10QSB/A 1 ie10qsb063005-a2.htm IELEMENT CORPORATION 10QSB 06/30/05 AMENDMENT 2 IElement Corporation 10QSB 06/30/05 Amendment 2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-QSB
(AMENDMENT NO. 2)
 
 
(Mark One)
 
[X] Quarterly report under Section 13 or 15(d) of the
Securities Exchange Actof 1934
 
For the quarterly period ended: June 30, 2005
 
[ ] Transition report under Section 13 or 15(d) of the Exchange Act of 1934
 
For the transition period from __________ to __________
 
Commission File No. 000-29331
 
IELEMENT CORPORATION 
(FORMERLY MAILKEY CORPORATION)
 
(Exact Name of Small Business Issuer as Specified in Its Charter)

Nevada                                        76-0270295
----------------------------------                        ----------------------------------
(State or Other Jurisdiction of                         (IRS Employer
Incorporation or Organization)                         Identification No.)

17194 Preston Rd.
Suite 102 PMB 341
Dallas, TX 75248
 
(Address of Principal Executive Offices)

1-214-254-3440
 
(Issuer's Telephone Number, Including Area Code)
 
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes [X] No [ ]
 
 
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
 
 
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.
 
 
N.A.
 
 APPLICABLE ONLY TO CORPORATE ISSUERS
 
 
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
 
 
There were 96,446,846 issued and outstanding shares of the registrant's common stock, $.001 par value per share, on August 5, 2005.
 
 
Transitional Small Business Disclosure Format (check one):
 
 
Yes [ ] No [X]
 
 
 
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology, such as "may," "will," "expects," "intends," "plans," "projects," "estimates," "anticipates," or "believes" or the negative thereof or any variation thereon or similar terminology or expressions.
 
These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from results proposed in such statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to: our ability to fund future growth and implement our business strategy; our ability to integrate the operations of any businesses we may acquire; our ability to attract and retain customers; our ability to attract and qualified personnel; customer acceptance and satisfaction with our telecommunications solutions; our success in undertaking anticipated product enhancements and releases; potential legal claims against us, including, but not limited to, intellectual property infringement claims; our ability to protect our intellectual property; variation in forecasts of the evolving telecommunications solutions industry; rapid technological changes in the industry; competition in our industry and markets; general economic and business conditions, either nationally or internationally or in the regions in which we are doing business; the condition of the securities and capital markets; legislative or regulatory changes that affect our business, related or supplemental industries or our ability to ability to comply with regulatory bodies; and statements of assumption underlying any of the foregoing, as well as any other factors set forth in our 2005 Annual Report on Form 10-KSB, in our consolidated financial statements contained in this report and the notes thereto, or under the caption "Plan of Operation" under Item 2 of this report.
 
All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as otherwise required by law, we assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise subsequent to the date of this filing.
 
Unless otherwise indicated or the context otherwise requires, all references to "MailKey," the "Company," "we," "us" or "our" and similar terms refer to MailKey Corporation and its subsidiaries.
 
 
PART I
FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
 
 
IELEMENT CORPORATION AND SUBSIDIARY
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
 
TABLE OF CONTENTS

Condensed Consolidated Unaudited Financial Statements:
PAGE(S)

Condensed Consolidated Balance Sheets as of June 30, 2005 and 2004                               1
 
Condensed Consolidated Statements of Operations for
the Three Months Ended June 30, 2005 and 2004                                                                     2
 
Condensed Consolidated Statements of Cash Flow for
the Three Months Ended June 30, 2005 and 2004                                                                 3-4
 
Notes to Condensed Consolidated Financial Statements                                                  5-17

 

IELEMENT CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (RESTATED)
JUNE 30, 2005 AND 2004
 
 
    
Restated
 
 
Restated
 
ASSETS
 
 
 
June 30,
 
 
June 30,
 
 
 
 
2005
 
 
2004
 
 
 
 
(Unaudited)
 
 
(Unaudited)
 
CURRENT ASSETS:
              
Cash and cash equivalents
  
$
96,532
  
$
62,680
  
Accounts receivable, net
    
509,005
   
724,082
 
Other current assets
    
3,469
   
2,539
 
               
Total current assets
    
609,006
   
789,301
 
               
Fixed assets, net of depreciation
    
-
   
-
 
               
Fixed assets, net of depreciation
    
834,131
   
1,061,265
 
               
OTHER ASSETS:
              
Deposits
    
55,361
   
53,523
 
               
Total other assets
    
55,361
   
53,523
 
               
TOTAL ASSETS
  
$
1,498,498
  
$
1,904,089
  
           
               
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               
CURRENT LIABILITIES:
              
Accounts payable and accrued expenses
  
$
1,399,777
  
$
979,681
  
Customer deposits
    
155,887
   
188,527
 
Receivable financing payable
    
307,756
   
516,199
 
Commissions payable
    
179,454
   
92,789
 
Deferred revenue
    
792,095
   
1,148,629
 
Current portion - notes payable
   
465,467
   
264,620
 
               
Total current liabilities
    
3,300,436
   
3,190,445
 
               
LONG-TERM LIABILITIES:
              
Notes payable, net of current portion
    
261,775
   
896,641
 
               
Total long-term liabilities
    
261,775
   
896,641
 
               
Total Liabilities
    
3,562,211
   
4,087,086
 
               
STOCKHOLDERS' EQUITY (DEFICIT)
              
Common stock, $.001 Par Value, 100,000,000 shares authorized;
              
94,850,535 and 4,319,392 shares issued and outstanding
              
at June 30, 2005 and 2004 respectively
    
94,851
   
4,319
 
Additional paid-in capital
    
(1,030,878
)
  
(1,707,486
)
Accumulated deficit
   
(1,127,686
)
  
(479,830
)
               
Total Stockholders' Equity (Deficit)
    
(2,063,713
)
  
(2,182,997
)
               
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
  
$
1,498,498
  
$
1,904,089
  
               
               
The accompanying notes are an integral part of these condensed consolidated financial statements.
 


1
 


IELEMENT CORPORATION AND SUBSIDIARY
  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)
  
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
  
 
 
    
Restated
 
 
Restated
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
 
2005
 
 
2004
 
 
 
 
(Unaudited)
 
 
(Unaudited)
 
               
OPERATING REVENUE
  
$
1,215,479
  
$
1,504,941
  
               
OPERATING EXPENSES
              
Cost of Sales , excluding depreciation
    
739,614
   
833,999
 
General and administrative
    
423,354
   
509,367
 
Selling expenses
    
96,328
   
136,842
 
Depreciation & amortization
    
68,665
   
65,173
 
Interest expense
    
4,925
   
30,265
 
Receivable factoring fees
    
28,974
   
33,155
 
               
Total Operating Expenses
    
1,361,860
   
1,608,801
 
               
INCOME (LOSS) BEFORE OTHER (EXPENSE)
    
(146,381
)
  
(103,860
)
               
OTHER (EXPENSE)
              
Loss on sale of investments
    
-
   
(38,511
)
               
Total Other Expenses
    
-
   
(38,511
)
               
NET LOSS BEFORE PROVISION FOR INCOME TAXES
    
(146,381
)
  
(142,371
)
               
Provision for Income Taxes
    
-
   
-
 
               
NET LOSS APPLICABLE TO COMMON SHARES
  
$
(146,381
)
$
(142,371
)
               
NET LOSS PER BASIC AND DILUTED SHARES
  
$
(0.00
)
$
(0.01
)
               
WEIGHTED AVERAGE NUMBER OF COMMON
             
SHARES OUTSTANDING
   
91,947,843
   
14,709,571
 
               
               
               
               
The accompanying notes are an integral part of these condensed consolidated financial statements.
 


2
 
 

IELEMENT CORPORATION AND SUBSIDIARY
  
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (RESTATED)
  
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
  
   
 
    
Restated
 
 
Restated
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
 
2005
 
 
2004
 
 
 
 
(Unaudited)
 
 
(Unaudited)
 
               
CASH FLOWS FROM OPERATING ACTIVITIES
              
Net (loss)
  
$
(146,381
)
$
(142,371
)
               
Adjustments to reconcile net loss to net cash
              
(used in) operating activities:
              
Depreciation and amortization
    
68,665
   
65,173
 
Bad debt expense
    
18,709
   
17,001
 
Stock issued for services
    
54,047
   
-
 
               
Changes in assets and liabilities
              
(Increase) decrease in accounts receivable
    
(7,070
)
  
(232,490
)
(Increase) decrease in other current assets
    
(1,689
)
  
105
 
(Increase) in deposits
    
3,632
   
1,015
 
Increase in accounts payable
    
10,785
   
66,536
 
Increase in accrued interest
    
4,864
   
30,258
 
(Decrease) in customer deposits
    
(8,225
)
  
(654
)
Increase (decrease) in receivable financing payable
    
(175,358
)
  
201,875
 
Increase (decrease) in commissions payable
    
3,318
   
(9,728
)
(Decrease) in deferred revenue
    
(22,941
)
  
(42,637
)
               
Total adjustments
    
(51,263
)
  
96,454
 
               
Net cash (used in) operating activities
    
(197,644
)
  
(45,917
)
               
CASH FLOWS FROM INVESTING ACTIVITIES
              
Acquisition of fixed assets
   
(13,745
)
  
(37,511
)
               
Net cash (used in) investing activities
    
(13,745
)
  
(37,511
)
               
               
               
               
               
               
               
               
The accompanying notes are an integral part of these condensed consolidated financial statements
 


3
 

 
IELEMENT CORPORATION AND SUBSIDIARY
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED) (RESTATED)
  
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
  
   
 
    
Restated
 
 
Restated
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
 
2005
 
 
2004
 
 
 
 
(Unaudited)
 
 
(Unaudited)
 
               
CASH FLOWS FROM FINANCING ACTIVITES
              
Payments of notes payable
  
$
(32,400
)
$
(52,534
)
Proceeds from notes payable
    
-
   
50,000
 
Common stock issued for cash
    
-
   
119,300
 
Proceeds in exercise of stock options
    
-
   
75
 
               
Net cash provided by (used in) financing activities
    
(32,400
)
  
116,841
 
               
NET INCREASE (DECREASE) IN CASH
              
AND CASH EQUIVALENTS
    
(243,789
)
  
33,413
 
               
CASH AND CASH EQUIVALENTS -
              
BEGINNING OF PERIOD
    
340,321
   
29,267
 
               
CASH AND CASH EQUIVALENTS -
             
END OF PERIOD
  
$
96,532
  
$
62,680
  
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
              
INFORMATION:
              
               
CASH PAID DURING THE QUARTER FOR:
              
Interest expense
  
$
106
  
$
4,714
  
               
SUPPLEMENTAL DISCLOSURE OF NONCASH
              
ACTIVITIES:
              
               
Accounts payable converted to equity
  
$
12,000
  
$
-
  
               
Accounts payable converted to debt
  
$
-
  
$
50,000
  
               
Conversion of notes payable to equity
  
$
-
  
$
248,000
  
               
Stock issued for services
  
$
54,047
  
$
-
  
               
The accompanying notes are an integral part of these condensed consolidated financial statements
 


4
 

IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004

NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements included herein have been prepared by MailKey Corporation and Subsidiary (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as allowed by such rules and regulations, and the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the March 31, 2005 audited financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.

The management of the Company believes that the accompanying unaudited condensed consolidated financial statements contain all adjustments (including normal recurring adjustments) necessary to present fairly the operations, changes in stockholders’ equity and cash flows for the periods presented.

MailKey Corporation (the “Company” or “MailKey”) was established as a messaging security and management company. On March 25, 2004, pursuant to an Agreement and Plan of Merger, Global Diversified Acquisition Corp. ("GDAC"), acquired all of the outstanding capital stock of MK Secure Solutions Ltd ("MKSS"), a holding company incorporated on March 11, 2003, under the laws of the British Virgin Islands. The transaction was effected by the issuance of shares such that the former MKSS shareholders owned approximately 90% of the outstanding MailKey stock after the transaction. GDAC then changed its name to MailKey Corporation ("MailKey").

The Company's Chairman and Chief Executive Officer resigned in September 2004 and the Company's Chief Financial Officer and member of the Board resigned in November 2004. Both positions have been filled by the Company's founder and deputy chairman.

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.

5
 

 IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004

NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

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.

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

6
 

IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004


NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

outstanding options shall become fully vested, MailKey shall pay all earned performance bonuses and all accrued vacation. If Mr. Zweig is terminated for any reason other than cause, MailKey shall pay in full the Notes owed to either Mr. Zweig or Kramerica Capital Corporation and at least 75% of the earned bonus plan set forth by the directors.

Effective January 24, 2005, Mr. Zweig was also appointed to the Board of Directors of MailKey.

Ivan Zweig has served as the Chief Executive Officer of I-Element since March 2003. Mr. Zweig is also the Chief Executive Officer, director and sole shareholder of Kramerica, a personnel services corporation. Since December 1998, Mr. Zweig has served as the Chief Executive Officer and director of Integrated Communications Consultants Corp. ("ICCC"), a nationwide data carrier specializing in high speed Internet access and secure data transaction. ICCC provides I-Element with resold telecom services and I-Element pays ICCC approximately $98,000 on a monthly basis for such services. On October 1, 2004, ICCC filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court, Northern District of Texas, Dallas Division.

Upon the consummation of the acquisition, I-Element has issued outstanding promissory notes to, among others, Kramerica in the aggregate amount of $120,000 (the "Notes"). I-Element has also issued Notes in the aggregate amount to members of Mr. Zweig's immediate family. The Notes are payable in 36 monthly installments with the first payment commencing six months after the closing of the merger and will continue to be secured by substantially all of the assets of I-Element.

The Company’s condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America, and have been presented on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

RESTATEMENT

The restatement relates to the recapitalization of IElement by Integrated Communications Consultants Corporation (ICCC) on March 1, 2003. In a recapitalization, fair value adjustments and goodwill are not recognized. This restatement corrects the reporting of this transaction by removing those adjustments relating to fair value and goodwill.

The restatement also reclassified the presentation of certain expenses in Cost of Sales in the Statement of Operations, which are now presented as Operating Expenses. In addition, Bad Debt Expense and Accounts Receivable are now presented separately in the Statement of Cash Flows.

7
 

RESTATEMENT - (CONTINUED)

The effects of the restatement adjustments on IElement’s previously reported Balance Sheet for the period ended June 30, 2005 are summarized below.


Balance Sheet                                                    6/30/05                               6/30/05
                                                                      As RestatedAs                  Previously Reported

Goodwill                                                               $0                           $2,079,665

Total other assets                              $55,361                         $2,135,026

Total assets                                  $1,498,498                           $3,578,163

Additional paid-in capital                   ($1,030,878)                          $1,048,787

Total stockholders’ equity (deficit)   ($2,063,713)                          $15,952

Total liabilities and stockholders’
Equity (deficit)                                  $1,498,498                          $3,578,163

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.

8
 

IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
 
NOTE 2-  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

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.

Deferred Revenue

Deferred revenue consists of customers billed in advance of revenue being earned.

Provision for Bad Debt

Under SOP 01-6 “Accounting for Certain Entities (including Entities with Trade Receivables), the Company has intent and belief that all amounts in accounts receivable are collectible. The Company has determined that based on their collections an allowance for doubtful accounts of $8,151 and $5,761 has been recorded at June 30, 2005 and 2004, respectively.

Bad debt expense for the three months ended June 30, 2005 and 2004 was $18,709 and $17,001, respectively.

Advertising Costs

    The Company expenses the costs associated with advertising and marketing as incurred. Advertising and marketing expenses, included in the statements of operations for the three months ended June 30, 2005 and 2004 were $0 and $8,793, respectively.

Income Taxes

The income tax benefit is computed on the pretax loss based on the current tax law. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates. No benefit is reflected for the three months ended June 30, 2005 and 2004, respectively.

9
 

IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

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.
 
(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.

The following is a reconciliation of the computation for basic and diluted EPS:
 
The Company had no options or warrants granted during the period, therefore there were no common stock equivalents.

10
 

IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
 
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Stock-Based Compensation

Employee stock awards under the Company's compensation plans are accounted for in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”, and related interpretations. The Company provides the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and related interpretations. Stock-based awards to non-employees are accounted for under the provisions of SFAS 123 and has adopted the enhanced disclosure provisions of SFAS No. 148 “Accounting for Stock-Based Compensation- Transition and Disclosure, an amendment of SFAS No. 123”.

The Company measures compensation expense for its employee stock-based compensation using the intrinsic-value method. Under the intrinsic-value method of accounting for stock-based compensation, when the exercise price of options granted to employees is less than the estimated fair value of the underlying stock on the date of grant, deferred compensation is recognized and is amortized to compensation expense over the applicable vesting period. In each of the periods presented, the vesting period was the period in which the options were granted. All options were expensed to compensation in the period granted rather than the exercise date.

The Company measures compensation expense for its non-employee stock-based compensation under the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.

The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital.

Net stock-based compensation for the three months ended June 30, 2005 and 2004 was $57,047 and $0, respectively.

11
 

IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
 
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a significant impact on the Company' results of operations or financial position.

On December 16, 2004, the Financial Accounting Standards Board ("FASB") published Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” ("SFAS 123R"). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans.

The provisions of SFAS 123R are effective for small business issuers as of the first interim period that begins after December 15, 2005. Accordingly, the Company will implement the revised standard in the first quarter of fiscal year 2006. Currently, the Company accounts for its share-based payment transactions under the provisions of APB 25, which does not necessarily require the recognition of compensation cost in the financial statements. Management is assessing the implications of this revised standard, which may materially impact the Company's results of operations in the first quarter of fiscal year 2006 and thereafter.

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.

12
 

IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
 
NOTE 3- FIXED ASSETS

Property and equipment as of June 30, 2005 and 2004 was as follows:
 
Three Month Ended
    
 
    
June 30,
2005
(unaudited)
    
June 30,
2005
(unaudited
)
Property and Equipment
  
$
1,387,013
  
$
1,343,532
  
Less Accumulated Depreciation
    
552,882
    
282,267
  
Net book value
  
$
834,131
  
$
1,061,265
  
 
There was $68,665 and $65,173 charged to operations for depreciation expense for the three months ended June 30, 2005 and 2004, respectively.

NOTE 4- NOTES PAYABLE

The Company has several notes payable at June 30, 2005. Proceeds from the notes were utilized to finance the general working capital requirements of the Company, purchase equipment and pay certain liabilities assumed by the Company in the purchase of the principal assets of Integrated Communications Consultants Corporation in March of 2003. The notes carry varying interest rates between zero and 5.75%. Prior to the effective merger of I-Element with MailKey, certain of the notes were converted into shares of common stock.

Accrued interest on the notes was $19,168 at June 30, 2005.

13
 

IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
 
NOTE 4- NOTES PAYABLE - (CONTINUED)

The notes payable balances at June 30, 2005 and 2004 were as follows:

                                                  June 30,                          June 30,
                                                  2005                               2004
                                                  (Unaudited)                    (Unaudited)
 
Total Notes Payable                    $727,242                        $1,161,261
Less Current maturuies                  465,467                             264,620
Long term Notes Payable             $261,775                           $896,641
 
The amount of principal maturuties of the notes payable for the next four years ending June 30, and in the aggregate is as follows:
 
            2006                   $465,467
            2007                     125,652
            2008                     125,652
            2009                       10,471
                                        $727,242
 
NOTE 5- OPERATING LEASES

The Company leases office space under leases commencing in March and June of 2004. The leases are payable on a month-to-month basis. Monthly payments under the current leases are $3,900. The Company also leased additional office space in Texas and California. The Company ceased leasing this additional space during the year ended December 31, 2004.

Rental payments charged to expense for the three months ended June 30, 2005 and 2004 were $11,700 and $22,638, respectively.

NOTE 6- STOCKHOLDERS’ EQUITY (DEFICIT)

Common Stock

As of June 30, 2005, the Company has 100,000,000 shares of common stock authorized at a par value of $0.001, and 94,850,535 shares issued and outstanding.

14
 

IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
 
NOTE 6- STOCKHOLDERS’ EQUITY (DEFICIT) - (CONTINUED)

Common Stock - (Continued)

The following details the stock transactions for the three months ended June 30, 2005:

The Company received 1,498,195 shares of common stock valued at $37,455 which were issued in the previous quarter for services. Upon receipt, the common shares were canceled.

The Company issued 1,500,000 shares of common stock against the $75,000 Liability for Stock to be issued.
 
The Company issued 340,000 shares of common stock valued at $8,500 to a sales agent as payment on the outstanding balance owed.

The Company issued 175,000 shares of common stock valued at $3,500 to a consultant as payment on the outstanding balance owed.

The Company issued 300,000 shares of common stock valued at $6,000 to a consultant for services received.

The Company issued 250,000 shares of common stock valued at $5,500 to a consultant for services received.

The Company issued 1,000,000 shares of common stock valued at $40,000 to an employee as a bonus.

The Company issued 1,000,000 shares of common stock valued at $40,000 to a consultant for services received.

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.

15
 

IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
 
NOTE 7- PROVISION FOR INCOME TAXES - (CONTINUED)

At June 30, 2005, deferred tax assets consist of the following:    

Net deferred tax assets       $338,306
Less: valuation allowance  (338,306) 
                                                   $ -0-    

At June 30, 2005, the Company had deficits accumulated in the approximate amount of $1,127,686, available to offset future taxable income through 2023. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.

NOTE 8- GOING CONCERN

As shown in the accompanying condensed consolidated financial statements, the Company has sustained net operating losses for the three months ended June 30, 2005 and 2004. There is no guarantee that the Company will be able to raise enough capital or generate revenues to sustain its operations. This raises substantial doubt about the Company’s ability to continue as a going concern.

The Company’s future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing. There is no guarantee that the Company will be able to raise enough capital or generate revenues to sustain its operations. Management believes they can raise the appropriate funds needed to support their business plan and acquire an operating, cash flow positive company.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern.

NOTE 9- CONTINGENCIES

On April 19, 2005 KK Solutions, Inc., a California corporation d/b/a/ Three 18, Inc. (“KK”), filed a complaint against the Company and its CEO, Ivan Zweig, individually, in the Superior Court of the State of California, County of Los Angeles, alleging breach of contract pursuant to a dispute regarding sales commissions due to KK. KK seeks damages in the amount of $78,000, plus interest. The Company is vigorously defending against this action, which is currently in the discovery phase of the proceeding.

On April 26, 2005 Communications Plus, Inc., a California company d/b/a Global Communications, (“Global”), filed a complaint against the Company and its CEO, Ivan Zweig, individually, in the Superior Court of the State of California, County of Los Angeles, alleging breach of contract pursuant to a dispute regarding sales

16
 

IELEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004

NOTE 9- CONTINGENCIES - (CONTINUED)

commissions due to Global. Global seeks damages in the amount of $50,000, plus interest. The Company is vigorously defending against this action, which is currently in the discovery phase of the proceeding.

NOTE 10- SUBSEQUENT EVENTS

The Company received consent to amend the Articles of Incorporation to increase the number of shares of common stock authorized to be issued from 100,000,000 shares to 2,000,000,000 shares, and consented to the authorization of 200,000,000 shares of Blank Check Preferred Stock. There are no current plans to designate any Blank Check Preferred Stock.

On August 1, 2005, the Company filed an Information Statement in definitive form on schedule 14C with the SEC to change its name from MailKey Corporation to IElement Corporation. Concurrent with this name change, the Company will receive a new stock trading symbol on the NASD Over-the-Counter Electronic Bulletin Board.

On August 8, 2005 Tim Dean-Smith and Susan Walton resigned their positions on the Board of Directors (the “Board”) of the Company. Tim Dean-Smith also resigned from his position as Chief Financial Officer of the Company. The resignations of Mr. Dean-Smith and Ms. Walton were consistent with the expectations of the parties pursuant to the consummation of the merger between I-Element, and the Company on January 19, 2005, and do not arise from any disagreement on any matter relating to the Company’s operations, policies or practices, nor regarding the general direction of the Company. Neither Mr. Dean-Smith nor Ms. Walton served on any subcommittees of the Board. Ivan Zweig, the current Chairman of the Board and Chief Executive Officer was appointed as the Chief Financial Officer of the Company until a new Chief Financial Officer is found.
 
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
 
This "Plan of Operation" and other parts of this report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this report are based on information available to us on the date hereof and, except as required by law we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the caption "Disclosure Regarding Forward-Looking Statements" and elsewhere in this report. The following should be read in conjunction with our unaudited financial statements and the related notes thereto contained elsewhere in this report.
 
The statements contained in this quarterly report that are not historical facts are forward-looking statements that involve a number of risks and uncertainties. Historical results should not be relied on as indicative of trends in operating results for any future period. The actual results of the future events described in such forward-looking statements in this quarterly report could differ materially from those stated in such forward-looking statements.
 
OUR PLAN OF OPERATION
 
In January of 2005, the Company closed its merger agreement with IElement, Inc., a facilities-based nationwide telecommunications communications service provider to small and medium sized enterprises. IElement, Inc., seeks to provide broadband data, voice and wireless services using integrated T-1 lines with a Layer 2 Private Network/Wide Area Network (WAN) solution to provide dedicated Internet access services, customizable business solutions for voice, data and Internet, and secure communications channels between our customers' offices, partners, vendors, customers and employees without the use of a firewall or encryption devices. In the first quarter 2005 the Company was unable to continue funding the development of its messaging security solutions, and the rights were transferred to the development team in return for the cancellation of most of the liabilities that the Company owed to them. The Company retains an interest of 20% in the messaging security solutions; however to date there has been no commercialization of the solutions. In the first quarter 2005, the Company sold its insolvent British Virgin Islands subsidiary, MK Secure Solutions Limited, for $1 to a UK based accounting firm, SS Khehar & Company. SS Khehar & Company have agreed to deal with the winding up of the former subsidiary, for a fee of $1,800.
 
 
On July 21, 2005 and August 1, 2005, the Company filed an Information Statement on Schedule 14C in preliminary form and in definitive form, respectively, disclosing that, among other items, it had obtained the requisite shareholder approval to change the Company name to
 
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IElement Corporation ("IElement"), effective as soon as practicable following August 21, 2005. We now aim to grow the business of IElement and establish it as a leading regional added-value carrier.
 
IElement's focus is to become the leading regional Communication Service Provider (CSP) from California to Florida. IElement's added value, managed service strategy includes the potential development of additional subscription model services such as Managed Microsoft Exchange, prepaid and postpaid cellular services, email and network security, residential/ business based wireless, and Managed Blackberry(tm) services. The development of these services would allow IElement to offer Small and Medium-sized Enterprises ("SMEs") the access to Large Enterprise type applications with little or no software purchase, hardware investment, upgrade concerns, or full-time administration of these services. These sell- through services should increase the Average Revenue Per Customer ("ARPC"), as well as help improve customer retention.
 
The Company intends to:
 
o Initially concentrate its resources on adding customers in the Dallas, Los Angeles and Chicago markets, while extending its sales reach into the next target markets.
 
o Build out the necessary infrastructure to sell IElement broadband services (wireless or wireline), as well as reselling voice services over the same T1 or wireless equivalent.
 
o Upsell added value managed services to our current and future customer base to raise our ARPC. We believe that existing infrastructure can serve multiple new markets as they are brought online in advance of the need for additional capital expenditures or additional software licenses.
 
o Seek acquisitions of wireless ISPs (WISPs) and other suitable telephony and/or data carriers in secondary and tertiary markets that can be layered onto the Company's national backbone. We believe that such acquisitions would enable greater economies of scale and operating efficiencies.
 
We anticipate that the number of people who we employ may increase substantially over the next 12 months as we continue to execute on our business plan.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Since our inception, we have funded our operations primarily through private sales of equity securities and the utilization of short-term convertible debt. As of June 30, 2005 we had a cash balance of $96,532.
 
19
 
 
In order to facilitate working cash flow, the Company factors approximately 99% of accounts receivables for its customer billing with an outside agency, thereby receiving 75% of the aggregate net face value of the assigned accounts at the time of placement with the factor. We do not otherwise maintain a line of credit or term loan with any commercial bank or other financial institution. To date, our capital needs have been principally met through the receipt of proceeds from factoring customer receivables and the sale of equity and debt securities.
 
 
We believe that our current cash resources will not be sufficient to sustain our current operations for the next twelve (12) months, and that intend to obtain additional cash resources through sales of debt or equity securities in order to execute our business plan. The Company anticipates, based on currently proposed plans and assumptions relating to its operations, that it will be essential to secure additional working capital. While we believe that Company will be successful in obtaining additional funds, the Company currently has no firm arrangements or understandings for additional financing and there can be no assurance that additional financing will be available to the Company if required. Additionally, in the event that the Company's plans change, its assumptions prove to be inaccurate or its cash flow proves to be insufficient (due to unanticipated expenses, inadequate revenues, difficulties, problems or otherwise), the Company may be required to either seek further additional financing or curtail its activities.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
As of June 30, 2005, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, that had been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we were engaged in such relationships.
 
RECENT DEVELOPMENTS
 
On January 19, 2005 we completed the acquisition of iElement Inc. ("iElement"). iElement is now a wholly owned subsidiary of the Company. Under the terms of the Merger Agreement, the Company authorized the issuance of an aggregate of approximately 47,850,000 shares of its common stock, $.001 par vale per share, to the former shareholders of iElement in exchange for all of the issued and outstanding shares of capital stock of I-Element. A majority of iElement shareholders as of the record date of December 30, 2004, consented to the transaction as approved by the board of directors of iElement.
 
The exchange ratio setting forth the number of shares of Company common stock issued for each issued and outstanding share of capital stock of iElement was 3.52 shares of Company common stock for each issued and outstanding share of capital stock of iElement.
 
On January 24, 2005 we appointed Mr. Zweig, the founder and Chief Executive Officer of iElement, to the board of the Company; and Mr. Zweig replaced Mr. Dean-Smith as the Chief Executive Officer of the Company.
 
20
 
 
On August 1, 2005 the Company filed an Information Statement Schedule 14C in definitive form disclosing that, among other items, it had obtained the requisite shareholder approval to change the Company name to IElement Corporation, effective as soon as practicable following August 21, 2005, as more fully detailed in Item 4 of this Form 10-QSB.
 
FACTORS THAT MAY AFFECT FUTURE RESULTS
 
Generally: The Voice over Internet Protocol (VoIP) and internet based communications solutions industry is highly competitive and requires constant investment in research and development expenditures in order to keep pace with technology and competitors' products. The success of the Company depends upon its ability to enter markets and establish a base level of customers that will cover costs of opening and maintaining a market while seeking to expand both the customer base and products base. If the Company is unable to compete effectively or acquire additional financing to fund future research and development and deployment expenditures, it would have a materially adverse effect on the company's business operations and the Company would negatively affect the Company's ability to effectively market and develop existing and future products. The Company has been building its business through revenues generated from operations supplemented by the sale of its common stock. The ability of the Company to continue its growth and expand its business is dependent upon the ability of the Company to raise additional through external financing either through the issuance of additional stock or the incurrence of debt or a combination thereof.
 
RISK FACTORS
 
This report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. The following risk factors should be considered carefully in addition to the other information presented in this report. Factors that might cause such differences include, but are not limited to, the following:
 
RISKS ASSOCIATED WITH OUR BUSINESS
 
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IF WE ACQUIRE ANY COMPANIES OR TECHNOLOGIES IN THE FUTURE, SUCH COMPANIES AND TECHNOLOGIES COULD PROVE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS.
 
We intend to acquire or make investments in complementary companies, businesses, assets and/or technologies in the future. We have not made any acquisitions or investments to date, and therefore, our ability to make acquisitions or investments is unproven. Acquisitions and investments involve numerous risks, including:
 
o inability to generate sufficient revenue or growth in revenue or to offset acquisition or investment costs;
 
o difficulties in integrating operations, technologies, service and personnel;
 
o diversion of financial and management resources from existing operations;
 
o risk of entering new markets; and
 
o potential loss of key employees;
 
Acquisitions could also require us to record substantial amounts of goodwill and other intangible assets. Any future impairment of such goodwill along with the amortization of other intangible assets, would adversely affect our operating results. In addition, if we finance acquisitions by issuing convertible debt or equity securities our existing stockholders may be diluted, which could affect the market price of our stock. If we finance such acquisitions with bank debt or high yield debt, these arrangements would likely impose substantial operating covenants on us and result in interest expense that could adversely affect our business and operating results. As a result, if we fail to properly evaluate and execute any future acquisitions or investments, our business and operating results may be materially harmed.
 
OUR GROWTH COULD STRAIN OUR PERSONNEL AND INFRASTRUCTURE RESOURCES. IF WE ARE UNABLE TO IMPLEMENT APPROPRIATE CONTROLS AND PROCEDURES TO MANAGE OUR GROWTH, WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN.
 
As we implement our business plan we may experience a period of rapid growth in our headcount and operations, which may place a significant strain on our management, administrative, operational and financial infrastructure.
 
Our success will depend in part upon the ability of our senior management to manage this growth effectively. To do so, we must continue to hire, train and manage new employees as needed. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to continually improve our operational, financial and management controls and our
 
22
 
reporting systems and procedures. The additional headcount and capital investments we are adding will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth we will be unable to execute our business plan.
 
 
THE MARKET IN WHICH WE PARTICIPATE IS INTENSELY COMPETITIVE AND, IF WE DO NOT COMPETE EFFECTIVELY, OUR OPERATING RESULTS COULD BE HARMED.
 
The market for telecommunications solutions, including local, long distance, data and Internet products and services, is intensely competitive and rapidly changing. Barriers to entry into this market have increased due to regulatory changes and increased costs of doing business with the Incumbent Local Exchange Carriers (ILECs), but these barriers have been offset by reductions in costs for bandwidth and the subsequent development of Voice over Internet
 
Protocol (VoIP), which has allowed new competition to arise in the telephone services arena. Many of our competitors are larger and have more resources than we do. With the introduction of new technologies and market entrants, we expect competition to intensify in the future. Many of our current and potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories, larger research, development and marketing budgets as well as substantially greater financial, technical and other resources. In addition, many of our current and potential competitors have access to larger customer bases and have more extensive marketing and distribution arrangements with resellers, distributors and OEMs than we do. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Furthermore, because of these advantages, even if we develop products that are more effective than the products that our competitors offer, potential customers might accept competitive products in lieu of purchasing our products or services.
 
We face competition from businesses that develop their own VoIP and other Internet based telecommunications services, as well as from ILECs who have achieved regulatory relief from the Telecommunications Act of 1996, and who have begun to charge the Company more for wholesale prices and in some cases eliminated the wholesale opportunity based on the size of the market. Our current and potential principal competitors include:
 
o Other Competitive Local Exchange (CLECs) providers who provide many of the same telecommunications products and services that we do. Some examples of CLECs are: XO Communications, Xspedius, Logix Communications and McLeod Telecom; ILECs such as SBC Communications,Verizon, Qwest and Bell South who are the largest provider of local, long distance and Internet services to businesses;
 
o VoIP providers such as Vonage, Covad and mPower who can deliver local and long distance services over an Internet connection.
 
WE ARE DEPENDENT ON OUR MANAGEMENT TEAM SUCH THAT THE LOSS OF ANY KEY MEMBER OF THIS TEAM MAY PREVENT US FROM IMPLEMENTING OUR BUSINESS PLAN IN A TIMELY MANNER.
 
 
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Our success depends largely upon the continued services of our executive officers and other key personnel. We have entered into employment agreements with many of our employees. These agreements provide that the employees may discontinue their employment with us after providing us with little notice of their decision (typically one month). As a result, our employees could terminate their employment with us at any time without penalty and go to work for one of our competitors. We believe that we have offset this risk to some degree by maintaining a key person life insurance policy on Ivan Zweig, the CEO of the Company. Nonetheless, the loss of one or more of our key employees could seriously harm our business.
 
OUR MANAGEMENT TEAM WAS ONLY RECENTLY FORMED, AND OUR SUCCESS DEPENDS ON ITS ABILITY TO WORK TOGETHER EFFECTIVELY.
 
We appointed Ivan Zweig, our Chairman and Chief Executive Officer, in January 2005. Furthermore, the majority of our senior management team has joined us as recently as within the last 12 months. Our future success depends on the integration of this management team and its ability to work together effectively. If our management team fails to work together effectively, our business could be harmed.
 
BECAUSE COMPETITION FOR OUR TARGET EMPLOYEES IS INTENSE, WE MAY NOT BE ABLE TO ATTRACT AND RETAIN THE HIGHLY SKILLED EMPLOYEES WE NEED TO SUPPORT OUR PLANNED GROWTH.
 
To execute our growth plan, we must attract and retain highly qualified personnel. We may need to hire additional personnel in virtually all operational areas, including selling and marketing, operations and technical support, customer service and administration.. We may not be successful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.
 
WE MAY BECOME INVOLVED IN LITIGATION, WHICH COULD BE COSTLY AND TIME CONSUMING TO DEFEND.
 
We may become involved in litigation such as securities class actions, intellectual property, employment (unfair hiring or terminations) and/ or issues pertaining to delivering E911 services, among others. For example, we may be subject to lawsuits by parties claiming that we did not offer E911 services that are required by law at increasingly higher standards. Parties trying to call 911 from locations that we service may not be able to complete the call based on the fact that a T1 is a digital service and that emergencies such as fires, power outages, or simple equipment failure could disable the ability of a person to dial out over our local lines. Any of these parties could potentially claim that we are interfering with the lawful conduct of their business. Although we believe we have properly informed our customers, given them information on backup E911 procedures, as well as paying for backup lines to be installed, risk of litigation cannot be entirely eliminated. Litigation involves costs in defending the action and the risk of an adverse judgment. Any resulting litigation, with or without merit, could result in substantial costs and divert management's attention and resources, which could seriously harm our business and operating results.
 
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RISKS ASSOCIATED WITH OUR STOCK
 
WE INTEND TO ATTEMPT TO RAISE ADDITIONAL FUNDS IN THE FUTURE, AND SUCH ADDITIONAL FUNDING MAY BE DILUTIVE TO STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS.
 
We intend to attempt to raise additional capital in the future to help fund our operations either through sales of shares of our common stock or securities convertible into shares of our common stock, through the issuances of debt, or some combination thereof. Such additional financing may be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants that may limit our operating flexibility. If additional capital is raised through the issuances of shares of our common stock or securities convertible into shares of our common stock, the percentage ownership of our stockholders will be reduced. Pre-equity financing stockholders may experience additional dilution in net book value per share and any additional equity securities may additionally have rights, preferences and privileges senior to those of the holders of our common stock.
 
THE MARKET PRICE OF OUR COMMON STOCK IS LIKELY TO BE HIGHLY VOLATILE AND SUBJECT TO WIDE FLUCTUATIONS.
 
The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:
 
o announcements of new products or services by our competitors;
 
o fluctuations in revenue from our indirect sales channels.
 
In addition, the market price of our common stock could be subject to wide fluctuations in response to:
 
o quarterly variations in our revenues and operating expenses;
 
o announcements of technological innovations or new products or services by us; and
 
o our technological capabilities to accommodate the future growth in our operations or those of our customers.
 
In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market price of the stock of many Internet-related companies, and that often have been unrelated or disproportionate to the operating performance of these companies. Market fluctuations such as these may seriously harm the market price of our common stock. Further, securities class action suits have been filed against companies following periods of market volatility in the price of their securities. If such an action is instituted against
 
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us, we may incur substantial costs and a diversion of management attention and resources, which would seriously harm our business, financial condition and results of operations.
 
IF WE EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR OPERATING RESULTS OR FAIL TO MEET REVENUE AND EARNINGS EXPECTATIONS, OUR STOCK PRICE MAY FALL.
 
Due to our limited operating history and the unpredictability of the telecommunications industry we may not be able to accurately forecast our future operating results. In addition, while
 
our expenses are to a large extent fixed in the short term, we expect that these expenses will increase in the future. Should we incur more rapid increases in expenses than expected we may not be able to adjust our spending quickly enough. Factors that could cause our quarterly financial results to fluctuate include:
 
o the successful development of our products and implementation of our products by organizations;
 
o the addition of added value products and services, and the effect those new products will have on our ability to retain existing customers and to win new customers;
 
o the introduction of competitive services and the pricing of these services;
 
o reduced demand for our T1 based services;
 
o significant increases in expenses to drive the growth of our business, which may not yield corresponding increases in revenue;
 
o the effectiveness of future legislation in further increasing the cost of leasing lines from the ILEC or decreasing the ability to buy wholesale services from the ILEC ;
 
o changes in customer demands and needs for T1 based services; and
 
As a result, we may not concurrently generate significantly increased revenues and therefore our earnings may be harmed. We believe that period-to-period comparisons of our historical operating results may not be meaningful, and you should not rely on them as an indication of future performance.
 
WE DO NOT INTEND TO PAY DIVIDENDS.
 
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future profits from operations to fund growth and do not expect to pay any dividends in the foreseeable future.
 
APPLICABLE SEC RULES GOVERNING THE TRADING OF "PENNY STOCKS" LIMITS THE TRADING AND LIQUIDITY OF OUR COMMON STOCK WHICH MAY AFFECT THE TRADING PRICE OF OUR COMMON STOCK.
 
Our common stock currently trades on the OTC Bulletin Board. Since our common stock trades at a price below $5.00 per share, our common stock is considered a "penny stock" and is subject to the rules and regulations of the Securities and Exchange Commission that impose limitations upon the manner in which our shares can be publicly traded. These regulations require the delivery, prior to any transaction involving our stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend our securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a
 
26
 
purchaser and receive such purchaser's written agreement to the transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.
 
Cautionary Statement:
 
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding intent, belief or current expectations of the Company and its management. These forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in these statements. Factors that might cause such differences include, but are not limited to, those described under the heading, "Critical Accounting Policies and Estimates" herein, or and other factors described in the Company's future filings with the Securities and Exchange Commission.
 
ITEM 3. CRITICAL ACCOUNTING POLICY AND ESTIMATES
 
Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America as promulgated by the Public Company Accounting Oversight Board. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the condensed consolidated financial statements included in this quarterly report.
 
ITEM 4. CONTROLS AND PROCEDURES
 
The term " disclosure controls and procedures " is defined in Rules
 
13(a)-15e and 15(d) - 15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act). Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure
 
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controls and procedures as of June 30, 2005. They have concluded that, as of June 30, 2005 that our disclosures were effective to ensure that:
 
1) That information required to be disclosed by the Company in reports that it files or submits under the act is recorded, processed, summarized and reported, within the time periods specified in the Commissions' rules and forms, and
 
2) Controls and procedures are designed by the Company to ensure that information required to be disclosed by MailKey Corporation and Subsidiary in the reports it files or submits under the Act is accumulated and communicated to the issuer's management including the Chief Executive Officer and the Chief Financial Officer or persons performing similar functions, as appropriate to allow timely decisions regarding financial disclosure.
 
This term refers to the controls and procedures of a Company that are designed to ensure that information required to be disclosed by a Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. They have concluded that, as of June 30, 2005 our disclosure and procedures were effective in ensuring that required information will be disclosed on a timely basis in our reports filed under the exchange act.
 
PART II
OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS.
 
On April 19, 2005 KK Solutions, Inc., a California corporation d/b/a/ Three 18, Inc. ("KK"), filed a complaint against the Company and its CEO, Ivan Zweig, individually, in the Superior Court of the State of California, County of Los Angeles, alleging breach of contact pursuant to a dispute regarding sales commissions due to KK. KK seeks damages in the amount of $78,000, plus interest. The Company is vigorously defending against this action, which is currently in the discovery phase of the proceeding.
 
On April 26, 2005 Communications Plus, Inc., a California company d/b/a Global Communications, ("Global"), filed a complaint against the Company and its CEO, Ivan Zweig, individually, in the Superior Court of the State of California, County of Los Angeles, alleging breach of contact pursuant to a dispute regarding sales commissions due to Global. Global seeks damages in the amount of $50,000, plus interest. The Company is vigorously defending against this action, which is currently in the discovery phase of the proceeding.
 
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
On April 13, 2005 the Company issued 1,500,000 shares of its common stock to BDM Holdings, LLC, pursuant to Regulation D, Rule 506 and 4(2) of the Securities Act of 1933 as payment for equity financing consulting services.
 
On May 19, 2005 the Company issued 340,000 shares of its common stock to Trad Solutions pursuant to Regulation D, Rule 506 and 4(2) of the Securities Act of 1933 as payment for sales commissions.
 
On June 7, 2005 the Company issued 175,000 shares of its common stock to Rick Wright pursuant to Regulation D, Rule 506 and 4(2) of the Securities Act of 1933 as payment for consulting services.
 
On June 7, 2005 the Company issued 300,000 shares of its common stock to Blake Martensen pursuant to Regulation D, Rule 506 and 4(2) of the Securities Act of 1933 as payment for consulting services.
 
On June 20, 2005 the Company issued 250,000 shares of its common stock to Burton Goldi pursuant to Regulation D, Rule 506 and 4(2) of the Securities Act of 1933 as payment for consulting services.
 
On June 29, 2005 the Company issued 1,000,000 shares of its common stock to Heather Walther pursuant to Regulation D, Rule 506 and 4(2) of the Securities Act of 1933 as bonus compensation for employment services.
 
On June 29, 2005 the Company issued 1,000,000 shares of its common stock to Blake Martensen pursuant to Regulation D, Rule 506 and 4(2) of the Securities Act of 1933 as payment for consulting services.
 
ITEM 3. DEFAULTS ON SENIOR SECURITIES.
 
None.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
On July 21, 2005 and August 1, 2005, the Company filed an Information Statement on Schedule 14C in preliminary form and in definitive form, respectively, disclosing that it had obtained the requisite, majority shareholder approval, in the form of shareholder consent of greater than 50% of the voting capital stock, for the Company to undertake the following actions, effective as soon as practicable following August 21, 2005:
 
1. The amendment to the Company's Articles of Incorporation to change the name of the Company from Mailkey Corporation to IElement Corporation;
 
29
 

2. The amendment to the Company's Articles of Incorporation to increase the number of shares of common stock authorized to be issued from 100,000,000 shares to 2,000,000,000 shares;
 
3. The amendment to the Company's Articles of Incorporation to authorize the creation of 200,000,000 shares of Blank Check Preferred Stock;
 
4. To approve the Restated Bylaws of the Company;
 
5. To authorize the Board of Directors or their authorized agent(s) to obtain a new stock symbol on the NASD Over-the-Counter Electronic Bulletin Board.
 
ITEM 5. OTHER INFORMATION.
 
None.
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
(a) The following documents are filed as exhibits to this report.
 
EXHIBIT INDEX

Exhibit No. Description
----------- -----------
 
3.1.1 Articles of Incorporation of the Company (incorporated by
reference to the Company's Registration Statement on Form 10-SB
12G/A filed on February 3, 2000).
 
3.1.2 Certificate of Amendment to Articles of Incorporation of the
Company (incorporated by reference to the Company's Schedule 14A
filed on October 9, 2001).
 
3.1.3 Certificate of Amendment to Articles of Incorporation of the
Company (incorporated by reference to the Company's Schedule 14C
filed on March 26, 2003).
 
3.1.4 Certificate of Amendment to Articles of Incorporation of the
Company (incorporated by reference to the Company's Schedule 14C
filed on Aug 1, 2005).
 
3.2.1 Bylaws of the Company (incorporated by reference to the
Company's Registration Statement on Form 10-SB 12G/A filed on
February 3, 2000).
 
3.2.2 Amendment to Bylaws of the Company (incorporated by reference to
the Company's Schedule 14A filed on February 1, 2001).

 
30
3.2.3 Bylaws of the Company (incorporated by reference to the
Company's Schedule 14C filed on Aug 1, 2005).
 
31.1 Certification of Chief Executive Officer of the Company required
by Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
 
31.2 Certification of Chief Financial Officer of the Company required
by Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
 
32.1 Certification of Chief Executive Officer and Chief Financial
Officer of the Company required by Rule 13a-14(b) under the
Securities Exchange Act of 1934, as amended.
 
(b) Reports on Form 8-K.
 
During the period ended June 30, 2005, the Company filed the following reports on Form 8-K:
 
----------------------- --------------------------------------------------------
DATE REPORT FILED ITEMS REPORTED
----------------------- --------------------------------------------------------
April 5, 2005 Item 9.01, Financial Statements of I-Element, Inc. for
the Years Ended December 31, 2004 and December 31, 2005
----------------------- --------------------------------------------------------
April 12, 2005 Items 4.01 and 7.01
----------------------- --------------------------------------------------------
 
31
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
IELEMENT CORPORATION
 
Date: August 9, 2006 /s/ Ivan Zweig
-----------------------------------
Ivan Zweig
Chief Executive Officer