ITEM 1 - BUSINESS
Overview
Internet Media Services, Inc. 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.
We were incorporated in March 2007 as a Delaware corporation and refer to ourself herein as “we”, “us”, the “Company” or “IMS.” We conduct our operations in Santa Monica, California and use an independent warehouse and product fulfillment center in Western New York. Our corporate office is located at 1434 6th Street, Suite 2, Santa Monica, CA 90401 and our telephone number is (800) 467-1496. Our corporate website address is www.internetmediaservices.com and our commercial website address is www.legalstore.com . Information contained on our websites is not a part of this annual report.
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. 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.
We primarily seek to create, acquire or partner with web businesses that serve the small and mid-sized businesses since we feel that market segment offers the best opportunity for cost-effective revenue growth.
We use Internet marketing techniques and applications, either developed by us or purchased from a third party, to generate high-quality traffic (visitors) to our websites. This traffic in turn supports our revenue model which consists of either advertising-based revenue, or sale of a product or service. We generate revenue through the sale of products and services via our internet properties.
On March 7, 2012, we 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 is 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.
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The Agreement provides that as consideration for the purchase of the Assets, the Company will issue a total of up to 4,000,000 shares of its restricted common stock (the “Shares”), and the assumption by the Company of a certain real estate lease associated with the Assets. On the Closing Date, the Agreement calls for the delivery of 3,323,261 Shares by the Company to EMH for the benefit of EMH’s secured creditors. In addition, the Agreement calls for the Company to issue, within sixty (60) from the effective date of the Agreement, and upon receiving signed releases from the unsecured creditors, up to 676,739 Shares to EMH on a pro rata basis, for the benefit of EMH’s unsecured creditors. The Agreement includes the forfeiture of 728,326 of the shares issued to EMH in the event that the domain name, “waterchannel.com”, is not delivered to and accepted by the Company, within sixty (60) days from execution date of the Agreement. All Shares to be issued are subject to a cumulative lock-up agreement that calls for fifty (50) percent of the Shares to be eligible for resale after six (6) months, with another twenty-five (25) percent being eligible after one year, and the remaining twenty-five (25) percent being eligible for resale after eighteen (18) months.
The Agreement also provides for customary representations, warranties, and indemnification from the parties.
Our Strategy
Our objective is to build a leading digital media company consisting of multiple Internet properties that offer products or services to small to medium-sized business. Key elements of our strategy include:
Continue to target websites for acquisition that serve the small to medium sized business market segment. We seek to acquire existing web businesses within vertical channels we believe are currently underdeveloped. We have identified several vertical channels that will be explored for possible development. We anticipate identifying additional vertical channels in the future. Therefore, we will not be limited to develop the vertical channels we have currently identified. We will only develop those channels we feel will allow the best opportunity for growth. Some of our identified vertical channels are: computers and technology; careers and education; Internet marketing; legal; and sports and recreation. We use an acquisition model that seeks opportunities that have some of the following characteristics: web-based service offering where the customer accesses our application server via the Internet; defined market segment; cash flow positive (post transaction); undervalued (based on potential growth); in need of automation or process improvement; synergistic to other owned web businesses; recurring revenue model; scalable model. Web businesses for acquisition will be found through a combination of word of mouth, business brokers, and Internet sites offering web businesses for sale.
To finance future acquisitions of web businesses, we will seek to purchase the business using debt or equity financing or through issuance of our common stock. We cannot assure that we will be able to raise additional debt or equity capital or issue common stock on terms favorable to us or at all. Our inability to raise capital could require us to delay or eliminate our plans to expand, and would likely impact future revenues.
Once a web business is acquired, we will begin to integrate the business into our current operations starting with the financial areas. Bank accounts and merchant accounts will be moved under our control, as well as accounts receivable and accounts payable. We will then analyze the technology requirements necessary to improve the overall operation of the website.
Develop or acquire marketing services or technologies. We operate web businesses, and as such, depend on web-based marketing and technology applications to generate search traffic to our websites. Once at our websites, we attempt to convert the traffic into a paying customer. While we currently utilize marketing solutions through our relationships with other providers such as search engines and third party technology providers, we will seek opportunities either to internally develop some or all of these services and products.
Selling additional products and services to existing customers. We believe we can sell additional products and services once a customer places their first order which can increase our average revenue per customer (measured over a fixed period), and improve our revenue growth.
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Strengthening customer retention. We seek to enhance customer retention and build lasting relationships with our customers. Such efforts begin with our marketing message, continue through the ordering process, and conclude with the fulfillment process. We believe we can build lasting customer relationships by listening to our customers, consistently examining our internal processes, focusing on customer satisfaction, and offer an expanded product line.
Our Services
Our goal is to develop a diversified and broad range of products and services that are offered through a collection of vertically oriented websites that target small to medium-sized business. The products and services we offer through our websites will first be dependent on the website offerings at time of acquisition. As we evaluate the potential revenue opportunities associated with the acquired website, we will expand the products and services offerings to address those opportunities.
We are currently in the build-out phase of our first vertical channel, the legal channel, through our acquisition of the web business LegalStore.com in October 2009. Traditionally, LegalStore.com offered legal supplies and print services for the small to medium-size law firms. We have continued to offer these products and services. As we identify additional products and services to be offered to our customers in the future we anticipate a product/service development timeframe to be between three and six months measured from the approval by management of the development project to the product/service release to the general public.
Sales and Marketing
Our websites focus on one specific business channel. We define a business channel as a business category such as “Careers”, “Sports”, or “Legal”. Presently, we have one vertical channel operating, the legal channel, and one website in production within that channel, www.legalstore.com.
We sell our products primarily through our website. In addition, we provide a toll-free sales number and chat service for our customers that have questions that cannot be answered by using our website. Orders can be placed through our toll-free sales number, but not through our chat service.
For the Legal channel, we market our products and services through search engine positioning, paid-marketing sources including search engine placement, email marketing activities to our current and past customer base on an opt-in basis, and partnerships with other channel providers.
Technology
Our third-party e-commerce solution for our LegalStore.com website is hosted in the data center of the e-commerce provider. The LegalStore.com website contains over 1500 product codes and over 8,243 customer account records. We have off-line access to approximately 10,000 customer account records that are stored on local computers within the LegalStore.com offices.
In the second half of 2011, we concentrated our efforts on the development and testing of an Internet-based customer lead generation service named SimplyProspects.com. We believe some of the most opportune markets at present for this type of a lead generation service are: legal; elective medical; home remodeling or reconstruction; travel and leisure; event planning; et al. SimplyProspects.com is an auction-based Internet marketplace based on the following needs and premises: