESTORS IN OUR SECURITIES MAY SUFFER DILUTION.
The issuance of shares of our common stock, or shares of our common
stock underlying warrants, options or preferred stock will dilute the equity
interest of existing stockholders who do not have anti-dilution rights and could
have a significant adverse effect on the market price of our common stock. The
sale of our common stock acquired at a discount could have a negative impact on
the market price of our common stock and could increase the volatility in the
market price of our common stock. In addition, we may seek additional financing
which may result in the issuance of additional shares of our common stock and/or
rights to acquire additional shares of our common stock. The issuance of our
common stock in connection with such financing may result in substantial
dilution to the existing holders of our common stock who do not have
anti-dilution rights. Those additional issuances of our common stock would
result in a reduction of an existing holder's percentage interest in our
company.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO RESELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS.
13
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny
stocks are stocks:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ listed stock must have a price of not less than $5.00 per
share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years), or
with average revenues of less than $6.0 million for the last three
years.
Broker-dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker-dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE
ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS. AS A RESULT, CURRENT AND
POTENTIAL STOCKHOLDERS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH
COULD HARM OUR BUSINESS AND THE TRADING PRICE OF OUR COMMON STOCK.
Effective internal controls are necessary for us to provide reliable
financial reports. We have in the past discovered, and may in the future
discover, areas of our internal controls that need improvement. In addition,
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report
on our internal controls over financial reporting and have our independent
auditors annually attest to our evaluation, as well as issue their own opinion
on our internal controls over financial reporting We are preparing for
compliance with Section 404 by strengthening, assessing and testing our system
of internal controls to provide the basis for our report. The process of
strengthening our internal controls and complying with Section 404 is expensive
and time consuming, and requires significant management attention. We cannot be
certain that these measures will ensure that we will maintain adequate controls
over our financial processes
14
and reporting in the future. Furthermore, as we rapidly grow our business, our
internal controls will become more complex and will require significantly more
resources to ensure our internal controls overall remain effective. Failure to
implement required new or improved controls, or difficulties encountered in
their implementation, could harm our operating results or cause us to fail to
meet our reporting obligations. If we or our auditors discover a material
weakness, the disclosure of that fact, even if quickly remedied, could reduce
the market's confidence in our financial statements and harm our stock price.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements (as defined in Section 27A
of the Securities Act and Section 21E of the Securities Exchange Act of 1934
(the "Exchange Act"). To the extent that any statements made in this prospectus
contain information that is not historical, these statements are essentially
forward-looking. Forward-looking statements can be identified by the use of
words such as "expects", "plans", "will", "may", "anticipates", "believes",
"should", "intends", "estimates", and other words of similar meaning. Although
we believe that the expectations reflected in these forward-looking statements
are reasonable and achievable, these statements involve risks and uncertainties
and we cannot assure you that actual results will be consistent with these
forward-looking statements. Important factors that could cause our actual
results, performance or achievements to differ from these forward-looking
statements include the following:
o the availability and adequacy of our cash flow to meet our
requirements,
o economic, competitive, demographic, business and other
conditions in our markets,
o competition,
o changes in our business and growth strategy (including our
acquisition strategy) or development plans,
o the availability of additional capital to support acquisitions
and development, and
o other factors discussed under the section entitled "Risk
Factors" or elsewhere in this prospectus.
All forward-looking statements attributable to us are expressly qualified by
these and other factors. Information regarding market and industry statistics
contained in this prospectus is included based on information available to us
that we believe is
15
accurate. It is generally based on academic and other publications that are not
produced for purposes of securities offerings or economic analysis. Forecasts
and other forward-looking information obtained from these sources are subject to
the same qualifications and the additional uncertainties accompanying any
estimates of future market size, revenue and market acceptance of products and
services. We do not undertake any obligation to publicly update any
forward-looking statements. As a result, you should not place undue reliance on
these forward-looking statements.
USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the sale of the
shares offered for sale by them under this prospectus. We will not receive any
proceeds from the resale of shares by the selling stockholders covered by this
prospectus. We will, however, receive proceeds from the exercise of warrants
outstanding. In that case, we could receive a maximum of $3,080,234.00, which
would be used for working capital and general corporate purposes.
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since April 2004, our common stock has been quoted on the OTC Bulletin Board
under the symbol "IELM.OB". Prior to that date, there was no active market for
our common stock. We have a March 31 fiscal year.
The following table sets forth the high and low sales prices for the periods
indicated as reported by the OTC Bulletin Board:
Fiscal Year 2005 High Low
First Quarter(beginning April 14, 2004) $3.80 $3.30
Second Quarter 3.60 0.78
Third Quarter 1.01 0.40
Fourth Quarter 0.09 0.02
Fiscal Year 2006 High Low
First Quarter $0.09 $0.01
Second Quarter 0.07 0.03
Third Quarter 0.08 0.03
Fourth Quarter(through January 19, 2006) 0.10 0.06
The source of these high and low prices was the OTC Bulletin Board.
These quotations reflect inter-dealer prices, without
16
retail mark-up, mark-down or commissions and may not represent actual
transactions. The high and low prices listed have been rounded up to the next
highest two decimal places.
The market price of our common stock is subject to significant
fluctuations in response to variations in our quarterly operating results,
general trends in the market for the products we distribute, and other factors,
over many of which we have little or no control. In addition, board market
fluctuations, as well as general economic, business and political conditions,
may adversely affect the market for our common stock, regardless of our actual
or projected performance.
Holders
As of January 30, 2006, there were 392 holders of record of our common
stock and approximately 530 beneficial holders.
Dividend Policy
We have never paid dividends on our common stock and do not expected to
do so in the foreseeable future.
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 herein 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 report could differ materially from
those stated in such forward-looking statements.
17
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 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'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
present itself as IElement to 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 intention to enter into
the Voice Over Internet Protocol ("VOIP") market. The Company subsequently
purchased the equipment necessary to
18
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 the Company's current and potential customers.
We anticipate that the number of people who we employ may increase
substantially over the next 12 months as we continue to execute on our business
plan.
19
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
20
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.
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.
BUSINESS
We were 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
21
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.
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
22
provider that provides state-of-the-art telecommunications services to small and
medium sized enterprises ("SMEs").
I-Element provides broadband data, voice and wireless services by
offering integrated T-1 lines as well as Layer 2 Private Network solutions that
provide SMEs with dedicated Internet access services, customizable business
solutions for voice, data, wireless and Internet, and secure communications
channels between the SME offices, partners, vendors, customers and employees
without the use of a firewall or encryption devices. I-Element has a network
presence in 18 major markets in the United States, including facilities in Los
Angeles, Dallas, and Chicago. The Company started business in 2003.
In 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
23
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 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.
We now aim to grow and establish us as a leading regional added-value
carrier. We intend to:
24
o 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 (Blackberry, secure email,
VoIP, prepaid cellular, and storage) to our current and future customer base to
raise our ARPC. Existing infrastructure can serve multiple new markets as they
are brought online before we would need any capital expenditures or additional
software licenses.
o Look for acquisitions of wireless ISPs (WISPs), and other
suitable telephony and/or data carriers, in secondary and tertiary markets which
can be layered onto the Company's national backbone, which we expect will create
economies of scale and operating efficiencies.
o Complete VOIP testing phase and begin aggressively marketing
VOIP to the Company's current and potential customers.
Our focus is to become the leading regional Communication Service
Provider (CSP) from California to Florida. Our 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
us to offer SMEs access to Enterprise type applications with little or no
software purchase, hardware investment, upgrade worries, or full-time
administration of these services. These sell through services should increase
the Average Revenue Per Customer, as well as help improve customer retention.
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.
ENGAGE IN STRATEGIC ACQUISITIONS AND JOINT VENTURES
We intend to acquire, where appropriate, additional telecommunication
companies, companies with technologies that we believe
25
are complimentary to our existing technologies, as well as to acquire wireless
broadband Internet service providers with strategically located networks that
will enable the expansion of our national coverage area. In addition, we intend
to acquire companies, businesses and assets that we believe are complementary to
our business. We may seek to form joint ventures and seek joint venture partners
in order to reduce our investment in a particular project and to help promote
the development and sale of our products.
PRINCIPAL EXECUTIVE OFFICES
Our corporate headquarters and principal offices are located at 17194
Preston Road Suite 102, PMB 341, Dallas, TX 75248 where we lease this 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. We believe that this office space is adequate to support our current
operations.
THE OFFERING
We are registering up to 112,700,329 shares of our common stock, of
which 82,212,048 shares are currently outstanding and 30,488,281 shares are
issuable upon the exercise of stock purchase warrants by certain selling
shareholders identified in this prospectus (the "Warrants"). We will not receive
any proceeds from this offering. We may receive proceeds from the exercise price
of the Warrants if they are exercised by the selling security holders. We will
bear all costs associated with this registration.
The shares of common stock being offered in this prospectus may be sold
at fixed prices, prevailing market prices determined at the time of sale,
varying prices determined at the time of sale or at negotiated prices. The
shares of our common stock covered by this prospectus may be issued from time to
time pursuant to various agreements between the selling shareholders and us. We
will receive proceeds upon the exercise of the Warrants, but we will not receive
any of the proceeds from the resale of shares
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares in this
offering by the selling stockholders. However, we will receive
26
proceeds from the exercise of the warrants if they are exercised by the selling
stockholders, which proceeds we intend to use for working capital and general
corporate purposes.
EMPLOYEES
As of January 27, 2006, we had 13 full-time and 3 part-time employees.
We enjoy good employee relations. None of our employees are members of any labor
union and we are not a party to any collective bargaining agreement.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information as of January 27, 2005 regarding the
members of our board of directors and our executive officers. All directors hold
office until the next annual meeting of shareholders and the election and
qualification of their successors. Officers are elected annually by the board of
directors and serve at the discretion of the board.
Name Age Position Since
- ---- --- -------- -----
Ivan Zweig 33 CEO and Chairman January 2005
Interim CFO August 2005
Ivan Zweig. Mr. Zweig has been our Chairman and Chief Executive Officer
since January 2005, and has been interim Chief Financial Officer since August
2005. 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. From
February 1998 until March 1999 Mr. Zweig was the Western Region Dedicated Sales
Manager of NET-tel Communications. He was responsible for Internet sales for 52
reps in the Western Region. Previously he employed by MidCom Communications,
where he was a Sales Manager after being an Account Executive for a short time.
MidCom was purchased by Winstar whereupon all of the management team migrated
over to NET-tel. Before Midcom, Mr. Zweig helped form a joint venture of five
individuals who invested over $500,000 to fund a health food and nutrition
franchise called Smoothie King. He purchased the rights to build 18 stores in
the San Francisco Bay Area and sold his interest after building the first two.
Additionally, in
27
1995 he started a city magazine called Dallas/Ft.Worth Lifestyles. This was Mr.
Zweig's first employment venture after college and a brief stint of playing
professional baseball. He attended Tulane University and was a member of Team
USA in 1991, which played in Cuba for the Pan American Games. He was also a
two-time All-American pitcher while at Tulane. Mr. Zweig left Tulane before
earning a degree.
Resignations. On August 3, 2005 we accepted the resignations of Timothy
Dean-Smith and Susan Walton from their positions on the Board of Directors. Mr.
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.
We have begun searching for 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, our current Chairman of the Board and Chief
Executive Officer of, has accepted our appointment as the Chief Financial
Officer until such time as a new Chief Financial Officer is appointed.
BOARD OF DIRECTORS
Our Board of Directors serves until the next annual meeting of
shareholders or until their respective successor is duly elected and qualified.
Directors are elected at the annual meeting of shareholders or by written
consent of the shareholders, and each Director holds office until his successor
is duly elected and qualified or he resigns, unless sooner removed. Officers are
elected annually by our Board of Directors and serve at the discretion of the
Board.
During the fiscal year ended March 31, 2005, the Board of Directors held
one meeting. One action of the Board of Directors was taken by written consent,
which action approved the merger between Mailkey and IElement Corporation.
DIRECTOR COMPENSATION
Currently, members of our board are not entitled to compensation for
serving on the board but are entitled to be reimbursed for their reasonable
costs and expenses incurred in attending
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board meetings. The Company intends to offer $40,000 per year as compensation
for future board members. Moreover, our former Director Susan Walton received
compensation of $30,000 during the fiscal year end March, 2005 and $20,000
during the fiscal year end March, 2006 for serving on the Board of Directors of
the Company.
SHAREHOLDER COMMUNICATIONS
In light of the limited operations we conduct and the limited number of
record and beneficial shareholders that we have, we have not implemented any
formal procedures for shareholder communication with our Board of Directors. Any
matter intended for the Board, or for any individual member or members of the
Board, should be directed to our corporate secretary at 17194 Preston Rd., Suite
102 PMB 341, Dallas, TX 75248. In general, all shareholder communication
delivered to the corporate secretary for forwarding to the Board or specified
Board members will be forwarded in accordance with the shareholder's
instructions. However, the corporate secretary reserves the right to not forward
to Board members any abusive, threatening or otherwise inappropriate materials.
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, 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
present itself as IElement to 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.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has not created a standing audit committee of the
Board. Instead, our full Board of Directors acts as our audit committee.
The Board of Directors determined that our internal controls are
adequate to insure that financial information is recorded, processed, summarized
and reported in a timely and accurate manner in accordance with applicable rules
and regulations of the Securities and Exchange Commission. Accordingly, our
Board of Directors concluded that the benefits of retaining an individual who
qualifies as an "audit committee financial
29
expert," as that term is defined in Item 401(e) of Regulation S-B promulgated
under the Securities Act, would be outweighed by the costs of retaining such a
person. As a result, no member of our Board of Directors is an "audit committee
financial expert."
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers, and persons who own 10% or more of our common
stock, to file reports of ownership and changes in ownership with the SEC.
Officers, directors and greater than 10% stockholders are required to furnish us
with copies of all Section 16(a) forms they file. Based solely on our review of
the copies of such forms received by us or written representations from such
persons that no other reports were required for such persons, we believe that
during the fiscal year ended March 31, 2005, the Section 16(a) filing
requirements applicable to our officers, directors and ten percent (10%)
stockholders were not satisfied in a timely fashion. In particular, Mr. Zweig
did not timely meet the Section 16(a) filing requirements. However, as of the
date of this registration statement, the filing requirements of Mr. Zweig have
been satisfied. In addition, Mr. Barry Brault received 2,258,013 shares of
common stock in the merger with IElement on January 19, 2005, and on the same
date received 8,784,669 shares of common stock in exchange for debt for a total
of 11,042,682 which at the time represented in excess of 10% of the outstanding
common shares. Mr. Brault has not made any filings pursuant to Section 16(a). As
of the date of this registration statement Mr. Brault owns less than 10% of the
outstanding common shares.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a Code of Business Conduct and Ethics that applies to
our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. Our
Code of Business Conduct and Ethics is designed to deter wrongdoing and promote:
(i) honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
(ii) full, fair, accurate, timely and understandable disclosure in reports and
documents that we file with, or submit to, the SEC and in our other public
communications; (iii) compliance with applicable governmental laws, rules and
regulations; (iv) the prompt internal reporting of violations of the code to an
appropriate person or persons identified in the code; and (v) accountability for
adherence to the Code of Ethics.
30
EXECUTIVE COMPENSATION
(a) Compensation.
The following table sets forth compensation awarded to, earned by or
paid to the Company's Chief Executive Officer and the four other most highly
compensated executive officers with compensation in excess of $100,000 for the
calendar years ended December 31, 2005, 2004 and 2003 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
Securities
Restricted Underlying All other
Name and Principal Salary Bonus Stock Options/ compensation
Position Year ($) ($) Award(s) Warrants ($)
- ------------------------------------------------------------------------------------------------------
Ivan Zweig, CEO 2005 300,000 0 0 0 0
2004 300,000 60,000 85,000 0 0
2003 180,000 0 0 0 0
Timothy Dean-Smith* 2005 47,000 0 0 0 0
2004 120,000 0 0 0 0
2003 80,000 0 0 0 0
* On August 8, 2005 Timothy Dean-Smith resigned as Chief Financial Officer.
OPTION GRANTS DURING 2005
-------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION
NAME OFFERING 2005 SHARE DATE
---- -------- ---- ----- ----
Debra Chase 50,000 16.39% $0.01 09/08/15
Albert Marrero 50,000 16.39% $0.01 09/08/15
Brett Jensen 30,000 9.84% $0.01 09/08/15
Eric Mason 5,000 1.64% $0.01 09/08/15
Mark Mooney 20,000 6.56% $0.01 09/08/15
Alex Nelson 40,000 13.11% $0.01 09/08/15
Heather Walther 40,000 13.11% $0.01 09/08/15
Peter Walther 50,000 16.39% $0.01 09/08/15
Jeff Wilson 20,000 6.56% $0.01 09/08/15
TOTALS 305,000 100.00%
31
EMPLOYMENT CONTRACTS
On January 18, 2005 we entered into an Employment Agreement with Mr.
Zweig in the form of a Binding Letter of Intent. Pursuant to the Agreement Mr.
Zweig is the Chief Executive Officer of the Company. The terms of the agreement
are as follows. Mr. Zweig's base salary in the amount of $25,000.00 per month is
to be paid to Kramerica Capital Corporation, a company for which Mr. Zweig is
the sole shareholder, officer and director. Mr. Zweig receives benefits offered
to other employees of the Company and is to receive 4 weeks of vacation per
year. Mr. Zweig's reasonable expenses are to be reimbursed. Upon termination
without cause, all Notes due and owing to Mr. Zweig or his entities are to be
paid in full, all outstanding options are to accelerate and fully vest and be
paid in full, all earned performance bonuses must be paid in full, and all
accrued vacation pay and other outstanding benefits are to be paid in full. If
Mr. Zweig is terminated for cause, all Notes and other obligations are to be
paid within 60 days. In addition, the Agreement provides for bonus payments
following the end of the 12th month as follows: for months 13 through 24, a
$1,000,000 bonus calculated on the closing average revenue number and EDITDA for
months 22 through 24 which revenue number must be $1,250,000 ($15,000,000
annualized) per month and EBITDA of 15%; for months 25-36 a $2,000,000 bonus if
actual revenue during months 25-36 reaches $22,500,000 and EBITDA of 18%; and
for months 37-48 a $3,000,000 bonus if actual revenue during months 37-48
reaches $30,000,000 and EBITDA of 21%. Bonuses are payable in promissory notes.
The term of the Agreement is 48 months, provided however, that the Agreement may
be immediately terminated if the Notes due to Mr. Zweig are declared in default.
Although the Notes are 6 months behind, Mr. Zweig has not declared a default or
terminated the employment agreement.
We do not have an employment contract with any other executive officer. We may
in the future create retirement, pension, profit sharing and medical
reimbursement plans covering our Executive Officers and Directors.
32
Directors Compensation
Our former Director Susan Walton received compensation of $30,000 during
the fiscal year end March, 2005 and $20,000 during the fiscal year end March,
2006 for serving on the Board of Directors of the Company. No other director
received compensation for serving on the Board of Directors during year end
March, 2005.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of January 27, 2005, the number of outstanding
common shares of the Company beneficially owned by (i) each person known to us
to beneficially own more than 5% of its outstanding common shares, (ii) each
director, (iii) each nominee for director, (iv) each executive officer listed in
the Summary Compensation Table, and (iv) all executive officers and directors as
a group.
- --------------------------------- ------------------------- --------------------
Owner Common Shares(2) Percentage
- --------------------------------- ------------------------- --------------------
Ivan Zweig(1) 18,967,576(1) 11.95%
- --------------------------------- ------------------------- --------------------
Barry Brault(3) 11,042,682 6.96%
- --------------------------------- ------------------------- --------------------
Gerd Weger(4) 10,000,000 6.30%
- --------------------------------- ------------------------- --------------------
Officers and directors as a
group (1 persons) 18,967,576 11.95%
- --------------------------------- ------------------------- --------------------
(1) An officer and director. Comprised of 85,000 shares of common stock
owned by Mr. Zweig individually; 18,685,966 shares of common stock owned
by Kramerica Corporation, an entity in which Mr. Zweig is the sole
shareholder, officer and director; and 196,610 shares of common stock
owned by Mr. Zweig's spouse.
(2) Does not include common shares underlying options and warrants
(3) A beneficial owner of more than 5% of outstanding common shares
(4) A beneficial owner of more than 5% of outstanding common shares
There are no family relationships among our directors and executive officers.
Except as set forth below, no director or executive officer has been a director
or executive officer of any business which has filed a bankruptcy petition or
had a bankruptcy petition filed against it. No director or executive officer has
been convicted of a criminal offense or is the subject of a pending criminal
proceeding. No director or executive officer has been the subject of any order,
judgment or decree of any court permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business,
securities or banking activities. No director or officer has been found by a
court to have violated a federal or state securities or commodities law.
None of our directors or executive officers or their respective immediate family
members or affiliates is indebted to us. As of the date of this prospectus,
there is no material proceeding to
33
which any of our directors, executive officers or affiliates is a party or has a
material interest adverse to us.
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.
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. I-Element is currently six months
behind on payments due on these Notes.
DESCRIPTION OF THE PRIVATE PLACEMENT
In August 2005, the Company has entered into an agreement with Vista
Capital, S.A. ("Vista") whereby Vista assisted in raising 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 and only if the underlying shares are registered. 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. As part of its compensation Vista Capital
received or will receive 1,000,000 shares of common stock, warrants for
1,046,874 shares of common stock at an exercise price of $0.13 per share and
warrants for 2,878,907 shares of common stock at an exercise price of $0.10. The
Company is currently working to register and issue all 45,125,000 of the shares
of common stock.
34
The Securities were not registered under applicable securities laws and
were sold in reliance on an exemption from such registration. Each of the
investors is an "accredited investor" and the Company believes that the issuance
and sale of the Convertible Notes qualified for an exemption from registration
pursuant to Section 4(2) of the Securities Act of 1933.
SELLING STOCKHOLDERS
The following table sets forth the shares beneficially owned, as of the date of
this prospectus, by the selling stockholders prior to the offering contemplated
by this prospectus, the number of shares each selling stockholder is offering by
this prospectus and the number of shares which each selling stockholder would
own beneficially if all such offered shares are sold. None of the selling
stockholders is known to us to be a registered broker-dealer or an affiliate of
a registered broker-dealer
Each of the selling stockholders has acquired his, her or its shares solely for
investment and not with a view to or for resale or distribution of such
securities. Beneficial ownership is determined in accordance with SEC rules and
includes voting or investment power with respect to the securities.
SELLING STOCKHOLDERS
SHARES OF
SHARES OF COMMON COMMON STOCK PERCENTAGE OF COMMON
STOCK OWNED PRIOR SHARES TO BE OWNED AFTER STOCK OWNED AFTER THE
INVESTOR TO THE OFFERING SOLD THE OFFERING OFFERING;
- -------- --------------- ---- ------------ ---------
AK Asset Management 1,000,000 1,000,000 0 0
Amaltea SA 500,000 500,000 0 0
Annette Bohmer 500,000 500,000 0 0
Barry Brault 8,784,669 8,784,669 0 0
BDM Holdings, LLC. c/o Palladian Advisors 1,500,000 1,500,000 0 0
Bellano Family Trust 300,000 300,000 0 0
Benjamin S. Eichholz 3,050,000 1,500,000 1,550,000 0.97%
Brett Jensen 200,000 200,000 0 0
Calder Capital Inc. 500,000 500,000 0 0
Chet Zalesky 1,601,930 1,601,930 0 0
Christiane Loeberbauer 250,000 250,000 0 0
Clarence V. Keck Jr 150,000 150,000 0 0
35
Derrick Stilwell 500,000 500,000 0 0
Dolphin Capital 2,900,000 2,900,000 0 0
Donald Kennedy 20,000 20,000 0 0
Duane Morris, LLP 880,000 880,000 0 0
Film and Music Entertainment, Inc. 1,000,000 1,000,000 0 0
Frank A. Davis 200,000 200,000 0 0
Fred J. Matulka 500,000 500,000 0 0
Fred Schmitz 5,000,000 5,000,000 0 0
General Research GMBH 500,000 500,000 0 0
Gerd Weger 10,000,000 10,000,000 0 0
Glenn L. Jensen 3,000,000 3,000,000 0 0
Global Equity Trading & Finance LTD. 2,750,000 2,750,000 0 0
Hendrik Paulus 500,000 500,000 0 0
Holger Pfeiffer 250,000 250,000 0 0
Isaac de la Pena 150,000 150,000 0 0
Jeff Wilson 714,286 714,286 0 0
Jeffery Brault 1,050,000 1,050,000 0 0
Jeremy Dean-Smith 1,800,000 1,800,000 0 0
Jerome Niedfelt 300,000 300,000 0 0
John Fox 100,000 100,000 0 0
John Niedfelt 200,000 200,000 0 0
Jonathan Lowenthal 500,000 500,000 0 0
Jorn Follmer 500,000 500,000 0 0
Jurgen Popp 2,500,000 2,500,000 0 0
Kenneth J. Meyer 1,000,000 1,000,000 0 0
Laurence B. Straus 300,000 300,000 0 0
March Enterprises Defined Benefit Plan 1,601,930 1,601,930 0 0
Marianne Issels 250,000 250,000 0 0
Matthias Graeve 250,000 250,000 0 0
Michael Bloch 4,034,200 2,000,000 2,034,200 1.27%
Michael D. Melson 500,000 500,000 0 0
Misty Starke 500,000 500,000 0 0
Oscar Greene Jr. 500,000 500,000 0 0
Palladian Capital Advisors 2,500,000 2,500,000 0 0
Quality Sound Communications dba Telcombrokers 1,626,530 1,626,530 0 0
Raymond R. Dunwoodie 500,000 500,000 0 0
Red Giant Productions, Inc. 500,000 500,000 0 0
Richard R. Crose 500,000 500,000 0 0
Robert A. Flaster 200,000 200,000 0 0
Robert A. Smith 300,000 300,000 0 0
Robert H. Gillman 500,000 500,000 0 0
Robert R. Rowley 500,000 500,000 0 0
Robert Zweig 275,000 275,000 0 0
Ryan Cornelius 1,500,000 1,500,000 0 0
Sat Paul Dewan 300,000 300,000 0 0
Stefan Muller 1,500,000 1,500,000 0 0
Stonegate Ventures 1,000,000 1,000,000 0 0
Susan Walton 400,000 400,000 0 0
Terrence Byrne 2,712,703 2,712,703 0 0
Thomas Allen Piscula 500,000 500,000 0 0
36
Thomas W. Barrett 200,000 200,000 0 0
Thomas Weiss Dr. 250,000 250,000 0 0
Tim Dean-Smith 1,680,000 1,680,000 0 0
Timothy M. Broder 500,000 500,000 0 0
Trad Solutions 340,000 340,000 0 0
Trey Investments, LLP 150,000 150,000 0 0
Ulrich Nusser 250,000 250,000 0 0
Veronica Kristi Prenn 3,886,000 1,500,000 2,386,000 1.50%
Vista Capital 1,000,000 1,000,000 0 0
Wayne P. Schoenmakers 100,000 100,000 0 0
William G. Cail 25,000 25,000 0 0
William Harner 150,000 150,000 0 0
William M. Goatley Revocable Trust FBO William
M Goatley DTD 5/9/89 250,000 250,000 0 0
Yock Investments 1,000,000 1,000,000 0 0
TOTALS 82,212,048 82,212,048 0 0
DESCRIPTION OF SECURITIES
We are authorized to issue 2,000,000,000 shares of common stock, par
value $0.001 per share, and 200,000,000 shares of blank check preferred stock.
As of January 17, 2006, there were 96,477,065 shares of common stock and -0-
shares of preferred stock issued and outstanding. There are no current plans to
designate any Blank Check Preferred Stock.
COMMON STOCK
Subject to any prior rights to receive dividends to which the holders of
shares of any series of the preferred stock may be entitled, the holders of
shares of common stock shall be entitled to receive dividends, if and when
declared payable from time to time by the board of directors, from funds legally
available for payment of dividends.
In the event of any dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, after there shall have been paid to
the holders of shares of preferred stock the full amounts to which they shall be
entitled, the holders of the then outstanding shares of common stock shall be
entitled to receive, pro rata, any remaining assets of the Company available for
distribution to our shareholders. The board of directors may distribute in kind
to the holders of the shares of common stock such remaining assets of the
Company or may sell, transfer or otherwise dispose of all or any part of such
remaining assets to
37
any other corporation trust or entity and receive payment in cash, stock or
obligations of such other corporation, trust or entity or any combination of
such cash, stock, or obligations, and may sell all or any part of the
consideration so received, and may distribute the consideration so received or
any balance or proceeds of it to holders of the shares of common stock. The
voluntary sale, conveyance, lease, exchange or transfer of all or substantially
all the property or assets of the Company (unless in connection with that event
the dissolution, liquidation or winding up of the Company is specifically
approved), or the merger or consolidation of the Company into or with any other
corporation, or the merger of any other corporation into it, or any purchase or
redemption of shares of stock of the Company of any class, shall not be deemed
to be a dissolution, liquidation or winding up of the Company.
Except as provided by law or this certificate of incorporation with
respect to voting by class or series, each outstanding share of common stock
shall entitle the holder of that share to one vote on each matter submitted to a
vote at a meeting of shareholders.
Such numbers of shares of common stock as may from time to time be
required for such purpose shall be reserved for issuance (i) upon conversion of
any shares of preferred stock or any obligation of the Company convertible into
shares of common stock and (ii) upon exercise of any options or warrants to
purchase shares of common stock.
PREFERRED STOCK
The board of directors is expressly authorized to adopt, from time to
time, a resolution or resolutions providing for the issue of preferred stock in
one or more series, to fix the number of shares in each such series and to fix
the designations and the powers, preferences and relative, participating,
optional and other special rights and the qualifications, limitations and
restrictions of such shares, of each such series. The authority of the board of
directors with respect to each such series shall include a determination of the
following, which may vary as between the different series of preferred stock:
(a) The number of shares constituting the series and the distinctive
designation of the series;
(b) The dividend rate on the shares of the series, the conditions and
dates upon which dividends on such shares shall be
38
payable the extent, if any, to which dividends on such shares shall be
cumulative, and the relative rights of preference, if any, of payment of
dividends on such shares;
(c) Whether or not the shares of the series are redeemable and, if
redeemable, the time or times during which they shall be redeemable and the
amount per share payable on redemption of such shares, which amount may, but
need not, vary according to the time and circumstances of such redemption;
(d) The amount payable in respect of the shares of the series, in the
event of any liquidation, dissolution or winding up of this corporation, which
amount may, but need not, vary according to the time or circumstances of such
action, and the relative rights of preference, if any, of payment of such
amount;
(e) Any requirement as to a sinking fund for the shares of the series,
or any requirement as to the redemption, purchase or other retirement by the
Company of the shares of the series;
(f) The right, if any, to exchange or convert shares of the series into
other securities or property, and the rate or basis, time, manner and condition
of exchange or conversion;
(g) The voting rights, if any, to which the holders of shares of the
series shall be entitled in addition to the voting tights provided by law, and
(h) Any other terms, conditions or provisions with respect to the series
not inconsistent with the provisions of the articles of incorporation or any
resolution adopted by the board of directors pursuant thereto.
The number of authorized shares of preferred stock may be increased or
decreased by the affirmative vote of the holders of a majority of the stock of
the Company entitled to vote at a meeting of shareholders. No holder of shares
of preferred stock of the Company shall, by reason of such holding have any
preemptive right to subscribe to any additional issue of any stock of any class
or series nor to any security convertible into such stock.
TRADING INFORMATION
Our common stock is currently quoted on the OTC Bulletin Board under the
trading symbol IELM.OB.
39
The transfer agent for our common stock is Madison Stock Transfer, P.O. Box 145,
Brooklyn, NY 11229; (718) 627-4453.
PLAN OF DISTRIBUTION
We are registering an aggregate of 112,700,329 shares of our common stock
covered by this prospectus on behalf of the selling stockholders. The selling
stockholders and any of their donees, pledgees, assignees and
successors-in-interest may, from time to time, offer and sell any and all of
their shares of common stock on any stock exchange, market, or trading facility
on which such shares are traded. The selling stockholders will act independently
of us and each other in making decisions with respect to the timing, manner and
size of each such sale. Sales may be made at fixed or negotiated or market
prices. The shares may be sold by way of any legally available means, including
in one or more of the following transactions:
o a block trade in which a broker-dealer engaged by a selling stockholder
attempts to sell the shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which a
broker-dealer solicits purchasers; and
o privately negotiated transactions.
Transactions under this prospectus may or may not involve brokers or
dealers. The selling stockholders may sell shares directly to purchasers or to
or through broker-dealers, who may act as agents or principals. Broker-dealers
engaged by the selling stockholders may arrange for other broker-dealers to
participate in selling shares. Broker-dealers or agents may receive compensation
in the form of commissions, discounts or concessions from the selling
stockholders in amounts to be negotiated in connection with the sale.
Broker-dealers or agents also may receive compensation in the form of discounts,
concessions, or commissions from the purchasers of shares for whom the
broker-dealers may act as agents or to whom they sell as principal, or both. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Selling stockholders
and any broker-dealers and any other participating broker-dealers who execute
sales for the selling stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such
40
sales. In such event, any commissions received by such broker-dealers or agents
and any profit on the resale of the shares purchased by them may be deemed to be
underwriting discounts and commissions under the Securities Act. If the selling
stockholders are deemed to be underwriters, they may be subject to certain
statutory and regulatory liabilities, including liabilities imposed pursuant to
Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange
Act.
To the extent required, the number of shares to be sold, the name of the
selling stockholder, the purchase price, the name of any agent or broker and any
applicable commissions, discounts or other compensation to such agents or
brokers and other material facts with respect to a particular offering will be
set forth in a prospectus supplement as required by the Rules and Regulations
under the Securities Act.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act if available, rather than pursuant to this prospectus.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdictions, if required, only
through registered or licensed brokers or dealers. In addition, in certain
states the shares may not be sold unless the shares have been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and complied with. The anti-manipulative provisions
of Regulation M promulgated under the Exchange Act may apply to sales of the
shares offered by the selling stockholders.
We are required to pay all fees and expenses incident to the
registration of the shares. Otherwise, all discounts, commissions or fees
incurred in connection with the sale of our common stock offered hereby will be
paid by the selling stockholders.
SHARES ELIGIBLE FOR FUTURE SALE
As of January 17, 2006, we had outstanding an aggregate of 96,477,065
shares of our common stock, assuming no exercises of our outstanding Stock
Purchase Warrants. All shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
they are purchased by our "affiliates," as that term is defined in Rule 144
promulgated under the Securities Act.
41
PUBLIC FLOAT
As of January 27, 2006, the public float for our common stock consisted
of 24,071,140 shares. These shares are freely tradable without restriction or
further registration under the Securities Act, unless they are purchased by our
"affiliates," as that term is defined in Rule 144 promulgated under the
Securities Act.
RULE 144
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year, including
the holding period of prior owners other than affiliates, is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
o 1% of the number of shares of our common stock then outstanding or
o the average weekly trading volume of our common stock on the OTC
Bulletin Board during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner-of-sale provisions,
notice requirements and the availability of current public information about us.
In order to effect a Rule 144 sale of our common stock, our transfer agent will
require an opinion from legal counsel. We may charge a fee to persons requesting
sales under Rule 144 to obtain the necessary legal opinions.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale and who has
beneficially owned shares for at least two years, including the holding period
of certain prior owners other than affiliates, is entitled to sell those shares
without complying with the manner-of-sale, public information, volume limitation
or notice provisions of Rule 144. Our transfer agent will require an opinion
from legal counsel to effect a Rule 144(k) transaction. We may charge a fee to
persons requesting transactions under Rule 144(k) to obtain the necessary legal
opinions. No shares of our common stock currently outstanding
42
will be eligible for sale pursuant to Rule 144(k) until June 24, 2007.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, and other information
with the SEC. Our filings are available to the public at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Further
information on the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
We have filed a registration statement on Form SB-2 with the SEC under
the Securities Act for the common stock offered by this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement, certain parts of which have been omitted in accordance with the rules
and regulations of the SEC. For further information, reference is made to the
registration statement and its exhibits. Whenever we make references in this
prospectus to any of our contracts, agreements or other documents, the
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for the copies of the actual contract,
agreement or other document.
LEGAL MATTERS
The validity of the securities being offered by this prospectus have
been passed upon for us by Laura Anthony, Esq., Legal & Compliance, LLC, 330
Clematis Street, West Palm Beach, Florida 33401. Telephone (561) 514-0936
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
43
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.
EXPERTS
The financial statements of the Company as of December 31, 2005 appearing in
this prospectus have been so included in reliance on the report of Bagell,
Josephs & Levine, CPA's, an independent registered public accounting firm, given
on the authority of said firm as experts in accounting and auditing. The
financial statements as of March 30, 2005 and 2004 included in this prospectus
have been so included in reliance on the report of Bagell, Josephs & Levine,
CPA's, an independent certified public accounting firm, given on the authority
of said firm as experts in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers or persons controlling us, we have been
advised that it is the SEC's opinion that such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
44
I-ELEMENT CORPORATION
FINANCIAL STATEMENTS
Index to Financial Statements
FISCAL YEAR END 2004, 2005
AND NINE MONTHS ENDED DECEMBER 31, 2005
45
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003
TABLE OF CONTENTS
Consolidated Audited Financial Statements:..
PAGE(S)
-------
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheet as of March 31, 2005 F-2
Consolidated Statements of Operations for the Three
Months Ended March 31, 2005 and 2004 and the Years
Ended December 31, 2004 and 2003 F-3
Consolidated Statement of Changes in Stockholders'
(Deficit) for the Period March 11, 2003 (Inception)
to March 31, 2005 F-4 - F-7
Consolidated Statements of Cash Flow for the Three
Months Ended March 31, 2005 and 2004 and the Years
Ended December 31, 2004 and 2003 F-8 - F-9
Notes to Consolidated Financial Statements. F-10 - F-27
BAGELL, JOSEPHS & COMPANY, L.L.C.
Certified Public Accountants
High Ridge Commons
Suites 400-403
200 Haddonfield Berlin Road
Gibbsboro, New Jersey 08026
(856) 346-2828 Fax (856) 346-2882
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
MailKey Corporation and Subsidiary
Dallas, Texas
We have audited the accompanying consolidated balance sheet of MailKey
Corporation and Subsidiary (the "Company") as of March 31, 2005 and the related
statements of operations and cash flow for the three months ended March 31, 2005
and 2004, the years ended December 31, 2004 and 2003 and the related statement
of stockholders' equity (deficit) from March 11, 2003 (inception) to March 31,
2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying consolidated financial statements for the three months ended
March 31, 2005 and 2004 and for the years ended December 31, 2004 and 2003 have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 8 to the consolidated financial statements, the Company has
sustained operating losses and capital deficits that raise substantial doubt
about its ability to continue as a going concern. Management's plan in regard to
these matters are also described in Note 8. The consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MailKey Corporation
and Subsidiary as of March 31, 2005 and the results of its operations and cash
flow for the three months ended March 31, 2005 and 2004 and the years ended
December 31, 2004 and 2003 and changes in stockholders' equity (deficit) from
March 11, 2003 (inception) to March 31, 2005 in conformity with accounting
principles generally accepted in the United States of America.
MEMBER OF:
BAGELL, JOSEPHS & COMPANY, L.L.C. AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS NEW JERSEY SOCIETY OF
CERTIFIED PUBLIC
ACCOUNTANTS PENNSYLVANIA INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS
/s/ BAGELL, JOSEPHS & COMPANY, L.L.C.
- -------------------------------------
Certified Public Accountants
Gibbsboro, New Jersey
June 28, 2005
F-1
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
AUDITED
ASSETS
March 31,
2005
----------------
CURRENT ASSETS:
Cash and cash equivalents $ 340,321
Accounts receivable, net 520,644
Other current assets 1,780
----------------
TOTAL CURRENT ASSETS 862,745
----------------
Fixed assets, net of depreciation 889,051
----------------
OTHER ASSETS:
Goodwill 2,079,665
Deposits 58,993
----------------
TOTAL OTHER ASSETS 2,138,658
----------------
TOTAL ASSETS $ 3,890,454
================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,400,992
Customer deposits 164,112
Receivable financing payable 483,114
Commissions payable 176,136
Liability for stock to be issued 75,000
Deferred revenue 815,036
Current portion - notes payable 461,590
----------------
TOTAL CURRENT LIABILITIES 3,575,980
----------------
LONG-TERM LIABILITIES:
Notes payable, net of current portion 293,188
----------------
TOTAL LONG-TERM LIABILITIES 293,188
----------------
TOTAL LIABILITIES 3,869,168
----------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 Par Value, 100,000,000 shares
authorized; 91,783,730 shares issued and outstanding
at March 31, 2005 91,783
Additional paid-in capital 910,808
Accumulated deficit (981,305)
----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 21,286
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,890,454
================
The accompanying notes are an integral part of these consolidated financial statements.
F-2
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
THREE MONTHS ENDED YEARS ENDED
------------------ -----------
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
2005 2004 2004 2003
(AUDITED) (UNAUDITED) (AUDITED) (AUDITED)
------------- ------------- ------------- -------------
OPERATING REVENUE:
Service income $ 1,228,411 $ 1,530,427 $ 5,954,772 $ 4,552,436
COST OF SALES 736,275 819,756 3,042,978 2,716,680
------------- ------------- ------------- -------------
GROSS PROFIT 492,136 710,671 2,911,794 1,835,756
------------- ------------- ------------- -------------
OPERATING EXPENSES
General and administrative 687,928 458,311 2,033,764 1,116,810
Selling expenses 116,263 109,240 519,600 518,425
Depreciation & amortization 68,164 60,403 260,806 159,070
Interest expense 6,992 31,354 138,576 122,100
Receivable factoring fees 29,874 33,085 129,021 118,504
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 909,221 692,393 3,081,767 2,034,909
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE OTHER (EXPENSE) (417,085) 18,278 (169,973) (199,153)
------------- ------------- ------------- -------------
OTHER (EXPENSE)
Loss on sale of investments - (86,558) (125,068) (65,903)
------------- ------------- ------------- -------------
TOTAL OTHER EXPENSES - (86,558) (125,068) (65,903)
------------- ------------- ------------- -------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (417,085) (68,280) (295,041) (265,056)
PROVISION FOR INCOME TAXES - - - -
------------- ------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON SHARES $ (417,085) $ (68,280) $ (295,041) $ (265,056)
============= ============= ============= =============
NET LOSS PER BASIC AND DILUTED SHARES $ (0.01) $ (1.40) $ (0.09) $ -
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 38,143,835 48,825 3,222,743 1
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - AUDITED
FOR THE PERIOD MARCH 11, 2003 (INCEPTION) TO MARCH 31, 2005
ADDITIONAL
MINORITY COMMON STOCK PAID - IN SUBSCRIPTION DEFERRED
INTEREST SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
-------- ------ ------ ------- ---------- ------------
Balance at March 11, 2003 (Inception)
Old Company (MailKey Corporation) $ - - $ - $ - $ - $ -
Issuance of "founders" shares
at $0.001 per share - March - 8,692,900 8,693 (7,824) - -
Issuance of shares at $0.05 per share
for $0.001 cash and $0.0499
services - October - 5,110,397 5,110 250,921 - -
Issuance of shares at $0.05 per share
for cash - October - 1,976,318 1,976 96,845 - -
Issuance of shares at $0.05 per share
for services - October - 483,800 484 23,703 - -
Issuance of shares and warrants at
$0.25 per share plus 1/2 of a
warrant - June - Aug. - 3,306,000 3,306 823,194 - -
Issuance of shares valued at $0.1919
per share for services - June - Aug. - 1,230,585 1,231 235,041 - -
Issuance of shares and warrants at
$0.50 per share plus 1/2 of a
warrant - Aug. - Nov. - 490,000 490 244,510 - -
Issuance of shares valued at $0.3878
per share for services - Aug. - Nov. - 230,000 230 88,986 - -
Issuance of shares and warrants at
$0.85 for one share plus 1/2 of a
warrant - Nov. - Dec. - 375,000 375 318,375 - -
Consulting fees paid in conjunction
with 2003 share issuances - - - (149,790) - -
Options issued for services - - - 53,520 - -
Issuance of minority interest in
subsidiary 411 - - - - -
Foreign currency translation
adjustments - - - - - -
Minority interest in loss (411) - - - - -
(continued)
ACCUMULATED
FOREIGN
EXCHANGE
TRANSLATION ACCUMULATED
ADJUSTMENT DEFICIT TOTAL
---------- ------- -----
Balance at March 11, 2003 (Inception)
Old Company (MailKey Corporation) $ - $ - $ -
Issuance of "founders" shares
at $0.001 per share - March - - 869
Issuance of shares at $0.05 per share
for $0.001 cash and $0.0499
services - October - - 256,031
Issuance of shares at $0.05 per share
for cash - October - - 98,821
Issuance of shares at $0.05 per share
for services - October - - 24,187
Issuance of shares and warrants at
$0.25 per share plus 1/2 of a
warrant - June - Aug. - - 826,500
Issuance of shares valued at $0.1919
per share for services - June - Aug. - - 236,272
Issuance of shares and warrants at
$0.50 per share plus 1/2 of a
warrant - Aug. - Nov. - - 245,000
Issuance of shares valued at $0.3878
per share for services - Aug. - Nov. - - 89,216
Issuance of shares and warrants at
$0.85 for one share plus 1/2 of a
warrant - Nov. - Dec. - - 318,750
Consulting fees paid in conjunction
with 2003 share issuances - - (149,790)
Options issued for services - - 53,520
Issuance of minority interest in
subsidiary - - 411
Foreign currency translation
adjustments 9,251 - 9,251
Minority interest in loss - - (411)
The accompanying notes are an integral part of the consolidated financial statements.
F-4
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - AUDITED - (CONTINUED)
FOR THE PERIOD MARCH 11, 2003 (INCEPTION) TO MARCH 31, 2005
ADDITIONAL
MINORITY COMMON STOCK PAID - IN SUBSCRIPTION DEFERRED
INTEREST SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
-------- ------ ------ ------- ---------- ------------
Transfer of shares $0.6468 per share
for employee benefit trust $ - 1,500,000 $ 1,500 $ 968,700 $ - $ -
650,000 warrants issued in conjunction
with notes payable of $650,000
beneficial conversion feature on
notes payable - January 23 to
February 23, 2004 - - - 246,727 - -
Issuance of shares at $0.85 per share
for cash - March 24 - 950,000 950 806,550 (212,500) -
Issuance of shares on exercise of
warrants at $0.50 - March 24 - 1,001,000 1,001 499,499 - -
Issuance of shares on exercise of
warrants at $1 - March 24 - 100,000 100 99,900 (50,000) -
Issuance of shares on exercise of
options at $0.125 - March 24 - 800,000 800 99,200 - -
Consulting fees incurred in
conjunction with 2004 share
issuances - - - (93,756) - -
Options issued to consultants in
connection with services in
January 2004 - - - 2,086,523 - (2,086,523)
Amortization of options issued to
consultants - - - - - 163,888 -
Shares deemed issued in
recapitalization transaction -
March 25, 2004 - 2,619,238 2,619 (2,619) - -
Foreign currency translation - - - - - -
Net loss - - - - - -
--------- ----------- -------- ------------ ------------- ---------------
Balance March 31, 2004 $ - 28,865,238 $ 28,865 $ 6,688,205 $ (262,500) $ (1,922,635)
========= =========== ======== ============ ============= ===============
(continued)
ACCUMULATED
FOREIGN
EXCHANGE
TRANSLATION ACCUMULATED
ADJUSTMENT DEFICIT TOTAL
---------- ------- -----
Transfer of shares $0.6468 per share
for employee benefit trust $ - $ - $ 970,200
650,000 warrants issued in conjunction
with notes payable of $650,000
beneficial conversion feature on
notes payable - January 23 to
February 23, 2004 - - 246,727
Issuance of shares at $0.85 per share
for cash - March 24 - - 595,000
Issuance of shares on exercise of
warrants at $0.50 - March 24 - - 500,500
Issuance of shares on exercise of
warrants at $1 - March 24 - - 50,000
Issuance of shares on exercise of
options at $0.125 - March 24 - - 100,000
Consulting fees incurred in
conjunction with 2004 share
issuances - - (93,756)
Options issued to consultants in
connection with services in
January 2004 - - -
Amortization of options issued to
consultants - - 163,888
Shares deemed issued in
recapitalization transaction -
March 25, 2004 - - -
Foreign currency translation (3,047) - (3,047)
Net loss - (4,667,885) (4,667,885)
----------- ---------------- ---------------
Balance March 31, 2004 $ 6,204 $ (4,667,885) $ (129,746)
=========== ================ ===============
The accompanying notes are an integral part of the consolidated financial statements.
F-5
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - AUDITED - (CONTINUED)
FOR THE PERIOD MARCH 11, 2003 (INCEPTION) TO MARCH 31, 2005
ADDITIONAL
MINORITY COMMON STOCK PAID - IN SUBSCRIPTION DEFERRED
INTEREST SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
-------- ------ ------ ------- ---------- ------------
Issuance of shares at $0.85 per share
in connection with conversion of
bridge loan, 470,588 shares issued,
294,118 issuable at June 30,
2004 - J-ne $ - 764,706 $ 765 $ 649,235 $ - $ -
Issuance of shares at $0.85 per share
in connection with conversion of
bridge loan, 19,425 shares issued,
8,831 issuable at June 30, 2004 -
June - 28,256 28 23,990 - -
Issuance of shares at $0.50 per share
in connection with exercise of
warrants between June 18, 2004 -
August 20, 2004 - 462,000 462 230,538 - -
Issuance of shares at $1.00 per share
in connection with exercise of
warrants between June 18, 2004 -
August 20, 2004 - 953,019 953 952,066 - -
Offering costs incurred in conjunction
with June and July 2004 warrant
conversions - - - (114,897) - -
Stock subscriptions received - - - - 160,000 -
Issuance of shares to consultants at
$0.60 per share in lieu of fees
owed - September - 51,803 52 31,032 - -
Revalue options issued to consultants
in conjunction with services in
December 2003 and January 2004 - - - (1,264,864) - 1,264,864
Amortization of expense for options
issued to consultants - - - - - 512,382
Issuance of shares to consultants in
November and December 2004 - 3,601,333 4,101 1,205,001 - -
Subscription receivable written-off - - - - 102,500 -
Deferred compensation written-off - - - - - 145,389
Foreign currency translation - - - - - -
Net loss for the nine months ended
December 31, 2004 - - - - - -
---------- ----------- -------- ------------ ------------- --------------
Balance December 31, 2004 $ - 34,726,355 $ 35,226 $8,400,306 $ - $ -
========== =========== ======== ============ ============= ==============
(continued)
ACCUMULATED
FOREIGN
EXCHANGE
TRANSLATION ACCUMULATED
ADJUSTMENT DEFICIT TOTAL
---------- ------- -----
Issuance of shares at $0.85 per share
in connection with conversion of
bridge loan, 470,588 shares issued,
294,118 issuable at June 30,
2004 - J-ne $ - $ - $ 650,000
Issuance of shares at $0.85 per share
in connection with conversion of
bridge loan, 19,425 shares issued,
8,831 issuable at June 30, 2004 -
June - - 24,018
Issuance of shares at $0.50 per share
in connection with exercise of
warrants between June 18, 2004 -
August 20, 2004 - - 231,000
Issuance of shares at $1.00 per share
in connection with exercise of
warrants between June 18, 2004 -
August 20, 2004 - - 953,019
Offering costs incurred in conjunction
with June and July 2004 warrant
conversions - - (114,897)
Stock subscriptions received - - 160,000
Issuance of shares to consultants at
$0.60 per share in lieu of fees
owed - September - - 31,084
Revalue options issued to consultants
in conjunction with services in
December 2003 and January 2004 - - -
Amortization of expense for options
issued to consultants - - 512,382
Issuance of shares to consultants in
November and December 2004 - - 1,209,102
Subscription receivable written-off - - 102,500
Deferred compensation written-off - - 145,389
Foreign currency translation 47,441 - 47,441
Net loss for the nine months ended
December 31, 2004 - (4,816,835) (4,816,835)
----------- ---------------- ------------
Balance December 31, 2004 $ 53,645 $ (9,484,720) $ (995,543)
=========== ================ ============
The accompanying notes are an integral part of the consolidated financial statements.
F-6
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - AUDITED - (CONTINUED)
FOR THE PERIOD MARCH 11, 2003 (INCEPTION) TO MARCH 31, 2005
ADDITIONAL
MINORITY COMMON STOCK PAID - IN SUBSCRIPTION DEFERRED
INTEREST SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
-------- ------ ------ ------- ---------- ------------
Balance December 31, 2004 - carried
forward $ - 34,726,355 $ 35,226 $ 8,400,306 $ - $ -
Recapitalization - (30,406,963) (30,907) (8,028,127) - -
New equity - reverse merger -
I-Element - 4,319,392 4,319 372,179 - -
Shares of common stock issued in
exercise of options - 4,578,223 4,578 41,204 - -
Issuance of common stock in
conversion of notes payable - 4,694,953 4,695 821,617 - -
Shares issued in reverse merger -
Exchange - new company assumed
liabilities 68,979,623 68,979 (545,267) - -
Issuance of shares at $0.025 per
share for services - 7,487,587 7,488 179,701 - -
Issuance of shares at $0.025 per
share in conversion of accounts
payable - 693,280 693 16,639 - -
Issuance of shares at $0.025 per share
in conversion of debt to equity - 1,030,672 1,031 24,735 - -
Net loss for the three months ended
March 31, 2005
--------- ------------- ------------- ------------- ------------- -------------
Balance March 31, 2005 $ - 91,783,730 $ 91,783 $ 910,808 $ - $ -
========= ============= ============= ============= ============= =============
(continued)
ACCUMULATED
FOREIGN
EXCHANGE
TRANSLATION ACCUMULATED
ADJUSTMENT DEFICIT TOTAL
---------- ------- -----
Balance December 31, 2004 - carried
forward $ 53,645 $ (9,484,720) $6(995,543)
Recapitalization (53,645) 8,920, 500 807,821
New equity - reverse merger -
I-Element - (564,220) (187,722)
Shares of common stock issued in
exercise of options - - 45,782
Issuance of common stock in
conversion of notes payable - - 826,312
Shares issued in reverse merger -
Exchange - new company assumed
liabilities - - (476,288)
Issuance of shares at $0.025 per
share for services - - 187,189
Issuance of shares at $0.025 per
share in conversion of accounts
payable - - 17,332
Issuance of shares at $0.025 per share
in conversion of debt to equity - 25,766
Net loss for the three months ended
March 31, 2005 (417,085) (417,085)
------------ --------------- ------------
Balance March 31, 2005 $ - $ (981,305) $ 21,286
============ =============== ============
The accompanying notes are an integral part of the consolidated financial statements.
F-7
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
THREE MONTHS ENDED YEARS ENDED
------------------ -----------
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
2005 2004 2004 2003
(AUDITED) (UNAUDITED) (AUDITED) (AUDITED)
---------- --------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (417,085) $ (68,280) $ (295,041) $ (265,056)
---------- --------- ---------- ----------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 68,164 60,403 260,806 159,070
Acquisition of fixed assets in business combination - - - (893,611)
Debt and accrued interest assumed in business
combination - - - 824,480
Goodwill - - - (2,079,665)
Stock issued for services 187,189 - - -
Loss on disposal of equipment 1,877 - 2,296 -
CHANGES IN ASSETS AND LIABILITIES
(Increase) decrease in accounts receivable 67,361 239,346 159,934 (747,939)
(Increase) decrease in other current assets 2,470 (2,471) (4,077) (173)
(Increase) decrease in deposits 10,530 468 (14,517) (55,006)
Increase (decrease) in accounts payable 294,777 (19,316) 154,463 904,740
Increase in accrued interest - 17,289 77,364 56,507
Increase (decrease) in payroll taxes payable (17,230) 27,232 17,230 -
Increase (decrease) in customer deposits (4,878) (14,819) (35,010) 204,000
Increase (decrease) in receivable financing payable (20,807) (342,679) (153,082) 657,003
Increase in commissions payable 18,411 43,786 98,994 58,731
Increase (decrease) in refunds payable (1,079) (1,526) (936) 2,015
Increase (decrease) in deferred revenue (19,940) 93,331 (262,959) 1,097,935
---------- --------- ---------- ----------
Total adjustments 586,845 101,044 300,506 188,087
---------- --------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 169,760 32,764 5,465 (76,969)
---------- --------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment 2,800 - 3,451 -
Acquisition of fixed assets (9,485) (163,766) (233,396) (251,023)
---------- --------- ---------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES (6,685) (163,766) (229,945) (251,023)
---------- --------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements
F-8
MAILKEY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
THREE MONTHS ENDED YEARS ENDED
------------------ -----------
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
2005 2004 2004 2003
(AUDITED) (UNAUDITED) (AUDITED) (AUDITED)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITES
Payments of notes payable $ (32,909) $ (32,600) $ (465,344) $ (46,193)
Proceeds from notes payable 22,450 100,000 625,331 467,054
Common stock issued for cash - - 119,300 -
Proceeds in exercise of stock options 39,954 - 75 -
--------- --------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,495 67,400 279,362 420,861
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 192,570 (63,602) 54,882 92,869
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR / PERIOD 147,751 92,869 92,869 -
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF
YEAR / PERIOD $ 340,321 $ 29,267 $ 147,751 $ 92,869
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest expense $ 2,563 $ 3,890 $ 34,983 $ 6,459
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES:
Accounts payable converted to equity $ 17,332 $ 5,000 $ 5,000 $ -
========= ========= ========= =========
Accounts payable converted to debt $ 70,000 $ - $ 50,000 $ -
========= ========= ========= =========
Conversion of notes payable to equity $ 852,078 $ - $ 248,000 $ -
========= ========= ========= =========
Issuance of stock for redemption of ICCC shares $ - $ 4,123 $ 4,123 $ -
========= ========= ========= =========
Debt converted to accounts payable $ 126,000 $ - $ - $ -
========= ========= ========= =========
Debt converted in exercise of options $ 5,828 $ - $ - $ -
========= ========= ========= =========
Accounts payable and accrued expenses
acquired in reverse merger $ 63,343 $ - $ - $ -
========= ========= ========= =========
Debt acquired in reverse merger $ 337,945 $ - $ - $ -
========= ========= ========= =========
Stock issued for services $ 187,189 $ - $ - $ -
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements
F-9
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
MK Secure Solutions Ltd. was established as a messaging security and
management. 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.
In the first quarter of 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.
F-10
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
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.
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
F-11
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
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 $97,000 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 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.
F-12
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The 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 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 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.
F-13
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
ACCOUNTS RECEIVABLE
The Company factors 99% of its billings with an outside agency. The
Company invoices its customers on the 28th of the month for services to
be rendered two months subsequent to the billing date. The Company
receives 75% of the aggregate net face value of the assigned accounts at
the time of placement with the factor.
DEFERRED REVENUE
Deferred revenue consists of customers billed in advance of revenue
being earned.
PROVISION FOR BAD DEBT
Under SOP 01-6 "Accounting for Certain Entities (including Entities with
Trade Receivables), the Company has intent and belief that all amounts
in accounts receivable are collectible. The Company has determined that
based on their collections an allowance for doubtful accounts of $6,673
and $6,098 has been recorded at March 31, 2005 and December 31, 2004.
Bad debt expense for the three months ended March 31, 2005 and 2004 was
$4,821 and $17,626, respectively and for the years ending December 31,
2004 and 2003 was $63,498 and $52,241, respectively.
ADVERTISING COSTS
The Company expenses the costs associated with advertising and marketing
as incurred. Advertising and marketing expenses, included in the
statements of operations for the three months ended March 31, 2005 and
2004 were $660 and $9,216, respectively, and for the years ended
December 31, 2004 and 2003 were $24,556 and $5,901, respectively.
F-14
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 March 31, 2005 and 2004 and for
the years ended December 31, 2004 and 2003, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value because of the immediate or short-term maturity
of these financial instruments. The carrying amount reported for notes
payable approximates fair value because, in general, the interest on the
underlying instruments fluctuates with market rates.
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.
F-15
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(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.
(LOSS) PER SHARE OF COMMON STOCK (CONTINUED)
The following is a reconciliation of the computation for basic and
diluted EPS:
THREE MONTHS ENDED YEARS ENDED
------------------ -----------
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
2005 2004 2004 2003
(AUDITED) (UNAUDITED) (AUDITED) (AUDITED)
------------ --------- ----------- -----------
Net loss $ (417,085) $ (68,280) $ (295,041) $ (265,056)
------------ --------- ----------- -----------
Weighted-average common
shares Outstanding (Basic) 38,143,835 48,825 3,222,743 1
Weighted-average common
stock Equivalents
Stock options - - - -
Warrants - - - -
------------ --------- ----------- -----------
Weighted-average common
shares Outstanding (Diluted) 38,143,835 48,825 3,222,743 1
------------ --------- ----------- -----------
The Company had no options or warrants granted during the period,
therefore there were no common stock equivalents.
F-16
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued Statement No. 142 "Goodwill and Other
Intangible Assets". This Statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. It addresses how
intangible assets that are acquired individually or with a group of
other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This
Statement also addresses how goodwill and other intangible assets should
be accounted for after they have been initially recognized in the
financial statements.
STOCK-BASED COMPENSATION
Employee stock awards under the Company's compensation plans are
accounted for in accordance with Accounting Principles Board Opinion No.
25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and related
interpretations. The Company provides the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS 123"), and related interpretations.
Stock-based awards to non-employees are accounted for under the
provisions of SFAS 123 and has adopted the enhanced disclosure
provisions of SFAS No. 148 "Accounting for Stock-Based Compensation-
Transition and Disclosure, an amendment of SFAS No. 123".
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic-value method. Under the intrinsic-value
method of accounting for stock-based compensation, when the exercise
price of options granted to employees is less than the estimated fair
value of the underlying stock on the date of grant, deferred
compensation is recognized and is amortized to compensation expense over
the applicable vesting period. In each of the periods presented, the
vesting period was the period in which the options were granted. All
options were expensed to compensation in the period granted rather than
the exercise date.
F-17
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
The Company measures compensation expense for its non-employee
stock-based compensation under the Financial Accounting Standards Board
(FASB) Emerging Issues Task Force (EITF) Issue No. 96-18, "ACCOUNTING
FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR
ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES".
The fair value of the option issued is used to measure the transaction,
as this is more reliable than the fair value of the services received.
The fair value is measured at the value of the Company's common stock on
the date that the commitment for performance by the counterparty has
been reached or the counterparty's performance is complete. The fair
value of the equity instrument is charged directly to compensation
expense and additional paid-in capital.
Stock-based compensation for the three months ended March 31, 2005 and
2004 was $0 and $0, respectively and for the years ended December 31,
2004 and 2003 was $0 and $0, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS" ("SFAS 144"), that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001.
The FASB's new rules on asset impairment supersede SFAS 121, "ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF," and portions of Accounting Principles Board Opinion 30,
"Reporting the Results of Operations."
This Standard provides a single accounting model for long-lived assets
to be disposed of and significantly changes the criteria that would have
to be met to classify an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are not
depreciated and are stated at the lower of fair value and carrying
amount.
F-18
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
This Standard also requires expected future operating losses from
discontinued operations to be displayed in the period (s) in which the
losses are incurred, rather than as of the measurement date as presently
required. The adoption of SFAS No. 144 did not have an impact on the
Company's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This statement rescinds SFAS No. 4, "REPORTING
GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT," and an amendment of that
statement, SFAS No. 44, "ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR
CARRIERS," and SFAS No. 64, "EXTINGUISHMENTS OF DEBT MADE TO SATISFY
SINKING-FUND REQUIREMENTS". This statement amends SFAS No. 13,
"ACCOUNTING FOR LEASES", to eliminate inconsistencies between the
required accounting for sales-leaseback transactions and the required
accounting for certain lease modifications that have economic effects
that are similar to sales-leaseback transactions.
Also, this statement amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe
their applicability under changed conditions. Provisions of SFAS No. 145
related to the rescissions of SFAS No. 4 were effective for the Company
on November 1, 2002 and provisions affecting SFAS No. 13 were effective
for transactions occurring after May 15, 2002. The adoption of SFAS No.
145 did not have a significant impact on the Company's results of
operations or financial position.
In June 2003, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES". This statement covers
restructuring type activities beginning with plans initiated after
December 31, 2002. Activities covered by this standard that are entered
into after that date will be recorded in accordance with provisions of
SFAS No. 146. The adoption of SFAS No. 146 did not have a significant
impact on the Company's results of operations or financial position.
F-19
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In December 2002, the FASB issued Statement No. 148, "ACCOUNTING FOR
STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB
STATEMENT NO. 123"("SFAS 148"). SFAS 148 amends FASB Statement No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION," to provide alternative
methods of transition for an entity that voluntarily changes to the fair
value based method of accounting for stock-based employee compensation.
It also amends the disclosure provisions of that Statement to require
prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting
Principles Board ("APB") Opinion No. 28, "INTERIM FINANCIAL REPORTING",
to require disclosure about those effects in interim financial
information. SFAS 148 is effective for financial statements for fiscal
years ending after December 15, 2002. The Company will continue to
account for stock-based employee compensation using the intrinsic value
method of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES," but has adopted the enhanced disclosure requirements of SFAS
148.
In May 2003, the FASB issued SFAS Statement No. 150, "ACCOUNTING FOR
CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES
AND EQUITY". This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). This statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities, if applicable.
It is to be implemented by reporting the cumulative effect of a change
in an accounting principle for financial instruments created before the
issuance date of the Statement and still existing at the beginning of
the interim period of adoption. The adoption of this statement
F-20
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
did not have a significant impact on the Company's results of operations
or financial position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF Others". FIN 45
requires a company, at the time it issues a guarantee, to recognize an
initial liability for the fair value of obligations assumed under the
guarantees and elaborates on existing disclosure requirements related to
guarantees and warranties. The recognition requirements are effective
for guarantees issued or modified after December 31, 2002 for initial
recognition and initial measurement provisions. The adoption of FIN 45
did not have a significant impact on the Company's results of operations
or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB
NO. 51". FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003.
For variable interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the first interim or
annual period beginning after June 15, 2003. The adoption of FIN 46 did
not have a significant impact on the Company' results of operations or
financial position.
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
F-21
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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.
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.
F-22
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 3- FIXED ASSETS
Property and equipment as of March 31, 2005 was as follows:
MARCH 31,
2005
---------------
Property and equipment $1,373,268
Less: accumulated depreciation (484,217)
---------------
Net book value $ 889,051
===============
There was $68,164 and $60,403 charged to operations for depreciation
expense for the three months ended March 31, 2005 and 2004, respectively
and $260,806 and $156,691 was charged to operations for depreciation
expense for the years ended December 31, 2004 and 2003, respectively.
NOTE 4- NOTES PAYABLE
The Company has several notes payable at March 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. 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.
F-23
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 4- NOTES PAYABLE (CONTINUED)
Accrued interest on the notes is $4,767 at March 31, 2005.
The notes payable balances at March 31, 2005 were as follows:
March 31,
2005
----------------
Total notes payable $ 754,778
Less current maturities (461,590)
----------------
Long-term notes payable $ 293,188
================
The amount of principal maturities of the
notes payable for the next four years
ending March 31, and in the aggregate
is as follows:
2006 $ 461,590
2007 125,652
2008 125,652
2009 41,884
----------------
$ 754,778
================
F-24
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 5- OPERATING LEASES
The Company leases office space under leases commencing in March and
June of 2004. The leases are payable on a month-to-month basis. Monthly
payments under the current leases are $3,900. The Company also leased
additional office space in Texas and California. The Company ceased
leasing this additional space during the year ended December 31, 2004.
Rental payments charged to expense for the three months ended March 31,
2005 and 2004 were $11,700 and $15,050, respectively and during the
years ended December 31, 2004 and 2003 were $82,072 and $68,750,
respectively.
NOTE 6- STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
As of March 31, 2005, the Company has 100,000,000 shares of common stock
authorized at a par value of $0.001, and 91,783,730 shares issued and
outstanding.
The following details the stock transactions for the three months ended
March 31, 2005:
The Company issued 4,578,223 shares of common stock due to the exercise
of options.
The Company issued 4,694,953 shares of common stock for the conversion
of debt to equity valued at $826,312.
The Company issued 7,487,587 shares of common stock for services valued
at $187,189.
The Company issued 693,280 shares of common stock in conversion of
accounts payable to equity valued at $17,332.
The Company issued 1,030,672 shares of common stock for the conversion
of debt to equity valued at $25,766.
In connection with the recapitalization, there were $337,945 in notes
payable and $63,343 in liabilities assumed by the new company.
F-25
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
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 March 31, 2005, deferred tax assets consist of the following:
Net deferred tax assets $ 294,392
Less: valuation allowance (294,392)
---------
$ -0-
=========
At March 31, 2005, the Company had deficits accumulated in the
approximate amount of $981,305, 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 consolidated financial statements the
Company has sustained net operating losses for the three months ended
March 31, 2005 and 2004 and the years ended December 31, 2004 and 2003.
There is no guarantee that the Company will be able to raise enough
capital or generate revenues to sustain its operations. This raises
substantial doubt about the Company's ability to continue as a going
concern.
The Company's future success is dependent upon its ability to achieve
profitable operations and generate cash from operating activities, and
upon additional financing. There is no guarantee that the Company will
be able to raise enough capital or generate revenues to sustain its
operations. Management believes they can raise the appropriate funds
needed to support their business plan and acquire an operating, cash
flow positive company.
F-26
MAILKEY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 8- GOING CONCERN
The 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.
F-27
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
-------------
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
-------------
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
-------------
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)
------------- -------------
Total adjustments 508,748 191,457
------------- -------------
NET CASH (USED IN) OPERATING ACTIVITIES (355,538) (35,304)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (52,368) (69,632)
Proceeds from sale of fixed assets - 3,453
------------- -------------
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
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,272,714 219,967
------------- -------------
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)
------------- -------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 864,808 118,484
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 340,321 29,267
------------- -------------
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
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Nevada corporation law provides that:
o a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of the corporation,
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith
and in a manner which he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful;
o a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him
in connection with the defense or settlement of the action or suit if he
acted in good faith and in a manner which he reasonably believed to be
in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to
which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to
the corporation or for amounts paid in settlement to the corporation,
unless and only to the extent that the court in which the action or suit
was brought or other court of competent jurisdiction
II-1
determines upon application that in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper; and
o to the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding, or in defense of any claim, issue or
matter therein, the corporation shall indemnify him against expenses,
including attorneys' fees, actually and reasonably incurred by him in
connection with the defense.
Our Certificate of Incorporation provide that no director or officer
shall be personally liable to our company or any of its stockholders for damages
for breach of fiduciary duty as a director or officer involving any act or
omission of such director or officer unless a final adjudication establishes
that such acts or omissions involve: (i) intentional misconduct , (ii) fraud, or
(iii) a knowing violation of the law that was material to the cause of action.
Our Bylaws provide we have the power to indemnify, to the greatest
allowable extent permitted under the General Corporate Laws of Nevada, directors
or officers of our company for any duties or obligations arising out of any acts
or conduct of the officer or director performed for or on behalf of our company.
We will reimburse each such person for all legal and other expenses reasonably
incurred by him in connection with any such claim or liability, including power
to defend such persons from all suits or claims as provided for under the
provisions of the General Corporate Law of Nevada.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of our
company under Nevada law or otherwise, we have been advised the opinion of the
Securities and Exchange Commission is that such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event a claim for indemnification against such liabilities
(other than payment by us for expenses incurred or paid by a director, officer
or controlling person of our company in successful defense of any action, suit,
or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction,
II-2
the question of whether such indemnification by it is against public policy in
the Securities Act of 1933 and will be governed by the final adjudication of
such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We will pay all expenses in connection with the registration and sale of our
common stock. All amounts shown are estimates except for the registration fee.
EXPENSES AMOUNT
Registration Fee $ 1,375.00
Costs of Printing and Engraving $ 3,900.00
Legal Fees $ 15,000.00
Accounting Fees $ 2,000.00
Miscellaneous $ 650.00
TOTAL $ 22,925.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
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:
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 $0.10 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
II-3
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.
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.
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 following details the sales of unregistered securities since from
December 31, 2005 through the date of filing of this registration statement:
On January 23, 2006 the Company issued an aggregate of 17,094,286 shares
of common stock in exchange for services rendered by certain employees and
consultants. A total of 914,286 shares were issued at price of $.035 per share;
3,250,000 shares were issued at a price of $.040 per share; 7,930,000 shares
were issued at a price of $.050 per share; 4,000,000 shares were
II-4
issued at a price of $.060 per share; and 1,000,000 shares were issued at a
price of $.070 per share.
- --------------------------------------------------------------------------------
ITEM 27. EXHIBITS.
Exhibit
Number Description
- ------ -----------
5.1 Legal Opinion
10.1 Employment Agreement with Ivan Zweig in the form of Binding
Letter of Intent dated January 18, 2005
10.2 Form of Warrant
23.1 Consent of Auditor
23.2 Consent of Attorney (within Exhibit 5.1)
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the
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"Calculation of Registration Fee" table in the effective Registration Statement;
(iii) Include any additional or changed information on the plan of
distribution.
(2) For determining liability under the Securities Act, the Registrant will
treat each such post-effective amendment as a new registration statement of the
securities offered, and the offering of such securities at that time to be the
initial bona fide offering.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described under Item 24 above, or otherwise, the
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities, other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding, is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas on January 31, 2006.
IELEMENT CORPORATION:
By: /s/ Ivan Zweig
------------------------------
Name: Ivan Zweig
Title: Chief Executive Officer,
Chairman and Chief
Financial Officer (Interim)
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