Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - BOXSCORE BRANDS, INC.Financial_Report.xls
EX-31.1 - CERTIFICATION - BOXSCORE BRANDS, INC.ex31-1.htm
EX-32.1 - CERTIFICATION - BOXSCORE BRANDS, INC.ex32-1.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

For the transition period from ________ to __________

Commission File Number: 333-165972

INTERNET MEDIA SERVICES, INC.
(Exact name of registrant specified in charter)
 
Delaware
22-3956444
(State or other jurisdiction of incorporation
or organization)
(I.R.S. Employer Identification
No.)
 
1507 7th STREET,
#425
SANTA MONICA, CALIFORNIA 90401
(Address of principal executive offices)

(800) 467-1496
 (Issuer's telephone number)

1434 6th STREET,
UNIT 2
SANTA MONICA, CALIFORNIA 90401
(Former address of principal executive offices)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if smaller reporting company)
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the registrant’s Common Stock, $0.001 par value per share, was 24,587,893 as of November 5, 2012.
 
 
 

 
 
INTERNET MEDIA SERVICES, INC.

INDEX
 
          
Page
   
PART I - FINANCIAL INFORMATION:
 
   
Item 1.
Financial Statements
 
 
Consolidated Balance Sheets
3
 
Consolidated Statement of Operations
4
 
Consolidated Statement of Cash Flows
5
 
Notes to Consolidated Financial Statements
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11
     
Item 4.
Controls and Procedures
14
     
PART II - OTHER INFORMATION:
 
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
15
     
Item 3.
Defaults Upon Senior Securities
15
     
Item 4.
Mine Safety Disclosures
15
     
Item 6.
Exhibits
15
     
SIGNATURES
16


 
 
 
 

 
 
   
INTERNET MEDIA SERVICES, INC.  
   
CONSOLIDATED BALANCE SHEETS  
   
As of
 
             
   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
ASSETS
           
             
Current assets:
           
Cash
  $ 1,771     $ 1,693  
Accounts receivable, net
    29,883       31,337  
Inventory
    110,208       115,952  
Prepaid expenses and other assets
    11,513       6,464  
Total current assets
    153,375       155,446  
                 
Property and equipment, net
    39,950       40,607  
                 
Other intangibles, net
    119,000       131,750  
                 
Goodwill
    19,417       19,417  
                 
Other assets
    -       3,483  
                 
Total assets
  $ 331,742     $ 350,703  
                 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
               
                 
Current liabilities:
               
  Accounts payable
  $ 140,337     $ 95,369  
  Accrued expenses
    108,779       67,400  
  Revolving note form related party
    277,648       -  
  Notes payable
    280,034       223,224  
Total current liabilities
    806,798       385,993  
                 
Long-term revolving note from related party
    -       214,489  
                 
Deferred tax liability
    1,066       1,066  
                 
Commitments and contingencies  (See Note 6)
    -       -  
                 
Stockholders' deficiency
               
Common stock, $.001 par value, 100,000,000 shares
         
authorized, 24,587,893 shares issued and outstanding
         
(23,821,000 - 2011)
    24,588       23,821  
Additional paid-in capital
    764,387       685,317  
Accumulated deficit
    (1,265,097 )     (959,983 )
Total stockholders' deficiency
    (476,122 )     (250,845 )
                 
Total liabilities and stockholders' deficiency
  $ 331,742     $ 350,703  
                 
                 
                 
  The accompanying notes are an integral part of the financial statements  
 
 
-3-

 
 
   
INTERNET MEDIA SERVICES, INC.  
   
CONSOLIDATED STATEMENT OF OPERATIONS  
(Unaudited)  
                         
                         
   
Three months ended
   
Three months ended
   
Nine months ended
   
Nine months ended
 
   
September 30, 2012
   
September 30, 2011
   
September 30, 2012
   
September 30, 2011
 
                         
                         
Revenue
  $ 120,526     $ 138,830     $ 380,164     $ 415,754  
                                 
Costs of revenue
    64,295       78,993       200,183       213,480  
                                 
Gross profit
    56,231       59,837       179,981       202,274  
                                 
Operating expenses:
                               
General and administrative:
                               
Salaries and benefits
    32,220       133,055       99,456       271,983  
Professional fees
    10,329       8,766       50,329       42,960  
Other
    53,854       37,322       135,964       119,793  
      96,403       179,143       285,749       434,736  
Selling and marketing
    22,490       25,266       67,391       76,869  
      118,893       204,409       353,140       511,605  
                                 
Operating loss
    (62,662 )     (144,572 )     (173,159 )     (309,331 )
                                 
Other expenses:
                               
Loss from change in fair value of notes payable
    -       (30,048 )     (105,009 )     (30,048 )
Interest expense
    (11,960 )     (4,112 )     (26,946 )     (11,332 )
      (11,960 )     (34,160 )     (131,955 )     (41,380 )
                                 
Net Loss
  $ (74,622 )   $ (178,732 )   $ (305,114 )   $ (350,711 )
                                 
Loss per share - basic and diluted
  $ (0.00 )   $ (0.01 )   $ (0.01 )   $ (0.02 )
                                 
Weighted average common shares
                         
outstanding - basic and diluted
    24,402,620       23,821,000       24,217,418       23,125,029  
                                 
                                 
                                 
  The accompanying notes are an integral part of the financial statements  
 
 
-4-

 
 
INTERNET MEDIA SERVICES, INC.
 
   
CONSOLIDATED STATEMENT OF CASH FLOWS
 
(Unaudited)
 
   
   
Nine months ended
   
Nine months ended
 
   
September 30, 2012
   
September 30, 2011
 
Cash flows from operating activities:
           
Net loss
  $ (305,114 )   $ (350,711 )
Adjustments to reconcile net loss to net
               
  cash used by operating activities:
               
Depreciation and amortization
    13,407       13,407  
Stock based compensation
    18,847       6,789  
Loss from change in fair value of notes payable
    105,009       30,048  
(Increase) decrease in assets:
               
Accounts receivable
    1,454       (1,297 )
Inventory
    5,744       8,557  
Prepaid expenses and other assets
    (5,049 )     (37,357 )
Other assets
    3,483       -  
Increase in liabilities:
               
Accounts payable and accrued expenses
    89,138       31,946  
Net cash used by operating activities
    (73,081 )     (298,618 )
                 
Cash flows from investing activities:
               
Purchase of software development costs
    -       (28,800 )
Net cash used by investing activities
    -       (28,800 )
                 
Cash flows from financing activities:
               
Proceeds from sale of common stock
    10,000       250,000  
Proceeds from issuance of notes
    -       60,000  
Net borrowings from related party
    63,159       9,685  
Net cash provided by financing activities
    73,159       319,685  
                 
Net increase (decrease) in cash
    78       (7,733 )
                 
Cash - beginning of period
    1,693       21,372  
                 
Cash - end of  period
  $ 1,771     $ 13,639  
                 
                 
Cash paid for :
               
  Interest
  $ -     $ -  
  Income taxes
  $ 3,800     $ 1,999  
                 
Non-cash financing activities:
               
   Note payable and accrued interest converted to shares of common stock
  $ 50,990     $ -  
                 
The accompanying notes are an integral part of the financial statements  
 
 
 
-5-

 
INTERNET MEDIA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. NATURE OF BUSINESS AND MANAGEMENT'S PLANS
 
Nature of Business - Internet Media Services, Inc. (the Company) is a digital media company created to develop, own and operate a portfolio of integrated “internet properties”, offering complementary business models and components. The Company is primarily focused on creating, acquiring and partnering with companies with customer acquisition- customer relationship management solutions. The Company is also interested in information technology / content acquisition opportunities whether the content is informational, educational, or entertainment. On October 8, 2009, the Company completed its first acquisition in the legal vertical market through the purchase of the assets and assumption of certain liabilities of LegalStore.com. LegalStore.com is an internet based company that primarily sells legal supplies and legal forms.

In 2011, the Company developed a new service offering named SimplyProspects.com, an auction-based Internet application that provides a marketplace for businesses seeking to find new clients.  SimplyProspects.com was released in July 2011 as part of a six-month beta program.  In December 2011, at the end of this six-month period, the Company, based on the feedback obtained during the beta program, decided to further develop the service prior to a general release of the service.  The Company anticipates having SimplyProspects.com released into the legal channel during the second half of 2012.  In addition, the success of SimplyProspects.com service is contingent on the Company raising sufficient investment capital to support the national release and operational needs of the service.  During the nine months ended September 30, 2012, SimplyProspects.com had no revenue and incurred approximately $62,000 of start-up costs.

Management's Plans - The accompanying consolidated financial statements have been prepared on a going concern basis.  As shown in the accompanying consolidated financial statements, the Company has incurred accumulated losses totaling $1,265,097, has a stockholders’ deficiency of $476,122 and has a working capital deficit of $653,423 at September 30, 2012. These factors, among others, indicate that the Company may be unable to continue as a going concern.

Management recognizes that the Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to allow the Company to continue the development of its business plans and satisfy its obligations on a timely basis.  The Company believes that it will be able to complete the necessary steps in order to meet its cash requirements throughout the next 12 months and continue its business development efforts.  Management's plans in this regard include, but are not limited to, current discussions and negotiations with a number of additional financing alternatives.  There is no assurance the Company will be successful in completing the financing. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

To fund the Company’s operations for the next 12 months, the Company needs to raise additional financing and generate cash flows from its operations.  Should additional cash flows not be available, the Company believes that it will have the ability to restructure its operations, and if necessary, initiate significant expense reductions.  In addition, the Company will need to negotiate with its lenders to extend the repayment dates of its indebtedness.  There can be no assurance that the Company will be able to successfully restructure its operations or debt obligations in the event it fails to obtain additional financing.

NOTE 2. BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, these statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  
 
 
-6-

 
In the opinion of management, the accompanying balance sheets and related interim statements of operations and cash flows include all adjustments, consisting only of normal recurring items necessary for their fair presentation in accordance with U.S. generally accepted accounting principles. All significant intercompany transactions have been eliminated.
 
Interim results are not necessarily indicative of results expected for a full year. For further information regarding the Company’s accounting policies, please refer to the audited consolidated financial statements and footnotes thereto for the fiscal year ended December 31, 2011 included in the Company’s 10-K annual report filed with the SEC on March 30, 2012.
 
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially from those estimates and assumptions.

Fair Value of Financial Instruments- Financial instruments include cash, accounts receivable, accounts payable, accrued expenses, revolving note from related party and notes payable.  Except for notes payable, fair values were assumed to approximate carrying values for these financial instruments, since they are short term in nature or they are receivable or payable on demand.  The fair value of the revolving note from related party approximates the carrying value of the obligations based on these instruments bearing interest at variable rates consistent with the current rates available to the Company.  Notes payable to third parties are measured at their fair value at each reporting period (see Note 3).

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement Topic of the FASB Accounting Standards Coded (“ASC") 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:

·
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

·
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

·
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Earnings Per Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual weighted average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number of additional shares that would have been outstanding if dilutive potential shares had been issued. In a loss period, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive.

As of September 30, 2012, there were 35,669,195 shares potentially issuable under convertible debt agreements, options, and warrants that could dilute basic earnings per share in the future that were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive to the Company’s losses during the year. There were 6,618,390 shares of potentially dilutive instruments outstanding as of September 30, 2011.

 
-7-

 
Recent Accounting Pronouncements - In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.
 
This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS. ASU 2011-04 is required to be applied prospectively in interim and annual periods beginning after December 15, 2011. Early application was not permitted. The adoption of ASU 2011 did not have a material impact on the consolidated financial statements.
 
NOTE 3. NOTES PAYABLE

During 2011, the Company entered into a subscription agreement with two accredited investors under a Private Placement offering. Under this subscription agreement, each of the investors received a 12% convertible promissory note with warrants for aggregate consideration of $25,000 in cash. The notes were secured by a lien on all assets of the Company. The principal amounts of the notes plus accrued interest automatically were converted into common stock on the maturity date of August 31, 2012. The conversion price was determined based on a twenty percent discount of the fair market value of the average closing transaction price of the Company’s common stock for the ten days of trading prior to conversion, but the conversion price was not to be less than $0.10 per share according to the agreements. Upon completion of the Private Placement offering, each investor received a two year warrant to purchase shares of the Company’s common stock at $0.30 per share. The warrants are exercisable for such number of common shares equal to twenty percent of the funds invested (20% warrant coverage) amounting to 16,667. The Company did not allocate a portion the proceeds to the warrants because the warrants' value is not considered material.

In accordance with the agreement, on August 31, 2012, two convertible promissory notes in the principal amount of $25,000 and accrued interest of $2,791 were converted to 277,910 shares of the Company's common stock. The fair value of the debt was $31,250, resulting in an increase to equity of $34,041 upon conversion.

Also in 2011, the Company issued three Convertible Promissory Notes (“Note”) in the aggregate principal amount of $117,500. The Notes, which are due on various dates between May and September, 2012, bear interest at the rate of 8% per annum, with a provision for additional interest under certain circumstances, are unsecured and are convertible into shares of our common stock at the election of lender at any time after 180 days from the date of the Note issuance at a conversion price equal to a 41% discount (for two Notes) or 42% discount (for one Note) to the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion. The conversion price is subject to certain anti-dilution protection; for example, if the Company issues shares for a consideration less than the applicable conversion price, the conversion price is reduced to such amount. The lender agreed to restrict its ability to convert the Note and receive shares of the Company if the number of shares of common stock beneficially held by the lender and its affiliates in the aggregate after such conversion exceeds 4.99% of the then outstanding shares of common stock. On March 2, 2012, the lender elected to partially convert one Note in the principal amount of $8,000 into shares of the Company stock and was issued 338,983 shares of common stock by the Company pursuant to the terms of the Note. The fair value of the note converted and shares issued was $16,949.

As of September 30, 2012, the outstanding principal of the three Notes amounted to $109,500 and the maximum number of common shares the note could be converted into based on 4.99% of the outstanding shares as of September 30, 2012 is 1,226,936 shares. Based on the average of the three lowest stock prices for the last ten days preceding September 30, 2012, the three Notes would be convertible into 30,342,528 shares, after considering the default noted below, when not taking into account the 4.99% limit on the number of shares the holder may own. An increase in the Company's stock price will result in decreased number of shares the Company would be obligated to issue.

The three convertible promissory notes have become due and payable along with any unpaid interest on various dates between May and September 2012. The aggregate outstanding principal of $109,500 plus unpaid interest was not paid on the maturity dates. As a result, the three convertible promissory notes are considered to be in default and therefore, due and payable in an amount equal to the Default Sum as defined in the agreement. The Default Sum is equal to 150% of the sum of the unpaid principal, unpaid interest and unpaid default interest, which amounted to $180,852 in aggregate as of September 30, 2012.  Further, the default interest rate for the three convertible notes during the default period has increased to 22%.
 
On November 7, 2012, the Company received a demand notice requesting payment for the Default Sum owed together with all unpaid interest.  If the Company fails to comply with this demand notice within five days from receipt of the demand notice the investor may exercise the rights under the convertible promissory notes.  This includes, but is not limited to, conversion of the Default Sum owed into equity as provided for in the convertible promissory notes or bringing an action against the Company for all amounts due under the convertible promissory notes.
 
 
-8-

 
Under ASC 480, Distinguishing Liabilities from Equity, the Company determined the notes payable are liabilities reported at fair value because the notes payable will be convertible into a variable number of common shares at fixed monetary amount, known at inception. The notes payable are to be subsequently measured at fair value at each reporting period, with changes in fair value being recognized in earnings. The fair value of the notes payable is measured by calculating possible outcomes of conversion to common shares and repayment of the notes payable, then weighting the probability of each possible outcome according to management’s estimates. Management has determined that the most likely outcome will be conversion at the default sum and the fair value of the notes payable is equal to the estimated fair value of equity securities the Company will issue upon conversion. The fair value measurement is classified as a Level 3 in the valuation hierarchy. The following table is a roll forward of the notes payable fair value:
 
Fair value at December 31, 2011
 
$
223,224
 
Changes in fair value and adjustment for default provision
   
105,009
 
Adjustment for conversion
   
(48,199
)
Fair value at September 30, 2012
 
$
280,034
 

NOTE 4. REVOLVING NOTE FROM RELATED PARTY

The Company has a revolving credit agreement with Mr. Raymond Meyers, a shareholder and chief executive officer of the Company. This credit agreement is in the amount of $250,000 and is scheduled to expire on March 31, 2013. Effective September 30, 2012, Mr. Meyers has agreed to increase the amount available under this credit agreement by $32,000 to $282,000. The outstanding balance on the credit agreement bears interest at an annual rate of 6% above one year LIBOR (7.0% as of September 30, 2012), and is secured by all of the assets of the Company. As of September 30, 2012 the revolving credit line had an outstanding balance of $277,648 ($214,489 - December 31, 2011). For the three months ended September 30, 2012 and 2011, interest expense under this note amounted to $4,641 and $3,579, respectively. For the nine months ended September 30, 2012 and 2011, interest expense under this note amounted to $12,987 and $10,799, respectively. As of September 30, 2012, accrued interest amounted to $34,285 ($21,298 - December 31, 2011), which is included in accrued expenses in the accompanying balance sheet. As of September 30, 2012, the Company was in default of the credit agreement due to a failure to pay interest when due. Mr. Meyers has waived this default through the maturity date.

NOTE 5. STOCKHOLDERS’ DEFICIENCY

On March 21, 2012, the Company sold in a private placement 50,000 shares of its common stock and warrants to acquire 50,000 shares of the Company stock at an exercise price of $0.15 for total proceeds of $5,000. The warrants have a contractual term of three years.

In April 2012, the Company sold in a private placement 100,000 shares of its common stock and warrants to acquire 100,000 shares of the Company stock at an exercise price of $0.15 for total proceeds of $5,000. The warrants have a contractual term of three years.
 

 
 
-9-

 
Warrants

Outstanding warrant securities consist of the following at September 30, 2012:

 
Warrants
 
Exercise Price
 
Expiration
             
2011 Common share private placement warrants
2,500,000
 
$
0.30
 
March 2018
             
             
2011-2012 Convertible Note and private placement warrants
166,667
 
$
0.15 to 0.30
 
June 2014 to April 2015
             
 
2,666,667
         

NOTE 6. COMMITMENTS AND CONTINGENCIES

On March 7, 2012, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Enthusiast Media Holdings, Inc. (“EMH”), a privately-held Washington corporation, to acquire the assets of the former Water Channel television network (the “Assets”). The Agreement was expected to close within thirty (30) days (the “Closing Date”) if certain contingencies are met. The contingencies include the delivery by EMH of general releases from at least ninety (90) percent of EMH’s secured creditors and the Company’s final review and acceptance of the Assets and an associated real estate lease.

On April 6, 2012, EMH informed the Company that the contingencies have not been met as outlined and requested the Company grant an extension of the agreement. The Company granted extensions of the Agreement through August 31, 2012. On August 31, 2012, the Company informed EMH that the contingencies have not been met and as a result the Agreement has been terminated.  As of the time of this filing, the Company and EMH continue to discuss the possible purchase of the Assets, but no definitive agreement has been proposed or accepted.
 
 
 

 
 
 
-10-

 
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
FORWARD-LOOKING STATEMENTS
 
Certain statements contained herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Reform Act”). Internet Media Services, Inc. desires to avail itself of certain “safe harbor” provisions of the 1995 Reform Act and is therefore including this special note to enable us to do so. Except for the historical information contained herein, this report contains forward-looking statements (identified by the words "estimate," "project," "anticipate," "plan," "expect," "intend," "believe," "hope," "strategy" and similar expressions), which are based on our current expectations and speak only as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements, including, without limitation, those discussed under Part I, Item 1A “Risk Factors” in our annual report as filed on Form 10-K dated March 30, 2012 as filed with the Securities and Exchange Commission, and those described herein that could cause actual results to differ materially from the results anticipated in the forward-looking statements, and the following:
 
 
Our limited operating history with our business model.
 
The low cash balance and limited financing currently available to us. We may in the near future have a number of obligations that we will be unable to meet without generating additional income or raising additional capital.
 
Further cost reductions or curtailment in future operations due to our low cash balance and negative cash flow.
 
Our ability to effect a financing transaction to fund our operations which could adversely affect the value of our stock.
 
Our limited cash resources may not be sufficient to fund continuing losses from operations.
 
The failure of our products and services to achieve market acceptance.
 
The inability to compete in our market, especially against established industry competitors with greater market presence and financial resources.
 
The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our results of operations and financial condition and should be read in conjunction with the financial statements and footnotes that appear elsewhere in this report.
 
General
 
Internet Media Services, Inc. (referred to in this report as “Internet Media,” “IMS,” “we,” “us,” “our” or “Company”) is a diversified digital media company created to develop, own and operate a portfolio of integrated “Internet properties” (websites), offering complementary business models and components, high levels of customer appeal, lower cost of goods sold (“COGS”) and significantly higher margins than other Internet-based service companies in similar sectors. We operate our branded websites within discrete vertical business channels or markets allowing us to utilize cross-promotion marketing activities between our websites within a channel. A vertical market is a distinct business category, or sector, within a broader industry such as "Elective Medical," “Home Reconstruction” or "Travel and Leisure." For example, the "Legal" vertical market (a part of the Professional Services Industry) would include Web properties, domains and business opportunities focusing on legal services, legal case opportunities, and related instruments, procedures and transactions. Vertical markets are often identified as “niche” markets, with companies involved in transacting trade – primarily -- with other businesses in the same niche or sector. Currently, we operate one website within one business channel.
 
The Company is primarily focused on creating, acquiring and partnering with companies with customer acquisition- customer relationship management solutions; however, the Company is also interested in information technology / content acquisition opportunities -- whether the content is informational, educational, or entertaining. On October 8, 2009, the Company completed its first acquisition in the legal vertical market through the purchase of the assets and assumption of certain liabilities of LegalStore.com. LegalStore.com is an Internet based company that primarily sells legal supplies and legal forms.

 
-11-

 
This acquisition was then leveraged by the creation and development of SimplyProspects.com -- a proprietary “auction-based marketplace” that promises to revolutionize the lead-sale industry in the legal field, and in numerous other key niche markets, including: elective medical; home reconstruction; health and medicine; leisure and travel; et al.
 
            SimplyProspects.com was released in July 2011 as part of a six-month beta program. At the end of this six-month period in December 2011, the Company, based on the feedback obtained during the beta program, decided to further develop the service prior to releasing the service into production. In addition, the success of the SimplyProspects.com service is contingent on the Company raising sufficient investment capital to support the national release and operational needs of the service.
  
Results of Operations
 
For the Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine Months Ended September 30, 2011
 
Revenue
 
Our revenue for the three months ended September 30, 2012 decreased by $18,304 or 13.2% to $120,526 compared to revenue of $138,830 during the three months ended September 30, 2011.  For the nine months ended September 30, 2012, our revenue decreased by $35,590 or 8.6% to $380,164 compared to $415,754 during the nine months ended September 30, 2011. Our revenue was derived from the sale of legal products through our web property, LegalStore.com. Our planned new service, SimplyProspects.com did not generate any revenue in the three and nine months ended September 30, 2012 and it generated approximately $3,200 revenues during the three and nine months ended September 30, 2011.  We continue to market our products offered through LegalStore.com on a national level.  We experienced a decrease in revenue for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011 due to a decrease in the number of orders. We have started a number of price increases during the last six months of 2011 and during the first three months of 2012 on certain products to increase our gross profit margins. Though the Company experienced a decrease in volume orders year to year, over the long term, we do not expect a decrease in the overall number of orders through our LegalStore.com property as a result of this action. We continue to expect relatively modest or flat revenue growth through our LegalStore.com service until we are able to spend additional resources and increase our marketing efforts. We do not expect to generate any revenue from our SimplyProspects.com service until the Company is successful in raising the necessary capital to release the service on the national level.
 
Cost of Revenue and Gross Profit
 
Our cost of revenue includes supplies associated with the sale of products through our LegalStore.com website. Our cost of revenue for the three months ended September 30, 2012 decreased by $14,698 or 18.6% to $64,295 compared to $78,993 for the three months ended September 30, 2011. As a percentage of revenue, our gross profit was 46.7% in for the three months ended September 30, 2012 compared to 43.1% attained during the comparable period in 2011.  Our cost of revenue for the nine months ended September 30, 2012 decreased by $13,297 or 6.2% to $200,183 compared to $213,480 for the nine months ended September 30, 2011. As a percentage of revenue, our gross profit was 47.3% in for the nine months ended September 30, 2012 compared to 48.7% attained during the comparable period in 2011. The variations in gross profit as a percentage of revenue were due to our product mix.

Operating Expenses
 
General and Administrative
 
During the three months ended September 30, 2012, we incurred general and administrative expenses of $96,403 compared to $179,143 incurred during the comparable period in 2011. Our general and administrative expenses during the three months ended September 30, 2012 decreased by $82,740 or 46.2% from 2011. During the nine months ended September 30, 2012, we incurred general and administrative expenses of $285,749 compared to $434,736 incurred during the comparable period in 2011. Our general and administrative expenses during the nine months ended September 30, 2012 decreased by $148,987 or 34.3% from 2011. The decrease was principally due to decreased salaries and benefits of $100,835 during the three months ended September 30, 2012 and $172,527 during the nine months ended September 30, 2012.

 
-12-

 
We reduced our headcount early in 2012 due to cost reduction measures resulting in reduced salaries and benefits expense for the three and nine month period ended September 30, 2012. We expect an overall increase in general and administrative expenses in subsequent periods as we continue to execute our business plan pending the successful raising of additional financing.

Selling and Marketing
 
For the three months ended September 30, 2012, selling and marketing expenses, consisting of search engine and web marketing expenses, credit card processing fees, and customer delivery fees were $22,490, compared to $25,266 during the three months ended September 30, 2011. Our selling and marketing expenses for nine months ended September 30, 2012 were $67,391 compared $76,869 in 2011. In line with our revenue, our selling and marketing expenses decreased in 2012 compared to 2011. We anticipate search engine marketing expense to increase in the future as we continue to implement our SimplyProspects.com business plan if we are successful raising additional financing.
 
Other Expenses
 
Interest expense for the three and nine months ended September 30, 2012 increased by $7,848 or 190.9% and $15,614 or 137.8%, respectively, compared to our interest expense incurred during the three and nine months ended September 30, 2011. The increase was due to the increased levels of borrowings outstanding during 2012 and due to additional interest resulting from defaults of convertible promissory notes. During the nine months ended September 30, 2012, we also incurred a loss of $105,009 associated with the change in the fair value of our convertible promissory notes and during the three and nine months ended September 30, 2011 we incurred a loss of $30,048 associated with the change in the fair value of our convertible promissory notes.
 
Net Loss
 
As a result of the foregoing, our net loss for the three months ended September 30, 2012 decreased by $104,110 or 58.2% to $74,622 compared to a net loss of $178,732 incurred in 2011. For the nine months ended September 30, 2012, our net loss decreased by $45,597 or 13.0% to $305,114 compared to a net loss of $350,711 incurred in 2011.
 
Liquidity and Capital Resources
 
At September 30, 2012, we had a working capital deficiency of $653,423 compared to working capital deficiency of $230,547 at December 31, 2011. The increase in working capital deficiency was due to our operating losses and reclassification of revolving note from a related party from a long-term liability at December 31, 2011 to a current liability at September 30, 2012, as well as an increase in the fair value of notes payable as a result of default on Asher notes.  During the nine months ended September 30, 2012, our operating activities used cash of approximately $73,000 compared to approximately $299,000 used during the nine months ended September 30, 2011.
 
During the nine months ended September 30, 2012, our operating losses, after adjusting for non-cash items, utilized approximately $168,000 of cash, and working capital items provided approximately $95,000 of cash. The principal component of these working capital changes was an increase in our accounts payable and accrued expenses. During the nine months ended September 30, 2011, our operating losses, after adjusting for non-cash items, utilized approximately $300,000 of cash, and working capital items provided approximately $2,000 of cash.
 
During the nine months ended September 30, 2012, we received $10,000 from a private sale of shares of our common stock and had approximately $63,000 of net additional borrowings from a related party. Further, we were able to reduce notes payable and accrued interest through a conversion to equity in the amount of approximately $51,000.
 
 
-13-

 
In reviewing our 2012 operational plans and associated risks, we have determined it will be necessary to raise additional financing during 2012. In January 2012, we engaged an investment banker to assist us in this effort. We are seeking to raise funds in 2012 to support the execution of our business plans. As of the date of this filing we have not entered into any definitive agreements for additional financing. No assurances can be given that we can obtain these funds through the sale of common stock or other securities, the issuance of indebtedness or otherwise or on terms acceptable to us. Further, no assurances can be given that any such equity financing will not result in a further substantial dilution to the existing stockholders or will be on terms satisfactory to us. If we are unable to obtain additional equity or loan financing, our financial condition and results of operations will be materially adversely affected and we may need to significantly restrict our operations.
 
Management recognizes that the Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to allow the Company to continue the development of its business plans and satisfy its obligations on a timely basis. The Company believes that it will be able to complete the necessary steps in order to meet its cash requirements throughout fiscal year 2012 and continue its business development efforts.  However, no assurances can be given that we can obtain these funds through the sale of common stock or other securities, the issuance of indebtedness or otherwise or on terms acceptable to us.
 
Management's plans in this regard include, but are not limited to current discussions and negotiations with a number of additional financing alternatives, one or more of which it believes will be able to successfully close to provide the necessary working capital. There is no assurance that the Company will be successful in completing the financing. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 To fund the Company’s operations for fiscal year 2012, the Company needs to raise additional financing and generate cash flows from its operations. Should additional cash flows not be available, the Company believes that it will have the ability to restructure its operations, and if necessary, initiate significant expense reductions. In addition, the Company will have to negotiate with its lenders to extend the repayment dates of its indebtedness. There can be no assurance, however, that the Company will be able to successfully restructure its operations or debt obligations in the event it fails to obtain additional financing.
 
Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s chief executive officer also acting as chief financial officer , as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of our chief executive officer, also acting as chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2012. Based on this evaluation, management concluded that, as of such date, that our disclosure controls and procedures were not effective and that material weaknesses exists in our internal control over financial reporting.  The material weaknesses consist of an insufficient complement of qualified accounting personnel and controls associated with segregation of duties and ineffective controls associated with identifying and accounting for complex and non-routine transactions in accordance with U.S. generally accepted accounting principles. To address the material weaknesses we performed additional analyses and other post-closing procedures and retained the services of a consultant to ensure that our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Notwithstanding these material weaknesses, management believes that the financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, result of operations and cash flows for the periods presented.

Changes in Internal Control Over Financial Reporting
 
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
 
-14-

 
PART II - OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended September 30, 2012, the Company issued 277,910 shares of common stock upon conversion of Convertible Promissory Notes pursuant to the terms of the Convertible Promissory Note.

The shares of common stock to be issued in this transaction have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and were issued and sold in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.


Item 3. Defaults Upon Senior Securities.

The Company has defaulted on three convertible promissory notes maturing on May 29, 2012, July 5, 2012 and September 5, 2012, with an aggregate principal balance of $109,500 and default sum owed of $180,852 as a result of the default, plus unpaid interest of approximately $17,000 remains unpaid as of the date of this filing. Further, the default interest rate during the default period has increased to 22%.
 
On November 7, 2012, the Company received a demand notice requesting payment for the Default Sum owed together with all unpaid interest.  If the Company fails to comply with this demand notice within five days from receipt of the demand notice the investor may exercise the rights under the convertible promissory notes.  This includes, but is not limited to, conversion of the Default Sum owed into equity as provided for in the convertible promissory notes or bringing an action against the Company for all amounts due under the convertible promissory notes.
 
Item 4. Mine Safety Disclosures

None.

Item 6.    Exhibits

31.1
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rule 13a-14(a) and15d-14(a) (filed herewith.)
32.1
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. 1350 (furnished herewith.)


 
 
 

 
 
-15-

 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
INTERNET MEDIA SERVICES, INC.
   
   
Dated: November 14, 2012
By: /s/ Raymond Meyers
 
Raymond Meyers
Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer and Principal Financial Officer)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
-16-