UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 2)

 

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

 

For the quarterly period ended: June 30, 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)

 

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 ¨ No x

 

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 March 15, 2012, there were 27,252,958 shares of common stock, par value $0.001 per share, of the Registrant issued and outstanding.

 

 

EXPANATORY NOTE

 

This Amendment No. 2 on Form 10-Q/A (the “Form 10-Q/A”) to the Quarterly Report on Form 10-Q for GBS Enterprises Incorporated, a Nevada corporation (“we” or the “Company”), for the quarterly period ended June 30, 2011, initially filed with the Securities and Exchange Commission (the “SEC”) on August 19, 2011 (the “Original Filing”) and amended with the SEC on September 14, 2011 (“First Amendment”), is being filed in response to comments received from the staff of the SEC in its review of the Company’s periodic SEC filings, including the Original Filing and First Amendment.

 

The Company reports segment information based on the “management” approach. Segment management is performed at the level of chief operating decision maker. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by Joerg Ott, the Company’s chief operating decision maker (CODM), in deciding how to allocate resources and assessing performance. Because of this management structure, the Company has only one reporting unit which is the same as an operating or reportable segment, which is no different, in this case, as the entity as a whole (entity or consolidated level). In summary, the Company presents its financial statements as a single reporting unit because it directly reflects the way the entity manages its operations through its chief operating decision maker. All of the Company’s operations are being performed in the area of software and services. Therefore, pricing models, gross margin and the nature of all business activities are similar. The Company groups its software and services into portfolios that are categorized into classes such as Applications, GroupLive/ Cloud Computing and Consulting/Expert Services to simplify market communication. The Company is managed as a single reporting unit, and all required financial segment information will be found in the consolidated financial statements.

 

For the convenience of the reader, this Form 10-Q/A restates the Original Filing and Amendment No. 1 in their entirety. Pursuant to the rules of the SEC, Item 6 of Part II of the Original Filings has been amended to contain currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and are attached as Exhibits 31.1, 31.2, 32.1 and 32.2 to this Form 10-Q/A.

 

Except as otherwise noted herein, this Form 10-Q/A continues to speak as of the quarter ended June 30, 2011, and the Company has not updated the disclosures contained herein to reflect events that occurred at a later date. Other events occurring after the quarter ended June 30, 2011 or other disclosures necessary to reflect subsequent events will be addressed in any reports filed with the Commission subsequent to this filing.

 

 

TABLE OF CONTENTS

 

		Page No:
PART I — FINANCIAL INFORMATION		3
Item 1.	Consolidated Financial Statements	4
	Balance Sheet	5
	Statement of Operations	6
	Statement of Cash Flows	7
	Notes to the Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	29
Item 4.	Controls and Procedures	29
PART II – OTHER INFORMATION:
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	32
Item 4.	[Removed and Reserved by the Securities and Exchange Commission]	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		33

 

 

PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

GBS Enterprises Incorporated

 

Interim Consolidated Financial Statements

 

June 30, 2011

 

(Unaudited)

 

 

GBS Enterprises Incorporated

Interim Consolidated Balance Sheets

June 30, 2011 and March 31, 2011

(Unaudited)

 

		Restated
		June 30, 2011				March 31, 2011
		$				$
Assets
Current Assets
Cash and cash equivalents			6,805,940				8,530,864
Accounts receivable			4,896,092				5,698,320
Prepaid expenses			1,647,095				1,423,281
Other receivables			854,486				1,981,887
Total current assets			14,203,613				17,634,352
Equity investments in related parties - Note 4			6,585,000				-
Property, plant and equipment - Note 5			347,477				298,497
Financial assets			2,687,035				1,369,454
Deferred tax assets			2,107,040				1,136,135
Goodwill - Note 6			39,688,966				39,688,966
Software - Note 7			16,900,047				16,514,894
Other assets			228,544				223,630
Total non-current assets			68,544,109				59,231,576
Total assets			82,747,722				76,865,928
Liabilities and shareholders' equity
Current liabilities
Notes payable			1,516,383				1,440,295
Liabilities to banks			42,493				50,074
Accounts payable and accrued liabilities			3,759,994				4,972,832
Other liabilities			2,901,918				2,846,417
Due to related parties - Note 8			688,532				827,656
Deferred income			9,673,504				6,208,458
Total current liabilities			18,582,824				16,345,732
Liabilities to banks			-				780,277
Deferred tax liabilities			798,009				878,450
Retirement benefit obligation			162,095				153,962
Other liabilities			5,778,505				6,127,373
Total non-current liabilities			6,738,609				7,940,062
Total liabilities			25,321,433				24,285,794

 

See Accompanying Notes

 

 

Interim Consolidated Balance Sheets

June 30, 2011 and March 31, 2011

(Unaudited)

 

		June 30, 2011				March 31, 2011
		$				$
Shareholders' equity
Capital Stock - Note 9
Authorized:
75,000,000 common shares and 25,000,000 preferred shares each with a par value of $.001
Issued and outstanding
23,793,790 common shares (22,544,000 shares at March 31, 2011)			23,794				22,544
Additional paid in capital			39,912,411				33,894,661
Deficit			(2,137,412	)			(322,519	)
Other comprehensive income			800,929				(13,639	)
Noncontrolling interest in subsidiaries			18,826,567				18,999,088
Total shareholders' equity			57,426,289				52,580,135
Total equity and liabilities			82,747,722				76,865,929

 

See Accompanying Notes

 

 

GBS Enterprises Incorporated

Interim Consolidated Statements of Operations

For the three months ended June 30, 2011 and June 30, 2010

(Unaudited)

 

		For the three months
		ended June 30
		2011				2010
		$				$
Net sales			5,676,430				7,053,238
Cost of goods sold			2,589,348				3,048,244
Gross profit			3,087,082				4,004,994
Operating expenses
Selling expenses			3,663,474				3,367,119
Administrative expenses			1,499,856				1,004,334
General expenses			202,304				287,527
			5,365,634				4,658,980
Operating income			(2,278,552	)			(653,986	)
Other Income (expense)
Other Income (expense)			(658,569	)			1,286,461
Interest income			11,381				7,458
Interest expense			(98,301	)			(94,155	)
			(745,489	)			1,199,764
Income (loss) before income taxes			(3,024,041	)			545,778
Income tax (income) expense			(1,036,877	)			93,475
Net income (loss)			(1,987,164	)			452,303
Net income (loss) attributable to non controlling interest			(172,271	)			(10,726	)
Net income (loss) attibutable to shareholders			(1,814,893	)			463,029
Other comprehensive income (loss)			(21,891	)			(7,571	)
Net income (loss) and comprehesive income (loss) attributed to shareholders			(1,836,784	)			455,458
Basic and diluted income (loss) per share			(0.077	)			0.021
Weighted average number of shares outstanding			23,626,418				22,544,000

 

See Accompanying Notes

 

 

GBS Enterprises Incorporated

Interim Consolidated Statements of Cash Flows

For the three months ended June 30, 2011 and June 30, 2010

(Unaudited)

 

		For the three months
		ended June 30
		2011				2010
		$				$
Cash flow from operating activties
Net loss / net income			(1,814,893	)			463,029
Adjustments
Deferred income taxes			(1,051,345	)			351,069
Depreciation and amortization			1,030,391				904,269
Minority interest losses			(172,271	)			444,836
Changes in operating assets and liabilities
Accounts receivable and other assets			1,705,817				1,365,167
Retirement benefit obligation			(4,915	)			84,468
Inventories							659
Accounts payable and other liabilities			2,270,840				(1,240,803	)
Net cash provided by operating activities			1,963,624				2,372,694
Cash flow from investing activties
Purchase of intangible assets			(847,721	)			(1,347,222	)
Purchase of property, plant and equipment			(64,164	)			(27,344	)
Purchase of subsidiaries			(600,000	)			-
Currancy differences			(623,443	)			(292,199	)
Purchase of financial assets			(1,246,776	)			133,526
Net cash used in investing activities			(3,382,104	)			(1,533,239	)
Cash flow from financing activties
Net borrowings - banks			(780,277	)			(751,615	)
other borrowings			(340,735	)			(113,491	)
Net cash used in financing activities			(1,121,012	)			(865,106	)
Effect of exchange rate changes on cash			814,568				138,052
Net increase in cash			(1,724,924	)			112,401
Cash and cash equivalents - Beginning of the period			8,530,864				1,744,965
Cash and cash equivalents - End of period			6,805,940				1,857,366
Supplemental information
Taxes paid			14,468				(257,594	)
Interest paid			98,301				94,155

 

See Accompanying Notes

 

 

GBS Incorporated Inc.

Notes to the Interim Financial Statements

June 30, 2011

(Unaudited)

 

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 three months ended June 30, 2011 are not necessarily indicative of the results that can be expected for the year ending March31, 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 having 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 Cloud Computing technology, IBM Lotus Notes/Domino Application Transformation technology, Email Management software, Lotus Software Services, Customer Relationship Management software and Risk & Compliance Management solutions. 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 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.

 

 

GBS Incorporated Inc.

Notes to the Interim Financial Statements

June 30, 2011

(Unaudited)

 

NOTE 2 - OPERATIONS AND RESTRUCTURING – (continued)

 

On November 5, 2010, the Company entered in to 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 acquisition was a two-step transaction, culminating in a share exchange. 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 $.0579 per share as determined by an independent valuation firm. The agreement was effective December 30, 2010.

 

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 form 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 June 30, 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.

 

 

GBS Incorporated Inc.

Notes to the Interim Financial Statements

June 30, 2011

(Unaudited)

 

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 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.

 

 

GBS Incorporated Inc.

Notes to the Interim Financial Statements

June 30, 2011

(Unaudited)

 

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 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.

 

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 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.

 

 

GBS Incorporated Inc.

Notes to the Interim Financial Statements

June 30, 2011

(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)

 

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 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.

 

 

GBS Incorporated Inc.

Notes to the Interim Financial Statements

June 30, 2011

(Unaudited)

 

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 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 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 3A-02.

 

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.

 

NOTE 4 – EQUITY INVESTMENTS IN RELATED PARTIES

 

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 was recorded as $5,250,000.

 

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. 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 was recorded as $1,335,000.

 

 

GBS Incorporated Inc.

Notes to the Interim Financial Statements

June 30, 2011

(Unaudited)

 

NOTE 4 – EQUITY INVESTMENTS IN RELATED PARTIES – (continued)

 

The Company has accounted for these two transactions in accordance with Regulation S-X Rule 3A-02, wherein the asset and liabilities of subsidiaries may reflect an earlier balance sheet date and the operations may be of a period ending in that earlier date. Accordingly, the Company has not yet allocated the purchase prices to the assets and liabilities acquired, nor have the operations from these subsidiaries been recorded in the accounts as of June 30, 2011.

 

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.

 

		June 30, 2011												March 31, 2011
						Accumulated				Net Book								Accumulated				Net Book
		Cost				Depreciation				Value				Cost				Depreciation				Value
			$				$				$				$				$				$
Equipment			5,114,071				4,766,594				347,477				4,857,380				4,558,883				298,497

 

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 YE in kUSD				Goodwill Q1 in kUSD
global words AG			01/10/02				5,095.3				5,095.3
GROUP Technologies AG			01/09/05				4,479.7				4,479.7
GROUP Business Software Inc.			31/12/05				2,177.5				2,177.5
GROUP LIVE N.V.			31/12/05				1,324.2				1,324.2
Remaining goodwill from CRM			31/12/05				3,108.4				3,108.4
GROUP Business Software Ltd			31/12/05				2,765.1				2,765.1
ebVOKUS Software GmbH			01/10/05				443.6				443.6
GAP AG für GSM Applikationen und Produkte			31/12/05				1,913.9				1,913.9
Relavis Corporation			01/08/07				7,288.3				7,288.3
Permessa			22/09/10				2,387.4				2,387.4
GROUP Business Software AG			06/01/11				8,705.5				8,705.5
							39,689.0				39,689.0

 

 

GBS Incorporated Inc.

Notes to the Interim Financial Statements

June 30, 2011

(Unaudited)

 

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 ASC 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.

 

NOTE 8 – RELATED PARTY TRANSACTIONS AND BALANCES

 

The Company had the following transactions with related parties for the three months ending June 30, 2011 and June 30, 2010:

 

		2011				2010
		$				$
Expenses paid to related parties:
Wages			34,615				34,615
Rent			15,098				14,722
Consulting fees			273,171				88,871
Interest			5,000				-
Stock Base Compensation			34,000				-

 

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

 

 

GBS Incorporated Inc.

Notes to the Interim Financial Statements

June 30, 2011

(Unaudited)

 

		June 30				March 31
		2011				2011
Due to a director and shareholder, unsecured demand note payable, bearing interest at 5%, due Mar 1, 2011		$	5,012			$	114,750
Due to Lotus Holdings Ltd., a sharehoder, demand notes payable, bearing interest at 5%, due October 31, 2011
- note secured by shares in GROUP Business Software AG			562,238				600,000
- secured by OUTPUT software			105,000				105,000
Accrued interest on loans			16,282				7,906
		$	688,532			$	827,656

 

NOTE 9 - CAPITAL STOCK

 

On March 20, 2007 the Company issued 8,900,000 shares in aggregate for $75,462 of debt.

 

On May 4, 2007, the Company completed a private placement, issuing 2,500,000 shares for $67,757 in cash.

 

On June 30, 2008, the Company completed a private placement, issuing 834,670 shares for $25,040 in cash.

 

On April 26, 2010, the Company issued 2,265,240 shares in aggregate for goodwill, inventory, licenses, customer lists and computer software valued at $165,000.

 

On November 5, 2010, the Company purchased 3,043,985 shares from an existing shareholder for $300,000. Thereupon it exchanged those shares for 7,115,500 common shares of GROUP Business Software AG, a German Company, the fair value of which was determined to be $3,898,000.

 

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 fair value was determined to be $2,796,000. This brought the total ownership of the issued and outstanding shares of GROUP owned by the Company to be 50.1%

 

The acquisition of GROUP was accounted for as a reverse acquisition whereby GROUP is treated as the accounting acquirer and the Company is treated as the accounting acquiree. As the transaction is accounted for as a recapitalization applied retroactively, the balance of 16,500,000 issued and outstanding at that time has been recorded as outstanding since inception.

 

On March 31, 2011, the Company completed a private placement offering whereby it raised $7,555,000 gross proceeds through the sale of 6,044,000 units at $1.25 per unit. Each unit represents one share of common stock and one warrant. The warrant allows the holder to purchase one share of common stock of the Company from the date of the grant until the third anniversary of the date of the grant for a purchase price of $1.50 per share.

 

On April 1, 2011, the Company issued 1,000,000 shares 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.

 

 

GBS Incorporated Inc.

Notes to the Interim Financial Statements

June 30, 2011

(Unaudited)

 

On June 1, 2011, the Company issued 250,000 shares 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.

 

NOTE 10 – 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 compensation granted in either of the three month periods ending June 30, 2011 or June 30, 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 has recorded compensation expense for the quarter ending June 30, 2011 of $34,000 ($nil – 2010). This amount has been credited to additional paid in capital.

 

 

GBS Incorporated Inc.

Notes to the Interim Financial Statements

June 30, 2011

(Unaudited)

 

NOTE 11- 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.

 

Common Stock Warrants Issued to Outside Consultants		Common  Shares				Exercise  Price				Valuation Date				Fair Value per Warrant Share				Warrants' 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 warrant as at the grant date 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 June 30, 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
Expired			-			$	-
Outstanding, end of period			8,866,280			$	2.06

 

 

GBS Incorporated Inc.

Notes to the Interim Financial Statements

June 30, 2011

(Unaudited)

 

NOTE 12 – SALES AND COST OF SALES

 

Sales and costs of sales are comprised of products and services. An allocation of those items for the three month periods ended June 30, 2011 and 2010 is as follows:

 

		For the three months
		Ended June 30
		2011				2010
		$				$
Sales
Products			1796,151				2,769,093
Services			3,880,279				4,284,145
			5,676,430				7,053,238
Cost of Sales
Products			721,901				1,176,239
Services			1,867,447				1,872,005
			2,589,348				3,048,244
Gross profit
Products			1,074,250				1,592,854
Services			2,012,832				2,412,140
			3,087,082				4,004,994

 

NOTE 13 – CORRECTION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

 

The financial statements for the year ended March 31, 2011 were amended and re-issued after the initial issue of these statements. These statements have been restated to give reflect the changes. The changes to the March 31, 2011 balance sheet has already been issued. The changes to the previously issued June 30, 2011 Balance Sheet are as follows:

 

		As previously issued				As Restated
		$				$
Deficit			(1,989,851	)			(2,137,412	)
Noncontrolling interest in subsidiaries			18,679,006				18,826,567

 

 

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

 

General Summary

 

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 software and service 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 and 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.

 

The Company’s Common Stock is quoted on the OTC Bulletin Board under the ticker symbol, “GBSX.”

 

Products and Services

 

GBS has achieved significant growth by consolidating the fragmented Lotus Software market through the successful merger & acquisitions of companies with complementary product, technology or services offerings. Based on its organic growth and growth by acquisition GBS has continuously developed its software and service business to service and support GBS’s expanding Lotus customer base.

 

Historically, GROUP has achieved growth through acquisition by targeting attractive, yet underperforming companies with complimentary operations and leveraging GROUP’s expertise to successfully turnaround and integrate these targets.

Key success factors for this strategy are: enhanced portfolio, positioning GROUP as the ‘one-stop-shop’ for Lotus applications and services, expand customer support, fast code migration, and cloud enablement/XPages conversion of acquired applications.

Going forward, the Company will focus on potential acquisition targets in the following areas of software and services: Applications, Professional Services, Hosting/Outsourcing Services, Administration and IT services, and XPages expertise.

 

Messaging and Business Applications Software & Solutions

 

GBS Messaging and Business Application Software & Solutions product lines include software and advisory services for email and Instant Messaging (IM) Management, Security, Compliance, Archiving and Productivity, CRM Applications, Governance, Risk & Compliance (GRC) Management software, Workflow and Business Process Management software, ePDF Archiving & Document Management and e-Banking solutions.

 

GBS develops, sells and installs well known business process and management software suites based on Lotus Notes / Domino and IBM Portal technology, mainly for major international companies and medium-sized customers.

 

Through GBS’s comprehensive messaging software product lines and associated services, Lotus Notes, Microsoft Exchange or SMTP-based-email customers, as well as Lotus Sametime customers are able to provide their users with secure, efficient and centrally administered use of e-mail and IM while maintaining control over their compliance with current legal requirements and corporate guidelines.

 

Consulting Services

 

As a leader in the IBM Lotus Notes Software and Services business GBS provides high-end consulting services to its customers. GBS develops, sells and orchestrates customer-specific Lotus Domino strategy and consulting services, such as CIO and IT department leader Strategic Advisory Services, Managed Services, Outsourcing, Administration, Assessments and Implementations, Performance Improvements, Custom Application Development, Governance and Security, Technical Support, and Training, as well as Email Migration Services. The talented team at GBS Experts has outstanding skill sets in the areas of system architecture and evaluation, application integration, e-mail and Instant Messaging, administration, application development, application migration, middleware deployments and licensing, outsourcing and hosting.

 

Based on GBS’s unique concentration of industry talent and expertise, mainly in the areas inside and around IBM Lotus Notes/Domino, inside and around corporate messaging (IBM, Microsoft, SMTP) and inside and around IT environmental and application assessment, analysis and reporting, commercial and governmental customers, as well as SIs and channel partners are able to relay on the industry leading strategic and tactical advisory services for evaluating, planning, staffing and execution of any customer project. GBS Consulting Services’ global team of consultants use modern project management techniques, proprietary methodologies and GBS accelerator technologies to complete client projects on time and with reduced risk.

 

 

GBS’s focus on recruiting and retaining top Lotus expertise, positions our team to offer leading-edge Lotus Notes / Domino subject matter knowledge to our customers. As a testament to this focus, GBS employs 10 of the top 20 most recognized ‘market experts’ and thought-leaders in Lotus development and administration. GBS consultants have an average of over 12 years’ experience each in Lotus Notes/Domino and its related products and are routinely asked to present at IBM Lotus events including Lotusphere, an annual conference hosted by IBM Lotus Software.

 

As a Premier IBM Business Partner - GBS is one of the few partners that can sell and support licenses for all five IBM software brands: Lotus, WebSphere, Rational, Tivoli, and DB2.

 

Cloud Computing

 

As IT departments face continuous budget reductions and constant pressure for higher performance and efficiency, CIOs are focusing on modern technologies to support their need for increased scalability, flexibility and lower costs. GBS has identified this demand as a strategic growth opportunity for the company and has placed a significant focus on expanding its Cloud Computing and Modernizing/Migrating technology offerings. The strategic opportunities are served by GBS with two distinct offerings:

 

1)

GROUP Live - Cloud Automation Platform / Cloud Platform-as-a-Service (PaaS) software and services. and

2)

Transformer - Lotus Notes modernization/migration services and technology accelerators

 

GBS Cloud Computing activities are focused on cloud automation solutions and therefore the Company has made key acquisitions and R&D investments to create an award winning Cloud Platform-as-a-Service offering. Under the GROUP Live banner, the GBS PaaS offering has been sold to a variety of enterprise customers, which use the PaaS software to host internal corporate clouds (Private cloud) and applications as-a-service to their various internal user groups. GROUP Live has also be sold and implemented by a number of Independent Software Vendors (ISVs), which are leveraging the platform to deliver their own Software-as-a-Service (SaaS) applications to their respective customer bases.

 

Both of these customer groups enjoy the comprehensive nature of this platform agnostic PaaS solution and its exceptional change management capabilities enabling resource flexibility, business agility, scalability and ease-of-use beyond that which is generally available in the market today.

 

GBS Lotus Application Modernization and Migration

 

GBS Lotus Application Modernization and Migration activities are focused on the IBM Lotus / Domino applications market and the offering spans from expert services and accelerator technologies to modernize, web enable and migrate Lotus applications; and thus ultimately take the Lotus applications from legacy to the future. The foundation of the Transformer Suite Software offering is GBS’s significant R&D investment in a set of methodologies and key technology accelerators to automate the conversion of traditional Notes based client-server applications, into the IBM XPages framework which enables Domino applications to be run and accessed via the Lotus client, a web browser or on a mobile device. The patent-pending software that underpins Transformer was developed by GBS with the assistance and guidance from IBM Corporation’s Software Group to ensure alignment with future releases of the IBM Lotus / Domino and XPages technology.

 

IBM has deemed the Transformer technology a “game changer,” and will be employing it to modernize their clients’ applications.

 

Revenue Model

 

GBS receives four types of revenues for its products and services, including Licensing, Service, Maintenance, and Subscription.  Licensing revenue is derived from the licensing of applications for Lotus Notes and Domino, which will now include IBM’s marketing of the CAP and DAT products.  Service revenue is obtained from a wide range of consulting, maintenance and support Services provided by the Company.

 

Strategy and Focus Areas

 

The Company is focused on developing a portfolio of Cloud Computing software technologies and Application Services to address the needs of Independent Service Providers (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.

 

In addition to the significant growth potential anticipated through its multiple partnerships with IBM, GBS also has the potential for dramatic growth from large strategic partnerships such as with major Cloud platform/OEM players, data centers, ISV’s as well as a variety of large enterprise class and medium sized end users who are interested in having their own private clouds. GBS also intends to pursue highly attractive opportunities with a wide variety of other Cloud vendors including Computer Associates, Dell, HP, Accenture, and Amazon, as well as with specialized distributors and system integrators.

 

 

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.

 

Subsequent Event:

 

As previously reported by the Company on a Form 8-K/A (Amendment No. 2) filed by the Commission on March 12, 2012, on February 27, 2012, the Company acquired an additional 883,765 shares of common stock of GROUP to maintain its 50.1% ownership of GROUP. On February 27, 2012, an outstanding loan of GROUP was converted into an aggregate of 1,750,000 shares of GROUP common stock, thereby increasing GROUP’s outstanding common stock to 26,982,000 shares. As a result of the foregoing increase in the number of outstanding shares of GROUP common stock, the Company increased its ownership of GROUP common stock to an aggregate of 13,525,000 shares, representing approximately 50.1% of the outstanding common stock of GROUP. The Company purchased the 883,765 shares of GROUP common stock from GAVF LLC for an average purchase price of $0.70 per share.

 

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.

 

 

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

 

As previously reported by the Company, during the three month period ended June 30, 2011, the Company made two business acquisitions as described below:

 

Pavone AG

 

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. Pavone is a leader in business process management and optimization technologies. Pavone’s extensive workflow software for Lotus Notes and Domino along with their large customer base is well suited to GBS Enterprises portfolio strategy. This acquisition of Pavone complements GBS's majority ownership in GROUP and further strengthens their leading industry position on the IBM Lotus Platforms and expands their cloud computing technology offerings beyond the IBM Lotus market. Pavone currently has offices in Germany and the UK. They have over 2,500 customers and over 150,000 users worldwide. Some of their customers include Deutsche Bundes Bank, BMW, Linde AG, Philips, British Sugar and Mahle Industries.

 

GroupWare, Inc.

 

Effective June 1, 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. Upon the consummation of the acquisition, the management and board of GroupWare resigned and Joerg Ott, the Company’s Chief Executive Officer and sole director, was appointed as the Chief Executive Officer and sole director of GroupWare. GroupWare is based in Lubeck, Germany with offices in St. Petersburg, Florida. GroupWare's ePDF server delivers centralized, network-wide PDF solutions for messaging, workflow, document, content and data management. This acquisition strengthens the GBS Transformer offering, which helps bring IBM Lotus Notes client applications to the web, by substituting traditional printing methods provided by the Notes client with simple-to-use print-to-PDF capabilities in the browser. In addition, GroupWare provides a solution for applications that are ready to be retired. With the ePDF Server, GBS customers can convert the entire contents of IBM Lotus Notes and Domino applications to a permanent and secure archive in PDF or PDF/A format, while preserving their ability to be full-text searched and ensuring that the critical application data is accessible in the future, when needed. GBS will deliver the application archiving capabilities via its GroupLive cloud, making it possible for customers and partners to take advantage of elastic cloud computing resources to rapidly process the application contents without the need to dedicate hardware on-site for temporary or intermittent processing jobs.

 

Results of Operations

 

Assets

 

Total Assets increased from $76,865,929 at March 31, 2011 to $82,747,722 at June 30, 2011.  Total Assets consist of Total Current Assets and Total Non-Current Assets.

 

 

At June 30, 2011, our Total Current Assets were $14,203,613, compared to $17,875,353 at March 31, 2011. Our cash and cash equivalents decreased from $8,530,864 at March 31, 2011 to $6,805,940 at June 30, 2011.  The decrease was primarily due to the Company’s acquisition of two companies during the quarter and on-going working capital needs to finance current operations.  Accounts Receivable decreased from $5,698,321 at March 31, 2011 to $4,896,092 at June 30, 2011.  This decrease was primarily due to a decrease in sales activity.   Prepaid Expenses increased from $1,423,281 at March 31, 2011 to $1,647,095 at June 30, 2011 based on the purchase of additional material.  Other receivables consisted of a receivable for anticipated compensation for damage, security deposits, tax refund claims and decreased from $2,222,887 at March 31, 2011 to $854,486 at June 30, 2011.  The decrease was primarily due to receipt of damage compensation and tax refund claims.  .

 

At June 30, 2011, our Total Non-Current Assets were $68,544,109, compared to $58,990,576 at March 31, 2011.  Equity investments in related parties increased from $ 290,973 at March 31, 2011 to $6,585,000 at June 30, 2011. See Note 4 to the Financial Statements for explanation. Our Financial Assets increased from $837,481 at March 31, 2011 to $2,687,035 at June 30, 2011 and consist of the value of the 50% interest in an associated company and the amount still outstanding against the purchaser of GEDYS IntraWare GmbH due for monthly repayments. Our Deferred Tax Assets increased from $1,136,135 at March 31, 2011 to $2,107,040 at June 30, 2011 and consisted of Deferred Tax Assets derived from increases in Financial Assets. There were no changes in Goodwill during the period. Software increased from $16,514,894 at March 31, 2011 to $16,900,047 at June 30, 2011 and consists of an increase in capitalized development cost, product rights and licenses.  Other Assets increased from $223,630 at March 31, 2011 to $228,544 at June 30, 2011 and consisted of the reinsurance relating to pension obligations.

 

Liabilities

 

Total Liabilities increased from $24,285,794 at March 31, 2011 to $25,321,433 at June 30, 2011.  Total Liabilities consists of Total Current Liabilities and Total Non-Current Liabilities.

 

At March 31, 2011, our Total Current Liabilities were $16,345,732 compared to $18,582,824 at June 30, 2011.  Notes Payable increased from $1,440,295 at March 31, 2011 to $1,516,383 at June 30, 2011 and primarily consists of the external capital components of the convertible bond issue. Liabilities to Bank decreased from $50,074 at March 31, 2011 to $42,493 at June 30, 2011 and consisted of a line of credit.  Accounts Payable and Accrued Liabilities decreased from $4,972,832 at March 31, 2011 to $3,759,994 at June 30, 2011 and consists of Trade payables, Tax accruals and other accruals.  Other Liabilities decreased from $2,846,417 at March 31, 2011to $2,901,918 at June 30, 2011 and consists of the liabilities relating to the purchase of assets, tax liabilities, other miscellaneous loans.  Amounts due to related parties decreased from $827,656 at March 31, 2011 to $688,532 at June 30, 2011.  Deferred Income increased from $6,208,458 at March 31, 2011 to $9,673,504 at June 30, 2011 and consists mainly of maintenance income collected in advance of the contractual maintenance period.   

 

At June 30, 2011, our Total Non-Current Liabilities were $6,738,609, compared to $7,940,062 at March 31, 2011.  Liabilities to Banks decreased from $780,277 at March 31, 2011 to $-0- at June 30, 2011 and consisted of a reduction of long-term liabilities vis-à-vis Baden-Württembergische Bank.  Deferred Tax Liabilities decreased from $878,450 at March 31, 2011 to $798,009 at June 30, 2011 and consists of the Deferred Tax Liabilities from the capitalization of software expenses.  The decrease was primarily due to depreciation of Assets.  Retirement Benefit Obligation increased from $153,962 at March 31, 2011 to $162,095 at June 30, 2011, and consisted of additional accrued retirement benefit obligations.  Other Liabilities decreased from $6,127,373 at March 31, 2011 to $5,778,505 at June 30, 2011 and consisted of a reduction of liabilities related to the purchase of assets in a prior period.

 

Fiscal Quarter Ended June 30, 2011 Compared to the Fiscal Quarter Ended June 30, 2010

 

Revenues

 

For the fiscal quarter ended June 30, 2011, our Net Sales decreased to $5,676,430 from $7,053,238 for the fiscal quarter ended June 30, 2010.  The Company generates Net Sales by Licenses, Maintenance, Services, Third-Party Products and Others.   The Revenue with Products decreased from $2,769,093 to $1,796,151 in the first three months of the fiscal year. That decrease is mainly driven by a decrease in 3^rd Party Products with a decrease from $1,512,015 to $704,573 and a decrease in License Revenue from $1,257,077 to $1,091,578 in the same period. The Revenue with Services decreased from $4,284,145 to $3,880,279 in the first three months of the fiscal year. Overall these decreases were primarily due to the sale of the two subsidiaries, Gedys IntraWare GmbH and GROUP Business Software Holding OY.

 

Cost of Goods Sold

 

For the fiscal quarter ended June 30, 2011, our Cost of Goods Sold decreased to $2,589,348 from $3,048,244 for the fiscal quarter ended June 30, 2010.  Cost of Goods Sold consists of Cost for Services, Cost for Third-Party Products and Cost for Software Licenses.   The decrease from 2010 to 2011 was primarily due to the sale of the subsidiary Gedys IntraWare GmbH.

 

The Costs of Good Sold for Products decreased from $1,176,239 to $721,901 due to lower 3^rd Party Product sales as mentioned above. The Cost of Goods Sold for Services remained on the same level with $1,867,447 for the fiscal quarter ended June 30, 2011 and $1,872,005 for the fiscal quarter ended June 30, 2010. As of June 30, 2011, there were 156 people employed by the Company (2010: 117). Approximately 30% (2010: 29%) were employed in programming activities due to the extensive Lotus software development and licensing business.

 

 

Operating Expenses

 

For the fiscal quarter ended June 30, 2011, our Operating Expenses increased to $5,365,634 from $4,658,980 for the fiscal quarter ended June 30, 2010.  Operating Expenses consist of Selling Expenses, Administrative Expenses and General Expenses.  

 

For the fiscal quarter ended June 30, 2011, our Selling Expenses increased to $3,663,474 from $3,367,119 for the fiscal quarter ended June 30, 2010.  Selling Expenses consist of 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 aforementioned acquisitions. $241,323 of this increase is resulting from the acquisitions made by the company in the fiscal quarter ended June 30, 2011. $996,203 of this increase is resulting from additional sales activities around our CRM portfolio in the North American market. The sale of the two subsidiaries, Gedys IntraWare GmbH and GROUP Business Software Holding OY in 2010 accounted for a decrease of Selling Expenses in the amount of $848,467 for the same three months period.

 

For the fiscal quarter ended June 30, 2011, our Administrative Expenses increased to $1,499,856 from $1,004,334 for the fiscal quarter ended June 30, 2010.  The reason for the increase from 2010 to 2011 was primarily due to an increase in legal expense, consultant expense, investor relations expense and associated travel costs. This increase is associated with the acquisitions made during the first quarter of the fiscal year ended June 30, 2011 in the amount of $83,186 and an increase in administrative operations by GBS Enterprises Inc. in the amount of $379,993.  

 

For the fiscal quarter ended June 30, 2011, our General Expenses decreased to $202,304 from $287,527 for the fiscal quarter ended June 30, 2010.  The reason for the decrease from 2010 to 2011 was primarily due to a decrease in professional fees, cost of money transactions and currency conversion.

 

Overall and due to increased business activities and as a result of the support of the dual listing within GBS group the Auditing and Consulting Costs increased for the fiscal quarter ended June 30, 2011 to $307,809 from $125,313 for the three months ended June 30, 2010. The overall increase in marketing expenses for the three months ended June 30, 2011 to $659,080 by nearly 50% from $439,654 for the three months ended June 30, 2010 is also directly a result of additional business activities and the growth of the company resulting of the aforementioned acquisitions. Due to the increase in personnel to 156 employees from 117 employees Other Personnel related Costs increased to $ 457,310 from $ 425,191 in the same three months period.

 

For the three-month period ended June 30, 2011, Other Income decreased to $ (658,569) (Other Expenses) from $1,286,461 for the three-month period ended June 30, 2010.  The reason for the decrease was primarily due to earnings in the previous year in relation to the selling of the Assets of Gedys IntraWare GmbH. The Other Expenses for the fiscal quarter ended June 30, 2011 consist of approximately $809,531 of currency differences resulting from consolidations and a total Other Income of $155,086 in the same period.

 

The consolidated Statements of Operations also include expenses of $ 0,6 million directly relating to Group Live, the Company’s cloud computing technology service, and expenses of $ 0,5 million directly relating to the Transformer, the Company’s Lotus Notes application conversion service, for the fiscal quarter ended June 30, 2011.

 

Liquidity & Capital Resources

 

At June 30, 2011, we had $6,805,940 in cash and cash equivalents, compared to $8,530,864 at March 30, 2011.  The decrease in Cash and Cash Equivalents between March 31, 2011 and June 30, 2011 is primarily due to cash payments relating to two acquisitions as explained in Note 4 to the Financial Statements as well as additional working capital needs during the period.

 

Management believes that the Company’s cash at June 30, 2011 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.

 

Cash Flows

 

		Fiscal Quarter Ended
		June 30,
		2011				2010
Cash provided by operating activities		$	1,963,624			$	2,372,694
Net cash provided by (used in) Investing Activities		$	(3,382,104	)		$	(1,533,239	)
Net cash provided by (used in) Financing Activities		$	(1,121,012	)		$	(865,106	)
Effect of exchange rate changes on cash		$	814,568			$	138,052
Net increase (decrease) in cash and cash equivalents during the period		$	(1,724,924	)		$	112,401
Cash and cash equivalents, beginning of period		$	8,530,864			$	1,744,965
Cash and cash equivalents, end of period		$	6,805,940			$	1,857,366

 

 

 

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.

 

Comprehensive Income (Loss)

 

The Company adopted FASB Codification topic (“ASC”) 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 (“ASC”) 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. Accordingly, although the diluted weighted average number of common stock outstanding is disclosed on the statements of operation, the calculated net loss per share is the same for bother basic and diluted as both are based on the basic weighted average of common stock outstanding. 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 currency and we are subject to foreign currency risks.

 

Fair Value Measurements

 

The Company follows FASB Codification topic (“ASC”) 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 (“ASC”) 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.

 

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 ASC 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.

 

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 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 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.

 

In addition, an impairment test, whereby the appraised fair value of the invested capital of the reporting segment, (as described in Note 14,) is compared with the carrying (book) value of its invested capital amount, including goodwill.

If the appraised value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired. If the carrying amount of the reporting unit exceeds the appraised fair value, an impairment test based on use value is necessary in order to measure the amount of impairment loss, if any.

 

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

 

License Revenues

 

Our license revenues consist of revenues earned from the licensing of our software products. These products are generally licensed on a perpetual basis. Pricing models have generally been based either upon the physical infrastructure, such as the number of physical desktop computers or servers, on which our software runs or on a per user basis. License revenues are recognized when the elements of revenue recognition for the licensed software are complete, generally upon electronic shipment of the software and the software key to provide full access to all functionalities for our customers. In general our invoices reflect license, service and maintenance components. In the case of multi element contracts, the revenues allocated to the software license represent the residual amount of the contract after the fair value of the other elements has been determined. Certain products of our software offering are licensed on a subscription basis.

 

Software Maintenance Revenues

 

Software maintenance revenues are recognized ratably on a pro-rata basis over the range of the contract period. Our contract periods typically range from one to five years. Vendor-specific objective evidence (“VSOE”) of fair value for software maintenance services is established by the rates charged in stand-alone sales of software maintenance contracts or the stated renewal rate for software maintenance. Customers who are party to software maintenance agreements with us are entitled to receive support, product updates and upgrades on a when-and-if-available basis.

 

 

Professional Services Revenues

 

Professional services include pre-project consulting, software design, customization, project management, implementation and training. Professional services are not considered essential to the functionality of our products, as these services do not alter the product capabilities and may be performed by our customers or by other vendors. Professional services engagements performed for a fixed fee, for which we are able to make reasonably dependable estimates of progress toward completion, are recognized on a proportional performance basis based on hours incurred and estimated hours of completion. Professional services engagements that are on a time and materials basis are recognized based on hours incurred. Revenues on all other professional services engagements are recognized upon completion. Our professional services may be sold with software products or on a stand-alone basis. Vendor Specific Objective Evidence (VSOE) of fair value for professional services is based upon the standard rates we charge for such services when sold separately.

 

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 quarters beginning after December 15, 2010 (the Company’s fiscal quarter 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

 

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. Those expenses totaled approximately $300,000 and were included in professional fees in administrative expenses.

 

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.

 

We have recorded the acquired assets and liabilities of GBSX on the acquisition date of January 6, 2011, at their fair value and the operations of GBSX have been included in the consolidated financial statements since the acquisition date.

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 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 3A-02.

 

The purpose of the acquisition was to allow GROUP easier access to American financial markets. Goodwill recognized of $8,705 KUSD was recorded upon consolidation and was calculated as the value of the consideration given less the value of the asset received. The resulting goodwill represents the benefit to be gained by gaining entry into American financial markets.  

 

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 shareholder’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.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

 

None

 

Item 4T.  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 as of June 30, 2011 have caused the Company’s disclosure controls and procedures to be ineffective as of June 30, 2011:

 

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 June 30, 2011, the Board of Directors did not have a functioning audit committee or outside directors.

 

n

LIMITED KNOWLEDGE OF U.S. GAAP BY THE COMPANY’S BOARD OF DIRECTORS AND ACCOUNTING AND REPORTING DEPARTMENTS. As of June 30, 2011, our Board of Directors had one director, Joerg Ott, who also serves as the Chief Executive Officer of the Company. Mr. Ott has 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 an ineffective oversight in the establishment and monitoring of the required disclosure controls and procedures.

 

Changes in Internal Controls Over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 Subsequent Events

 

New Chief Financial Officer:

 

As previously reported by the Company on a Current Report on Form 8-K filed by the Company with the Commission on February 28, 2012, on February 24, 2012, the Board of Directors of the Company appointed Markus R. Ernst as the Company’s Chief Financial Officer (Principal Financial and Accounting Officer), effective February 24, 2012. Mr. Ernst replaced Ronald J. Everett who had been serving as the Company’s Chief Financial Officer since August 2, 2010. Mr. Everett resigned as Chief Financial Officer on February 27, 2012.

 

New Board Members:

 

As also previously reported by the Company on a Current Report on Form 8-K filed by the Company with the Commission on March 6, 2012, on March 1, 2012, the Company’s Board of Directors increased the size of the Board from two (2) to seven (7) members and appointed Messrs. David Darsch, John A. Moore, Jr., Mohammad Shihadah, Stephen D. Baksa and Woody A. Allen (collectively, the “New Directors”) to fill the five (5) vacancies created thereby until the next annual meeting of stockholders of the Company or until his respective successor is elected and qualified.

 

Independent Directors:

 

The Board has determined that each of the New Directors qualifies as an “independent director” as defined by Section 10A(m)(3)(ii) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 5065(a)(2) of the NASDAQ Marketplace Rules.

 

 

Audit Committee:

 

On March 1, 2012, the Board established a standing Audit Committee comprised of two of the New Directors, John A. Moore, Jr. and Woody A. Allen, and Gary MacDonald. As previously disclosed by the Company, Mr. MacDonald was elected as a member of the Board on December 2, 2011. Mr. MacDonald also serves as the Executive Vice President and Chief Development Officer of the Company and its 50.1% subsidiary, GROUP Software AG, a German publicly-traded company, and therefore, does not qualify as an “independent director” as defined by Section 10A(m)(3)(ii) of the Exchange Act or Rule 5605(a)(2) of the NASDAQ Marketplace Rules.

 

On March 1, 2012, Mr. Moore was appointed the Chairman of the Audit Committee and unanimously designated as the “audit committee financial expert” as that term is defined under Item 407(d)(5)(ii) of Regulation S-K due to Mr. Moore’s business experience.

 

The Audit Committee shall 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, approve the compensation of and oversee the Company’s independent auditors; (ii) preapprove all auditing and non-auditing services to be provided by the independent auditors (other than non-auditing 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.

 

The Company believes that the appointment of the New Directors, each of whom qualifies as an “independent director” (as defined by Section 10A(m)(3)(ii) of the Exchange Act and Rule 5065(a)(2) of the NASDAQ Marketplace Rules), as well as the establishment of a standing Audit Committee comprised of a majority of independent directors, one of whom who has been appointed an “audit committee financial expert” (as defined by Item 407(d)(5)(ii) of Regulation S-K) will serve to correct the material weaknesses discussed above.

 

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

 

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.

 

Pavone AG Acquisition

 

On April 1, 2011, the Company acquired 100% of the issued and outstanding shares of capital stock of Pavone, AG, a German corporation (“Pavone”), from the stockholders of Pavone in consideration for 1,000,000 shares of Common Stock of the Company and an aggregate of $350,000.

 

The Company issued the foregoing shares of the Company’s Common Stock pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), afforded the Company under Section 4(2) of Regulation D promulgated under the Securities Act due to the fact that the issuances were isolated and did not involve a public offering of securities.

 

 

GroupWare AG Acquisition

 

As previously reported by the Company on a Form 8-K filed by the Company with the Securities and Exchange Commission on June 9, 2011, the Company acquired GroupWare AG, a Florida corporation (“GroupWare”) pursuant to an Acquisition Agreement, dated June 1, 2011 (the “GroupWare Agreement”), by and among the Company, GroupWare and the holder of 100% of the issued and outstanding shares of common stock of GroupWare (the “GroupWare Stockholder”).

 

In consideration for one hundred percent (100%) of the outstanding shares of GroupWare, the Company issued to the GroupWare Stockholder an aggregate of 250,000 shares of restricted common stock of the Company and paid the GroupWare Stockholder a sum of $250,000.

 

The Company issued the foregoing shares of the Company’s Common Stock pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), afforded the Company under Section 4(2) of Regulation D promulgated under the Securities Act due to the fact that the issuances were isolated and did not involve a public offering of securities.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

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

 

Item 5. Other Information.

 

Subsequent Event

 

IDC Global, Inc. Acquisition

 

As previously reported by the Company on a Form 8-K filed with the Commission on July 28, 2011, on July 25, 2011, the Company consummated its acquisition of IDC Global, Inc., a Delaware corporation (“IDC”), pursuant to an Acquisition Agreement, dated July 15, 2011 (the “Agreement”), by and among the Company, IDC, the shareholders of IDC (the “IDC Shareholders”) represented by a Shareholder Representative, and the management shareholders of the Company (the “Management Shareholders”) represented by a Management Shareholder Representative.

 

Pursuant to the Agreement, the Company purchased 100% of the issued and outstanding shares of capital stock of IDC (the “IDC Shares”) from the IDC Shareholders in consideration for (i) an aggregate of 800,000 restricted shares of common stock of the Company (the “GBS Common Stock”) and (ii) $750,000.   The Company also agreed to issue an aggregate of 80,000 restricted shares of GBS Common Stock to the Management Shareholders and to pay signing bonuses to certain IDC personnel, totaling $35,000.  The Company also agreed to reimburse IDC up to $25,000 for incurred accounting and legal fees related to the transaction.

 

IDC is a privately held company that provides nationwide network and data center services.  IDC delivers customized, high availability technology solutions for WAN, Wireless Services, Co-location & Hosting, Managed Services, and Network Security. IDC has data centers in Chicago, New York and London and other key cities.  IDC is helping customers make the transition from large, static and expensive on-premise computing to dynamic, flexible and cost-effective off-premise computing.  The acquisition of IDC provides the Company with the infrastructure needed to provide a comprehensive end-to-end solution for all customers regardless of their platforms.  It proves especially beneficial to IBM Lotus Domino and Notes customers who finally have the same options as other platforms

 

The Company issued the foregoing shares of GBS Common Stock pursuant to the exemption from the registration requirements of the Securities Act, afforded the Company under Section 4(2) of Regulation D promulgated under the Securities Act due to the fact that the issuances were isolated and did not involve a public offering of securities.

 

 

Item 6. Exhibits.

 

No.		Description
31.1(1)		Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Executive Officer
31.2(1)		Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Financial and Accounting Officer
32.1(1)		Section 1350 Certification of Principal Executive Officer
32.2(1)		Section 1350 Certification of Principal Financial and Accounting Officer
101.INS(2)		XBRL Instance Document
101.SCH(2)		XBRL Taxonomy Extension Schema Document
101.CAL(2)		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB(2)		XBRL Taxonomy Extension Labels Linkbase Document
101.DEF (2)		XBRL Taxonomy Extension Definition Linkbase Document
101.PRE (2)		XBRL Taxonomy Extension Presentation Linkbase Document

  

(1)	Filed herewith.
(2)	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, 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.

 

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: March 23, 2012	By: /s/ Joerg Ott
	Joerg Ott
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: March 23, 2012	By: /s/ Markus R. Ernst
	Markus R. Ernst
	Chief Financial Officer
	(Principal Financial and Accounting Officer)