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EX-32.1 - GBS Enterprises Incv301897_ex32-1.htm

 

 

 

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: December 31, 2011

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-53223

 

GBS ENTERPRISES INCORPORATED

 (Exact name of registrant as specified in its charter)

Nevada   27-3755055
(State or other jurisdiction of incorporation or   (I.R.S. Employer Identification No.)
organization)    

 

585 Molly Lane

Woodstock, GA 30189

(Address of principal executive offices)

 

(404) 474-7256

Issuer’s telephone number

 

Securities registered under Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered
None   N/A

Securities registered under Section 12(g) of the Act:

 

Common Stock, $0.001 par value

 (Title of class)

 

Copies to:

 Philip Magri, Esq.

The Sourlis Law Firm      

The Courts of Red Bank

130 Maple Avenue, Unit 9B2

 Red Bank, New Jersey 07701

 Direct Dial: (954) 303-8027

T: (732) 530-9007

 F: (732) 530-9008

 PhilMagri@SourlisLaw.com

www.SourlisLaw.com

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Yes ¨ No x

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x No ¨

  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes x No ¨

 

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 ct. (Check one):

 

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

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Yes x No ¨

 

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

 PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

Yes x No ¨

 

APPLICABLE ONLY TO CORPORATE REGISTRANTS

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of February 13, 2012, there were 27,247,958 shares of common stock, par value $0.001 per share, of the Registrant issued and outstanding.

 

 
 

  

TABLE OF CONTENTS   
 

Page

No:

PART I — FINANCIAL INFORMATION  
Item 1. Consolidated Financial Statements 3
  Balance Sheet 4-5
  Statement of Operations 6
  Statement of Cash Flows 7
  Notes to the Financial Statements 8-19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 28
Item 4. Controls and Procedures 28
     
PART II – OTHER INFORMATION:  
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 30
Item 4. [Removed and Reserved by the Securities and Exchange Commission] 30
Item 5. Other Information 30
Item 6. Exhibits 30
Signatures 31

  

2
 

  

PART I — FINANCIAL INFORMATION

 

Item 1.          Financial Statements 

 

GBS Enterprises Incorporated

 

Interim Consolidated Financial Statements

 

December 31, 2011

 

(Unaudited)

 

3
 

 

GBS Enterprises Incorporated

Consolidated Balance Sheets

December 31, 2011 and March 31, 2011

(Unaudited)

 

   December 31, 2011   March 31, 2011 
   $   $ 
Assets          
Current Assets          
Cash and cash equivalents   3,537,517    8,530,864 
Debtors (Accounts receivable)   4,544,023    5,698,320 
Inventories   264,611    - 
Prepaid expenses   1,097,370    1,423,281 
Other receivables   796,454    2,222,887 
Total current assets   10,239,975    17,875,353 
           
Property, plant and equipment - Note 5   2,133,969    298,497 
Financial assets   2,818,310    837,480 
Investment in related company, at equity   285,908    290,973 
Prepaid expenses   725,178    - 
Deferred tax assets   3,385,350    1,136,135 
Goodwill - Note 6   49,693,027    39,688,967 
Software - Note 7   17,110,114    16,514,894 
Other assets   319,139    223,630 
Total non-current assets   76,470,995    58,990,576 
           
Total assets   86,710,970    76,865,929 
           
Liabilities and stockholders' equity          
Current liabilities          
Notes payable   1,462,560    1,440,295 
Liabilities to banks   39,073    50,073 
Accounts payables and accrued liabilities   5,489,528    4,996,748 
Deferred income   7,200,058    6,208,458 
Other liabilities   3,507,192    2,820,002 
Due to related parties - Note 8   475,579    830,156 
Shares payable - Note 9   298,956    - 
Total current liabilities   18,472,945    16,345,733 
           
Liabilities to banks   3,606,461    780,277 
Deferred tax liabilities   611,849    878,450 
Retirement benefit obligation   163,648    153,962 
Other liabilities   2,786,781    6,127,373 
Total non-current liabilities   7,168,739    7,940,061 
           
Total liabilities   25,641,684    24,285,794 
           
4
 

 

GBS Enterprises Incorporated

Consolidated Balance Sheets

December 31, 2011 and March 31, 2011

(Unaudited)

 

   December 31, 2011   March 31, 2011 
   $   $ 
Stockholders' equity          
Capital stock - Note 10          
Authorized:          
75,000,000 common shares of $.001 par value each          
25,000,000 peferred shares of $.001 par value each          
Issued and outstanding          
27,247,958 shares of common stock          
(22,544,000 shares at March 31, 2011)   27,248    22,544 
Additional paid in capital   47,325,971    33,894,661 
Deficit   (2,888,488)   (322,519)
Other comprehensive income   73,951    (13,639)
           
    44,538,682    33,581,047 
Noncontrolling interest in subsidiaries   16,530,604    18,999,088 
           
Total stockholders' equity   61,069,286    52,580,135 
           
           
Total stockholders' equity and liabilities   86,710,970    76,865,929 

 

5
 

 

GBS Enterprises Incorporated

Consolidated Statements of Operations

For the Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

 

   For the three months   For the nine months 
   Ended December 31   Ended December 31 
   2011   2010   2011   2010 
   $   $   $   $ 
                 
Net sales   8,229,318    5,362,060    21,320,351    17,959,639 
Cost of goods sold   4,693,603    2,718,728    10,843,557    8,687,916 
Gross profit   3,535,716    2,643,332    10,476,794    9,271,723 
                     
Operating expenses                    
Selling expenses   4,308,647    2,036,168    12,277,502    7,537,061 
Administrative expenses   1,589,374    715,228    4,846,513    2,724,305 
General expenses   160,162    397,130    861,017    979,973 
    6,058,183    3,148,526    17,985,032    11,241,338 
                     
Operating income   (2,522,468)   (505,194)   (7,508,238)   (1,969,616)
                     
Other Income (expense)                    
Other Income (expense)   (245,631)   (533,815)   64,916    888,513 
Interest income   2,563    2,366    19,449    19,454 
Interest expense   (43,471)   527,293    (251,955)   307,239 
    (286,539)   (4,157)   (167,590)   1,215,206 
                     
Income (loss) before income taxes   (2,809,007)   (509,352)   (7,675,828)   (754,410)
                     
Income tax (income) expense   (971,062)   (456,672)   (2,554,134)   (416,596)
                     
Net income (loss)   (1,837,945)   (52,680)   (5,121,694)   (337,813)
                     
Net income (loss) attributable to non controlling interest   (932,163)   575    (2,555,725)   (8,996)
                     
Net income (loss) attributable to stockholders   (905,782)   (53,255)   (2,565,969)   (328,817)
                     
Other comprehensive income   144,444    -    174,831    9,572 
                    
Other comprehensive income attributable to non noncontrolling interest   72,078    -    87,241    4,776 
                     
                    
Net income (loss) and comprehensive income (loss) attributed to stockholders   (833,416)   (53,255)   (2,478,378)   (324,022)
                     
Net earnings (loss) per share, basic and diluted  $(0.04)  $0.00   $(0.10)  (0.00)
                     
Weighted average number of common stock outstanding, basic and diluted   25,458,401    16,500,000    24,632,896    16,500,000 

 

6
 

  

GBS Enterprises Incorporated

Consolidated statements of Cash Flows

For the Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

 

   December 31, 2011   December 31, 2010 
   $   $ 
Cash flow from operating activities          
Net loss / net income   (2,565,969)   (328,817)
Adjustments          
Deferred income taxes   (2,515,815)   (485,886)
Depreciation and amortization   3,462,047    3,125,805 
Earnings from equity investment   5,065    12,282 
Minority interest losses   (2,555,725)   (8,996)
Stock based compensation   34,000    - 
Foreign exchange   140,831    - 
Changes in operating assets and liabilities          
Accounts receivable and other assets   2,181,463    2,613,710 
Retirement benefit obligation   (95,510)   75,149 
Inventories   (264,611)   (7,510)
Accounts payable and other liabilities   2,227,834    (1,465,629)
Net cash provided by operating activities   53,610    3,530,107 
           
           
Cash flow from investing activities          
Purchase of intangible assets   (3,035,533)   (5,091,537)
Purchase of property, plant and equipment   (2,186,029)   (5,278)
Purchase of financial assets   (1,980,066)   97,958 
Net cash used in investing activities   (7,201,629)   (4,998,857)
           
           
Cash flow from financing activities          
Net borrowings - banks   2,815,184    772,958 
Other borrowings   (3,330,906)   460,062 
Net proceeds from exercise of warrants   3,024,970    - 
Loans from related party   (354,577)   - 
Net cash used in financing activities   2,154,671    1,233,020 
           
Net decrease in cash   (4,993,347)   (235,730)
Cash and cash equivalents - Beginning of period   8,530,864    1,744,965 
           
Cash and cash equivalents - End of period   3,537,517    1,509,235 
           
Note 11 - Supplemental Cash Flow Information          

 

7
 

 

NOTE 1 – INTERIM REPORTING

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, they include all adjustments, which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States of America. These interim financial statements follow the same accounting policies and methods of their application as the Company’s audited March 31, 2011 financial statements. All adjustments are of a normal recurring nature. It is suggested that these interim financial statements be read in conjunction with the Company’s March 31, 2011 financial statements.

 

Operating results for the nine months ended December 31, 2011 are not necessarily indicative of the results that can be expected for the year ending March 31, 2012.

 

NOTE 2 - OPERATIONS AND RESTRUCTURING

 

GBS Enterprises Incorporated, a Nevada corporation (sometimes referred to in these statements as the “Company,” “GBSX,” “we,” “us,” “our” or similar terms), conducts its primary business through its 50.1% owned subsidiary, GROUP Business Software AG (“GROUP”), a German-based public-company whose stock trades on the Frankfurt Exchange under the stock symbol INW. GROUP’s core business is focused on serving IBM’s Lotus Notes and Domino market where it has become IBM’s largest provider of business solutions worldwide. GROUP caters primarily to mid-market and enterprise-size organizations with over 3,500 customers in thirty-eight countries spanning four continents, representing more than 5,000,000 active users of its products. GROUP’s customers include Abbot, Ernst & Young, Deutsche Bank, Bayer, HBSC, Merck and Toyota. GROUP provides IBM Lotus Notes/Domino Application Transformation technology and related Cloud Computing technology. Headquartered in Eisenach, Germany, GROUP has offices throughout Europe and North America.

 

General Corporate History

 

We were incorporated in Nevada on March 20, 2007 as SWAV Enterprises Ltd. (“SWAV”). SWAV was an importer and wholesaler of Chinese manufactured goods.

 

On April 26, 2010, SWAV purchased certain assets of Lotus Holdings Limited (“Lotus”) pursuant to an Asset Purchase Agreement in consideration for aggregate of 2,265,240 shares of SWAV common stock. Lotus is a holding company specializing in software technology and training services, particularly in the areas of advanced software development tools, innovative point-of-care electronic health record (EHR) software, and sales training.

Simultaneously with SWAV’s acquisition of Lotus, the SWAV stockholders sold an aggregate of 11,984,770 shares of SWAV common stock to Lotus, for an aggregate purchase price of $370,000.

 

Upon the consummation of the acquisition, the then executive officers and directors of SWAV resigned and Joerg Ott was appointed as the Company’s Chief Executive Officer, President and Chairman of the Board of Directors.

 

On September 6, 2010, SWAV’s name was changed to GBS Enterprises Incorporated. On October 14, 2010, the Company’s trading symbol on the OTC Bulletin Board was changed from SWAV to GBSX.

 

8
 


NOTE 2 - OPERATIONS AND RESTRUCTURING (continued)

 

On November 5, 2010, the Company entered into an agreement to acquire approximately 28.2% of the outstanding common shares of GROUP Business Software AG, (“GROUP”) a German company, trading on the Frankfurt Stock Exchange under the symbol INW. The Company purchased 3,043,985 of its own shares for $300,000 and then exchanged those shares for 7,115,500 shares of common stock of GROUP. Their fair value was calculated at $.579 per share as determined by an independent valuation firm. The agreement was effective December 30, 2010. The acquisition was a two-step transaction, culminating in a share exchange.

 

On January 6, 2011, the Company acquired an additional aggregate of 5,525,735 shares of common stock of GROUP in exchange for 2,361,426 shares of common stock of the Company. The acquisition represents approximately 21.9% of the issued and outstanding shares of GROUP. The effect of this transaction is that the Company gained a 50.1% controlling interest of GROUP with an aggregate of 12,641,235 common shares. The value of this additional purchase, using the same techniques as the previous acquisition, was $2,796,000, based on a value of $0.506 per share.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

This summary of significant accounting policies is presented to assist in understanding the financial statements. The financial statements and notes are the representations of the Company’s management, who is responsible for their integrity and objectivity.

 

There have been no changes in accounting policies from those disclosed in the notes to the audited financial statements for March 31, 2011.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statements above reflect all of the costs of doing business.

 

Cash and Cash Equivalents

 

For purposes of the Statement of Cash Flows, management considers liquid investments with an original maturity of three months or less to be cash equivalents. As at December 31, 2011, the Company did not have any cash equivalents ($nil – 2010).

 

Comprehensive Income (Loss)

 

The Company adopted FASB Codification topic 220, Reporting Comprehensive Income, which establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Comprehensive income consists of net income and other gains and losses affecting stockholder's equity that are excluded from net income, such as unrealized gains and losses on investments available for sale, foreign currency translation gains and losses and minimum pension liability. Since inception, the Company’s other comprehensive income represents foreign currency translation adjustments.

 

9
 

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Net Income per Common Share

 

FASB Codification topic 260, Earnings per share, requires dual presentation of basic and diluted earnings per share (EPS) with a reconciliation of the numerator and denominator of the EPS computations. Basic earnings per share amounts are based on the weighted average shares of common stock outstanding. If applicable, diluted earnings per share would assume the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. Diluted net income (loss) per share on the potential exercise of the equity-based financial instruments is not presented where anti-dilutive. There were no adjustments required to net income for the period presented in the computation of diluted earnings per share.

 

Financial Instruments

 

Financial instruments consist of cash and cash equivalents, accounts receivable, financial assets, notes payable, liabilities to banks, accounts payable and accrued liabilities and other liabilities. As of the financial statement date, the Company does not hold any derivate financial instruments. Financial assets and liabilities are measured upon first recognition and reviewed at the financial statement date. Changes in fair value are recognized through profit and loss. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.

 

Fair Value Measurements

 

The Company follows FASB Codification topic 820, Fair Value Measurements and Disclosures, for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis. This accounting standard establishes a single definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy to be used to classify the source of information used in fair value measurement and expands disclosures about fair value measurements required under other accounting pronouncements. It does not change existing guidance as to whether or not an instrument is carried at fair value. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

 

The Company has adopted FASB Codification topic 825, Financial Instruments, which allows companies to choose to measure eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. The Company has not elected the fair value option for any eligible financial instruments.

 

Impairment of Long-Lived Assets

 

The Company evaluates the recoverability of its fixed assets and other assets in accordance with FASB Codification topic, 360.10, Property, Plant and Equipment, Impairment or Disposal of Long-Lived Assets. This guidance requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds their expected cash flows, whereby it is considered to be impaired and is written down to fair value, which is determined based on either discounted future cash flows or appraised values. No impairment has been recognized in the accounts.

 

10
 

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Revenue Recognition

 

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. Under these guidelines, revenue is recognized when persuasive evidence of an arrangement exists, shipment has occurred or services rendered, the price is fixed or determinable and payment is reasonably assured. Customers take ownership at point of sale and bear the costs and risks of delivery. Maintenance earnings are realized per FASB Codification topic 605 Revenue Recognition on a pro rata basis over the contractual service period. Consulting and training services are realized upon provision of the service. Sales revenues are presented with deductions made for discounts, customer bonuses, and rebates.

 

Property, Plant and Equipment

 

Property, plant and equipment are valued at acquisition or manufacturing costs, reduced by scheduled and, if necessary, unscheduled depreciation. Fixed assets are depreciated on a straight-line basis, prorated over their expected useful life. Scheduled depreciation is mainly based on useful lives of 3 to 10 years. If fixed assets are sold, retired or scrapped, the profit or loss arising from the difference between the net sales proceeds and the residual book value are included under other operating earnings and expenses.

 

Intangible Assets

 

Intangible assets predominately comprise goodwill, acquired software and capitalized software development services. Intangible assets acquired in exchange for payment are reflected as acquisition costs. If the development costs can be capitalized per FASB Codification topic 985-20-25, these are reflected as ascribable personnel and overhead costs.

 

Company created software can be intended for sale to third parties or used by the Company itself. If the conditions for capitalization are not met, the expenses are recorded with their effect on profit in the year in which they were incurred.

 

GROUP amortizes intangible assets with a limited useful life to the estimated residual book value in accordance with codification regulations. In addition, in special circumstances according to FASB Codification topic 350-30, a recoverability test is performed and, if applicable, unscheduled amortization is considered. The useful life of acquired software is between three and five years and three years for Company-designed software.

 

Intangible assets obtained as part of an acquisition which do not meet the criteria for a separate entry are identified as goodwill and are reviewed once a year as to their recoverability in the form of an impairment test. If they are no longer recoverable, an unscheduled amortization expense entry is performed.

 

Use value is generally used in order to determine the recoverability of goodwill and intangible assets with an indefinite useful life. The current plan serves as the basis for this policy. The planning assumptions are each adjusted for the current state of knowledge. Reasonable assumptions regarding macroeconomic trends and historical developments are taken into account in making these adjustments. Future estimated cash flows are essentially determined based on the expected growth rates of the markets in question.

 

11
 

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Other Provisions

 

According to FASB Codification topic 450 Contingencies, provisions are made whenever there is a current obligation to third parties resulting from a past event which is likely in the future to lead to an outflow of resources and of which the amount can be reliably estimated. Provisions not already resulting in a outflow of resources in the following year are recognized at their discounted settlement amount on the financial statement date. The discount taken is based on market interest rates. The settlement amount also includes the expected cost increases. Provisions are not set off against contribution claims. If the amended estimate leads to a reduction of the obligatory amount, the provision is proportionally reversed and the earnings are recognized in other operating earnings.

 

Foreign currency translation

 

The functional currency of the Company is US dollars. For financial reporting purposes, the financial statements of GROUP were translated into US dollars. Assets and liabilities were translated at the exchange rates at the balance sheet dates and revenue and expenses were translated at the average exchange rates and stockholders’ equity was translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.

 

Deferred Taxes

 

Income taxes are provided in accordance with FASB Codification topic 740 Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss-carry forwards.

 

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that, some portion or all of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

 

Stock Based Compensation

 

The Company adopted the fair value recognition provisions of FASB Codification topic 740 Stock Compensation” under which the Company records stock-based compensation expense for warrants and stock options granted to employees, directors and officers using the fair value method. Under this method, stock-based compensation is recorded over the vesting period of the warrant and option based on the fair value of the warrant and option as the grant date. The fair value of each warrant and option granted is estimated using the Black-Scholes option pricing model that takes into account on the grant date, the exercise price, expected life of the warrant and/or option, the price of the underlying security, the expected volatility, expected dividends on the underlying security, and the risk-free interest rate. Transactions in which goods or services are received from non-employees in exchange for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

 

Stock based compensation is recorded with a corresponding increase to additional paid-in capital. Consideration received on the exercise of warrants and options, together with the amount previously credited to additional-paid in capital, is recognized as an increase in common stock.

 

12
 

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Principles of Consolidation and Reverse Acquisition

 

As previously disclosed, the Company has exchanged a total of 5,405,411 shares of common stock in exchange for 50.1% of the outstanding common shares of GROUP. Although the Company was the legal acquirer, the transaction was accounted for as a recapitalization of GROUP in the form of a reverse merger, whereby GROUP becomes the accounting acquirer and is deemed to have retroactively adopted the capital structure of the Corporation. Accordingly, the accompanying consolidated interim financial statements reflect the historical consolidated financial statements of GROUP for all periods presented prior to the merger of January 6, 2011. Only transactions and balances subsequent to that date are included in these interim financial statements. Common stock and additional paid in capital are the only exceptions, as their structure immediately after the merger were accounted for as being the initial balances at inception.

 

The Company has based its financial reporting for the consolidation with GROUP in accordance with FASB Accounting Standard Codification (ASC) 805-40 as it relates to reverse acquisitions. Goodwill has been measured as the excess of the fair value of the consideration effectively transferred by the Company, the acquiree for financial reporting purposes, over the net amount of the Company’s recognized identifiable assets and liabilities.

The assets and liabilities of GROUP, the acquirer for financial reporting purposes, are measured and recognized in the consolidated financial statements at their pre-combination carrying amounts in accordance with ASC 805-40-45-2(a). Therefore, in a reverse acquisition, the non-controlling interest reflects the non-controlling shareholders’ proportionate interest in the pre-combination carrying amounts of GROUP’s net assets even though the non-controlling interests in other acquisitions are measured at their fair values at the acquisition date.

 

It should also be noted that the Company and GROUP have different year-end reporting dates. The Company’s fiscal year-end reporting date is March 31 and GROUP”s calendar year-end reporting date is December 31. The consolidation of these entities for financial reporting purposes has been performed without any adjustments for timing differences between these two reporting dates in accordance Regulation S-X Rule 11-02.

 

Inventories

 

Pursuant to FASB Codification topic 330 Inventories, inventories held for sale are recognized under inventories. Inventories were measured at the lower of cost or market. Cost is determined on a first-in-first out basis, without any overhead component.

 

Recent Accounting Pronouncements

 

The Company adopts new pronouncements relating to generally accepted accounting principles applicable to the Company as they are issued, which may be in advance of their effective date. Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.

 

13
 

 

NOTE 4 – SUBSIDIARY COMPANIES ACQUIRED

 

Effective April 1, 2011, the Company entered into an agreement to acquire 100% of the outstanding common shares of Pavone AG, a German corporation, for $350,000 in cash and 1,000,000 shares of its common stock. The fair value of the common stock was determined to be $4.90 per share, representing the market value at the end of trading on the date of the agreement. The total value of the investment, including the assumption of $11,261 in debt was $5,261,261.

 

Effective June1, 2011, the Company acquired 100% of the outstanding common shares of GroupWare, Inc., a State of Florida corporation. As consideration the Company paid $250,000 and issued 250,000 shares of its common stock. The fair value of the common stock was determined to be $4.34 per share, representing the market value at the end of trading on the date of the agreement. The total value of the investment, including the assumption of $219,902 in debt was $1,554,902.

 

On July 25, 2011, the Company acquired 100% of the issued and outstanding shares of common stock of IDC Global, Inc. (“IDC”), a Delaware corporation with offices in Chicago, New York, London and other key cities. Pursuant to the acquisition agreement of July 15, 2011, the Company agreed to issue the shareholders an aggregate of 800,000 shares of common stock and make a cash payment of $750,000. The agreement required an additional payment to the management shareholders of 80,000 shares of common stock and signing bonuses to personnel of $35,000. The Company also agreed to reimburse IDC up to $25,000 for incurred accounting and legal fees related to the transaction. The fair value of the common stock was determined to be $3.50 per share, representing the market value at the end of trading on the date of the agreement. The total value of the investment, including $883,005 of debt assumption was $4,713.005.

 

On September 27, 2011, the Company entered into an acquisition agreement with SD Holdings Ltd. (“SYN”), a Mauritius corporation and the shareholders of SYN (the “Selling Shareholders”) owning 100% of issued and outstanding shares of SYN. Pursuant to the agreement, the Company purchased one hundred percent (100%) of the issued and outstanding shares of SYN (“SYN Shares”) effective November 1, 2011 in consideration for (i) 700,000 shares of common stock of GBS and (ii) $525,529 (Five Hundred Twenty Five Thousand, Five Hundred Twenty Nine United States Dollars). The fair value of the common stock was determined to be $2.05 per share, representing the market value at the end of trading on the date of the agreement.

 

The assets and liabilities of these companies represent the values as of September 30, 2011 as per Regulation S-X Rule 11-02.

 

NOTE 5 – PROPERTY PLANT AND EQUIPMENT

 

Fixed assets are measured at cost less scheduled straight-line depreciation. The specific useful life was based on those used uniformly at the parent company.

 

Depreciation of the computer hardware listed as office equipment is distributed over a period of three to five years. The depreciation period for other office equipment is three to ten years. Office furnishings are depreciated over a period of eight to ten years.

 

   December 31, 2011   March 31, 2011 
         Accumulated    Net Book         Accumulated    Net Book 
    Cost    Amortization    Value    Cost    Amortization    Value 
    $    $    $    $    $    $ 
Equipment   5,747,500    3,613,532    2,133,968    4,857,380    4,558,883    298,497 

 

14
 

 

NOTE 6 – GOODWILL

 

Goodwill results from business combinations and is tested annually for recoverability as part of an impairment test. Goodwill arises from the following business acquisitions: 

 

Affiliated Company  

Date of the First

Consolidation

 

Goodwill

as of

12.31.2009

in kUSD

 

Goodwill

YE in

kUSD

 

Goodwill

Q2 in

kUSD

global words AG   01/10/02   4,821.9   5,095.3   5,095.3
GROUP Technologies AG   01/09/05   4,239.4   4,479.7   4,479.7
GROUP Business Software Inc.   31/12/05   2,060.7   2,177.5   2,177.5
GROUP LIVE N.V.   31/12/05   1,253.2   1,324.2   1,324.2
zurückbehaltener GoF CRM   31/12/05   2,941.7   3,108.4   3,108.4
GROUP Business Software Ltd   31/12/05   2,616.7   2,765.1   2,765.1
ebVOKUS Software GmbH   01/10/05   419.8   443.6   443.6
GAP AG für GSM Applikationen und Produkte   31/12/05   1,811.2   1,913.9   1,913.9
Relavis Corporation   01/08/07   6,897.2   7,288.3   7,308.0
Permessa   22/09/10   0.0   2,387.4   2,387.4
GROUP Business Software AG   06/01/11   8,705.5   8,705.5   8,705.5
Pavone AG   01/04/11           4,956.7
Groupware Inc.   01/06/11           992.8
IDC   01/07/11           2,496.2
SD Holding   01/10/11           1,538.6
        35,767.3   39,689.0   49,693.0

 

NOTE 7 – SOFTWARE

 

Development costs

 

The costs of developing new software products and updating products already marketed by GROUP Business Software AG are generally recognized as expenses in the period in which they arise. Provided they meet the conditions for capitalization as per FASB Codification 985-20-25, they are capitalized. Capitalized development costs can be attributed to the defined products. These products are technically realizable and there is a target market for them.

 

The development costs arising in the reporting period result from the personnel costs to be attributed to the development work as well as overhead costs, provided that these are related to the development work and do not represent general administrative costs. The ascribable overhead costs are directly recognized. Capitalized development costs are generally amortized over a period of three years starting with the date of marketability of the new products or major releases.

 

Concessions, Industrial Property Rights, Licenses

 

The intangible financial assets carried in this item are licenses acquired in exchange for payment. These financial assets are measured at acquisition cost less scheduled straight-line amortization. The assets added in the scope of the cost price allocation of the business divisions acquired this year. The useful life spans were based uniformly throughout the Corporation on those used by the parent company. Scheduled amortization is performed over a period from three to ten years.

 

15
 

 

NOTE 8 – RELATED PARTY TRANSACTIONS AND BALANCES

 

The Company had the following transactions with related parties for the nine months ending December 31, 2011 and 2010:

 

    2011    2010 
    $    $ 
Expenses paid to related parties:          
Wages   138,775    126,681 
Rent   30,332    28,671 
Consulting fees   632,984    259,604 
Interest   23,327    - 
Stock Base Compensation   34,000    - 

 

The transactions between the Company and the parties were consummated at the price agreed upon between the parties.

 

The following balances were outstanding   Dec 31    March 31 
    2011    2011 
           
Due to (form) a director and shareholder, unsecured demand note payable, bearing interest at 5%  $(24,421)  $117,250 
Due to Lotus Holdings Ltd., a shareholder, demand notes bearing interest at 5%, due October 30, 2012          
-     secured by shares in GROUP Business Software AG   500,000    600,000 
-     secured by OUTPUT Software   -    105,000 
Accrued interest   -    7,906 
   $475,579   $830,156 

 

NOTE 9 – SHARE PAYABLE

 

The account relates to shares to be issued in connection with the purchase of 100% interest in SD Holdings. Amount consists of 145,832 shares of the company at $2.05 per share, not yet issued.

 

NOTE 10 - CAPITAL STOCK

 

The following are changes to the Company’s capital stock from April 1, 2010.

 

On April 1, 2011, the Company issued 1,000,000 shares of common stock as partial payment for 100% of the issued and outstanding shares of Pavone AG. The fair value of the shares issued was determined to be $4,900,000.

 

On June 1, 2011, the Company issued 250,000 shares of common stock as partial payment for 100% of the issued and outstanding shares of GroupWare, Inc. The fair value of the shares issued was determined to be $1,085,000.

 

16
 

 

NOTE 10 - CAPITAL STOCK (continued)

 

On July 25, 2011 the Company issued 880,000 shares of common stock as a partial payment for 100% of the issued and outstanding shares of IDC Global, Inc. The fair value of the shares issued was determined to be $3,080,000

 

On November 1, 2011 the Company issued 554,168 shares of common stock as a partial payment for 100% of the issued and outstanding shares of SD Holdings. The fair value of the shares issued was determined to be $1,136,044.

 

On December 13, 2011 the Company issued 2,020,000 shares of common stock from the exercise of 2,020,000 warrants for total proceeds of $3,030,000. The cost of issuance was $5,030, making net proceeds $3,024,970. 

 

NOTE 11 – SUPPLEMENTAL CASH FLOW INFORMATION

 

Non cash transactions during the period are described above in Note 4 – Subsidiary Companies Acquired and Note 9 – Capital Stock.

    December 31, 2011    December 31, 2010 
           
Interest paid  $251,954   $307,239 
Income taxes paid  $338,231   $54,543 

 

NOTE 12 – STOCK BASED COMPENSATION

 

Effective April 1, 2011, a warrant to purchase shares was granted to an officer of the Company. The warrant allowed the grantee to purchase 100,000 common shares of the Company at $1.50. The warrant may be exercised any time before the third anniversary of the grant. This was the only stock based compensation granted in either of the nine month periods ending December 31, 2011 or December 31, 2010.

 

Compensation was recorded at the fair value of the warrant as at the grant date based on the Black-Scholes option pricing model, using the following assumptions:

 

Expected dividend yield   0%
Average risk-free interest rate   1.19%
Expected life   3 years 
Expected volatility   77.1%

 

Under the fair value method of accounting for stock options (warrants) the Company recorded compensation expense for the six months ending December 31, 2011 of $34,000 ($nil – 2010). This amount has been credited to additional paid in capital.

 

NOTE 13- WARRANTS

 

The Company has issued warrants to outside consultants in payments for services provided as detailed in the following schedule. The warrants are issued as “cashless” warrants and all have a three-year term with the exception of the warrant issued on October 10, 2010, which has a 30 month term. The warrants have been valued using a Black-Scholes option pricing model with appropriate volatility, equity value and interest rate inputs as noted below. The valuation of the warrants is for disclosure purposes only as the charge is related to the cost of issuing the shares and there is no impact to the financial statements.

 

17
 

 

NOTE 13- WARRANTS (continued)

 

Common Stock Warrants Issued   Common    Exercise    Valuation    Fair Value per    Warrants' 
to Outside Consultants   Shares    Price    Date    Warrant Share    Fair Value 
                          
Issued on October 1, 2010   2,000,000   $4.00    10/1/2010   $-   $- 
Issued on March 14, 2011   707,280   $1.50    3/14/2011   $0.34   $240,475 
Issued on March 24, 2011   15,000   $1.50    3/24/2011   $0.34   $5,100 
                          
Total Warrant Value                      $245,575 

 

 

The fair value of the warrant as at the grant date of October 1, 2010 was based on the Black-Scholes option pricing model, using the following assumptions:

 

Expected dividend yield   0%
Average risk-free interest rate   0.74%
Expected life   2.5 years 
Expected volatility   65.0%

 

The fair value of the warrants as at the grant dates of March 14, and March 24, 2011 were based on the Black-Scholes option pricing model, using the following assumptions:

 

Expected dividend yield   0%
Average risk-free interest rate   1.07 – 1.19%
Expected life   3 years 
Expected volatility   77.2%

 

As at December 31, 2011, the number of shares the warrants outstanding could purchase if exercised was as follows:

 

         Weighted 
    Common    Average 
Warrants   Shares    Price/sh 
Outstanding, beginning of period   8,766,280   $2.07 
Issued   100,000   $1.50 
Exercised   (2,020,000)  $1.50 
Expired   -   $- 
Outstanding, end of period   6,846,280   $2.23 

 

18
 

 

NOTE 14 – SEGMENT REPORTING

 

The Company reports segment information based on the “management” approach. Operating segments are defined as components of an enterprise whose separate financial information is evaluated regularly by the chief decision maker in deciding how to allocate resources and assess performance. Since the company operates in one segment, all required financial segment information can be found in the consolidated financial statements.

 

Revenues by geographic area for the three and nine months ended December 31, 2011 and 2010 are as follows (USD 000's).

 

   For the three months  For the nine months
   ended  ended
   December 31,  December 31,
   2011  2010  2011  2010
             
US   2,398    1,242    6,442    4,190 
                     
Other   5,831    4,120    14,878    13,770 
                     
    8,229    5,362    21,320    17,960 

 

Long-lived assets by geographic area, which primarily include property plant and equipment net as of December 31, 2011 and March 31, 2011 were as follows (USD 000’s).

 

    December    March 
    31,    31, 
    2011    2011 
           
US   1,647    1 
           
Other   487    297 
           
    2,134    298 

  

19
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

OVERVIEW

 

GBS Enterprises Incorporated, a Nevada corporation (the “Company,” “GBS,” “GBSX,” “we,” “us,” “our” or similar expressions), conducts its primary business through its 50.1% owned subsidiary, GROUP Business Software AG (“GROUP”), a German-based public-company whose stock trades on the Frankfurt Exchange under the stock symbol INW.  GROUP’s software and consulting business is focused on serving IBM’s Lotus Notes and Domino market where it has become IBM’s largest provider of business solutions worldwide.  GROUP caters primarily to mid-market and enterprise-size organizations with over 3,500 customers in thirty-eight countries spanning four continents, representing more than 5,000,000 active users of its products.  GROUP’s customers include Abbot, Ernst & Young, Deutsche Bank, Bayer, HBSC, Merck and Toyota.  GROUP provides IBM Lotus Notes/Domino Application Transformation technology and related Cloud Computing technology. Headquartered in Eisenach, Germany the Company has offices throughout Europe and North America. The Company’s maintains a website at www.gbsx.us. GROUP maintains a website at www.gbs.com. The information contained in the Company’s and GROUP’s websites is not incorporated by reference herein.

   

General Corporate History

 

We were incorporated in Nevada on March 20, 2007 as SWAV Enterprises Ltd. (“SWAV”). SWAV was an importer and wholesaler of Chinese manufactured goods.

 

On April 26, 2010, SWAV purchased certain assets of Lotus Holdings Limited (“Lotus”) pursuant to an Asset Purchase Agreement in consideration for aggregate of 2,265,240 shares of SWAV common stock. Lotus is a holding company specializing in software technology and training services, particularly in the areas of advanced software development tools, innovative point-of-care electronic health record (EHR) software, and sales training. Simultaneously with SWAV’s acquisition of Lotus, the SWAV stockholders sold an aggregate of 11,984,770 shares of SWAV common stock to Joerg Ott, our CEO and Chairman, for an aggregate purchase price of $370,000.

 

Upon the consummation of the acquisition, the then executive officers and directors of SWAV resigned and Joerg Ott was appointed as the Company’s Chief Executive Officer, President and Chairman of the Board of Directors. On September 6, 2010, SWAV’s name was changed to GBS Enterprises Incorporated. On October 14, 2010, the Company’s trading symbol on the OTC Bulletin Board was changed from SWAV to GBSX.

 

Effective December 30, 2010, the Company acquired approximately 28.2% of the issued and outstanding shares of common stock of GROUP, pursuant to Share Purchase Agreements between the Company and several of GROUP’s stockholders, including Mr. Joerg Ott (also the Company’s Chairman and Chief Executive Officer). Pursuant to the Share Purchase Agreements, the Company acquired an aggregate of 7,115,500 shares of common stock of GROUP in consideration for an aggregate of 3,043,985 shares of the Company’s common stock.

 

On January 6, 2011, the Company acquired an additional 5,525,735 shares of common stock of GROUP, representing approximately 21.9% of the issued and outstanding shares, from several additional GROUP stockholders in consideration for an aggregate of 2,361,426 shares of the Company’s common stock.

 

In total, the Company purchased an aggregate of 12,641,235 shares of common stock of GROUP from a total of nine GROUP stockholders in consideration for a total of 5,405,411 shares of common stock of the Company, resulting in the Company owning a controlling equity interest of approximately 50.1% in GROUP. The Company conducts its primary business through GROUP.

 

Overview of Cloud Computing Technology and Industry Trends

 

Cloud computing is a general term for anything that involves delivering hosted services over the Internet. These services are broadly divided into three categories: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS).

 

IaaS providers have massive data centers that can handle the data run over the cloud, the largest of which is Amazon.com. IBM also participates in this business and hosts GROUP Live. PaaS providers offer the actual cloud platform that runs on the IaaS data centers and can deploy the applications (SaaS products).  Some of the leading PaaS providers include Amazon Web Services, Microsoft Azure Services Platform, Google App Engine, and Rackspace Cloud, along with GBS’s CAP and GROUP Live products.  SaaS delivers applications on the cloud, which simplify product licensing and maintenance.  The SaaS market was first filled by a number of CRM (Customer Relationship Management), ERP  (Enterprise Risk Management) and email applications but has spread into nearly all other types of software.  Leading providers in this space include Salesforce.com, Google and Zoho as well as IBM’s Lotus Live suite.  In 2009, SaaS made up the bulk of cloud computing revenue at $8 billion ( Source : IDC, June 2010).

 

Over the past five years, there has been a migration from on-premise hardware and software to cloud computing which allows companies to increase efficiency and reduce cost by paying for software and hardware use on a subscription basis.  In this model, IT managers are able to rent server capacity on an as-needed basis from a third party, instead of managing a data center on-premise, and purchasing up-to-date licenses for software based on real-time, instead of purchasing bundles of licenses or software and upgrading when updates are released.

 

20
 

 

An October 2010 IBM Tech Trend Survey found that 91% of the 2,000 IT developers surveyed expect cloud computing to over-take on-premise computing as the primary way organizations acquire IT over the next five years.  An IDC July 2010 report shows global public cloud-related spending at $16.5 billion in 2009 (4% of the total IT spending) with the expectation that the market will increase to $55.5 billion by 2014, making up 12% of total IT spending.  IDC broke down the market into five categories, three of which GBS competes in, including Applications, App Development and Deployment, and Infrastructure Software.  These three make up $13.0 billion of the 2009 total and $40.5 billion in 2014, which leaves plenty of room for growth for a number of competitors in the market.

 

Competition

 

The competitive landscape in the enterprise data center market is intense and changing, and we expect there will be a new class of very large, well-financed, and aggressive competitors, each bringing its own new class of products to address this new market. We also expect to see acquisitions, further industry consolidation, and new alliances among companies as they seek to serve the enterprise data center market.

 

The Company is focused on developing a portfolio of Cloud Computing software technologies and Application Services to address the needs of ISV’s, Data Center providers, as well as commercial and government organizations. GBSX is pursuing an aggressive growth strategy based upon highly targeted mergers and acquisitions so as to build its portfolio of technologies, applications, and services.

  

Acquisitions of Subsidiary Companies

 

During the nine month period ended December 31, 2011, the Company made four business acquisitions as described below:

 

·Effective April 1, 2011, the Company entered into an agreement to acquire 100% of the outstanding common shares of Pavone AG, a German corporation, for $350,000 in cash and 1,000,000 shares of its common stock. The fair value of the common stock was determined to be $4.90 per share, representing the market value at the end of trading on the date of the agreement. The total value of the investment, including the assumption of $11,261 in debt was $5,261,261.

 

·Effective June1, 2011, the Company acquired 100% of the outstanding common shares of GroupWare, Inc., a State of Florida corporation. As consideration the Company paid $250,000 and issued 250,000 shares of its common stock. The fair value of the common stock was determined to be $4.34 per share, representing the market value at the end of trading on the date of the agreement. The total value of the investment, including the assumption of $219,902 in debt was $1,554,902.

 

·On July 25, 2011, the Company acquired 100% of the issued and outstanding shares of common stock of IDC Global, Inc. (“IDC”), a Delaware corporation with offices in Chicago, New York, London and other key cities. Pursuant to the acquisition agreement of July 15, 2011, the Company agreed to issue the shareholders an aggregate of 800,000 shares of common stock and make a cash payment of $750,000. The agreement required an additional payment to the management shareholders of 80,000 shares of common stock and pay signing bonuses to personnel of $35,000. The Company also agreed to reimburse IDC up to $25,000 for incurred accounting and legal fees related to the transaction. The fair value of the common stock was determined to be $3.50 per share, representing the market value at the end of trading on the date of the agreement. The total value of the investment, including $883,005 of debt assumption was $4,713.005.

 

·On September 27, 2011, the Company entered into an acquisition agreement with SD Holdings Ltd. (“SYN”), a Mauritius corporation and the shareholders of SYN (the “Selling Shareholders”) owning 100% of issued and outstanding shares of SYN. Pursuant to the agreement, the Company purchased one hundred percent (100%) of the issued and outstanding shares of SYN (“SYN Shares”) effective November 1, 2011 in consideration for (i) 554,168 shares of common stock of GBS and (ii) $525,529. The fair value of the common stock was determined to be $2.05 per share, representing the market value at the end of trading on the date of the agreement.

 

The assets and liabilities of these companies represent the values as of September 30, 2011 as per Regulation S-X Rule 11-02.

 

Results of Operations

 

Comparison of Consolidated Balance Sheets at December 31, 2011 and March 31, 2011

 

Assets

 

Total Assets increased from $76,865,929 at March 31, 2011 to $86,710,970 at December 31, 2011. Total Assets consists of Total Current Assets and Total Non-Current Assets.

 

At December 31, 2011, our Total Current Assets were $10,239,975, compared to $17,634,353 at March 31, 2011. Our cash and cash equivalents decreased from $8,530,864 at March 31, 2011 to $3,537,517 at December 31, 2011. The decrease was primarily due to the Company’s continued expenditures in development of the Transformer and Cloud Application Platform technologies Accounts Receivable decreased from $5,698,320 at March 31, 2011 to $4,544,023 at December 31, 2011. This decrease was primarily due to seasonality issues in that billings increase at the beginning of the calendar year for recurring software maintenance and receivables decline during the year as these maintenance receivables are collected. Inventories increased from $0 at March 31, 2011 to $264,611 at December 31, 2011 primarily as the result of the accumulation of work-in-process labor which will be billed to clients when the projects are completed in the 4th quarter ending March 31, 2012. Prepaid Expenses decreased from $1,423,281 at March 31, 2011 to $1,097,370 at December 31, 2011 and consisted primarily of the expensing of prepaid items that consisted of office supplies and materials. Other receivables consisted of a receivable for anticipated compensation for damages, security deposits and tax refund claims. Other receivables decreased from $2,222,887 at March 31, 2011 to $796,454 at December 31, 2011. The decrease was primarily due to the receipt of a cash payment of $1,901,522 from an insurance company for damages compensation.

 

21
 

 

At December 31, 2011, our Total Non-Current Assets were $76,470,995, compared to $58,990,576 at March 31, 2011. Property, plant and equipment increased from $298,497 at March 31, 2011 to $2,133,969 at December 31, 2011 due to the acquisition of IDC whose property, plant and equipment assets consisted primarily of computer equipment and leasehold improvements used in the datacenter operations of IDC. For additional details, see Note 5 – Property, Plant and Equipment in the footnotes to the Interim Consolidated Financial Statements.

 

Our Financial Assets increased from $837,480 at March 31, 2011 to $2,818,310 at December 31, 2011. The increase resulted from a loan from the Company to GROUP Business Software AG. This loan would typically be classified as an intercompany loan and would be eliminated in consolidation, however, because of the application of the 93-day Rule, the intercompany loan will not be eliminated until the 4th quarter ending March 31, 2012 due to the one quarter timing difference between the two companies’ financial statements as reflected in the consolidated statements. Investment in related company was $290,973 at March 31, 2011 and decreased slightly to $285,908 at December 31, 2011. This amount represents an equity investment in BERS, a Bulgarian development company. Non-current Prepaid expenses increased from $-0- at March 31, 2011 to $725,178 at December 31, 2011 and consisted primarily of the reclassification of prepaid taxes to non-current prepaid taxes relating to recent acquisitions. Deferred Tax Assets increased from $1,136,135 at March 31, 2010 to $3,385,350 at December 31, 2011. The increase resulted from net operating loss carry forwards from the tax impact of recent losses relating to the operations of GROUP Business Software, AG, and the Company. Goodwill increased from $39,688,967 at March 31, 2011 to $49,693,027 at December 31, 2011. The increase was primarily due to the purchase of Pavone, AG, Groupware, Inc., IDC and SD Holdings which accounted for a total increase to Goodwill of approximately $9.98 million relating to these acquired companies. For additional details, see Note 6 – Goodwill in the footnotes to the Interim Consolidated Financial Statements.

 

Software increased from $16,514,894 at March 31, 2011 to $17,110,114 at December 31, 2011 and the increase consists of capitalized development costs and software, product rights and licenses acquired in recent acquisitions during the period. For additional details, see Note 7 – Software in the footnotes to the Interim Consolidated Financial Statements.

 

Other Assets increased from $223,630 at March 31, 2011 to $319,139 at December 31, 2011 and the increase consisted of additional reinsurance payments relating to an increase in pension obligations.

 

Liabilities

 

Total Liabilities increased from $24,285,794 at March 31, 2011 to $25,641,684 at March 31, 2011. Total Liabilities consists of Total Current Liabilities and Total Non-Current Liabilities.

 

At December 31, 2011, our Total Current Liabilities were $18,472,945, compared to $16,345,733 at March 31, 2011. Notes Payable increased from $1,440,295 at March 31, 2011 to $1,462,560 at December 31, 2011. The increase is related to notes payable associated with GROUP Business Software, AG warrants and the notes were paid off in January 2012. Liabilities to Bank decreased from $50,073 at March 31, 2011 to $39,073 at December 31, 2011 and the decrease consisted of payments made to reduce loan balances. The decrease from 2010 to 2011 was primarily due to a reduction from the bank liabilities. Accounts Payable and Accrued Liabilities increased from $4,996,748 at March 31, 2011 to $5,489,528 at December 31, 2011 and consists of Trade payables, Tax accruals and other accruals. The increase was primarily due to the acquisition of the four companies previously mentioned which accounts for most of the increase reflected in the corporate consolidation. Deferred Income increased from $6,208,458 at March 31, 2011 to $7,200,058 at December 31, 2011 and consists mainly of maintenance income collected in advance for the period after the end of the fiscal year. The increase was primarily due to the fact that four new acquisitions reflecting additional deferred income are included in the corporate consolidation for the period. Other Liabilities increased from $2,820,002 at March 31, 2011 to $3,507,192 at December 31, 2011 and the increase consists of the liabilities assumed relating to the acquisitions of four companies during the period as previously mentioned. Due to related parties decreased from $830,156 at March 31, 2011 to $475,579 at December 31, 2011 due to cash payments made to reduce the obligation during the period. For additional details, see Note 8 – Related Party Transactions and Balance in the footnotes to the Interim Consolidated Financial Statements. Shares payable balance reflects the obligation of the remaining shares owed to SD Holdings resulting from the acquisition in December 2011. The amount was calculated based on 145,832 shares of the Company at $2.05 per share. For additional details, see Note 9 – Share Payable in the footnotes to the Interim Consolidated Financial Statements.

 

At December 31, 2011 our Total Non-Current Liabilities were $7,168,739, compared to $7,940,061 at March 31, 2011. The decrease was primarily due to the reclassification of a portion of the balances to current liabilities. Non-Current Liabilities to Banks increased from $780,277 at March 31, 2011 to $3,606,461 at December 31, 2011. The increase consists of a long-term loan obligation to Baden-Württembergische Bank used for additional software development during the period relating to the Transformer and Cloud technologies. Deferred Tax Liabilities decreased from $878,450 at March 31, 2011 to $611,849 at December 31, 2011 and consists of the Deferred Tax Liabilities from the capitalization of software costs and the depreciation of property, plant and equipment assets. Retirement Benefit Obligation increased from $153,962 at March 31, 2011 to $163,648 at December 31, 2011. The increase consisted of additional obligations for pension plan benefits earned by the employees during the period. Other Non-Current Liabilities decreased from $6,127,373 at March 31, 2011 to $2,786,781 at December 31, 2011. The decrease was primarily the result of a reclassification of non-current Other liabilities to current Other liabilities. Approximately $2.8 million of non-current Other Liabilities relating to the Lotus 911 and Permessa acquisitions was reclassified to current liabilities during the nine month period ending December 31, 2011.

 

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Revenues

 

For the fiscal quarter ended December 31, 2011, our Net Sales increased to $8,229,318 from $5,362,060 for the fiscal quarter ended December 31, 2010. The Company generates nets sales from Licenses, Maintenance, Services, Third-Party Products and Other. This increase is mainly the result of increases in Transformer sales activity and the impact of four acquisitions made by the Company during the nine month period ended December 31, 2011.

 

Cost of Goods Sold

 

For the fiscal quarter ended December 31, 2011, our Cost of Goods Sold increased to $4,693,603 from $2,718,728 for the fiscal quarter ended December 31, 2010. Cost of Goods Sold consists of Cost for Services, Cost for Third-Party Products and Cost for Software Licenses. The increase was primarily due to the increase in costs for Software Licenses based on a higher sales volume. In addition, the cost of goods sold is higher because of the increase in salaries and related expenses to fulfill our business objectives in GROUP Live, our cloud application platform, and our Transformer Business.

 

Operating Expenses

 

For the fiscal quarter ended December 31, 2011, our Operating Expenses increased to $6,058,183 from $3,148,526 for the fiscal quarter ended December 31, 2010. Operating Expenses consist of Selling Expenses, Administrative Expenses and General Expenses. For the fiscal quarter ended December 31, 2011, our Selling Expenses increased to $4,308,647 from $2,036,168 for the fiscal quarter ended December 31, 2010. Selling Expenses consist of the cost for the Sales, Marketing and Service units. The increase was due to additional recruiting of sales personnel and additional selling expenses relating to the four acquisitions previously described. For the fiscal quarter ended December 31, 2011, our Administrative Expenses increased to $1,589,374 from $715,228 for the fiscal quarter ended December 31, 2010. Administrative Expenses consist of costs for the management and administration units. The reason for the increase was primarily due to the additional administrative expenses associated with the four acquisitions made during the nine month period ended December 31, 2011. For the fiscal quarter ended December 31, 2011, our General Expenses decreased to $160,162 from $397,130 for the fiscal quarter ended December 31, 2010 due to cost cutting efforts made during the period.

 

Liquidity & Capital Resources

 

At December 31, 2011, we had $3,537,517 in cash and cash equivalents, compared to $8,530,864 at March 31, 2011. In March 2011, the Company consummated a private placement offering of an aggregate of 6,044,000 Units at a purchase price of $1.25 per Unit, for gross proceeds of $7,555,000.  Each Unit was comprised of one share of Common Stock and one three-year Warrant to purchase one share of Common Stock at an exercise price of $1.50 per share. The Warrants are only exercisable by the payment of cash. Pursuant to the terms of the Warrants, the holders of the Warrants are required to exercise their Warrants in the event our Common Stock trades at an average of at least $3.00 per share for a period of not less than 20 consecutive trading days. Also, throughout the three year exercise period of the Warrants, the Company has the right to redeem the Warrants for $0.05 per share. The Company has agreed to register the 6,044,000 shares of Common Stock issuable upon the exercise of the Warrants under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1. The Company has not filed such Registration Statement as of the date of this Form 10-Q. Upon the full exercise of the Warrants, the Company would receive gross proceeds of $9,066,000.

 

During the quarter ended December 31, 2011, certain Warrant holders exercised their Warrants to purchase an aggregate of 2,020,000 shares of Common Stock for a total purchase price of $3,030,000. The cost of issuance was $5,030, resulting in net proceeds of $3,024,970.

 

We intend to use the net proceeds of the exercises of the Warrants to increase our marketing, advertising and Cloud and Transformer service development teams, acquisitions and for general corporate working capital purposes.

 

Management believes that the Company’s cash at December 31, 2011and available credit lines, will be sufficient to meet the Company’s working capital requirements for the next 12 month period. Management believes that as a result of the assets purchased to date, it will generate additional funds and that it will be able to obtain additional capital as required to meet projected operational requirements.

 

 

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Cash Flows

   For the Nine Month Periods Ended 
   December 31, 
   2011   2010 
Cash provided by operating activities  $53,610   $3,530,107 
Net cash provided by (used in) Investing Activities  $(7,201,629)  $(4,998,857)
Net cash provided by (used in) Financing Activities  $2,154,671   $1,233,020 
           
Net increase (decrease) in cash and cash equivalents during the period  $(4,993,347)  $(235,730)
Cash and cash equivalents, beginning of period  $8,530,864   $1,744,965 
           
Cash and cash equivalents, end of period  $3,537,517   $1,509,235 

 

Cash provided by operating activities for the nine month period ending December 31, 2011 was approximately $54,000, which is about $3.4 million less than the comparative period ending December 31, 2010. This change is primarily due to the expenditures made by the Company in developing the Transformer and GROUP Live technologies. The cash used in investing activities during the nine month period ending December 31, 2011was approximately $7.2 million, compared to cash used in investing activities in the comparative period ending December 31, 2010 of $4,998,857. This increase was primarily due to the investments in the four acquisitions made during the nine month period ending December 31, 2011 as previously described. Net cash used in financing activities increased from $1,233,020 for the nine month period ended December 31, 2010 to $2,154,671 for the nine month period ended December 31, 2011. The increase was primarily due to the exercise of warrants in December 2011 resulting in proceeds of $3,024,970 which was offset by a net decrease in borrowings of $870,299 resulting in net cash provided by financing activities of $2,154,671.

 

The Company has no significant planned commitments for capital expenditures and does not anticipate using either internal or external sources of funds for capital expenditure programs. As a software and services firm, the Company is not capital intensive and historically has had minimal or no planned capital expenditures. Therefore, the present or expected future impact on the Company’s liquidity for capital expenditure purposes is minimal and not material.

  

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.   The areas where critical estimates were made that have significant importance to the financial statements are as follow:

 

(a)Allowance for doubtful accounts.  The company provides for potential bad debts on an account by account basis.  Bad debts have not been significant and our allowance has been accurate.  Non trade receivables are also scrutinized and allowed for based on expected recovery.  One significant item ($1,902,000) which was previously written off was re-evaluated and reinstated during fiscal 2011.  The amount was subsequently paid.

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(b)Allocation of the price paid when acquiring subsidiaries.  When the Company acquires subsidiary companies an allocation of the purchase is required.  The allocation is based on management’s analysis of the value of the net assets, and is based on estimated future cash flows that each component will produce.  Such components might include software, customer lists and other intangible assets that are not readily determinable.  The allocation will have significant impact on the future earnings of the Company as certain assets, customer lists for example, must be amortized and charged to operations over time, while other assets, notably goodwill, do not.

 

(c)Impairment testing on intangibles and goodwill.  As noted in more detail below, these areas involve numerous estimates as to expected cash flows, expected rates of return and other factors that are difficult to determine and are often out of the Company’s direct control.  Accordingly, the Company adopts a conservative approach and has experienced better than projected results.

 

(d)Valuation of deferred tax credits.  The Company provides an allowance for tax recoveries arising from the application of losses carried forward.  An allowance is provided where management has determined that it is less than likely that the loss will be applied and income taxes recovered.

 

Comprehensive Income (Loss)

 

The Company adopted FASB Codification topic 220, Reporting Comprehensive Income, which establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Comprehensive income consists of net income and other gains and losses affecting stockholder's equity that are excluded from net income, such as unrealized gains and losses on investments available for sale, foreign currency translation gains and losses and minimum pension liability. Since inception, the Company’s other comprehensive income represents foreign currency translation adjustments.

 

Net Income per Common Share

 

FASB Codification topic 260, Earnings per share, requires dual presentation of basic and diluted earnings per share (EPS) with a reconciliation of the numerator and denominator of the EPS computations. Basic earnings per share amounts are based on the weighted average shares of common stock outstanding. If applicable, diluted earnings per share would assume the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. Diluted net income (loss) per share on the potential exercise of the equity-based financial instruments is not presented where anti-dilutive. There were no adjustments required to net income for the period presented in the computation of diluted earnings per share.

 

Financial Instruments

 

Financial instruments consist of cash and cash equivalents, accounts receivable, financial assets, notes payable, liabilities to banks, accounts payable and accrued liabilities and other liabilities.  As of the financial statement date, the Company does not hold any derivate financial instruments. Financial assets and liabilities are measured upon first recognition and reviewed at the financial statement date.  Changes in fair value are recognized through profit and loss.  Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.

 

Currency Risk

 

We use the US dollar as our reporting currency.  The functional currencies of our significant foreign subsidiaries are the local currency, which includes the Euro and the British pound.  Accordingly, some assets and liabilities are incurred in those currencies and we are subject to foreign currency risks.

  

Fair Value Measurements

 

The Company follows FASB Codification topic 820, Fair Value Measurements and Disclosures, for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis. This new accounting standard establishes a single definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy to be used to classify the source of information used in fair value measurement and expands disclosures about fair value measurements required under other accounting pronouncements. It does not change existing guidance as to whether or not an instrument is carried at fair value. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

 

The Company has adopted FASB Codification topic 825, Financial Instruments, which allows companies to choose to measure eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. The Company has not elected the fair value option for any eligible financial instruments.

 

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Cash and cash equivalents

 

The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.

 

Inventories

 

Pursuant to FASB ASC 330 (Inventories), inventories held for sale are recognized under inventories. Inventories were measured at cost, which is determined on a first-in-first out basis, without any overhead component.

 

Intangible Assets

 

Intangible assets predominately comprise goodwill, acquired software and capitalized software development services. Intangible assets acquired in exchange for payment are reflected as acquisition costs. If the development costs can be capitalized per FASB Accounting Standard Codification (“ASC“)  985-20-25, these are reflected as ascribable personnel and overhead costs.

 

Company created software can be intended for sale to third parties or used by the Company itself. If the conditions for capitalization are not met, the expenses are recorded with their effect on profit in the year in which they were incurred.

 

GROUP amortizes intangible assets with a limited useful life to the estimated residual book value in accordance with  ASC regulations. In addition, in special circumstances according to FASB ASC 350-30, a recoverability test is performed and, if applicable, unscheduled amortization is considered.

 

The useful life of acquired software is between three and five years and three years for Company-designed software.

 

Intangible assets obtained as part of an acquisition  which do not meet the criteria for a separate entry are identified as goodwill and are reviewed once a year as to their recoverability in the form of an impairment test. If they are no longer recoverable, an unscheduled amortization expense entry is performed.

 

Use value is generally used in order to determine the recoverability of goodwill and intangible assets with an indefinite useful life. The current plan prepared by the management serves as the basis for this policy. The planning assumptions are each adjusted for the current state of knowledge. Reasonable assumptions regarding macroeconomic trends and historical developments are taken into account in making these adjustments. Future estimated cash flows are essentially determined based on the expected growth rates of the markets in question.

 

Property, Plant and Equipment

 

Property, plant and equipment are valued at acquisition or manufacturing costs, reduced by scheduled and, if necessary, unscheduled depreciation. Fixed assets are depreciated on a straight-line basis, prorated over their expected useful life. Scheduled depreciation is mainly based on useful lives of 3 to 10 years.

 

If fixed assets are sold, retired or scrapped, the profit or loss arising from the difference between the net sales proceeds and the residual book value are included under other operating earnings and expenses.

 

Impairment or Disposal of Long-Lived Assets

 

The Company evaluates the recoverability of its fixed assets and other assets in accordance with FASB Codification topic, 360.10. This guidance requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds its expected cash flows, it is considered to be impaired and is written down to fair value, which is determined based on either discounted future cash flows or appraised values. No impairment has been recognized in the accounts.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. Under these guidelines, revenue is recognized when persuasive evidence of an arrangement exists, shipment has occurred or services rendered, the price is fixed or determinable and payment is reasonably assured. Customers take ownership at point of sale and bear the costs and risks of delivery.

  

Maintenance earnings are realized per FASB ASC 605  Revenue Recognition on a pro rata basis over the contractual service period. Consulting and training services are realized upon provision of the service. Sales revenues are presented with deductions made for discounts, customer bonuses, and rebates.

 

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Foreign Currency Translation

 

The functional currency of the Company is US dollars. For financial reporting purposes, the financial statements of GROUP were translated into US dollars. Assets and liabilities were translated at the exchange rates at the balance sheet dates and revenue and expenses were translated at the average exchange rates and stockholders’ equity was translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity .

 

Other Provisions

 

According to FASB ASC 450 Contingencies, provisions are made whenever there is a current obligation to third parties resulting from a past event which is likely in the future to lead to an outflow of resources and of which the amount can be reliably estimated. Provisions not already resulting in an outflow of resources in the following year are recognized at their discounted settlement amount on the financial statement date. The discount taken is based on market interest rates. The settlement amount also includes the expected cost increases. Provisions are not set off against contribution claims. If the amended estimate leads to a reduction of the obligatory amount, the provision is proportionally reversed and the earnings are recognized in other operating earnings.

 

Deferred Taxes

 

Income taxes are provided in accordance with FASB Codification topic 740, Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss-carry forwards.

 

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that, some portion or all of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

 

Recent Accounting Pronouncements

 

In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820, adding new requirements for disclosures for Levels 1 and 2, separate disclosures of purchases, sales, issuances, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures.  ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010 (the Company’s fiscal year 2012); early adoption is permitted.  The Company does not expect the adoption of ASU 2010-06 to have a material impact on its results of operations or financial position.

 

In February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements ("ASU 2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The Company does not expect the adoption of ASU 2010-09 to have a material impact on its results of operations or financial position.

 

Effective July 1, 2010, we adopted the update to the accounting standard regarding derivatives and hedging (Topic 815). This update clarifies how to determine whether embedded credit derivatives, including those interests held in collateralized debt obligations and synthetic collateralized debt obligations, should be bifurcated and accounted for separately. The adoption of this standard did not have a significant impact on our results of operations.

 

In December 2010, the FASB issued Accounting Standards Update ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (Topic 805). The update requires public companies to disclose pro forma information for business combinations that occur in the current reporting period. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. This guidance is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The Company’s adoption of FASB ASU No. 2010-29 effective December 1, 2010 did not have an impact on the Company’s consolidated results of operations or financial position but did result in additional disclosures.

 

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to the Company’s consolidated financial statements

 

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Off - Balance Sheet Arrangements

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

Principles of Consolidation and Reverse Acquisition

 

As previously disclosed, the Company has exchanged a total of 5,405,411 shares of common stock in exchange for 50.1% of the outstanding common shares of GROUP. Although the Company was the legal acquirer, the transaction was accounted for as a recapitalization of GROUP in the form of a reverse merger, whereby GROUP becomes the accounting acquirer and is deemed to have retroactively adopted the capital structure of the Corporation.  Accordingly, the accompanying consolidated financial statements reflect the historical consolidated financial statements of GROUP for all periods presented, and do not include the historical financial statements of the Company.  All costs associated with the reverse merger transaction were expensed as incurred.

 

The Company has based its financial reporting for the consolidation with GROUP in accordance with FASB Accounting Standard Codification (ASC) 805-40 as it relates to reverse acquisitions. Goodwill has been measured as the excess of the fair value of the consideration effectively transferred by the Company, the acquiree for financial reporting purposes, over the net amount of the Company’s recognized identifiable assets and liabilities.

 

The assets and liabilities of GROUP, the acquirer for financial reporting purposes, are measured and recognized in the consolidated financial statements at their precombination carrying amounts in accordance with ASC 805-40-45-2(a). Therefore, in a reverse acquisition, the non-controlling interest reflects the non-controlling stockholders’ proportionate interest in the pre-combination carrying amounts of GROUP’s net assets even though the non-controlling interests in other acquisitions are measured at their fair values at the acquisition date.

 

It should also be noted that the Company and GROUP have different year-end reporting dates. The Company’s fiscal year-end reporting date is March 31 and GROUP”s calendar year-end reporting date is December 31. The consolidation of these entities for financial reporting purposes has been performed without any adjustments for timing differences between these two reporting dates in accordance Regulation S-X Rule 11-02.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

None.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

 

None

 

Item 4.  Controls and Procedures.

 

Evaluation of Controls and Procedures.

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, our management is required to perform an evaluation under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and the principal financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were not effective in ensuring that the information we were required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. The Certifying Officers believe that the following material weaknesses have caused the Company’s disclosure controls and procedures to be ineffective:

 

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  n LACK OF SEGREGATION OF DUTUES OF INTERNAL ACCOUNTING AND SEC REPORTING DEPARTMENTS.  
       
  n LACK OF AUDIT COMMITTEE AND OUTSIDE DIRECTORS ON THE COMPANY'S BOARD OF DIRECTORS. As of December 31, 2011, we did not have a functioning audit committee or outside directors on our board of directors.  
       
  n LIMITED KNOWLEDGE OF U.S. GAAP BY THE COMPANY’S BOARD OF DIRECTORS AND ACCOUNTING AND REPORTING DEPARTMENTS. As of December 31, 2011, our Board of Directors had had two directors: Joerg Ott, who also serves as the Chief Executive Officer of the Company, and Gary MacDonald, who also serves as the Executive Vice President and Chief Development Officer of the Company. Mr. Ott and Mr. MacDonald have limited knowledge of U.S. GAAP, and the Certifying Officers believe that this limited knowledge constitutes a material weakness of the Company’s disclosure controls and procedures. The Company’s internal accounting and reporting departments also have limited knowledge of U.S. GAAP which the Certifying Officers also believe constitutes a material weakness of the Company’s disclosure controls and procedures.  

 

Management believes that the material weaknesses set forth above did not have an effect on the Company’s financial results. Notwithstanding the foregoing, management believes that the lack of a functioning audit committee and lack of a majority of outside directors on Company’s board of directors caused and continues to cause an ineffective oversight in the establishment and monitoring of the required disclosure controls and procedures.

 

The Company is committed to improving its financial organization. As part of this commitment, the Company intends to create a position within the Company’s accounting and finance team to segregate duties consistent with its control objectives and will increase its personnel resources and technical accounting expertise within the accounting function.

 

During the fiscal quarter ended December 31, 2011, the Company commenced an extensive recruitment process to locate, interview and retain the services of several qualified persons to serve as independent directors of the Company’s Board of Directors and as members of one or more of the Board’s Committees intended to be formed in the near future: the Audit Committee, Compensation Committee and Corporate Governance, Regulatory and Nominating Committee.

 

To date, the Company has extended invitations to four individuals deemed to be qualified by the Board, including one who would qualify as an “audit committee financial expert” under Rule 507 of Regulation S-K. The Board intends to appoint these four individuals to the Board and one or more of the Board’s Committees in the near future and will file a Form 8-K therein disclosing the required information.

 

One of the Committees that the Board expects to form once the new directors are elected is the Audit Committee which will consist of a majority of independent directors. The Audit Committee will assist the Board in fulfilling its responsibility to oversee the conduct and integrity of the Company’s financial reports, internal controls and compliance with legal and regulatory requirements, with ultimate authority to: (i) select, appoint, dismiss, compensate and oversee the Company’s independent auditors; (ii) preapprove all auditing and non-auditing services to be provided by the independent auditors (other than nonauditing services that are de minimis); (iii) oversee the independence and qualification of the Company’s independent auditors; (iv) oversee the performance of the Company’s internal audit and surveillance functions; and (v) prepare any reports of the Committee that are required by the rules of the Securities and Exchange Commission to be included in the Company’s annual proxy statement.


Management will continue to monitor and evaluate the effectiveness of the Company’s disclosure controls and procedures on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

Changes in Internal Controls over Financial Reporting

 

On December 2, 2011, the Company’s Board of Directors elected Gary MacDonald as a Director to serve until the next annual meeting of stockholders or until his successor is elected and qualified. Mr. MacDonald is not deemed to be an “independent director” in light of the fact that he also serves as the Executive Vice President and Chief Development Officer of the Company and the Chief Corporate Development Officer of GROUP.

 

Except as set forth above, there have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

The Company presently is not a party to, nor is management aware of, any pending, legal proceedings.

 

Item 1A. Risk Factors.

 

The disclosure required under this item is not required to be reported by small reporting companies; as such term is defined by Item 503(e) of Regulation S-K.

 

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

 

On December 16, 2011, the issued an aggregate of 554,168 shares of common stock of the Company to the stockholders of Synaptris pursuant to the Synaptris Acquisition Agreement, as amended. The Company issued the shares of Common Stock pursuant to the exemption from the registration requirement of the Securities Act of 1933, as amended (the “Securities Act”), provided under Section 4(2) under the Securities Act due to the fact that the share issuances were isolated, not advertised and did not involve a public offering of securities.

 

During the quarter ended December 31, 2011, five investors in the Company’s private placement offering consummated in March 2011 exercised their Warrants to purchase an aggregate of 2,020,000 shares of Common Stock for an aggregate purchase price of $3,030,000. The Warrants were exercisable for $1.50 per share of Common Stock and the shares of Common Stock issuable upon the exercise of the Warrants were “restricted” under Rule 144 of the Securities Act. The Company issued the shares of Common Stock underlying the Warrants based on the registration exemption provided under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act due to the fact that the sales were isolated, not advertised and did not involve a public offering of securities.  

 

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Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4.  (Removed and Reserved by the Securities and Exchange Commission).

 

Item 5. Other Information.

 

None.  

 

Item 6. Exhibits.

 

No.   Description
     
10.1(1)   Acquisition Agreement, dated September 27, 2011, by and between GBS Enterprises Incorporated, SD Holdings, Ltd. and the Shareholders of SD Holdings Ltd.
     
10.2(2)   Amendment, dated October 31, 2011, to that certain Acquisition Agreement, dated September 27, 2011, by and between GBS Enterprises Incorporated, SD Holdings, Ltd. and the Shareholders of SD Holdings Ltd.
     
10.3(2)   Amendment, dated November 30, 2011, to that certain Acquisition Agreement, dated September 27, 2011, by and between GBS Enterprises Incorporated, SD Holdings, Ltd. and the Shareholders of SD Holdings Ltd.
     
10.4(2)   Amendment, dated December 16, 2011, to that certain Acquisition Agreement, dated September 27, 2011, by and between GBS Enterprises Incorporated, SD Holdings, Ltd. and the Shareholders of SD Holdings Ltd.
     
31.1(2)   Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Executive Officer
     
31.2(2)   Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Financial and Accounting Officer
     
32.1(2)   Section 1350 Certification of Principal Executive Officer
     
32.2(2)   Section 1350 Certification of Principal Financial and Accounting Officer
     
101.INS (3)   XBRL Instance Document
     
101.SCH (3)   XBRL Taxonomy Extension Schema Document
     
101.CAL (3)   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.LAB (3)   XBRL Taxonomy Extension Labels Linkbase Document
     
101.DEF (3)   XBRL Taxonomy Extension Definition Linkbase Document
     
101.PRE (3)   XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) Filed as an Exhibit to the Company’s Form 8-K filed with the Securities and Exchange Commission on October 4, 2011 and incorporated by reference herein.
(2) Filed herewith.
(3) Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  GBS ENTERPRISES INCORPORATED
   
Date: February 14, 2012 By: /s/ Joerg Ott
  Joerg Ott
  President and Chief Executive Officer
  (Principal Executive Officer)
   
Date: February 14, 2012 By: /s/ Ronald Everett
  Ronald Everett
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

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