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EX-3.2 - BOXSCORE BRANDS, INC. | ex3-2.htm |
EX-5.1 - BOXSCORE BRANDS, INC. | ex5-1.htm |
EX-3.1 - BOXSCORE BRANDS, INC. | ex3-1.htm |
EX-23.1 - BOXSCORE BRANDS, INC. | ex23-1.htm |
EX-10.1 - BOXSCORE BRANDS, INC. | ex10-1.htm |
EX-10.2 - BOXSCORE BRANDS, INC. | ex10-2.htm |
File
Number 333-_____
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
INTERNET MEDIA SERVICES,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
5961
|
22-3956444
|
(State
or other jurisdiction
|
(Primary
Industrial
|
(I.R.S.
Employer
|
of
Incorporation)
|
Classification
Code)
|
Identification
No.)
|
1434
6th
Street
Suite
9
Santa
Monica, California 90401
(310)
295-1922
(Address,
including zip code, and telephone number,
including
area code, of registrant's principal executive offices)
Raymond
Meyers
Chief
Executive Officer
1434
6th
Street
Suite
9
Santa
Monica, California 90401
(310)
295-1922
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies of
all communications, including all communications sent to the agent
for
service,
should be sent to:
Law
Office of Gary A. Agron
5445 DTC
Pkwy., Suite 520
Greenwood
Village, Colorado 80111
(303)
770-7254
Approximate date of commencement of
proposed sale to the public: From time to time after the effective
date of this registration statement.
If any of the securities being
registered on this form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933 check the following box.
|X|
If this form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_|
If this form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the
following box and list the Securities Act Registration Statement number of the
earlier effective registration statement for the same offering. |_|
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of "large accelerated
filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large Accelerated Filer |_| Accelerated
Filer |_| Non-accelerated Filer |_| (Do not check if a small reporting company.)
Smaller Reporting Company |X|
CALCULATION
OF REGISTRATION FEE
Proposed
MaximumOffering
|
Proposed
Maximum
|
Amount
of
|
||
Title
of Each Class of
|
Amount
to be
|
Offering
Price Per
|
Aggregate
Offering
|
Registration |
Securities To Be Registered
|
Registered
|
Share (1) | Price |
Fee(2)
|
Common
Stock
|
7,500,000
|
$0.001
|
$7,500
|
$6.00 |
[1] No
exchange or over-the-counter market exists for the Registrant's common stock.
The offering price was arbitrarily established by the Registrant’s management
and does not reflect market value, assets or any established criteria of
valuation.
[2]
Estimated solely for purposes of calculating the registration fee under Rule
457(c).
THE REGISTRANT HEREBY AMENDS THIS
REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL
THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
EXPLANATORY
NOTE
This Registration Statement has been
prepared on a prospective basis on the assumption that the distribution of
7,500,000 shares of the Registrant’s common stock to the stockholders of
Document Security Systems, Inc. (as described in the Prospectus which is a part
of this Registration Statement) and the related transactions contemplated to
occur prior to or contemporaneously with the distribution will be consummated as
contemplated by the Prospectus. There can be no assurance, however, that such
transaction will occur or will occur as so contemplated. Any significant
modifications to or variations in the transactions contemplated will be
reflected in an amendment or supplement to this Registration
Statement.
SUBJECT
TO
COMPLETION THE
DATE OF THIS PROSPECTUS IS APRIL 9, 2010
INTERNET
MEDIA SERVICES, INC.
7,500,000
SHARES OF COMMON STOCK
The 7,500,000 shares of our common
stock will be distributed pro rata by Document Security Systems, Inc. (“DSS”),
to its shareholders based upon each DSS shareholder’s beneficial ownership of
DSS shares on the record date, which is the close of business (local time) on
__________, 2010 (the "Record Date"). The shares are not listed on any national
securities exchange nor are the shares quoted on the Over-the-Counter Electronic
Bulletin Board or any other quotation service. This Prospectus covers
the distribution of the shares and their resale.
The Offering involves substantial
risk. Please see the “Risk Factors” section beginning on page
5.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of
these securities or passed upon the adequacy or accuracy of the prospectus. Any
representation to the contrary is a criminal offense.
The information in this prospectus is
not complete and may be changed. Holders may not sell these securities until the
registration statement and any amendment thereto is filed with the Securities
and Exchange Commission and is declared effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
April 9,
2010
TABLE
OF CONTENTS
Page
|
|
Summary
of Offering
|
1
|
Selected
Financial Information
|
2
|
Questions
and Answers About the Distribution
|
3
|
Special
Note Regarding Forward-Looking Statements
|
4
|
Risk
Factors
|
5
|
Use
of Proceeds
|
15
|
Determination
of Offering Price
|
15
|
Selling
Security Holders
|
15
|
Plan
of Distribution
|
15
|
Description
of Securities
|
15
|
Interest
of Named Experts and Counsel
|
17
|
Business
|
17
|
Market
Price of Common Stock and Related Stockholder Matters
|
20
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
|
Management
|
22
|
Corporate
Governance
|
26
|
Security
Ownership of Certain Beneficial Owners and Management
|
26
|
Related
Party Transactions
|
26
|
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
|
26
|
Where
You Can Find More Information
|
27
|
Financial
Statements
|
F-1
|
SUMMARY
OF OUR OFFERING
OUR
BUSINESS
We are in the business of acquiring,
building and monetizing Internet Web properties. We have identified
several vertical business channels we believe present the best opportunity for
development. Our business strategy is to acquire existing Web
properties within vertical channels we believe are currently
underdeveloped. These acquired Web properties will serve as the
anchor for the build out of each vertical channel. A vertical channel
is defined as a business category such as "automotive," "legal,” or
"travel." On October 8, 2009, we completed our first vertical channel
acquisition in the legal channel with the asset purchase of the Web property
LegalStore.com from Document Security Systems, Inc. in exchange for 7,500,000
shares of our common stock.
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 Rochester, New York and Santa
Monica, California. Our corporate office is located at 1434 6th
Street, Suite 9, Santa Monica, CA 90401 and our telephone number is (310)
295-1922. Our website addresses are www.internetmediaservices.com
and www.legalstore.com .
Information contained on our websites is not a part of this
Prospectus.
THE
OFFERING
We intend to distribute to the
shareholders of DSS , on a pro rata basis, an aggregate of 7,500,000 shares of
our common stock based upon each DSS shareholder’s beneficial ownership of DSS
shares on the Record Date (_____________). The distribution will be pro rata and
the shareholders will not be required to pay any type of consideration in order
to participate.
-1-
SELECTED
FINANCIAL DATA
The following financial information
summarizes the more complete historical financial information at the end of this
prospectus.
As
of December 31, 2009
|
|||
Balance
Sheet
|
|||
Total
Assets
|
$ | 349,192 | |
Total
Liabilities
|
$ | 60,363 | |
Shareholders
Equity
|
$ | 288,829 | |
Statement
of Operations
|
|||
Revenue
|
$ | 111,022 | |
Cost
of Revenue
|
$ | 80,983 | |
Operating
Expense
|
$ | 104,211 | |
Net
(Loss)
|
$ | (74,172 | ) |
-2-
QUESTIONS
AND ANSWERS ABOUT THE DISTRIBUTION
WHY
IS THE DISTRIBUTION STRUCTURED AS A DIVIDEND, RETURN OF CAPITAL, OR CAPITAL
GAIN?
In connection with our asset purchase
of the LegalStore.com from DSS, we issued to DSS 7,500,000 shares of our common
stock and agreed to distribute these shares directly to DSS shareholders on a
pro rata basis. This distribution may constitute either a dividend,
return of capital, or capital gain to DSS shareholders. You should
consult your tax advisor.
HOW
WILL THE DISTRIBUTION OCCUR?
DSS will distribute to those
shareholders owning shares of DSS common stock all 7,500,000 shares of our
common stock owned by DSS.
HOW
MANY SHARES OF OUR COMMON STOCK WILL I RECEIVE?
You will receive shares of our common
stock based upon your beneficial ownership of DSS shares on the Record Date.
WHAT
IS THE RECORD DATE FOR THE DISTRIBUTION?
The record date for stockholders
entitled to receive shares of our common stock is
__________________.
WHAT
IS THE DISTRIBUTION DATE?
We intend to distribute our shares as
soon as possible following the effective date of this registration
statement.
WHAT
IF I WANT TO SELL MY INTERNET MEDIA SERVICES SHARES?
You should first consult your financial
advisor. Currently, there is no public market for our common stock, and there
can be no assurance that any public market will develop in the
future.
WILL
THE NUMBER OF SHARES OF COMMON STOCK I OWN IN DSS CHANGE AS A RESULT OF THE
DISTRIBUTION?
No. The number of shares of DSS that
you own will not change as a result of the distribution.
ARE
THERE RISKS TO OWNING SHARES OF OUR COMMON STOCK?
Yes. Our business is subject to risks
which are set forth in this Prospectus.
WHAT
ARE THE REASONS FOR THE DISTRIBUTION?
On October 8, 2009, we purchased
certain assets of the LegalStore.com from DSS for 7,500,000 shares of our common
stock. As a part of the purchase, we agreed to register the 7,500,000
shares so that DSS could distribute the shares on a pro rata basis to its
shareholders.
-3-
The Securities and Exchange Commission
encourages companies to disclose forward-looking information so that investors
can better understand a company's future prospects and make informed investment
decisions. This prospectus contains such "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements may be made directly in this prospectus, and they may also be made a
part of this prospectus by reference to other documents filed with the
Securities and Exchange Commission, which is known as "incorporation by
reference."
Words such as "may," "anticipate,"
"estimate," "expects," "projects," "intends," "plans," "believes" and words and
terms of similar substance used in connection with any discussion of future
operating or financial performance identify forward-looking statements. All
forward-looking statements are management's present expectations of future
events and are subject to a number of risks and uncertainties that could cause
actual results to differ materially from those described in the forward-looking
statements. Forward-looking statements might include one or more of the
following:
o Anticipated results of
operations;
o Anticipated pricing of goods and
services;
o Anticipated market
demand;
o Description of plans or objectives of
management for future operations;
o Forecasts of future economic
performance; and
In light of these assumptions, risks
and uncertainties, the results and events discussed in the forward-looking
statements contained in this prospectus or in any document incorporated by
reference might not occur. Investors are cautioned not to place undue reliance
on the forward-looking statements, which speak only as of the date of this
prospectus or the date of the document incorporated by reference in this
prospectus. We are not under any obligation, and we expressly disclaim any
obligation, to update or alter any forward-looking statements, whether as a
result of new information, future events or otherwise. All subsequent
forward-looking statements attributable to us or to any person acting on our
behalf are expressly qualified in their entirety by the cautionary statements
contained or referred to in this section.
-4-
RISK
FACTORS
Investors should carefully consider the
risks described below before making an investment decision. The risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial
may also impair our business operations. If any of the following risks actually
occur, our business could be materially adversely affected. In such case, we may
not be able to proceed with our planned operations and your investment may be
lost entirely. The securities offered hereby should only be acquired by persons
who can afford to lose their entire investment without adversely affecting their
standard of living or financial security.
Risks
Related to the Company
Economic
conditions could reduce our revenue and adversely affect our customers and our
working capital.
The U.S. economy has been in a downward
cycle that began in 2007 and substantially deepened in 2008. As most, if not
all, of our proposed vertical segments rely on Internet generated sales of goods
and services, or Internet revenue generated through the sales of online
advertising, the reduced consumer and advertiser demand resulting from the
economic downturn may negatively affect our revenues or negatively impact our
ability to grow our revenues. We cannot predict when the current economic
downturn will end or reverse. There also could be a number of follow-on effects
from the credit crisis and current economic environment on our business,
including insolvency of customers and the inability for us to raise additional
working capital economically to support the growth of our
operations.
We
have a limited operating history and may not be able to achieve financial or
operational success.
We were founded in March 2007, and we
initiated our first operating business by acquiring LegalStore.com in October
2009. We have a limited operating history with respect to this or any
newly acquired business. As a result, we may not be able to achieve
sustained financial or operational success, given the risks, uncertainties,
expenses, delays and difficulties associated with an early-stage business in an
evolving market.
Our
growth strategy includes acquisitions that entail significant execution,
integration and operational risks.
We are pursuing a growth strategy based
in part on acquisitions, with the objective of creating a combined company that
we believe can achieve increased cost savings and operating efficiencies through
economies of scale especially in the integration of back office
services. We closed on our first acquisition in October
2009. We will seek to make additional acquisitions in the future to
increase our revenue.
This growth strategy involves
significant risks. For example, there is significant competition for acquisition
targets in our markets. Consequently, we may not be able to identify suitable
acquisitions or may have difficulty finding attractive businesses for
acquisition at reasonable prices. If we are unable to identify future
acquisition opportunities, reach agreement with such third parties or obtain the
financing necessary to make such acquisitions, we could lose market share to
competitors who are able to make such acquisitions. This loss of market share
could negatively impact our business, revenues and future growth.
-5-
Even if we are able to complete
acquisitions that we believe will be successful, we may be unable to achieve the
anticipated benefits of a particular acquisition, the anticipated benefits may
take longer to realize than expected, or we may incur greater costs than
expected in attempting to achieve anticipated benefits. Significant risks to
these transactions, which could have an adverse effect on our business,
prospects, financial condition, operating results or cash flow,
include:
|
□
|
use
of substantial portions of our available cash to pay all or a portion of
the purchase prices of future acquisitions;
|
|
□
|
diversion
of our attention from normal daily operations of our business to acquiring
and assimilating new website businesses;
|
|
□
|
entry
into new markets in which we have limited or no prior experience and in
which competitors may have stronger market positions, which may result in
errors or failures by us in the conception, structure or implementation of
our strategies to take advantage of available opportunities in these new
markets;
|
|
□
|
failure
to understand the needs and behaviors of the audience for a newly acquired
website or other product;
|
|
□
|
unwillingness
by consumers and advertisers to accept our current or future pricing
models or our inability to implement pricing models that maximize our
revenues;
|
|
□
|
redundancy
or overlap between existing products and services, on the one hand, and
acquired products and services, on the other hand;
|
|
□
|
failure
of the market to accept the products and services of an acquired
business;
|
|
□
|
difficulty
assimilating operations, technologies, products and policies of acquired
businesses;
|
|
□
|
failure
to improve our operation, infrastructure, financial and management
controls, procedures and policies in step with our growth;
|
|
□
|
potential
loss of key employees from an acquired company, in such areas as
technology development, marketing, sales and content;
|
|
□
|
failure
to integrate, train, supervise and manage our expanding work force
effectively;
|
|
□
|
assuming
liabilities, including unknown and contingent liabilities, of acquired
businesses; and
|
|
□
|
potential
impairment of acquired assets.
|
In addition, the issuance of equity or
convertible debt securities to finance or otherwise complete acquisitions may
dilute the ownership of our then-existing stockholders. Failure of our
acquisition-based growth strategy to yield anticipated benefits would likely
harm our operating results.
If
any of our relationships with Internet search websites terminate or if such
websites’ methodologies are modified, traffic to our websites and corresponding
consumer origination volumes could decline.
We depend in part on various Internet
search websites, such as Google, MSN and Yahoo!, and other websites to direct a
significant amount of traffic to our websites and to generate customer referrals
for our customer referral activities. Search websites typically provide two
types of search results, algorithmic and purchased listings. Algorithmic
listings cannot be purchased and, instead, are determined and displayed solely
by a set of formulas designed by search engine companies. Other listings can be
purchased and are displayed if particular word searches are performed on a
search engine. We rely primarily on algorithmic search results to direct a
substantial share of the visitors to our websites and the advertiser customers
we serve.
-6-
Our ability to maintain the flow of
visitors directed to our websites by search websites and other Internet websites
is not entirely within our control. For example, search websites frequently
revise their algorithms in an attempt to optimize their search result listings.
Changes in the methodologies used by search websites to display results could
cause our websites to receive less favorable placements, which could reduce the
number of users who link to our websites from these search websites. Any
reduction in the number of users directed to our websites would negatively
affect our ability to earn revenue. If traffic on our websites declines, we may
need to resort to more costly sources to replace lost traffic, and such
increased expense could adversely affect our business and
profitability.
Increases
in the price of online marketing or the modification or termination of our
relationships with Internet search websites and other Internet websites could
have a negative impact on our revenues, margins and customer
referrals.
Prices charged to us for online
marketing have increased as a result of increased demand for advertising
inventory, which has caused our advertising expenses to increase and our margins
to decline. Our advertising contracts with online search engines and other
Internet websites are typically short-term. If one or more Internet search
websites or other Internet websites on which we rely for marketing modifies or
terminates its relationship with us, our marketing expenses could further
increase, the amount of website traffic and the number of customer referrals we
generate could decrease, and our related revenues or margins could decline. As
the number of customer referrals that we require to meet customer demand has
increased, we have increased our levels of marketing to meet those requirements.
However, we cannot assure you that an increase in marketing will result in an
increase in customer referrals.
We expect to face increasing
competition that could result in a loss of users and reduced profit
margins.
The
market within our designated vertical channels is anticipated to be highly
competitive, and we expect competition to significantly increase in the
future. We compete or intend to compete with a wide variety of
companies and web-based services, including well established
websites. We also anticipate that a number of companies are or will
be attempting to enter the vertical channels we have identified, either directly
or indirectly, some of which may become significant competitors in the future.
As we broaden our services and evolve into a multi-channel company, we may be
faced with increasing competition within each vertical channel we are
in.
Some of
our competitors have longer operating histories, greater name and brand
recognition, larger user bases, significantly greater financial, technical,
sales and marketing resources, and engage in more extensive research and
development than we do. We anticipate some of our competitors will
also have lower customer acquisition costs than we do and offer a wider variety
of services. If our competitors are more successful than we are in
attracting customers, our ability to maintain a large and growing customer base
will be adversely affected.
More
intense competition could also require us to increase our marketing
expenditures, thereby reducing our profit margins and any
profitability.
-7-
If
we are unable to compete effectively, our business, revenues and future growth
may suffer.
We
contend with a variety of Internet and traditional offline
competitors. Many of our current and potential online and traditional
store-based or print publication-based competitors have longer operating
histories, more industry experience, larger customer or user bases, greater
brand recognition and significantly greater financial, marketing and other
resources than we do. These current and potential competitors may be
able to devote substantially greater resources to Internet websites and systems
development than we can, including through acquisitions, investments and joint
ventures. Our competitors may also be able to secure products from vendors on
more favorable terms, fulfill customer orders more efficiently, adopt more
aggressive pricing or devote more resources to marketing and promotional
campaigns. In addition, traditional store-based and print publication-based
retailers are able to offer customers the experience to see and feel products in
a manner that is not possible over the Internet.
We cannot
assure you that we will be able to compete successfully against current or
future competitors. Competitive pressures may result in increased marketing
costs, decreased prices for our advertising products and services, and decreased
website traffic and loss of market share, which would adversely affect our
business, revenues and future growth.
If we are not successful in
increasing the number of our customers or having customers actively engage in
revenue producing activities through our websites, products and services, our
business and financial results will suffer.
The
success of our business depends upon our ability to increase our base of
customers actively engaged in revenue generating activities through our
websites, products or services. Our ability to increase our base of
customers is dependent upon attracting new customers to our
websites. We may not be able to increase the level of new customers
visiting our websites. Failure to increase or maintain our base of
customers would reduce our revenue and our ability to implement our
strategies.
Our
success is dependent upon our ability to enhance the quality and scalability of
our various products and services in a changing environment. If we
are unable to do so, we may be unable to generate revenue growth.
Our
customers use a wide variety of constantly changing hardware and software. We
will continue to invest significant resources to develop products and services
for new or emerging software and hardware platforms that may develop from time
to time. However, there is a risk that a new hardware or software platform for
which we do not provide products or services could rapidly grow in popularity.
As a result, we may not be in a position to develop products or services for
such platforms or may be late in doing so. If we fail to introduce new products
or services that address the needs of emerging market segments or if our new
products or services do not achieve market acceptance as a result of delays in
development or other factors, our future growth and revenue opportunity could
suffer.
If we are unable to develop new or
enhanced features or fail to predict or respond to emerging trends, our revenue
and any profitability will suffer.
Our
future success will depend in part on our ability to modify or enhance our
website features to meet user’s demands, add features and address technological
advancements. If we are unable to predict preferences or industry changes, or if
we are unable to modify our website features in a timely manner, we may lose
members. New features may be dependent upon our obtaining needed technology or
services from third parties, which we may not be able to obtain in a timely
manner, upon terms acceptable to us, or at all. We spend significant resources
developing and enhancing our features. However, new or enhanced features may
have technological problems or may not be accepted by users. If we are unable to
successfully develop, acquire or implement new features or enhance our existing
features in a timely and cost-effective manner, our revenue and any
profitability will suffer.
-8-
We do not currently maintain
redundant capabilities and a catastrophic event could result in a significant
disruption of our services.
Our
computer equipment and the telecommunications infrastructure of our third-party
network provider are vulnerable to damage from fires, earthquakes, floods, power
loss, telecommunications failures, terrorism and similar events. Our servers are
also vulnerable to computer viruses, worms, physical and electronic break-ins,
sabotage and similar disruptions from unauthorized tampering of our computer
systems. We do not currently maintain redundant capabilities and a catastrophic
event could result in a significant and extended disruption of our services.
Currently, we do not have a disaster recovery plan to address these and other
vulnerabilities. As a result, it would be difficult to operate our business in
the event of a disaster. Any prolonged disruption of our services due to these,
or other events, would severely impact or shut down our business. We do not
carry earthquake or flood insurance, and the property, business interruption and
other insurance we do carry may not be sufficient to cover, if at all, losses
that may occur as a result of any events which cause interruptions in our
services.
If
we fail to develop and diversify our website features, functionality and product
and service offerings, we could lose market share.
Internet
content, user tools and business models are evolving rapidly due to low barriers
to entry and continuous technology innovations. To remain competitive, we must
continue to improve the ease of use, responsiveness, functionality and features
of our websites, develop content, new products and services, and continually
improve the consumer’s purchasing experience. The time, expense and effort
associated with such development may be greater than anticipated, and any
features, functions, and products and services actually developed and introduced
may not achieve consumer or advertiser acceptance or enhance user loyalty.
Furthermore, our efforts to meet changing customer needs may require the
development or licensing of increasingly complex technologies at great expense.
If we are unable to develop and bring to market additional features, functions,
content, products and services, we could lose market share to competitors, which
could negatively impact our business, revenues and future growth.
Technological
advances and changes in customer demands or industry standards could result in
increased costs or render our products and services obsolete or less
competitive.
The
market for our products and services is characterized by rapid technological
advances, changes in customer requirements, changes in protocols and evolving
industry standards. Our efforts to keep up with such advances, requirements,
protocol and standards may lead to increased product and service development
costs and costly changes to our procedures and methodologies. If we fail in such
efforts, our products and services may become obsolete or less
competitive. There is no assurance that we will be successful in
keeping up with technological advances and changes in customer demands and
industry standards, and our failure to do so may have a negative impact on our
business, prospects and financial condition.
-9-
If
we are unable to obtain or maintain key website addresses, our ability to
operate and grow our business may be impaired.
Our
website addresses, or domain names, are critical to our business. However, the
regulation of domain names is subject to change, and it may be difficult for us
to prevent third parties from acquiring domain names that are similar to ours,
that infringe our trademarks or that otherwise decrease the value of our brands.
If we are unable to obtain or maintain key domain names for the various areas of
our business, our ability to operate and grow our business may be
impaired.
Assertions by any third party that we
infringe its intellectual property could result in costly and time-consuming
litigation, expensive licenses or the inability to operate as
planned.
The
software and technology industries are characterized by the existence of a large
number of patents, copyrights, trademarks and trade secrets and by frequent
litigation based on allegations of infringement or other violations of
intellectual property rights. As we face increasing competition, the possibility
of intellectual property rights claims against us may grow. Our services or
technologies may not be able to withstand third-party claims or rights
restricting their use. Companies, organizations or individuals, including our
competitors, may hold or obtain patents or other proprietary rights that would
prevent, limit or interfere with our ability to provide our services or develop
new services and features, which could make it more difficult for us to operate
our business.
If we are
determined to have infringed upon a third party’s intellectual property rights,
we may be required to pay substantial damages, stop using technologies or
services found to be in violation of a third party’s rights or seek to obtain a
license from the holder of the infringed intellectual property right, which
license may not be available on reasonable terms, or at all, and may
significantly increase our operating expenses or may require us to restrict our
business activities in one or more respects. We may also be required to develop
alternative non-infringing technologies or services that could require
significant effort and expense or may not be feasible. In the event of a
successful claim of infringement against us and our failure or inability to
obtain a license to the infringed technology or service, our business and
results of operations could be harmed.
Our business will be adversely
affected if we are unable to protect our intellectual property rights from
unauthorized use or infringement by third-parties.
We rely
on a combination of trademark, patent, trade secret and copyright law, license
agreements and contractual restrictions, including confidentiality agreements
and non-disclosure agreements with employees, contractors and suppliers, to
protect our proprietary rights, all of which provide only limited
protection.
In
addition, effective patent, trademark, copyright and trade secret protection may
not be available in every country in which our technologies and services are
available. Legal standards relating to the validity, enforceability and scope of
protection of intellectual property rights in Internet-related industries are
uncertain and still evolving.
-10-
Government
regulations and legal uncertainties concerning the Internet could hinder our
business operations.
Laws
applicable to the Internet and online privacy generally are becoming more
prevalent. New laws and regulations may be adopted regarding the Internet or
other online services in the United States and foreign countries that could
limit our business flexibility or cause us to incur higher compliance costs.
Such laws and regulations may address:
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user
privacy;
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freedom
of expression;
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information
security;
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pricing,
fees and taxes;
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content
and the distribution of content;
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intellectual
property rights;
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characteristics
and quality of products and
services;
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taxation;
and
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online
advertising and marketing, including email marketing and unsolicited
commercial email.
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There can
be no assurance that future laws will not impose taxes or other regulations on
Internet commerce, which could substantially harm our business, results of
operations and financial condition. The nature of such laws and regulations and
the manner in which they may be interpreted and enforced is uncertain. The
adoption of additional laws or regulations, either domestically and abroad, may
decrease the popularity or impede the expansion of Internet marketing, restrict
our present business practices, require us to implement costly compliance
procedures or expose us and/or our customers to potential liability, which, in
turn, could adversely affect our business. Furthermore, the applicability of
existing laws to the Internet is unsettled with regard to many important issues,
including intellectual property rights, export of encryption technology,
personal privacy, libel and taxation. It may take years to determine whether and
how such existing and future laws and regulations apply to us. If we are
required to comply with new regulations or new interpretations of existing
regulations, or if we are unable to comply with these regulations, our business
could be harmed.
Changes
in the legal regulation of the Internet may have specific negative effects on
our business and operating results. For example, we may be considered to
“operate” or “do business” in states where our customers conduct their business,
resulting in regulatory action. Alternatively, we may be subject to claims under
state consumer protection statutes if our customers are dissatisfied with the
quality of our services, customer referrals or contract cancellation policies.
These claims could result in monetary fines or require us to change the manner
in which we conduct our business, either of which could adversely affect our
business and operating results. Any of these types of claims, regardless of
merit, could be time-consuming, harmful to our reputation and expensive to
litigate or settle.
-11-
The
increased security risks of online advertising and e-commerce may cause us to
incur significant expenses and may negatively impact our credibility and
business.
A
significant prerequisite of online commerce, advertising, and communications is
the secure transmission of confidential information over public networks.
Concerns over the security of transactions conducted on the Internet, consumer
identity theft and user privacy have been significant barriers to growth in
consumer use of the Internet, online advertising, and e-commerce. A significant
portion of our sales is billed directly to our customers’ credit card accounts.
We rely on encryption and authentication technology licensed from third parties
to effect secure transmission of confidential information. Encryption technology
scrambles information being transmitted through a channel of communication to
help ensure that the channel is secure even when the underlying system and
network infrastructure may not be secure. Authentication technologies, the
simplest example of which is a password, help to ensure that an individual user
is who he or she claims to be by “authenticating” or validating the individual’s
identity and controlling that individual’s access to resources. Despite our
implementation of security measures, however, our computer systems may be
potentially susceptible to electronic or physical computer break-ins, viruses
and other disruptive harms and security breaches. Advances in computer
capabilities, new discoveries in the field of cryptography or other developments
may specifically compromise our security measures. Any perceived or actual
unauthorized disclosure of personally identifiable information regarding website
visitors, whether through breach of our network by an unauthorized party,
employee theft or misuse, or otherwise, could harm our reputation and brands,
substantially impair our ability to attract and retain our audiences, or subject
us to claims or litigation arising from damages suffered by consumers, and
thereby harm our business and operating results. If consumers experience
identity theft after using any of our websites, we may be exposed to liability,
adverse publicity and damage to our reputation. To the extent that identity
theft gives rise to reluctance to use our websites or a decline in consumer
confidence in financial transactions over the Internet, our businesses could be
adversely affected. Alleged or actual breaches of the network of one of our
business partners or competitors whom consumers associate with us could also
harm our reputation and brands. In addition, we could incur significant costs in
complying with the multitude of state, federal and foreign laws regarding the
unauthorized disclosure of personal information. For example, California law
requires companies that maintain data on California residents to inform
individuals of any security breaches that result in their personal information
being stolen. Because our success depends on the acceptance of online services
and e-commerce, we may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by such breaches. Internet
fraud has been increasing over the past few years, and fraudulent online
transactions, should they continue to increase in prevalence, could also
adversely affect the customer experience and therefore our business, operating
results and financial condition.
We
depend on key management, technical and marketing personnel for continued
success.
Our
success and future growth depend, to a significant degree, on the skills and
continued services of our management team, including Raymond Meyers, our Chief
Executive Officer, and Michael Buechler, our Executive Vice
president. Our ongoing success also depends on our ability to
identify, hire and retain skilled and qualified technical and Internet marketing
personnel in a highly competitive employment market. As we develop
and acquire new products and services, we will need to hire additional
employees. Our inability to attract and retain well-qualified
managerial, technical and Internet sales and marketing personnel may have a
negative effect on our business, operating results and financial
condition.
-12-
We may be required to seek additional
funding, and such funding may not be available on acceptable terms or at
all.
We may
need to obtain additional funding due to a number of factors beyond our
expectations or control, including a shortfall in revenue, increased expenses,
increased need for working capital due to growth, increased investment in
capital equipment or the acquisition of businesses, services or technologies. If
we do need to obtain funding, it may not be available on acceptable terms or at
all. If we are unable to obtain sufficient funding, our business would be
harmed. Even if we were able to find outside funding sources, we might be
required to issue securities in a transaction that could be highly dilutive to
our investors or we may be required to issue securities with greater rights than
the securities we have outstanding today. We may also be required to take other
actions that could lessen the value of our common stock, including borrowing
money on terms that are not favorable to us. If we are unable to generate or
raise capital that is sufficient to fund our operations, we may be required to
curtail operations, reduce our services, defer or cancel expansion or
acquisition plans or cease operations in certain jurisdictions or
completely.
Risks
Related to our Securities
Our common stock is not listed on any
stock exchange and may never be, is not currently traded or may not ever be, and
no public or private market exists for our stock.
We intend
to seek to list our common stock for quotation on the Over-the-Counter
Electronic Bulletin Board. There can be no assurance that the shares will be
quoted on the Bulletin Board and, even if quoted, there may be extremely limited
trading activity and liquidity.
Our
common stock may be considered “penny stock”, which will further reduce the
liquidity of our common stock. Our common stock is likely to fall
under the definition of “penny stock,” trading in the common stock is limited
because broker-dealers are required to provide their customers with disclosure
documents prior to allowing them to participate in transactions involving the
common stock. These disclosure requirements are burdensome to broker-dealers and
may discourage them from allowing their customers to participate in transactions
involving our common stock, thereby further reducing the liquidity of our common
stock.
Penny
stocks” are equity securities with a market price below $5.00 per share other
than a security that is registered on a national exchange, included for
quotation on the NASDAQ system or whose issuer has net tangible assets of more
than $2,000,000 and has been in continuous operation for greater than three
years. Issuers who have been in operation for less than three years must have
net tangible assets of at least $5,000,000.
Rules
promulgated by the Securities and Exchange Commission under
Section 15(g) of the Exchange Act require broker-dealers engaging in
transactions in penny stocks, to first provide to their customers a series of
disclosures and documents including:
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A
standardized risk disclosure document identifying the risks inherent in
investment in penny stocks;
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All
compensation received by the broker-dealer in connection with the
transaction;
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Current
quotation prices and other relevant market data; and o Monthly account
statements reflecting the fair market value of the
securities.
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-13-
These
rules also require that a broker-dealer obtain financial and other
information from a customer, determine that transactions in penny stocks are
suitable for such customer and deliver a written statement to such customer
setting forth the basis for this determination.
Our directors and executive officers
will continue to exert significant control over our future direction, which
could reduce the sale value of our Company.
Upon
completion of the distribution, members of our Board of Directors and our
executive officers will own 65.02% of our outstanding common
stock. Accordingly, these stockholders, if they act together, will be
able to control all matters requiring approval of our stockholders, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership, which could result in a continued concentration
of representation on our Board of Directors, may delay, prevent or deter a
change in control and could deprive our stockholders of an opportunity to
receive a premium for their common stock as part of a sale of our
assets.
Investors should not anticipate
receiving cash dividends on our common stock.
We have
never declared or paid any cash dividends or distributions on our common stock
and intend to retain future earnings, if any, to support our operations and to
finance expansion. Therefore, we do not anticipate paying any cash dividends on
the common stock in the foreseeable future.
Our
indemnification of officers and directors and limitations on their liability
could limit our recourse against them.
Our
Certificate of Incorporation and Bylaws contain broad indemnification and
liability limiting provisions regarding our officers, directors and employees,
including the limitation of liability for certain violations of fiduciary
duties. Shareholders therefore will have only limited recourse
against these individuals.
If we fail to implement and maintain
proper and effective internal controls and disclosure controls and procedures,
our ability to produce accurate and timely financial statements and public
reports could be impaired, which could adversely affect our operating results,
our ability to operate our business and investors’ views of
us.
We must
ensure that we have adequate internal financial and accounting controls and
procedures in place so that we can produce accurate financial statements on a
timely basis. We will be required to spend considerable effort
establishing and maintaining our internal controls, which will be costly and
time-consuming and will need to be re-evaluated frequently. We are in
the process of documenting, reviewing and, if appropriate, improving our
internal controls and procedures in anticipation of being a reporting company
and eventually being subject to Section 404 of the Sarbanes-Oxley Act of 2002,
which will require annual management assessments of the effectiveness of our
internal control over financial reporting. Under current regulations,
we expect that the first year for this assessment, as well as an audit of our
internal controls over financial reporting by our independent registered public
accounting firm, will be fiscal 2011. As we begin the assessment
process in anticipation of being subject to these Section 404 requirements and,
as part of that documentation and testing, we may identify areas for further
attention and improvement. We are in the process of developing
disclosure controls and procedures designed to ensure that information required
to be disclosed by us in our public reports and filings is recorded, processed,
summarized and reported within the time periods specified by applicable SEC
rules and forms.
-14-
Implementing
any appropriate changes to our internal controls and disclosure controls and
procedures may entail substantial costs to modify our existing financial and
accounting systems and internal policies, take a significant period of time to
complete, and distract our officers, directors and employees from the operation
of our business. These changes may not, however, be effective in establishing or
maintaining the adequacy of our internal controls or disclosure controls, and
any failure to maintain that adequacy, or a consequent inability to produce
accurate financial statements or public reports on a timely basis, could
materially adversely affect our business. Further, investors’ perceptions that
our internal controls or disclosure controls are inadequate or that we are
unable to produce accurate financial statements may seriously affect the price
of our common stock.
We
have additional common stock and preferred stock available for issuance, which,
if issued, could adversely affect the rights of the holders of our common
stock.
Our
Certificate of Incorporation authorizes the issuance of up to 25,000,000 shares
of our common stock and up to 10,000,000 shares of preferred
stock. The common stock and the preferred stock can be issued by the
Board of Directors, without stockholder approval. Any future
issuances of common stock, an increase in the authorized shares of common stock
or preferred stock would further dilute the percentage ownership of the Company
held by our investors.
USE
OF PROCEEDS
The shares included in this
registration statement will be distributed as a dividend to the shareholders of
DSS pro rata as of the Record Date. We will not receive any proceeds from the
sale of the shares offered by this prospectus.
DETERMINATION
OF OFFERING PRICE
There is no established public market
for the shares of common stock being registered. As a result the offering price
of the shares of common stock offered hereby has been arbitrarily determined by
us to be $0.001 per share, and does not necessarily bear any relationship to
assets, earnings, book value or any other objective criteria of value. In
addition, no investment banker, appraiser or other independent third party has
been consulted concerning the offering price for the shares or the fairness of
the offering price.
SELLING
SECURITY HOLDERS
DSS intends to distribute all 7,500,000
shares being registered hereby to its shareholders on a pro rata
basis.
PLAN
OF DISTRIBUTION
The securities to be registered will be
distributed by DSS to its shareholders as of the Record Date on a pro rata
basis.
DESCRIPTION
OF SECURITIES
GENERAL
The following is a summary of
information concerning our capital stock. The summaries and descriptions below
do not purport to be complete statements of the relevant provisions of our
Certificate of Incorporation and all amendments thereto. The summary is
qualified by these documents, which you must read for complete information on
our capital stock. The Certificate of Incorporation and all amendments thereto
and by-laws of the Company are included as exhibits to the registration
statement, of which this Prospectus is a part.
-15-
COMMON
STOCK
We are authorized to issue 25,000,000
shares of Common Stock, $.001 par value authorized, of which 20,501,000 are
issued and outstanding as of March 31, 2010.
VOTING
RIGHTS
Each outstanding share of common stock
entitles the holder thereof to one vote per share on matters submitted to a vote
of stockholders. Stockholders do not have preemptive rights to purchase shares
in any future issuance of our common stock.
The holders of shares of our common
stock are entitled to dividends out of funds legally available when and as
declared by our Board of Directors. Our Board of Directors has never declared a
dividend. Should we decide in the future to pay dividends, it will be at the
discretion of the Board of Directors and will be dependent upon then existing
conditions, including the Company’s financial condition and the results of
operations, capital requirements, contractual restrictions, business prospects,
and other factors that the Board of Directors considers relevant. Each share is
entitled to the same dividend. In the event of our liquidation,
dissolution or winding up, holders of our common stock are entitled to receive,
ratably, the net assets available to stockholders after payment of all
creditors.
All of the issued and outstanding
shares of our common stock are duly authorized, validly issued, fully paid and
non-assessable. To the extent that additional shares of our common stock are
issued, the relative interests of existing stockholders will be
diluted.
PREFERRED
STOCK
We
are authorized to issue up to 10,000,000 shares of $.001 par value preferred
stock in one or more series with such designations, voting powers, if any,
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations and restrictions, as are determined by
resolution of our Board of Directors. The issuance of preferred stock
may have the effect of delaying, deferring or preventing a change in control of
our Company without further action by stockholders and could adversely affect
the rights and powers, including voting rights, of the holders of common
stock. In certain circumstances, the issuance of preferred stock
could depress the market price of the common stock. No shares of preferred stock
have been issued.
DIVIDENDS
We have not declared any dividends, and
we do not plan to declare any cash dividends in the foreseeable future.
WARRANTS,
OPTIONS AND CONVERTIBLE DEBT.
There are no outstanding options,
warrants or convertible debt.
TRANSFER
AGENT
-16-
INTEREST
OF NAMED EXPERTS AND COUNSEL
The validity of the securities offered
hereby will be passed upon by the Law Office of Gary A. Agron. The financial
statements of the Company and the business aquired (Legalstore.com) appearing in
this Prospectus have been audited by Freed Maxick & Battaglia, CPAs, PC, our
independent registered public accounting firm.
BUSINESS
Our
Objective
Our plan
is to build a targeted multi-faceted Internet media company specializing in
acquiring, developing and enhancing Web properties through the use of technology
and advanced marketing techniques.
Our
objectives include:
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Acquiring
existing Web properties, generic and/or recognizable domain names with
existing Web traffic and revenue
streams.
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Starting
with LegalStore.com, and using our newly acquired domain names as
anchor names, creating vertical segments in which to sell products,
advertising, and marketing
services.
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Developing
innovative and distinctive advertising and marketing programs to
continually increase the monetization of all domain
names.
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Using
cross promotion traffic promotion techniques to increase the profitability
of the Web properties.
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Identify
quality Web properties for acquisition that generate, now or in the
future, targeted premium Web
traffic.
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Acquire
these Web properties in a manner that is supported by our business
model.
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Integrate
the acquired Web properties into our vertical channel in order to generate
additional traffic to the acquired Web
properties.
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Develop
new products and services that are pushed down the vertical
channels.
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Effectively
manage the growth, both traffic and revenue, throughout the Company's
lifecycle.
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We believe risks associated with our
objectives and strategies can be minimized by:
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Acquiring
quality Web properties that are currently producing a revenue stream that,
in our estimation, have the potential to be
increased.
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Utilizing
our management experience to manage the growth of the
organization.
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Using
our understanding of the marketplace to develop techniques and processes
that maximize the revenue generated from all vertical
channels.
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Creating
automated processes, wherever possible, throughout to increase accuracy
and reduce labor cost.
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-17-
Our Strategy
We will
seek to acquire existing Web properties within our identified vertical markets
that we believe are currently underdeveloped. IMS uses an acquisition
model that seeks opportunities that have some the following
characteristics:
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Web-based
service offering where the customer accesses our application server via
the Internet
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Defined
market segment
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Cash
flow positive (post transaction)
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Undervalued,
based on potential growth
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In
need of automation or process
improvement
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Synergistic
to other owned properties
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Recurring
revenue model
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Scaleable
model
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These
acquired Web properties will serve as the anchor for the build out of the
identified vertical channel. A vertical channel is defined as a
business category such as "automotive," "legal,” or "travel.” We have
identified several vertical channels that will be explored for possible
development. We anticipate identifying additional vertical channels
in the future. Therefore 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:
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Cars
and Automobiles
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Computers
and Technology
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Careers
and Education
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Online
Games
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Internet
Marketing
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Legal
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Money
and Investing
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Movies,
Music, and Films
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Real
Estate
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Sports
and Recreation
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Travel
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We intend to concentrate our initial
efforts on developing the Legal and the Internet Marketing
channel. Our first Web property acquisition, www.legalstore.com, will
serve as the anchor for the Legal vertical. We will seek to acquire
additional domain names with associated Web traffic and either redirect the
traffic to the Legalstore.com website or use the domain names to develop
supporting Web properties.
-18-
The
LegalStore.com
On
October 8, 2009, we completed our first vertical channel acquisition with the
asset purchase of LegalStore.com consisting of the e-commerce site www.legalstore.com; leased
warehouse and office space in Rochester, New York; a 15,000 customer name list;
cash and accounts receivable; current inventory; certain fixed assets; and
assumed certain accounts payables. LegalStore.com offers legal
supplies, legal forms, and related legal products. Using our channel
strategy detailed above, LegalStore.com will serve as the anchor Web property
for our Legal channel.
Since
acquiring the property we have upgraded the Website’s look and
feel. We have also been able to identify and acquire other key domain
names that will be used in the building of the legal channel, including the
domain names willsupplies.com, exhibitlabel.com and
securitypaper.com.
Our 2010
objectives for the Legal channel include:
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Lowering
the “Cost of Goods Sold” by contracting with lower cost
suppliers.
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Launching
additional Web sites focused on specific products thereby building a
network of sites enhancing the probability of better search engine
ranking.
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Introducing
the first technology based service – providing leads to
lawyers.
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Introducing
a consumer oriented legal product service which allows the consumer to
prepare certain legal forms and
documents.
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Competition
The
markets within our designated vertical channels are highly competitive, and we
expect competition to significantly increase in the future. We
compete or intend to compete with a wide variety of companies and Web-based
services, including well established Websites. We also anticipate
that a number of companies are or will be attempting to enter the vertical
channels we have identified, either directly or indirectly, some of which may
become significant competitors in the future. As we broaden our
services and evolve into a multi-channel company, we may be faced with
increasing competition within each vertical channel we are in.
Some of
our competitors have longer operating histories, greater name and brand
recognition, larger user bases, significantly greater financial, technical,
sales and marketing resources, and engage in more extensive research and
development than we do. We anticipate some of our competitors will
also have lower customer acquisition costs than we do and offer a wider variety
of services. If our competitors are more successful than we are in
attracting customers, our ability to maintain a large and growing customer base
will be adversely affected.
Employees
At March
31, 2010, we had five full-time employees, and one part-time
employee. Three of the full-time employees were located at our
Rochester, NY location, and the balance of our employees are located at our
Santa Monica, CA office. None of our employees are represented by a
labor union or are party to a collective bargaining agreement, and we consider
our relationships with our employees to be good.
-19-
Facilities
We lease
approximately 4,000 square feet of office and warehouse space at 320 North
Goodman Street, Suite 209, in Rochester, NY for our LegalStore.com
business unit for $1,750 per month on a five year lease expiring October 31,
2010. Our corporate offices are located at 1434 6th
Street, Suite 9, Santa Monica, CA and consist of 2,000 square feet under a one
year lease for $2,000 per month, which expires January 31, 2011.
MARKET
PRICE FOR COMMON STOCK AND RELATED
STOCKHOLDER
MATTERS
There is currently no public trading
market for our common stock. We intend to apply for quotation of our common
stock on the Bulletin Board. We can provide no assurance that we will
be able to list our stock for quotation on the Bulletin Board.
Upon distribution of the shares
included in this registration statement to the DSS shareholders, there will be
approximately 5,500 holders of our common stock.
We have not declared any cash dividends
on our common stock since our inception and do not anticipate doing so in the
foreseeable future.
-20-
MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
GENERAL
We were
incorporated on March 26, 2007 and did not have operations until we acquired the
LegalStore.com on October 8, 2009. We are in the business of
acquiring, building, and monetizing Internet web properties in vertical business
channels identified by us. We then use these web properties as an
anchor to build within that vertical channel.
On
October 8, 2009 we completed our first acquisition in the Legal vertical channel
through the purchase of assets and assumption of certain liabilities of
LegalStore.com from Lester Levin, Inc., a New York corporation and wholly owned
subsidiary of Document Security Systems, Inc. in exchange for 7,500,000 shares
of our common stock. LegalStore.com is an Internet based company that
primarily sells legal supplies and legal forms to the legal
community. We currently operate in one business segment.
During
2009, our Chief Executive Officer advanced IMS $23,929 for working
capital. These advances are unsecured, non-interest bearing, and are
due on demand. The advances are included in current liabilities on
our balance sheet as of December 31, 2009.
RESULTS
OF OPERATIONS
For The
Year Ended December 31, 2009
We did
not have any revenue in 2009 until the completion of our acquisition of the
LegalStore.com on October 8, 2009. Accordingly, revenue comparisons
in prior periods are not meaningful. Revenue for the three month
period subsequent to the acquisition date through December 31, 2009 totaled
$111,022. Costs of revenue for this period totaled $80,983 resulting
in a gross profit of $30,039. During this period we incurred
operating expenses totaling $104,211. As a result, we had a net loss
from operations of $74,172. The 2009 unaudited pro-forma results of
operations had the acquisition occurred January 1, 2009 are presented later in
this Prospectus.
LIQUIDITY
AND CAPITAL RESOURCES
At
December 31, 2009, we had cash totaling $7,777, accounts receivable of $33,246,
inventory of $90,829, and prepaid expenses of $5,251. Current assets
totaled $137,103. Total assets totaled $349,192.
At
December 31, 2009, we had accounts payable of $26,922, accrued expenses of
$9,781, and advances from related party of $23,929. Total current
liabilities were $60,363 at December 31, 2009.
At
December 31, 2009, we had a working capital surplus of $76,740.
We expect
to use our existing cash and revolving line of credit to support our current
operations and our efforts to achieve consistent positive cash flow from
operations,
although there is no guarantee the Company will be able to do
so. The Company’s ability to fund its capital requirements out
of its available cash, cash generated from operations and revolving line of
credit depends on a number of factors. Some of these factors include
our ability to (i) increase sales of our existing core products in the Legal
channel; (ii) successful introduction of new business-to-business products and
services for the Legal channel; and (iii) successful introduction of a
business-to-consumer product line for the Legal channel. If the
Company cannot generate sufficient cash from its current operations, the Company
may need to raise additional funds in the future in order to fund its working
capital needs.
-21-
We
anticipate additional financing will be needed to facilitate future growth
through the acquisition of Internet Web properties. Our future
financing needs may be met through either a debt or equity
offering.
SUBSQUENT
EVENTS
Subsequent
to December 31, 2009, additional advances from our Chief Executive Officer of
$41,063 for working capital were received by us upon the same terms as the 2009
advances. On April 8, 2010, the aggregate advances of $64,992 have
been formalized with the execution of a $200,000 revolving line of credit
agreement between the Company and our Chief Executive Officer.
OFF
BALANCE SHEET ARRANGEMENTS
We do not
have any off-balance sheet arrangements.
MANAGEMENT
Directors
and Executive Officers
Name
|
Age
|
Position
|
Director/Officer Since
|
Raymond
J. Meyers
|
53
|
Chief
Executive Officer, President,
|
April
2008
|
Treasurer
,and Director
|
|||
Michael
Buechler
|
37
|
Executive
Vice President, Secretary,
|
June
2009
|
and
Director
|
|||
Alexander
A. Orlando
|
47
|
Director
|
April
2008
|
Patrick
White
|
56
|
Director
|
October
2009
|
Philip
Jones
|
40
|
Director
|
October
2009
|
The principal occupations for at least
the past five years of each of our directors and executive officers are as
follows:
Raymond Meyers founded IMS in
March 2007 and has been Chief Executive Officer and President since the
Company’s inception. Mr. Meyers is a results-driven technology
industry executive bringing over 30 years of entrepreneurial, Internet,
technology, financial, operating and management experience to the
Company. Throughout his career, he has been successful by combining
expertise in marketing, business development, strategic planning, P&L
management and SEC regulatory requirements with excellent organizational,
leadership, team building and operations management
qualifications. Mr. Meyers founded and operated several
technology-based companies, with the most recent one being eBoz, Inc., an
Internet marketing tools company, which he sold to Web.com (NasdaqGM: WWWW) in
2005. He was previously (from December 1996 to December 1999) CEO and
President of a NASDQ listed company. He is a graduate of Rutgers
University with continuing education at UCLA.
-22-
Michael Buechler joined IMS in March 2009 and
is currently its Executive Vice President – Web Properties. Mr.
Buechler is an Internet specialist who is experienced in the development and
marketing of innovative Web-based products services. He brings over
15 years experience to IMS in areas of technology, operations, management and
entrepreneurial ventures. Mr. Buechler co-founded Linkbuddies.com
banner exchange which was one of the first and largest banner exchanges in the
world. Linkbuddies had over 250,000 members and displayed over
10,000,000 banner impressions a day. Linkbuddies.com was acquired by
iBoost, Inc. in 2000. Mr. Buechler was Vice President – Web
Properties at eBoz, Inc., an Internet marketing tools company and was
instrumental in eBoz’s sale to Web.com in 2005. At Web.com, he held
the title of Director – Product Strategy and was responsible for product
strategy for this NASDAQ listed Web services company. Mr. Buechler
also managed the team that was responsible for the technical integration of
newly acquired product lines.
Alexander A. Orlando has over
25 years experience implementing operational and financial strategies for
growing organizations. He has extensive experience in a number of
entrepreneurial ventures. Mr. Orlando's professional experience
includes; Chief Financial Officer and Treasurer for Eagle International
Institute, Inc., a member of the Rochester Top 100 fastest growing companies and
recognized as one of INC. 5000 fastest growing companies in the U.S., Vice
President for eBoz, Inc., a start up Internet venture purchased sold to Web.com
in 2005, General Manager and Controller for Foley-PLP, Senior
Executive for ITT Industries-Goulds Pumps, Managing Partner of Wagner's Tax and
Consulting Services and Owner of several Subway Sandwich Franchises and Real
Estate Investments. He is a graduate of Ithaca College with a BS in
Finance and Accounting, with continuing education at Geneseo State
College.
Patrick White founded
Document Security Systems, Inc. in 2002 and serves as Chief Executive Officer
and a Director. DSS is an AMEX Exchange listed company. Under Mr.
White's direction, in 2008 and 2009 Document Security Systems was named
"Technology Fast 500" which is a list published by Deloitte LLP for the fastest
growing technology companies in the USA. Mr. White is a forward thinking,
results-driven, security technology industry executive who brings over 25 years
of private and public company operating, financial, and management experience to
DSS. He has extensive experience building organizations through combining his
expertise in strategic planning, capital raising, product design and
development, sales and marketing, mergers and acquisitions, and operations
management. Mr. White currently sits on the board of several privately-held
technology companies and is a frequent speaker at industry functions.
Previously, he has held executive and financial positions at Citizens Bank
(formerly Rochester Community Savings Bank), and several commercial printing
companies. Mr. White received his Bachelors of Science (Accounting) degree and
Masters of Business Administration from Rochester Institute of
Technology.
Philip. Jones is a CPA and
holds an MBA from Rochester Institute of Technology. He has 13 years
experience in both the public and private accounting and finance sectors,
including positions at Arthur Anderson and PricewaterhouseCoopers, American
Fiber Systems (Controller), and Zapata (NYSE:ZAP)(Accounting Manager and
Director of Finance). Prior to his role at Document Security Systems, Mr. Jones
was Controller at American Fiber Systems, Inc. (AFS), a rapidly growing
telecommunications company based in Rochester, NY. At AFS, he was
responsible for all facets of financial and accounting management with
anticipation of an Initial Public Offering. At Zapata, Mr. Jones was responsible
for all SEC reporting requirements, which included the successful spin-off and
IPO of the company's Internet subsidiary. Mr. Jones joined DSS in
2005 and is currently its Chief Financial Officer. At DSS, Mr. Jones
combines his technical SEC reporting experience with his hands-on operational
experience, including directing systems and process implementations and general
financial controls.
-23-
Term
of Office
Directors
are elected to hold office until the next annual meeting of shareholders and
until their successors are elected and qualified. Annual meetings of
the shareholders, for the selection of directors to succeed those whose terms
expire, are held at such time each year as designated by the Board of
Directors. Officers of the Company are elected by the Board of
Directors, which is required to consider that subject at its first meeting after
every annual meeting of shareholders. Each officer holds office until
his successor is elected and qualified or until his earlier resignation or
removal.
Executive Compensation
We do not
have employment agreements with our executive officers, Mr. Meyers and Mr.
Buechler. We currently pay Mr. Meyers and Mr. Buechler $3,000 per
month each. We do not have key person life insurance on the lives of
any of our executive officers.
The
following table discloses compensation received by our Chief Executive Officer
and acting Chief Financial Officer, and our Executive Vice-President, also
referred to herein as our “named executive officers,” for the fiscal years ended
December 31, 2009 and 2008.
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards ($)
|
All
Other Compensation ($)
|
Total
($)
|
|||||||
Raymond
J Meyers,
|
2009
|
$7,500
|
—
|
—
|
—
|
—
|
$7,500
|
|||||||
Chief
Executive Officer, acting Chief Financial Officer
|
2008
|
(1)
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||
Michael
Buechler,
|
2009
|
$7,500
|
—
|
—
|
—
|
—
|
$7,500
|
|||||||
Executive
Vice President
|
2008
|
(1)
|
—
|
—
|
—
|
—
|
—
|
—
|
1. During 2008, Mr.
Meyers and Mr. Buechler were not employees and did not receive any compensation
from the Company.
-24-
Director
Compensation
Our
non-employee directors do not currently receive compensation for their services
as directors although they are provided reimbursement for out-of-pocket expenses
incurred in attending Board meetings. We may pay cash and stock-based
compensation to our directors in the future.
Board
Committees
We do not
have any committees of the Board of Directors. We consider a majority
of our Board members (Messrs. Orlando, White and Jones) to be independent
directors under rules of the Securities and Exchange Commission.
Equity
Incentive Plan
We intend
to adopt an equity incentive plan, which we refer to as our Plan, which will
provide for the grant of options intended to qualify as “incentive stock
options” and “non-statutory stock options” within the meaning of
Section 422 of the Internal Revenue Code of 1986, together with the grant
of bonus stock and stock appreciation rights, at the discretion of our Board of
Directors. Incentive stock options are issuable only to our eligible officers,
directors and key employees. Non-statutory stock options are issuable only to
our non-employee directors and consultants. We have not determined the aggregate
maximum number of shares of common stock or appreciation rights that may be
issued under the Plan. The Plan will be administered by our full Board of
Directors. Under the Plan, the Board will determine which individuals shall
receive options, grants or stock appreciation rights, the time period during
which the rights may be exercised, the number of shares of common stock that may
be purchased under the rights and the option price.
Limitation
on Liability and Indemnification of Officers and Directors
Our
Certificate of Incorporation provides that liability of directors to us for
monetary damages is eliminated to the full extent provided by Delaware law.
Under Delaware law, a director is not personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director
except for liability (i) for any breach of the director’s duty of loyalty
to us or our stockholders; (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law;
(iii) for authorizing the unlawful payment of a dividend or other
distribution on our capital stock or the unlawful purchases of our capital
stock; (iv) a violation of Delaware law with respect to conflicts of interest by
directors; or (v) for any transaction from which the director derived any
improper personal benefit.
The
effect of this provision in our Certificate of Incorporation is to eliminate our
rights and our stockholders’ rights (through stockholders’ derivative suits) to
recover monetary damages from a director for breach of the fiduciary duty of
care as a director (including any breach resulting from negligent or grossly
negligent behavior) except in the situations described in clauses
(i) through (v) above. This provision does not limit or eliminate our
rights or the rights of our security holders to seek non-monetary relief, such
as an injunction or rescission, in the event of a breach of a director’s duty of
care or any liability for violation of the federal securities laws.
-25-
CORPORATE
GOVERNANCE
We do not have an audit committee,
compensation committee or nominating committee.
As we grow and evolve into a SEC
registrant, our corporate governance structure is expected to be
enhanced.
As of the date of this Prospectus,
there are 20,501,000 shares of common stock outstanding. The following table
sets forth certain information regarding the beneficial ownership of the
outstanding shares as of the date of this Prospectus by (i) each person who
is known by us to own beneficially more than 5% of our outstanding common stock;
(ii) each of our executive officers and directors; and (iii) all of
our executive officers and directors as a group. Except as otherwise indicated,
each such person has investment and voting power with respect to such shares,
subject to community property laws where applicable. The address of our
executive officers and directors is in care of us at 1434 6th
Street, Suite9, Santa Monica, CA 90401.
Name of Beneficial Owner
|
Shares Beneficially Owned
|
Percentage Beneficially
Owned
|
||||||
Raymond
J. Meyers
|
9,000,000 | 43.90 | % | |||||
Document
Security Systems, Inc.
|
7,500,000 | 36.58 | % | |||||
Michael
Buechler
|
4,000,000 | 19.51 | % | |||||
Alexander
A. Orlando
|
1,000 | % | * | |||||
Patrick
White (1)
|
320,000 | 1.7 | % | |||||
Philip
Jones (1)
|
10,000 | % | * | |||||
All
executive officers and directors
|
||||||||
as
a group (five persons)
|
13,330,000 | 65.02 | % | |||||
*Less
than 1%
|
(1)
Represents shares to be received upon completion of the distribution to DSS
shareholders.
During
2009, our Chief Executive Officer advanced the Company $23,929. The
advances are unsecured, non–interest bearing, have no stated repayment terms and
are due on demand. The advances are included in current liabilities
in the accompanying balance sheet as of December 31, 2009. Subsequent
to December 31, 2009, additional advances of $41,063 were received from our
Chief Executive Officer by the Company for working capital and upon the same
terms as the 2009 advances. On April 8, 2010, the aggregate advances
of $64,992 have been formalized with the execution of a $200,000 revolving line
of credit agreement between the Company and our Chief Executive
Officer.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION
FOR
SECURITIES ACT LIABILITIES
The Company provides indemnification
for all reasonable actions taken by a director or officer in good faith to the
fullest extent permitted under Delaware law. In addition, under
Delaware law, officers and directors are not liable for monetary damages unless
an officer’s or director's breach of or failure to perform duties as a director
constitutes a violation of the criminal law or involves a transaction from which
the director derived an improper personal benefit either directly or
indirectly.
-26-
Insofar as indemnification for
liabilities arising under the Securities Act may be available to directors,
officers and controlling persons of the Registrant pursuant to any provision or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
WHERE
YOU CAN FIND MORE INFORMATION
We have filed a registration statement
on Form S-1 with the SEC with respect to the shares of our common stock being
registered hereunder. This prospectus, which is a part of such registration
statement, does not include all of the information that you can find in such
registration statement or the exhibits to such registration statement. You
should refer to the registration statement, including its exhibits and
schedules, for further information about us and our common stock. Statements
contained in this prospectus as to the contents of any contract or document are
not necessarily complete and, if the contract or document is filed as an exhibit
to a registration statement, is qualified in all respects by reference to the
relevant exhibit.
After the distribution, we will file
annual, quarterly and current reports, proxy statements and other information
with the SEC. The registration statement is, and any of these future filings
with the SEC will be, available to the public over the Internet on the SEC's
website at www.sec.gov . You may read and copy any filed document at the SEC's
public reference rooms in Washington, D.C. at 100 F Street, N.E., Washington,
D.C. 20549 and at the SEC's regional offices. Please call the SEC at
1-800-SEC-0330 for further information about the public reference
rooms.
-27-
Item 13. Other Expenses of Issuance and
Distribution
The estimated expenses of registration
and distribution will be borne exclusively by the Registrant and
include:
Registration
fee
|
$ | |||
Transfer
agent fees
|
$ | 10,000 | ||
Legal
fees
|
$ | 50,000 | ||
Accounting
fees
|
$ | 16,500 | ||
Miscellaneous
expenses
|
$ | 5,000 | ||
Total
|
$ | 81,500 |
RECENT
SALE OF UNREGISTERED SECURITIES
Item 14. Indemnification
of Directors and Officers
Our Certificate of Incorporation
provides that liability of directors to us for monetary damages is eliminated to
the full extent provided by Delaware law. Under Delaware law, a
director is not personally liable to us or our stockholders for monetary damages
for breach of fiduciary duty as a director except for liability (i) for any
breach of the director’s duty of loyalty to us or our stockholders;
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) for authorizing the
unlawful payment of a dividend or other distribution on our capital stock or the
unlawful purchases of our capital stock; (iv) a violation of Delaware law with
respect to conflicts of interest by directors; or (v) for any transaction
from which the director derived any improper personal benefit.
The
effect of this provision in our Certificate of Incorporation is to eliminate our
rights and our stockholders’ rights (through stockholders’ derivative suits) to
recover monetary damages from a director for breach of the fiduciary duty of
care as a director (including any breach resulting from negligent or grossly
negligent behavior) except in the situations described in clauses
(i) through (v) above. This provision does not limit or
eliminate our rights or the rights of our security holders to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a
director’s duty of care or any liability for violation of the federal securities
laws.
Insofar
as indemnification for liabilities arising under the Act may be permitted to our
directors, officers and controlling persons pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Item 15. Recent
Sales of Unregistered Securities
In the last three years, we have issued
the following unregistered securities:
Date
|
Name
|
Shares
|
Price
per Share
|
May
11, 2009
|
Raymond
Meyers
|
9,000,000
|
$.001
|
May
11, 2009
|
Alexander
Orlando
|
1,000
|
$.001
|
May
11, 2009
|
Michael
Buechler
|
4,000,000
|
$.001
|
October
8, 2009
|
Document
Security Systems, Inc.
|
7,500,000
|
Exchanged
for Assets in LegalStore.com
|
All
of the shares issued above were issued pursuant to the exemption from
registration provided in Section 4(2) of the Securities Act of 1933, as
amended. The shares were issued to only four investors, three of whom
were officers and/or directors of the Company and the fourth was Document
Security Systems, Inc. a public company which is also a control stockholder of
the Company.
-28-
Item
16. Exhibit Index
3.1
|
Certificate
of Incorporation of the Registrant, as amended
|
|
3.2
|
By-laws
of the Registrant
|
|
5.1
|
Opinion
on legality
|
|
10.1
|
Lease
(Santa Monica)
|
|
10.2
|
Agreements
with DSS
|
|
23.1 | Consent of independent registered public accounting firm | |
23.2 | Consent of Gary A. Agron (See Exhibit 5.1) |
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To
include any prospectus required by section 10(a)(3) of the Securities Act of
1933;
ii. To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with Commission pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than 12% change in the maximum aggregate
offering price set forth in the “Calculation of registration Fee” table in the
effective registration statements; and
iii. To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
-29-
(2) That,
for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 (the
“Act”) may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5) That,
for the purpose of determining liability under the securities Act of 1933 to any
purchaser:
(i)
Pursuant to Rule 430B:
(A) Each
prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to
be part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(B) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)9i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona
fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
effective date, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration statement
or made in any such document immediately prior to such effective date;
or
-30-
(6) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the
securities:
The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424;
(ii) Any free
writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
(iii) The portion of any
other free writing prospectus relating to the offering containing material
information about the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) Any other
communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(7) Upon
effectiveness of this registration statement, the Registrant will provide to DSS
certificates in such denominations and registered in such names as required to
permit prompt distribution to the named shareholders of DSS.
(8) In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
-31-
SIGNATURES
In accordance with the requirements of
the Securities Act of 1933, the Registrant certifies that it has reasonable
grounds to believe that it meets all of the requirements of filing on Form S-1
and authorized this registration statement to be signed on its behalf by the
undersigned, in the City of Santa Monica, State of California on April 9,
2010.
Internet
Media Services, Inc.
|
|
By: /s/ Raymond J.
Meyers
|
|
Chief
Executive Officer
|
In accordance with the requirements of
the Securities Act of 1933, this registration statement was signed by the
following persons in the capacities on April 9, 2010
/s/ Raymond J. Meyers
|
Chief
Executive Officer and Principal Accounting Officer
and Director
|
Raymond
J. Meyers
|
|
/s/ Michael Buechler
|
Executive
Vice President and Director
|
Michael
Buechler
|
|
/s/ Alexander A. Orlando
|
Director
|
Alexander
A. Orlando
|
|
/s/ Patrick White
|
Director
|
Patrick
White
|
|
/s/ Philip Jones
|
Director
|
Philip
Jones
|
-32-
EXHIBIT
INDEX
Exhibits.
3.1
|
Certificate
of Incorporation of the Registrant, as amended
|
|
3.2
|
By-laws
of the Registrant
|
|
5.1
|
Opinion
on legality
|
|
10.1
|
Lease
(Santa Monica)
|
|
10.2
|
Agreements
with DSS
|
|
23.1 | Consent of independent registered public accounting firm | |
23.2 | Consent of Gary A. Agron (See Exhibit 5.1) |
-33-
FINANCIAL
STATEMENTS
INTERNET
MEDIA SERVICES, INC.
DECEMBER
31, 2009
CONTENTS
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Financial Statements:
|
|
Balance
Sheet
|
F-3
|
Statement
of Operations and Accumulated Deficit
|
F-4
|
Statement
of Cash Flows
|
F-5
|
Notes
to the Consolidated Financial Statements
|
F-6
- F-11
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Internet
Media Services, Inc. and Subsidiary
We have
audited the accompanying consolidated balance sheet of Internet Media Services,
Inc. and Subsidiary as of December 31, 2009, and the related consolidated
statements of operations and accumulated deficit, and cash flows for the year
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor have we been engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Internet Media Services,
Inc. and Subsidiary as of December 31, 2009, and the results of its operations
and its cash flows for the year then ended, in conformity with U.S. generally
accepted accounting principles.
/s/
Freed Maxick & Battaglia, CPAs, PC
Buffalo,
New York
April 9,
2010
F-2
INTERNET
MEDIA SERVICES, INC.
|
||||
CONSOLIDATED
BALANCE SHEET
|
||||
December
31, 2009
|
||||
ASSETS
|
||||
Current
assets:
|
||||
Cash
|
$ | 7,777 | ||
Accounts
receivable
|
33,246 | |||
Inventory
|
90,829 | |||
Prepaid
expenses
|
5,251 | |||
Total
current assets
|
137,103 | |||
Property
and equipment, net
|
26,922 | |||
Other
intangibles, net
|
165,750 | |||
Goodwill
|
19,417 | |||
Total
assets
|
$ | 349,192 | ||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||
Current
liabilities:
|
||||
Accounts
payable
|
$ | 26,653 | ||
Accrued
expenses
|
9,781 | |||
Advances
from related party
|
23,929 | |||
Total
current liabilities
|
60,363 | |||
Stockholders'
equity
|
||||
Common
stock, $.001 par value, 25,000,000 shares authorized,
|
||||
20,501,000
shares issued and outstanding
|
20,501 | |||
Additional
paid in capital
|
342,500 | |||
Accumulated
deficit
|
(74,172 | ) | ||
288,829 | ||||
Total
liabilities and stockholders' equity
|
$ | 349,192 |
See accompanying notes.
F-3
INTERNET
MEDIA SERVICES, INC.
|
||||
CONSOLIDATED
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
|
||||
For
the Year Ended December 31, 2009
|
||||
Revenue
|
$ | 111,022 | ||
Costs
of revenue
|
80,983 | |||
Gross
profit
|
30,039 | |||
Operating
expenses
|
104,211 | |||
Net
loss and accumulated deficit - end of year
|
$ | (74,172 | ) |
See accompanying notes.
F-4
INTERNET
MEDIA SERVICES, INC.
|
||||
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
||||
For
the Year Ended December 31, 2009
|
||||
Cash
flows from operating activities:
|
||||
Net
loss
|
$ | (74,172 | ) | |
Adjustments
to reconcile net loss to net
|
||||
cash
used by operating activities:
|
||||
Depreciation
and amortization
|
5,739 | |||
(Increase)
decrease in assets:
|
||||
Accounts
receivable
|
(2,085 | ) | ||
Inventory
|
10,182 | |||
Prepaid
expenses
|
(5,251 | ) | ||
Increase
in liabilities:
|
||||
Accounts
payable and accrued expenses
|
36,434 | |||
Net
cash used by operating activities
|
(29,153 | ) | ||
Cash
flows from financing activities:
|
||||
Advances
from related party
|
23,929 | |||
Proceeds
from sale of common stock
|
13,001 | |||
Net
cash provided by financing activities
|
36,930 | |||
Cash
- end of year
|
$ | 7,777 | ||
Non-cash
investing and financing activities during the year
|
||||
Acquisition
of the business through issuance of common stock
|
$ | 350,000 |
See
accompanying notes.
F-5
INTERNET
MEDIA SERVICES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of
Business - Internet Media Services, Inc. (the Company) is in the business
of acquiring, building and monetizing internet web properties through the
acquisition of existing web properties in vertical business channels identified
by management and using these web properties as an anchor to build within that
vertical market. 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 (see Note
2). Legalstore.com is an internet based company that primarily sells
legal supplies and legal forms, including security paper. The Company
also sells products and supplies for use in the medical and educational
fields. The Company was incorporated on March 26, 2007 and did not
have operations until the acquisition in 2009.
Principles of
Consolidation - The consolidated
financial statements include the accounts of Internet Media Services, Inc. and
its wholly-owned subsidiary (Legalstore.com, Inc.). All intercompany
balances and transactions have been eliminated in consolidation.
Use of
Estimates - 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 amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates and be based on events different from those assumptions. Future
events and their effects cannot be predicted with certainty; estimating,
therefore, requires the exercise of judgment. Thus, accounting estimates change
as new events occur, as more experience is acquired or as additional information
is obtained.
Accounts
Receivable - The Company provides credit in the normal course of business
to the majority of its customers. The Company performs periodic
credit evaluations of its customers’ financial condition and generally does not
require collateral. Management closely monitors outstanding balances
and writes off amounts that it believes are uncollectible after reasonable
collection efforts have been made. No allowance for doubtful accounts
was considered necessary at December
31, 2009.The Company does not accrue interest on past due accounts
receivable.
Inventory
- Inventories consist of legal supplies held for resale and are stated at the
lower of cost or market on the first-in, first-out (“FIFO”) method.
Fixed
Assets - Fixed
assets are recorded at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, ranging from 1 to 7 years.
Expenditures for renewals and betterments are capitalized. Expenditures for
minor items, repairs and maintenance are charged to operations as
incurred. Any gain or loss upon sale or retirement due to obsolescence is
reflected in the operating results in the period the event takes
place.
Intangible
Assets - Intangible assets consist of a customer list and domain name
acquired pursuant to the asset purchase agreement (see Note 2).
Gross
|
Net
|
||||||||||||||
Carrying
|
Accumulated
|
Carrying
|
|||||||||||||
Useful life
|
Amount
|
Amortization
|
Cost
|
||||||||||||
Domain
name
|
10 | $ | 50,000 | $ | 1,250 | $ | 48,750 | ||||||||
Customer
list
|
10 | 120,000 | 3,000 | 117,000 | |||||||||||
Total
|
$ | 170,000 | $ | 4,250 | 165,750 |
F-6
INTERNET
MEDIA SERVICES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Amortization
expense related to these intangible assets amounted to $4,250 for the year ended
December 31, 2009. The expected future amortization expense for the
next five years is $17,000 per year.
Impairment of
Long-Lived Assets - The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net undiscounted
cash flows expected to be generated by the asset including its ultimate
disposition. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Goodwill -
Goodwill is the excess of cost of an acquired entity over the fair value of
amounts assigned to assets acquired and liabilities assumed in a business
combination. The Company does not amortize goodwill, rather it is tested for
impairment annually, and will be tested for impairment between annual tests if
an event occurs or circumstances change that would indicate the carrying amount
may be impaired. An impairment loss generally would be recognized when the
carrying amount of the reporting unit’s net assets exceeds the estimated fair
value. The Company performs annual assessments of potential impairment and
has determined that no impairment is necessary as of December 31,
2009.
Income
Taxes – The Company accounts for income taxes with the recognition of
estimated income taxes payable or refundable on income tax returns for the
current year and for the estimated future tax effect attributable to temporary
differences and carryforwards. Measurement of deferred income items
is based on enacted tax laws including tax rates, with the measurement of
deferred income tax assets being reduced by available tax benefits not expected
to be realized in the immediate future.
The Company reviews tax positions taken
to determine if it is more likely than not that the position would be sustained
upon examination resulting in an uncertain tax position. The Company
did not have any material unrecognized tax benefit at December 31,
2009. The Company recognizes interest accrued and penalties related
to unrecognized tax benefits in tax expense. During the year ended
December 31, 2009, the Company recognized no interest and
penalties.
The Company files U.S. federal tax
returns and tax returns in various states. The tax years 2007 through
2009 remain open to examination by the taxing jurisdictions to which the Company
is subject.
Revenue
Recognition -
Sales of legal products are recognized when a product or service is
delivered, shipped or provided to the customer and all material conditions
relating to the sale have been substantially performed.
Fair Value of
Financial Instruments - The Company discloses fair value information
about financial instruments. Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to
management as of December 31, 2009.
F-7
INTERNET
MEDIA SERVICES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
These
financial instruments include cash, accounts receivable, accounts payable,
accrued liabilities and short term advances. Fair values were assumed to
approximate carrying values for these financial instruments since they are
short-term in nature and their carrying amounts approximate fair values or they
are receivable or payable on demand. The fair value of the short term advances
is estimated based upon the carrying value which approximates the fair value of
the advance.
Advertising
Costs- Generally consist of online, keyword
advertising with various search engines with additional amounts spent on certain
targeted advertising. Advertising
costs are expensed as incurred and amounted to approximately $6,500 for the year
ended December 31, 2009.
Subsequent
Events - These financial statements have not been updated for subsequent
events occurring after April 9, 2010, which is the date these financial
statements were available to be issued.
NOTE
2. – ACQUISITION OF BUSINESS
On
October 8, 2009, the Company entered into an Asset Purchase Agreement with
Lester Levin Inc. (“LLI”), a New York corporation and wholly owned subsidiary of
Document Security Systems, Inc. (“DSS”), whereby the Company purchased the
assets and liabilities of Legalstore.com (constituting the Business), a division
of DSS, in exchange for 7,500,000 shares of common stock of the
Company.
Pursuant to the Asset Purchase
Agreement, the Company agreed to purchase all the assets of Legalstore.com,
including, cash and cash equivalents, accounts receivable, inventories, fixed
assets, customer lists, and domain names. In addition to issuing the
common stock, the Company agreed to assume certain liabilities associated with
Legalstore.com, including an existing office lease.
The Company accounted for the
acquisition in accordance with ASC 805-10 “Business Combinations”, whereby the
Company measured the identifiable assets acquired and liabilities assumed based
on the acquisition date fair value. The Company is required to
recognize and measure any related goodwill acquired in the business combination
or a gain from a bargain purchase. In order to determine the goodwill
or gain from a bargain purchase, the Company is required to determine the fair
value of the consideration transferred in a business combination. The
fair value is calculated as the sum of the acquisition date fair value of the
assets transferred by the Company, the liabilities incurred by the Company and
the equity interest issued by the Company. The Company had no
activity or value prior to the acquisition and the consideration paid for the
common stock issued prior to the acquisition was based on par value and not a
reliable indication of fair value. Therefore, the Company determined
that the fair value of the interest in the Business acquired is a more reliable
measure. As a result, the Company valued the Business acquired using
a discounted cash flow model and compared it to the fair value assigned to the
identifiable assets and liabilities acquired to determine the amount of goodwill
to record in connection with the business combination, which will be deductible
for income tax purposes. All the operations of the Business are
included in the accompanying statement of operations beginning with the date of
the Asset Purchase Agreement.
F-8
INTERNET
MEDIA SERVICES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2. – ACQUISITION OF BUSINESS (CONTINUED)
In
connection with the Asset Purchase Agreement, the Company and a majority
shareholder of the Company also entered into a Registration Rights Agreement and
a Stock Pledge and Escrow Agreement (collectively, the
Agreements). In connection with the Agreements, the Company is
required to file a registration statement on Form S-1, on a best efforts basis,
with respect to the 7,500,000 shares of common stock issued pursuant to the
terms of the Agreements, as well as raise at least $200,000 to be used for
working capital in the Company. If the Company fails to secure registration of
at least 20% of the 7,500,000 shares of common stock within 360 days of the
closing, and fails to meet certain working capital thresholds contained in the
Agreements, then the Company will be considered to be in default. In the event
of a default by the Company, Document Security Systems, Inc may receive up to an
additional 12,500,000 shares of the Company’s Common Stock currently issued and
outstanding and owned by the principal shareholders. These shares are
currently held in escrow as collateral.
In
addition to the Agreements, the Company’s principal shareholders, the Company
and Document Security Systems, Inc entered into a voting agreement whereby the
principal shareholders of the Company agreed to vote all common stock held by
them so as to elect two nominees designated by Lester Levin Inc. or Document
Security Systems, Inc as members of the Company’s Board of Directors, which
consists of five members.
The fair value of assets and
liabilities acquired as a result of this business combination were as
follows:
Fair
value of the consideration transferred
|
$ | 350,000 | ||
Fair
value of identifiable assets acquired
|
||||
and
liabilities assumed:
|
||||
Accounts
receivable
|
31,161 | |||
Inventory
|
101,011 | |||
Fixed
assets
|
28,411 | |||
Domain
name
|
50,000 | |||
Customer
list
|
120,000 | |||
Total
|
330,583 | |||
Goodwill
|
$ | 19,417 |
NOTE
3. - FIXED ASSETS
Fixed
assets consist of the following at December 31, 2009:
Machinery
and equipment
|
$ | 18,050 | ||
Furniture
and fixtures
|
7,820 | |||
Leasehold
improvements
|
2,541 | |||
28,411 | ||||
Less:
accumulated depreciation
|
(1,489 | ) | ||
$ | 26,922 |
Depreciation
expense was $1,489 for the year ended December 31, 2009.
F-9
INTERNET
MEDIA SERVICES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4. STOCKHOLDERS’ EQUITY
During the year ended December 31,
2009, the Company issued 13,001,000 shares of common stock in exchange for
$13,001, the par value of the shares issued.
Subsequent
to December 31, 2009, the Company approved for issuance up to 10,000,000 shares
of $.001 par value preferred stock. The rights and preferences of the
preferred stock will be determined by board resolution upon
issuance. As of April 9, 2010, no preferred shares have been
issued.
NOTE
5. - ADVANCES FROM RELATED PARTY
During 2009, a stockholder advanced the
Company $23,929 for working capital needs. The advances are
unsecured, non-interest bearing, have no stated repayment terms and are due on
demand. The advances are included in current liabilities in the
accompanying balance sheet as of December 31, 2009. Subsequent to
December 31, 2009, additional advances of $41,063 were received from the
stockholder by the Company. On April 8, 2010, the aggregate advances
were formalized with the execution of a $200,000 revolving credit
agreement. This credit agreement matures on April 8,
2011, bears interest at an annual rate of 6% above
Libor, and is secured by all of the assets of the Company.
NOTE
6. - INCOME TAXES
Following
is a summary of the components giving rise to the income tax provision (benefit)
for the year ended December 31, 2009:
Deferred:
|
||||
Federal
|
(24,071 | ) | ||
State
|
(4,964 | ) | ||
Total
deferred
|
(29,035 | ) | ||
Less
increase in allowance
|
29,035 | |||
Net
deferred
|
||||
Total
income tax provision
|
$ | - | ||
Individual
components of deferred taxes are as follows as of December 31,
2009:
|
||||
Deferred
tax assets:
|
||||
Net
operating loss carryforwards
|
$ | 28,182 | ||
Depreciable
and amortizable assets
|
853 | |||
Total
|
29,035 | |||
Less
valuation allowance
|
(29,035 | ) | ||
Gross
deferred tax assets
|
$ | - |
F-10
INTERNET
MEDIA SERVICES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6. - INCOME TAXES (CONTINUED)
The
Company has approximately $68,700 in net operating loss carryforwards (“NOL’s”)
available to reduce future taxable income. These carryforwards begin
to expire in year 2029. Due to the uncertainty as to the Company’s
ability to generate sufficient taxable income in the future and utilize the
NOL’s before they expire, the Company has recorded a valuation allowance to
reduce the net deferred tax asset to zero. The difference between the
statutory federal tax rate and the effective tax rate is due to the state income
tax rate and the change in the valuation allowance.
NOTE
7. - COMMITMENTS
Facilities
- The Company leases office and warehouse space with a monthly rental of $1,740.
This lease was assumed by the Company according to the asset purchase agreement
as discussed in Note 2. Lease expense for year ended December 31,
2009 was $3,740. The lease expires in October 2010, although renewal
options exist to extend lease agreements. Subsequent to December 31,
2009, the Company entered into a second lease for corporate office space, which
requires monthly payments of $2,000 and expires on January 31,
2011. Total approximate future lease commitments under both of these
leases are as follows:
2010
|
$ | 39,400 | |
2011
|
$ | 2,000 |
F-11
FINANCIAL
STATEMENTS
LEGALSTORE.COM
(A
DIVISION OF DOCUMENT SECURITY SYSTEMS, INC.)
DECEMBER
31, 2008
F-1
LEGALSTORE.COM
(A
DIVISION OF DOCUMENT SECURITY SYSTEMS, INC.)
CONTENTS
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
Carve-Out
Financial Statements:
|
|
Balance
Sheets
|
F-4
|
Statements
of Operations
|
F-5
|
Statements
of Cash Flows
|
F-6
|
Statements
of Changes in Divisional Equity
|
F-7
|
Notes
to the Carve-Out Financial Statements
|
F-8
- F-17
|
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors of
Document
Security Systems, Inc.
We have
audited the accompanying carve-out balance sheets of Legalstore.com (a division
of Document Security Systems, Inc.) as of December 31, 2008 and 2007, and the
related carve-out statements of operations, cash flows and changes in divisional
equity for the years then ended. These financial statements are the
responsibility of Legalstore.com’s management. Our responsibility is to express
an opinion on these carve-out financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material
misstatement. Legalstore.com is not required to have, nor have we
been engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of Legalstore.com’s internal control over financial
reporting. Accordingly we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the carve-out financial position of Legalstore.com (a
division of Document Security Systems, Inc.) as of December 31, 2008 and 2007,
and the results of its carve-out operations, cash flows and changes in
divisional equity for the years then ended, in conformity with U.S. generally
accepted accounting principles.
As
discussed in Note 8 to the carve-out financial statements, on October 8, 2009
Document Security Systems, Inc. entered into an asset purchase agreement to sell
the assets associated with Legalstore.com (a division of Document Security
Systems, Inc.).
/s/ FREED
MAXICK & BATTAGLIA, CPAs, PC
Buffalo,
New York
December
11, 2009
F-3
LEGALSTORE.COM
|
||||||||||||
(a
Division of Document Security Systems, Inc.)
|
||||||||||||
Carve-Out
Balance Sheets
|
||||||||||||
As
of
|
||||||||||||
September
30,
|
December
31,
|
December
31,
|
||||||||||
2009 | 2008 | 2007 | ||||||||||
(unaudited)
|
||||||||||||
ASSETS
|
||||||||||||
Current
assets:
|
||||||||||||
Cash
|
$ | 18,186 | $ | 6,797 | $ | 137,734 | ||||||
Accounts
receivable
|
31,434 | 22,319 | 35,407 | |||||||||
Inventory
|
92,521 | 95,014 | 116,108 | |||||||||
Total
current assets
|
142,141 | 124,130 | 289,249 | |||||||||
Fixed
assets, net
|
32,218 | 46,718 | 49,961 | |||||||||
Goodwill
|
81,013 | 81,013 | 81,013 | |||||||||
Total
assets
|
$ | 255,372 | $ | 251,861 | $ | 420,223 | ||||||
LIABILITIES
AND DIVISIONAL EQUITY
|
||||||||||||
Current
liabilities:
|
||||||||||||
Accounts
payable
|
$ | 18,563 | $ | 19,709 | $ | 40,671 | ||||||
Accrued
liabilities
|
35,833 | 34,688 | 34,688 | |||||||||
Current
portion of capital lease obligations
|
- | 346 | 980 | |||||||||
Total
current liabilities
|
54,396 | 54,743 | 76,339 | |||||||||
Capital
lease obligations
|
- | - | 347 | |||||||||
Commitments
and contingencies (see Note 6)
|
||||||||||||
Divisional
equity
|
200,976 | 197,118 | 343,537 | |||||||||
Total
liabilities and divisional equity
|
$ | 255,372 | $ | 251,861 | $ | 420,223 |
See accompanying notes.
F-4
LEGALSTORE.COM
|
||||||||||||||||
(a
Division of Document Security Systems, Inc.)
|
||||||||||||||||
Carve-out
Statements of Operations
|
||||||||||||||||
For
the Nine Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
For
the Year Ended December 31,
|
For
the Year Ended December 31,
|
|||||||||||||
2009
|
2008
|
2008 | 2007 | |||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||
Revenue
|
$ | 357,397 | $ | 482,553 | $ | 609,807 | $ | 682,051 | ||||||||
Costs
of revenue
|
177,544 | 271,296 | 351,769 | 373,537 | ||||||||||||
Gross
profit
|
179,853 | 211,257 | 258,038 | 308,514 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Compensation
and benefits
|
130,028 | 151,862 | 201,819 | 203,356 | ||||||||||||
Marketing
and advertising
|
1,250 | 22,483 | 27,667 | 53,286 | ||||||||||||
Rent
and utilities
|
20,516 | 17,716 | 23,570 | 23,394 | ||||||||||||
Depreciation
|
8,250 | 8,118 | 10,824 | 5,340 | ||||||||||||
Other
|
16,623 | 13,715 | 23,732 | 41,531 | ||||||||||||
Operating expenses
|
176,667 | 213,894 | 287,612 | 326,907 | ||||||||||||
Net
income (loss)
|
$ | 3,186 | $ | (2,637 | ) | $ | (29,574 | ) | $ | (18,393 | ) |
See accompanying notes.
F-5
LEGALSTORE.COM
|
|||||||||||||
(a
Division of Document Security Systems, Inc.)
|
|||||||||||||
Carve-out
Statements of Cash Flows
|
|||||||||||||
For
the Nine Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
For
the Year Ended
December
31,
|
|||||||||||
2009 | 2008 |
2008
|
2007
|
||||||||||
(unaudited)
|
(unaudited)
|
||||||||||||
Cash
flows from operating activities:
|
|||||||||||||
Net income (loss)
|
$ | 3,186 | $ | (2,637 | ) | $ | (29,574 | ) | $ | (18,393 | ) | ||
Adjustments to reconcile net income (loss) to net
|
|||||||||||||
cash
provided (used) by operating activities:
|
|||||||||||||
Depreciation
|
14,705 | 11,583 | 15,787 | 10,412 | |||||||||
Stock
based compensation
|
7,326 | 7,326 | 9,768 | 3,196 | |||||||||
(Increase)
decrease in assets:
|
|||||||||||||
Accounts
receivable
|
(9,115 | ) | (3,412 | ) | 13,088 | 2,399 | |||||||
Inventory
|
2,493 | 17,868 | 21,094 | (30,743 | ) | ||||||||
Increase
(decrease) in liabilities:
|
|||||||||||||
Accounts
payable
|
3,654 | 3,811 | (25,762 | ) | 5,648 | ||||||||
Accrued
liabilities
|
1,145 | (222 | ) | - | 1,202 | ||||||||
Net
cash provided (used) by operating activities
|
23,394 | 34,317 | 4,401 | (26,279 | ) | ||||||||
Cash
flows from investing activities:
|
|||||||||||||
Purchase
of fixed assets
|
(5,005 | ) | (5,944 | ) | (7,744 | ) | (16,452 | ) | |||||
Net
cash used by investing activities
|
(5,005 | ) | (5,944 | ) | (7,744 | ) | (16,452 | ) | |||||
Cash
flows from financing activities:
|
|||||||||||||
Payments
of capital lease obligations
|
(346 | ) | (728 | ) | (981 | ) | (901 | ) | |||||
Transfers
from (to) parent
|
(6,654 | ) | (103,128 | ) | (126,613 | ) | 181,366 | ||||||
Net
cash (used) provided by financing activities
|
(7,000 | ) | (103,856 | ) | (127,594 | ) | 180,465 | ||||||
Net
(decrease) increase in cash
|
11,389 | (75,483 | ) | (130,937 | ) | 137,734 | |||||||
Cash
beginning of period
|
6,797 | 137,734 | 137,734 | 0 | |||||||||
Cash
end of period
|
$ | 18,186 | $ | 62,251 | $ | 6,797 | $ | 137,734 |
See accompanying notes.
F-6
LEGALSTORE.COM
|
||||
(a
Division of Document Security Systems, Inc.)
|
||||
Carve-out
Statements of Changes in Divisional Equity
|
||||
Total
|
||||
Balance,
December 31, 2006
|
$ | 177,368 | ||
Transfers
from parent, net
|
181,366 | |||
Stock
based compensation
|
3,196 | |||
Net
loss
|
(18,393 | ) | ||
Balance,
December 31, 2007
|
343,537 | |||
Transfers
to parent, net
|
(126,613 | ) | ||
Stock
based compensation
|
9,768 | |||
Net
loss
|
(29,574 | ) | ||
Balance,
December 31, 2008
|
197,118 | |||
Transfers
to parent, net (unaudited)
|
(6,654 | ) | ||
Stock
based compensation (unaudited)
|
7,326 | |||
Net
income (unaudited)
|
3,186 | |||
Balance,
September 30, 2009 (unaudited)
|
$ | 200,976 |
See
accompanying notes.
F-7
LEGALSTORE.COM
(A
DIVISION OF DOCUMENT SECURITY SYSTEMS, INC.)
NOTES
TO THE CARVE-OUT FINANCIAL STATEMENTS
NOTE
1. – BACKGROUND AND BASIS OF PRESENTATION
The
accompanying carve-out financial statements of Legalstore.com (the
“Legalstore.com” and “Business”), as a division of Lester Levin, Inc, a New York
corporation, have been prepared from the historical accounting records of Lester
Levin, Inc. Lester Levin, Inc was 100% owned by Document Security
Systems during the years ended December 31, 2008 and 2007 and for the nine
months ended September 30, 2009. Legalstore.com primarily sells legal
supplies and documents, including security paper and products for the users of
legal documents and supplies in the legal, medical and educational
fields. These carve-out financial statements for Legalstore.com are
presented on a carve-out basis from the consolidated financial statements of
Document Security Systems, Inc. These carve-out financial statements
have been prepared to facilitate the sale of Legalstore.com assets to Internet
Media Services, Inc. (IMS) and the expected subsequent filing of the Form S-1 by
IMS (See Note 9). All material assets and liabilities specifically
identified with the Business have been presented in the balance sheets; all
material revenues and expenses specifically identified with the Business and
allocations of corporate expenses have been presented in the statements of
operations.
Document
Security Systems, Inc.’s, equity in the Business has been presented in lieu of
shareholders' equity in the carve-out financial statements. The
financial information presented in these carve-out financial statements also
reflects certain allocations from Document Security Systems that are directly
related to the Business and are based on historical activity
levels. As such, the carve-out financial statements may not
necessarily reflect the financial position, results of operations or cash flows
that the Business might have had in the past, or might have in the future, if
the Business had existed as a separate, stand-alone business during the periods
presented.
The
allocations consist of bookkeeping, financial and executive management time,
liability insurance, and accounting software costs incurred on behalf of the
Business by Document Security Systems, Inc.. In addition, the
allocations include stock based compensation expense for options to purchase
Document Security Systems, Inc. common stock that was granted to the Business’s
employees along with accrued payroll taxes related to grants of common stock of
Document Security Systems, Inc.. Management of Document Security
Systems, Inc. believes that these allocations and contributions have been made
on a reasonable basis. Payments made by Document Security Systems, Inc. to the
Business or to Document Security Systems, Inc. from the Business are
presented as transfers to and from parent as a component of divisional
equity.
Interim Financial
Information – The carve-out financial information at September 30, 2009
and the nine months ended September 30, 2009 and 2008 is unaudited but, in the
opinion of management, has been prepared on the same basis as the annual
carve-out financial statements and includes all adjustments (consisting only of
normal recurring adjustments) that the Business considers necessary for a fair
presentation of the financial position at such date and the operating result,
cash flow and divisional equity for such periods. Interim results are not
necessarily indicative of results expected for a full
year. These financial statements have not been updated for
subsequent events occurring after December 11, 2009.
NOTE
2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Accounting - The carve-out financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
The Business's significant accounting policies are summarized
below.
F-8
LEGALSTORE.COM
(A
DIVISION OF DOCUMENT SECURITY SYSTEMS, INC.)
NOTES
TO THE CARVE-OUT FINANCIAL STATEMENTS
NOTE
2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of
Estimates - 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 amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates and be based on events different from those assumptions. Future
events and their effects cannot be predicted with certainty; estimating,
therefore, requires the exercise of judgment. Thus, accounting estimates change
as new events occur, as more experience is acquired or as additional information
is obtained.
Cash –
Cash includes bank deposits. At times, bank balances may exceed
federally insured limits. The Business has not experienced any losses
in such accounts and believes it is not exposed to any significant risk with
respect to cash.
Accounts
Receivable - The Business provides credit in the normal course of
business to the majority of its customers. The Business performs
periodic credit evaluations of its customers’ financial condition and generally
does not require collateral. Management closely monitors outstanding
balances and writes off amounts that it believes are uncollectible after
reasonable collection efforts have been made. No allowance for
doubtful accounts was considered necessary at December
31, 2008 and 2007 and September 30, 2009. The Business does not
accrue interest on past due accounts receivable.
Inventory
- Inventories consist of legal supplies held for resale and are stated at the
lower of cost or market on the first-in, first-out (“FIFO”) method.
Fixed
Assets - Fixed
assets are recorded at cost. Depreciation is computed using the straight-line
method over the estimated useful lives or lease period of the assets whichever
is shorter. Expenditures for renewals and betterments are capitalized.
Expenditures for minor items, repairs and maintenance are charged to operations
as incurred. Any gain or loss upon sale or retirement due to obsolescence
is reflected in the operating results in the period the event takes
place.
Goodwill -
Goodwill is the excess of cost of an acquired entity over the fair value of
amounts assigned to assets acquired and liabilities assumed in a business
combination. The Business has elected the push-down method of accounting whereby
the net assets acquired that were adjusted to fair market value with the excess
cost recorded as goodwill on the financial statements of Document Security
Systems, Inc. have been pushed down to these carve-out financial
statements. The Business does not amortize goodwill, rather it is
tested for impairment annually, and will be tested for impairment between annual
tests if an event occurs or circumstances change that would indicate the
carrying amount may be impaired. An impairment loss generally would be
recognized when the carrying amount of the reporting unit’s net assets exceeds
the estimated fair value. The Business performs annual assessments of
potential impairment and has determined that no impairment is necessary as of
December 31, 2008 and 2007 and September 30, 2009.
Impairment of
Long-Lived Assets - The Business reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net undiscounted
cash flows expected to be generated by the asset including its ultimate
disposition. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Fair value
is determined based on discounted cash flows or appraised values, depending on
the nature of the assets.
F-9
LEGALSTORE.COM
(A
DIVISION OF DOCUMENT SECURITY SYSTEMS, INC.)
NOTES
TO THE CARVE-OUT FINANCIAL STATEMENTS
NOTE
2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of
Financial Instruments - The Business discloses fair value information
about financial instruments. Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to
management as of December 31, 2008 and 2009 and September 30,
2009.
These
financial instruments include cash, accounts receivable, accounts payable,
accrued liabilities and capital leases. Fair values were assumed to approximate
carrying values for these financial instruments since they are short-term in
nature and their carrying amounts approximate fair values or they are receivable
or payable on demand. The fair value of the Business’s capitalized lease
obligation is estimated based upon the carrying value which approximates the
fair value of the debt instrument in 2008 and 2007.
Share-Based
Payments - The Business accounts for compensation expense for stock
option awards granted under Document Security System’s Stock Incentive Plans
over the requisite service period based on the grant date fair value of the
awards. During the year ended December 31, 2007, the
Business’s employees were issued a total of 4,500 options to purchase shares of
stock of the Business’s parent company, Document Security Systems, Inc. at
various prices. There were no options issued to the Business’s
employees during the year ended December 31, 2008 or the nine-months ended
September 30, 2009. Legalstore.com employees have 5,500 options
outstanding as of December 31, 2008 and 2007 and September 30, 2009,
respectively, which includes 1,000 options outstanding as of December 31,
2006.
Compensation
expense for the Business’s employees from stock option grants for the years
ended December 31, 2008 and 2007, and for the period ended September 30, 2009
and 2008, was $9,768, $3,196 $7,326 and $7,326,
respectively. The Business uses the Black-Scholes option
pricing model for determining the estimated fair value for stock-based awards
with the following assumptions:
Period
Ended September 30, 2009
|
Year
Ended December 31, 2008
|
Year
Ended December 31, 2007
|
|||||
Risk-free
interest rate
|
na
|
na
|
4.05 | % | |||
Volatility
|
na
|
na
|
54 | % | |||
Expected
dividend yield
|
na
|
na
|
0 | % | |||
Expected
life
|
na
|
3.75
years
|
|||||
Estimated
forfeiture rate
|
na
|
na
|
0 | % |
The
Business calculates expected volatility for a share-based grant based on
historic daily stock price observations of Document Security Systems, Inc.’s
common stock during the period immediately preceding the grant that is equal in
length to the expected term of the grant. For estimating the expected term of
share-based grants, the Business has adopted the simplified method.
F-10
LEGALSTORE.COM
(A
DIVISION OF DOCUMENT SECURITY SYSTEMS, INC.)
NOTES
TO THE CARVE-OUT FINANCIAL STATEMENTS
NOTE
2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue
Recognition -
Sales of legal products are recognized when a product or service is
delivered, shipped or provided to the customer and all material conditions
relating to the sale have been substantially performed.
Advertising
Costs– Generally consist of online, keyword advertising with Google with
additional amounts spent on certain print media in targeted industry
publications. Advertising
costs were approximately $22,000 in 2008 ($48,000 – 2007).
Income
Taxes - Through September 30, 2009, the Business was not a separate
taxable entity for federal, state, or local income tax purposes, and its
operations were included in the consolidated tax returns of Document Security
Systems, Inc. Accordingly, all tax attribute carryforwards, such as
tax credits and net operating losses, are retained by Document Security Systems,
Inc., with no allocation to the Business. The Business has calculated
the tax provision on the separate return basis to illustrate the impact on the
Business. Accordingly, deferred income taxes are recognized for differences
between the financial statement and tax basis of assets and liabilities at
enacted statutory tax rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date. In addition, a valuation allowance is established to the extent
necessary to reduce deferred income tax assets to amounts that more likely than
not will be realized.
The
Business’s adoption of accounting for uncertainty in income tax did not have a
material impact on the Business’s results of operations and financial position,
and therefore, the Business did not have any adjustments to the January 1, 2007
beginning balance of divisional equity. The Business reviews the
financial statement recognition and measurement for income tax positions that
Document Security Systems, Inc. has taken or expects to take in its consolidated
income tax returns on behalf of the Business that were
uncertain. As of December 31, 2008 and 2007 and 2007 and
September 30, 2009 and 2008, the Business determined that it did not have any
uncertain tax positions. In addition, the Business did not have any
material unrecognized tax benefit at December 31, 2008 and 2007 and periods
ending September 30, 2009 and 2008. The Business would have
recognized interest accrued and penalties related to unrecognized tax benefits
in tax expense. During the years ended December 31, 2008 and 2007 and
periods ending September 30, 2009 and 2008, the Business recognized no interest
and penalties.
Recent Accounting
Pronouncements- In September 2006, the FASB issued SFAS No. 157 (“SFAS
157”), “Fair Value Measurements.” SFAS 157, now Accounting Standards
Codification (“ASC”) 820, as amended, defines fair value, establishes a
framework for measuring fair value and expands disclosures regarding fair value
measurements. ASC 820 does not require any new fair value measurements but
rather eliminates inconsistencies in guidance found in various prior accounting
pronouncements. ASC 820 was effective for fiscal years beginning after
November 15, 2007. However, on December 14, 2007, the FASB issued proposed
FSP FAS 157-2 which delayed the effective date of ASC 820 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to fiscal years beginning after November 15, 2008.
Accordingly, the Business’s adoption of this standard in 2008 was limited to
financial assets and liabilities and did not have a material effect on the
Business’s financial condition or results of operations. The adoption of
the portion of this statement related to nonfinancial assets and liabilities in
2009 did not have a material effect on the Business’s financial
statements.
F-11
LEGALSTORE.COM
(A
DIVISION OF DOCUMENT SECURITY SYSTEMS, INC.)
NOTES
TO THE CARVE-OUT FINANCIAL STATEMENTS
NOTE
2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June
2009, the FASB issued Statement of Financial Accounting Standard (SFAS)
No. 168, The FASB Accounting Standard Codification and the Hierarchy of the
Generally Accepted Accounting Principles — a replacement of SFAS No. 162
(SFAS 168), now Accounting Standards Codification (ASC) 105, to become the
source of authoritative U.S. generally accepted accounting principles (“GAAP”)
recognized by the FASB to be applied by nongovernmental entities. ASC 105 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009 and first adopted in the quarterly financial
statements for the period ended September 30, 2009. The Business does
not believe the adoption of ASC 105 had a material impact on the financial
statements.
In
April 2009, the FASB staff issued FSP No. FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments (“FSP No. FAS
107-1 and APB 28-1”), now ASC 825. ASC 825 amends prior standards to require
disclosures about fair value of financial instruments in interim financial
statements as well as in annual financial statements. The provisions of ASC 825
became effective on April 1, 2009, are being applied prospectively
beginning September 30, 2009 and did not have a material impact on the
Business’s financial statements. See “Fair Value of Financial Instruments”
included in “Note 2 for the related disclosure.
In
May 2009, the FASB issued Statement No. 165, Subsequent Events (“FAS
165”), now ASC 855. The provisions of ASC 855 set forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may have occurred for potential recognition or
disclosure in the financial statements, the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. The
provisions of ASC 855 became effective for the Business on April 1, 2009,
are being applied prospectively beginning September 30, 2009 and did not have a
material impact on the Business’s financial statements.
F-12
LEGALSTORE.COM
(A
DIVISION OF DOCUMENT SECURITY SYSTEMS, INC.)
NOTES
TO THE CARVE-OUT FINANCIAL STATEMENTS
NOTE
3. - FIXED ASSETS
Fixed
assets consisted of the following at December 31:
Estimated
Useful Life
|
Purchased
|
Under
Capital Leases
|
Purchased
|
Under
Capital Leases
|
||||||||||
Machinery
& equipment
|
5
years
|
$ | 24,905 | $ | 4,289 | $ | 24,905 | $ | 4,289 | |||||
Leasehold
improvements
|
10
years(1)
|
4,026 | - | 4,026 | - | |||||||||
Furniture
& fixtures
|
7
years
|
20,743 | - | 20,743 | - | |||||||||
Software
& websites
|
3
years
|
28,995 | - | 16,451 | - | |||||||||
Total cost
|
78,669 | 4,289 | 66,125 | 4,289 | ||||||||||
Less
accumulated depreciation
|
32,380 | 3,860 | 17,451 | 3,002 | ||||||||||
Net
|
$ | 46,289 | $ | 429 | $ | 48,674 | $ | 1,287 |
(1)
Expiration of lease term
Fixed
assets consisted of the following at September 30, 2009
(Unaudited):
Estimated
Useful Life
|
Purchased
|
Under
Capital Leases
|
|||||
Machinery
& equipment
|
5
years
|
24,905 | 4,289 | ||||
Leasehold
improvements
|
10
years(1)
|
4,026 | - | ||||
Furniture
& fixtures
|
7
years
|
20,743 | - | ||||
Software
& websites
|
3
years
|
28,995 | - | ||||
Total cost
|
78,669 | 4,289 | |||||
Less
accumulated depreciation
|
46,451 | 4,289 | |||||
Net
|
32,218 | - |
(1)
Expiration of lease term
NOTE
4. - INCOME TAXES
The net
operating income and losses incurred and tax credits earned since inception
attributable to the operations of the Business, a division of Lester Levin,
Inc., were included in the consolidated income tax returns filed by Document
Security Systems, Inc. Accordingly, all tax attribute carryforwards,
such as tax credits and net operating losses, are retained by Document Security
Systems, Inc. with no allocation to the Business.
F-13
LEGALSTORE.COM
(A
DIVISION OF DOCUMENT SECURITY SYSTEMS, INC.)
NOTES
TO THE CARVE-OUT FINANCIAL STATEMENTS
NOTE
4. - INCOME TAXES (CONTINUED)
Deferred
income taxes are recognized for differences between the financial statements and
the tax basis of assets and liabilities at enacted statutory tax rates in effect
for the years in which the differences are expected to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the
year that includes the enactment date. In addition, valuation
allowances are established when necessary to reduce deferred tax asset to the
amount expected to be realized.
The
provision (benefit) for income taxes shown in the Business’s statement of
operations for the year ended December 31, 2008 and 2007consist of the
following:
2008
|
2007
|
|||||||
Currently
payable:
|
||||||||
Federal
|
$ | - | $ | - | ||||
State
|
- | - | ||||||
Total
currently payable
|
- | - | ||||||
Deferred:
|
||||||||
Federal
|
(4,483 | ) | (3,616 | ) | ||||
State
|
(1,197 | ) | (1,193 | ) | ||||
Total
deferred
|
(5,680 | ) | (4,809 | ) | ||||
Less
increase in allowance
|
5,680 | 4,809 | ||||||
Net
deferred
|
- | 0 | ||||||
Total
income tax provision (benefit)
|
$ | 0 | $ | 0 | ||||
Individual
components of deferred taxes are as follows:
|
||||||||
Deferred
tax assets:
|
2008 | 2007 | ||||||
Net
operating loss carry forwards
|
$ | 23,631 | $ | 18,988 | ||||
Equity
issued for services
|
2,902 | 1,026 | ||||||
Total
|
26,533 | 20,014 | ||||||
Less
valuation allowance
|
(25,337 | ) | (19,657 | ) | ||||
Gross
deferred tax assets
|
$ | 1,196 | $ | 357 | ||||
Deferred
tax liabilities:
|
||||||||
Depreciation
|
$ | 1,196 | $ | 357 | ||||
Gross
deferred tax liabilities
|
$ | 1,196 | $ | 357 | ||||
Net
deferred tax liabilities
|
$ | - | $ | - |
Had the
Business filed stand alone tax returns, as of December 31, 2008, Net Operating
Losses (NOL’s) of approximately $123,000 would have been available to reduce
future taxable income. Due to the uncertainty as to the Business’s
ability to generate sufficient taxable income in the future and utilize the
NOL’s before they expire, the Business has recorded a valuation
allowance. On a stand-alone basis, it is assumed that the
Business is not a member of a controlled group and therefore, had a Federal tax
rate of 15%.
F-14
LEGALSTORE.COM
(A
DIVISION OF DOCUMENT SECURITY SYSTEMS, INC.)
NOTES
TO THE CARVE-OUT FINANCIAL STATEMENTS
NOTE
4. - INCOME TAXES (CONTINUED)
The provision (benefit) for income
taxes consists of the following at September 30, 2009:
2009
|
||||
Currently
payable:
|
||||
Federal
|
$ | - | ||
State
|
- | |||
Total
currently payable
|
- | |||
Deferred:
|
||||
Federal
|
(3,626 | ) | ||
State
|
(1,197 | ) | ||
Total
deferred
|
(4,823 | ) | ||
Less
increase in allowance
|
4,823 | |||
Net
deferred
|
- | |||
Total
income tax provision (benefit)
|
$ | 0 |
The
accompanying unaudited income tax footnote has been prepared in accordance with
U.S. generally accepted accounting principles for interim financial
information. Accordingly this footnote does not include all of the
information required by U.S. generally accepted accounting principles for
complete financial statements.
NOTE
5. - DEFINED CONTRIBUTION PENSION PLAN
The
Business’s employees participate in an Employee savings plan (the “401(k) Plan”)
sponsored by Document Security Systems, Inc. which qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue
Code. Employees become eligible to participate in the Plan at the
beginning of the following quarter after the employee’s hire
date. Employees may contribute up to 20% of their pay to the Plan,
subject to the limitations of the Internal Revenue Code. The
Business’s matching contributions are discretionary. Pursuant to the
401(k) Plan, employees may elect to defer a portion of their salary on a pre-tax
basis. For employees who participated in the plan, the Business matched
the employer’s contribution in 2007 pursuant to the Safe Harbor Provisions of
Section 401(k) of the Internal Revenue Code up to 4% in 2007 of the
participating employee’s annual compensation. During the period ended
September 30, 2009 and the year ended December 31, 2008, the Business did not
make any matching contributions. During the year ended December 31,
2007 the Business contributed approximately $5,000 to the 401(k) plan for its
employees.
F-15
LEGALSTORE.COM
(A
DIVISION OF DOCUMENT SECURITY SYSTEMS, INC.)
NOTES
TO THE CARVE-OUT FINANCIAL STATEMENTS
NOTE
6. - COMMITMENTS
Facilities
- The Business leases 3,829 square feet of office and warehouse space with a
monthly rental of approximately $1,700. Lease expense for years ended December
31, 2008 and 2007 was approximately $21,000 and $21,000,
respectively. The lease expires on October 31, 2010, although renewal
options exist to extend lease agreements for up to an additional 4
years. Total approximate lease commitments with this lease as of
December 31, 2008 are as follows:
2009
|
$ | 21,000 | ||
2010
|
$ | 19,000 |
NOTE
7. – RELATED PARTY TRANSACTIONS
Funding –
The Business’s cash requirements are funded by Document Security Systems, Inc.
which are not subject to formal financing arrangements and do not bear
interest. Transfers to and from Document Security
Systems, Inc. are recorded as transfers to/from affiliate as a component of
divisional equity because amounts are not expected to be
repaid. Included in divisional equity are amounts charged by
Document Security Systems for allocated corporate services.
Corporate
Services –
In accordance with SAB No. 55, corporate expense allocations have been reflected
in these financial statements. The corporate expenses have been
allocated based on a direct relationship to the Business’s operations and are
primarily related to accounting and finance operations performed by Document
Security Systems personnel on behalf of the Business and liability insurance and
for costs associated with the shared use of Document Security Systems accounting
and ERP system. In addition, the allocations include stock
based compensation expense for options to purchase Document Security Systems’
common stock that was granted to the Business’s employees along with accrued
payroll taxes related to grants of common stock of Document Security Systems,
Inc.. Management believes that the basis used for allocating
corporate services is reasonable. However, the terms of these
transactions may differ from those that would have resulted from transactions
among related parties.
NOTE
8. - SUBSEQUENT EVENTS
On October 8, 2009, Lester Levin Inc., a
New York corporation (“LLI”) and wholly owned subsidiary of Document Security
Systems, Inc., entered into an Asset Purchase Agreement with Internet Media
Services, Inc., a Delaware corporation (“IMS”), whereby LLI agreed to sell the
assets associated with its LegalStore.com business (“LegalStore”) to
IMS.
Pursuant
to the Asset Purchase Agreement, LLI agreed to sell to IMS all the assets of
LegalStore, (including, but not limited to, equipment, inventories, contracts,
domain names, accounts receivable, and certain cash and cash equivalents. In
consideration of the sale and transfer of the Acquired Assets, IMS agreed to
issue 7,500,000 shares of common stock, par value $.001 per share, of IMS (“IMS
Common Stock”) (the “Purchase Price”) to Document Security Systems, Inc.,
representing 37% of the then outstanding shares. In addition to
issuing the new IMS Common Stock, IMS agreed to assume certain liabilities
associated with LegalStore, including an existing office lease, trade payables
and accrued payroll. Certain liabilities presented in the
accompanying carve-out financial statements will not be assumed by
IMS.
F-16
LEGALSTORE.COM
(A
DIVISION OF DOCUMENT SECURITY SYSTEMS, INC.)
NOTES
TO THE CARVE-OUT FINANCIAL STATEMENTS
NOTE
8. - SUBSEQUENT EVENTS (CONTINUED)
Within
180 days of closing, IMS intends to file a registration statement on Form S-1
with respect to the IMS Common Stock pursuant to the terms of the Asset Purchase
Agreement and Registration Rights Agreement executed by IMS and Document
Security Systems, Inc concurrently with the Asset Purchase Agreement. Pursuant
to the terms of the Asset Purchase Agreement, Registration Rights Agreement, and
the Stock Pledge and Escrow Agreements executed by IMS’ principal shareholders,
IMS, LLI and Document Security Systems, Inc, if IMS fails to secure registration
of at least 20% of the IMS Common Stock within 360 days of closing, and to meet
certain working capital thresholds contained in the Asset Purchase Agreement,
then IMS will be in default. In the event of a default by IMS with respect to
the registration of the IMS Common Stock, if IMS has failed to satisfy the
working capital requirements provided for in the Asset Purchase Agreement,
Document Security Systems, Inc may take back the collateral, consisting of up to
12,500,000 additional shares of IMS Common Stock owned by the IMS shareholders
identified in the Pledge Agreements. If IMS is in default with
respect to the registration of IMS Common Stock, and IMS has satisfied the
working capital requirements contained in the Asset Purchase Agreement, Document
Security Systems, Inc may take back the collateral, consisting of up to
5,250,000 additional shares of IMS Common Stock owned by the IMS shareholders
identified in the Pledge Agreements.
In
addition to the Asset Purchase Agreement, the Registration Rights Agreement, and
the Pledge Agreements, IMS’ principal shareholders, IMS and Document Security
Systems, Inc entered into a voting agreement whereby the principal shareholders
of IMS agreed to vote all IMS Common Stock held by them so as to elect two
nominees designated by LLI or Document Security Systems, Inc as members of the
IMS Board of Directors.
F-17
Unaudited
Pro Forma Financial Statement
The
following table sets forth our summary unaudited pro forma consolidated
financial data as of December 31, 2009 as if the LegalStore.com assets had been
purchased as of January 1, 2009. The pro forma data for the twelve
months ended December 31, 2009 has been derived by adding our audited
consolidated financial data for the year ended Decemebr 31, 2009 and the
unaudited LegalStore.com (a Division of Document Security Systems, Inc.)
carve-out financial statements for the period prior to the asset purchase
agreement. The summary consolidated financial data as of December 31,
2009 have been derived from and should be read together with our audited
consolidated financial statements and the related notes incorporated by
reference in this prospectus. The summary consolidated financial data
of LegalStore,com for the the period prior to the asset purchase agreement have
been derived from and should be read together with the unaudited LegalStore.com
consolidated financial statements and the related notes incorporated by
reference in this prospectus. The unaudited condensed consolidated
financial statements have been prepared on the same basis as our audited
consolidated financial statements and, in the opinion of our management, reflect
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods
presented.
The
unaudited pro forma condensed combined financial information should not be
considered illustrative of what our results of operations would have been had
the LegalStore.com acquisition been completed on the dates
indicated. The results presented below are not necessarily indicative
of the results to be expected for any future period, and the results for any
interim period are not necessarily indicative of the results that may be
expected for a full year. We therefore caution you not to place undue reliance
on the unaudited pro forma condensed combined financial
information. You should read the following tables together with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this prospectus and our historical
consolidated financial statements and the related notes incorporated by
reference herein.
INTERNET
MEDIA SERVICES, INC.
|
||||||||||||||||
Pro
forma Consolidated Statement of Operations
|
||||||||||||||||
For
the Year Ended December 31, 2009
|
||||||||||||||||
LegalStore.com
(a Division of Document
Security Systems, Inc.)
|
Internet
Media Services, Inc.
|
Adjustments
|
Pro
forma Total For the Year Ended December 31,
|
|||||||||||||
2009
|
2009
|
2009 | 2009 | |||||||||||||
(unaudited)
|
(audited)
|
|||||||||||||||
Revenue
|
$ | 357,397 | $ | 111,022 | $ | - | $ | 468,419 | ||||||||
Costs
of revenue
|
177,544 | 80,983 | - | 258,527 | ||||||||||||
Gross
profit
|
179,853 | 30,039 | - | 209,892 | ||||||||||||
Operating
expenses
|
176,667 | 104,211 | 280,878 | |||||||||||||
Net
income (loss)
|
$ | 3,186 | $ | (74,172 | ) | $ | - | $ | (70,986 | ) |
F-18