UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 2)

 

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

 

For the quarterly period ended: September 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)		(Zip Code)

 

 (404) 891-1711

(Registrant’s telephone number, including area code)

 

With a copy to:

Philip Magri, Esq.

The Magri Law Firm, PLLC

11 Broadway, Suite 615

New York, NY 10004

T: (646) 502-5900

F: (646) 826-9200

pmagri@magrilaw.com

www.MagriLaw.com

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

 

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 ¨        No x

  

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 ¨        No x

 

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 July 16, 2013, there were 30,812,624 shares of common stock, par value $0.001 per share, of the Registrant issued and outstanding.

 

 

 

	TABLE OF CONTENTS
		Page No:
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 5.	Other Information	41
Item 6.	Exhibits	42
Signatures		43

  

   

EXPLANATORY NOTE

 

GBS Enterprises Incorporated, a Nevada company (the “Company”), is filing this Amendment No. 2 to its Form 10Q for the fiscal quarter ended September 30, 2011 originally filed with the Securities and Exchange Commission on November 16, 2011 (the “Original Filing”) and subsequently amended on March 23, 2012. As previously reported by the Company on a Form 8-K filed with the Commission on September 20, 2012, on September 19, 2012, the Company changed its fiscal year end from March 31st to December 31^st, commencing on December 31, 2012. Prior to this change, the Company’s subsidiaries, with the exception of SD Holdings, Ltd. had a December 31^st fiscal year end and in reporting the Company’s financial statements, the Company, incorrectly applied of Rule 3A-02 (“the 93-day rule”) promulgated under Regulation S-X by consolidating those subsidiaries without any adjustments for timing differences in the different period ends. With the change in Company’s fiscal year end, the Company is retroactively adjusting previously released financial statements to reflect this change, beginning with December 31, 2010. Accordingly, the unaudited financial statements for the fiscal quarters ended September 30, 2011 and 2010 have been restated in this Amendment No. 2 in the Form 10-Q for the fiscal quarter ended September 30, 2011 to include the accounts of all consolidated companies for the same three and nine month periods. The restatement of the Company’s financial statements is not a change from one accounting policy that applies with GAAP to another accounting policy that complies with GAAP.

 

Except as otherwise noted herein, this Amendment No. 2 continues to speak as of the date of the Original Filing.

 

  

PART I - FINANCIAL INFORMATION

 

Item 1.          Financial Statements 

 

GBS Enterprises Incorporated

 

Unaudited Interim Consolidated Financial Statements

 

September 30, 2011

 

(Restated)

 

 

GBS Enterprises Incorporated

Interim Consolidated Balance Sheets

September 30, 2011 and December 31, 2010

Restated and Unaudited

 

		Restated				Restated
		September 30,				December 31,
		2011				2010
		$				$
Assets
Current Assets
Cash and cash equivalents - Note 7			3,062,890				1,872,068
Accounts Receivable - Note 8			4,544,023				5,712,157
Inventories - Note 3			264,611				0
Prepaid expenses - Note 9			1,823,547				1,420,662
Other current receivables - Note 10			798,759				1,983,219
Total current assets			10,493,830				10,988,106
Non-Current Assets
Property, plant and equipment - Note  11			2,136,401				297,011
Other non-current receivables - Note 12			923,520				1,370,374
Deferred tax assets			2,936,954				257,859
Goodwill - Note 13			48,154,456				31,004,262
Software - Note 14			16,927,292				16,360,884
Other assets - Note 15			319,139				223,780
Total non-current assets			71,397,762				49,514,170
Total assets			81,891,592				60,502,276
Liabilities and stockholders' equity
Current liabilities
Notes payable - Note 16			1,462,560				1,441,263
Liabilities to banks - Note 17			39,040				50,358
Accounts payables and accrued liabilities - Note 18			5,316,468				4,804,434
Deferred income - Note 19			7,200,058				6,212,630
Other short term liabilities - Note 20			4,092,065				2,821,898
Due to related parties - Note 21			0				0
Total current liabilities			18,110,191				15,330,583
Non - Current liabilities
Liabilities to banks - Note 22			3,606,461				780,801
Retirement benefit obligation			163,648				154,065
Deferred Tax Liabilities			611,849				0
Other long term liabilities			2,786,781				6,131,492
Total non-current liabilities			7,168,739				7,066,358
Total liabilities			25,278,930				22,396,941
Stockholders' equity
Capital stock - Note 23
Authorized:
75,000,000 common shares of $.001 par value each
25,000,000 preferred shares of $.001 par value each
Issued and outstanding:
24,673,790 shares of common stock			24,674				33,810,880
Additional paid in capital			43,167,531				4,381,140
Accumulated deficit			(3,227,566	)			(53,544	)
Other comprehensive income			64,536				(27,241	)
			40,029,175				38,111,235
Noncontrolling interest in subsidiaries			16,583,487				(5,900	)
Total stockholders' equity			56,612,662				38,105,335
Total stockholders' equity and liabilities			81,891,592				60,502,276
Subsequent events - Note 27

  

  

GBS Enterprises Incorporated

Interim Consolidated Statements of Operations

Restated and Unaudited       

 

		For the Three Months Ended								For the Nine Months Ended
		Restated				Restated				Restated				Restated
		September 30,				September 30,				September 30,				September 30,
		2011				2010				2011				2010
		$				$				$				$
Revenues - Note 24
Products			5,521,989				4,270,987				15,496,714				14,120,203
Services			2,707,330				1,091,073				5,823,637				3,839,436
			8,229,318				5,362,060				21,320,351				17,959,639
Cost of goods sold
Products			1,876,285				1,388,966				3,976,750				4,286,847
Services			3,000,140				1,329,762				7,049,630				4,401,070
			4,876,425				2,718,728				11,026,379				8,687,916
Gross profit			3,352,893				2,643,332				10,293,972				9,271,723
Operating expenses
Selling expenses			4,308,647				2,036,168				12,277,502				7,537,061
Administrative expenses			1,980,558				715,228				4,839,237				2,724,305
General expenses			150,873				200,216				842,917				746,409
			6,440,079				2,951,612				17,959,655				11,007,774
Operating income (loss)			(3,087,185	)			(308,280	)			(7,665,684	)			(1,736,052	)
Other Income (expense) - Note 25
Other Income (expense)			(245,631	)			(533,815	)			64,916				865,377
Interest income			5,079				2,366				19,254				19,454
Interest expense			(60,314	)			(87,186	)			(261,753	)			(307,239	)
			(300,865	)			(618,636	)			(177,584	)			577,591
Income (loss) before income taxes			(3,388,051	)			(926,916	)			(7,843,268	)			(1,158,460	)
Income tax (income) expense			(522,667	)			(456,672	)			(2,105,739	)			(416,596	)
Income before extraordinary items,
discontinued operations			(2,865,384	)			(470,244	)			(5,737,529	)			(741,864	)
Discontinued operations			0				0				0				0
Net income (loss) before extraordinary items			(2,865,384	)			(470,244	)			(5,737,529	)			(741,864	)
Extraordinary items			0				0				0				0
Net income (loss)			(2,865,384	)			(470,244	)			(5,737,529	)			(741,864	)
Net Loss attributable to noncontrolling Interest			(868,769	)			575				(2,492,331	)			(8,996	)
Net income (loss) attributable to stockholders			(1,996,615	)			(470,819	)			(3,245,198	)			(732,868	)
Other comprehensive income (loss)			440,471				0				77,203				0
Other comprehensive income  (loss)
attributable to noncontrolling interest			219,795				0				38,524				0
Other comprehensive income (loss)
attributable to stockholders			220,676				0				38,679				0
Net income (loss) and comprehensive income (loss) attributed to stockholders			(1,775,939	)			(470,819	)			(3,206,519	)			(732,868	)
																(1)
Net earnings (loss) per share, basic and diluted			(0.073	)				(1)			(0.149	)
Weighted average number of common stock
outstanding, basic and diluted			24,176,032					(1)			21,550,753					(1)

  

(1) N/A. No determination of weighted average or earnings per shares was calculated as this was a predecessor company and comparison is not relevant.

 

GBS Enterprises Incorporated

Interim Consolidated Statements of Cash Flows

For the nine months ended September 30, 2011 and September 30, 2010

Restated and Unaudited

 

		Restated				Restated
		September 30, 2011				September 30, 2010
		$				$
Cash flow from operating activities
Net loss / net income			(3,245,198	)			(732,868	)
Adjustments:
Deferred income taxes			(2,067,246	)			(108,765	)
Depreciation and amortization			3,433,734				2,820,412
Consulting expense			34,000				-
Income (Losses) from equity investment			5,065				-
Loss on Sale of Assets							-
Minority interest losses			(2,492,331	)			(8,996	)
Changes in operating assets and liabilities:
Accounts receivable and other assets			2,301,204				4,065,381
Retirement benefit obligation			9,583				(7,376	)
Inventories			(264,611	)			2,891
Accounts payable and other liabilities			(575,082	)			(2,295,852	)
Net cash provided (used) by operating activities			(2,860,882	)			3,734,827
Net cash provided (used) by discontinued			-
Cash flow from investing activities
Sale (Purchase) of intangible assets			(1,857,435	)			(3,392,799	)
Purchase of property, plant and equipment			(3,982,098	)			-
Write-down goodwill and intangibles							-
Sale (Purchase) of Subsidiaries			(1,385,000	)			2,236,230
Increase in Financial assets			17,150,194				-
Net cash provided (used) in investing activities			9,925,662				(1,156,569	)
Cash flow from financing activities
Net borrowings - banks			2,814,342				420,421
Other borrowings			21,297				-
Forgiveness of Debt			-				-
Capital paid-in			-				-
Loans from related party			-				-
Net cash provided (used) in financing activities			2,835,639				420,421
Effect of exchange rate changes on cash			(8,709,597	)			(3,331,165	)
Net increase (decrease) in cash			1,190,822				(332,486	)
Cash and cash equivalents - Beginning of year			1,872,068				1,708,771
Cash and cash equivalents - End of Quarter			3,062,890				1,376,285

 

  

Note 1 COMPANY AND BACKROUND

 

GBS Enterprises Incorporated, a Nevada corporation, through its subsidiaries, is a global provider of technology solutions for businesses and government agencies. We focus on developing and delivering solutions that help our customers to gain value and reduce cost in the development, deployment and management of the applications used in the course of conducting their business (“business applications”). We do this by building software and providing services that aid in:

 

■

Information Technology (“IT”) systems analysis, planning and management;

■

Automating business processes;

■

Optimizing system and application performance;

■

Ensuring the security and compliance of systems, applications and processes; and

■

Migrating and integrating systems, applications and processes.

 

Our customers include corporate and government IT departments, solutions integrators (“SIs”) and independent software vendors (“ISVs”). Our corporate customers are from a variety of industries, including insurance, financial services, pharmaceuticals, healthcare, manufacturing, logistics, and education. The install-base of our software products spans more than 5,000,000 users in 38 countries on four continents. We principally market and sell our products and services directly in the United States, Canada, United Kingdom, Germany, Austria, Switzerland, the Nordics and India; and indirectly through local distributors and resellers representing Australia, South America and regionally in Europe.

 

Our software and services are designed to mainly serve organizations that have investments in IBM’s Lotus® Notes and Domino platform. The IBM Lotus® Notes and Domino platform is both a system for enterprise email as well as an application platform, meaning that it can be used as both an email system and an environment in which business applications can be deployed and used. This platform was originally brought to market by Lotus Development Corp. in 1989, and was subsequently acquired by IBM in 1995. According to Radiate, in 2011, IBM Lotus Domino will have a worldwide installed base of 189 million mailboxes. Currently, the installed base for On-Premises IBM Lotus Domino mailboxes represents the majority of worldwide IBM Lotus Domino mailboxes, accounting for 87% of worldwide IBM Lotus Domino mailboxes. By 2015, this percentage is expected to decrease to 80%, as hosted email grows in popularity. (The Radiate Group Inc., April 2011, “IBM Lotus Notes/Domino Market Analysis, 2011-2015“)

 

We, through our subsidiaries, have executed our strategy to acquire companies, which have developed software and specialized services for the Lotus Notes and Domino market. This growth by acquisition strategy has resulted in less competition for our software products; a large concentration of highly skilled employees with unique expertise in the area of Lotus Notes and Domino; staff and physical offices on three continents providing greater access to a global market; significant market awareness and greater market share amongst organizations that use Lotus Notes and Domino; and a comprehensive portfolio of solutions specific to the needs and requirements of organizations which use Lotus Notes and Domino.

 

While our products and services remain in use and demand, over the last several years, the market itself has been undergoing a paradigm shift. New technologies, especially in the areas of Cloud Computing and Mobile applications, have grown in popularity due to the potential cost savings and operational efficiencies they can offer. As organizations make investments in these new technologies, they are faced with highly complex and costly projects to migrate (“migration”) or replace their existing systems that don’t operate in the cloud or on mobile devices (“modernization”) – this includes their existing email and business applications that run on Lotus Notes and Domino.

 

To that end, we have acquired and developed technologies that help organizations reduce the time, cost, resources and risks associated with these highly complex migration and modernization projects.

 

 

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 technology assets of Lotus Holdings Ltd. (“Lotus”) in exchange for 2,265,240 shares of SWAV common stock. Also on April 26, 2010, Lotus (on behalf of the SPPEF Members as discussed below) purchased an aggregate of 11,984,770 of the outstanding shares of common stock from the selling shareholders of SWAV for an aggregate of $370,000. As a result of the two sets of transactions, Lotus owned an aggregate of 14,250,010 shares of common stock of SWAV, representing approximately 95.0% of the 15,000,000 shares of SWAV common stock outstanding on April 26, 2010.

 

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.

  

About Lotus Holdings, Ltd.

 

Lotus is a holding company which was formed under the laws of Gibraltar for the purpose of financing merger and acquisition projects, specifically in the niche market of small or microcap companies listed on the Frankfurt Stock Exchange with complex shareholder structures and whose stock is trading below one Euro (€1.00) per share.

 

SPPEFs

 

Lotus typically finances its merger and acquisition projects through the use of Special Purpose Private Equity Funds (“SPPEFs”). Typically, SPPEFs are funded by a company’s major shareholders (the “Major Shareholders”) seeking to raise capital for projects and who fund at least 50% of the SPPEF, with the remaining portion being provided through the investment community and network of investors in Lotus. Each SPPEF is co-managed by a representative of the company’s Major Shareholders (the “Representative Secretary”) and an attorney appointed by Lotus (the “Lotus Representative”).

 

On February 25, 2010, a group of shareholders (the “GROUP Major Shareholders”) of GROUP Business Software AG, a German public company trading on the Frankfurt Stock Exchange under the symbol “INW” (“GROUP”), engaged Lotus to provide financial consulting and advisory services, on a non-exclusive basis, for the primary task of establishing a SPPEF. On March 12, 2010, the GROUP Major Shareholders and Lotus established and funded a SPPEF with $1,400,000, consisting of $1,000,000 from the GROUP Major Shareholders and $400,000 from a Lotus investor (collectively, the “SPPEF Members”).

 

In early April 2010, the SPPEF Members decided to acquire SWAV. As disclosed above, on April 26, 2010, Lotus, on behalf of the SPPEF Members, acquired an aggregate of 11,984,770 shares of SWAV common stock from the selling shareholders of SWAV for an aggregate purchase price of $370,000. The 11,984,770 shares of SWAV common stock represented approximately 79.9% of the 15,000,000 outstanding shares of SWAV common stock on April 26, 2010. Upon the consummation of the acquisition, the then executive officers and directors of SWAV resigned and Mr. Joerg Ott, the Chief Executive Officer of GROUP and a GROUP Major Shareholder, was appointed the Chief Executive Officer of SWAV and sole member of SWAV’s Board of Directors.

 

Transactions following the acquisition

 

On November 1, 2010, the Company repurchased an aggregate of 3,043,985 of the 11,984,770 shares of the Company’s common stock originally purchased by Lotus on April 26, 2010. In consideration for the 3,043,985 shares of the Company’s common stock, the Company issued to Lotus a Secured Demand Note, dated November 1, 2010 (the “First Demand Note”), for the principal amount of $300,000 bearing interest at the rate of 5% per annum. The First Demand Note was repaid in September 2011.

 

Effective December 30, 2010, pursuant to securities purchase agreements between the Company and six GROUP Major Shareholders, the Company purchased an aggregate of 7,115,500 shares of GROUP common stock from the six GROUP Major Shareholders in consideration for an aggregate for 3,043,985 shares of the Company’s common stock (the “December Transaction”). As a result the Company owned approximately 28.2% of the outstanding common stock of GROUP.

 

 

Reverse Merger

 

After the December Transaction was completed, the additional GROUP Major Shareholders accepted the share swap offer from the Company and effectuated a reverse merger of GROUP and the Company. To effectuate the reverse merger, on January 5, 2011, the Company repurchased from Lotus an aggregate of 2,361,426 of the 11,984,770 shares of the Company’s common stock originally purchased by Lotus on April 26, 2010. In consideration for these 2,361,426 shares, the Company issued to Lotus a Secured Demand Note, dated January 5, 2011 (the “Second Demand Note”), for the principal amount of $200,000 bearing interest at the rate of 5% per annum. The Second Demand Note was repaid in November 2011.

 

Effective January 6, 2011, pursuant to securities purchase agreements between the Company and the remaining GROUP Major Shareholders, the Company purchased an aggregate of 5,525,735 shares of GROUP common stock from the remaining GROUP Major Shareholders in consideration for an aggregate of 2,361,426 shares of the Company’s common stock (the “January Transaction”). The 5,525,735 GROUP shares represented approximately 21.9% of the outstanding shares of common stock of GROUP. As a result of the December Transaction and January Transaction, the Company purchased an aggregate of 12,641,235 shares of GROUP from the GROUP Major Shareholders in consideration for an aggregate of 5,405,411 shares of the Company’s common stock, resulting in the Company owning approximately 50.1% of the outstanding common stock of GROUP and effectuating a reverse merger of the Company and GROUP whereby GROUP became the accounting acquirer.

 

Key Acquisitions in 2011

 

In 2011, we made the following key strategic acquisitions:

 

Pavone AG. On April 1, 2011, we acquired 100% of the outstanding common stock of Pavone AG, a German corporation (“Pavone”), for $350,000 in cash and 1,000,000 shares of GBS common stock. The fair value of the GBS common stock was determined to be $4.90 per share, representing the market value at the end of trading on the date of the acquisition. The total value of the investment, including the assumption of $583,991 in debt, was $5,843,991.

 

GroupWare, Inc. On June 1, 2011, we acquired 100% of the outstanding common stock of GroupWare, Inc., a Florida corporation (“GroupWare”), for $250,000 and 250,000 shares of GBS common stock. The fair value of the GBS common stock was determined to be $4.34 per share, representing the market value at the end of trading on the date of the acquisition. The total value of the investment, including the assumption of $694,617 in debt was $2,029,617.

 

IDC Global, Inc. On July 25, 2011, we acquired 100% of the outstanding common stock of IDC Global, Inc., a Delaware corporation (“IDC”), for 880,000 shares of GBS common stock and $785,000. The fair value of the GBS common stock was determined to be $3.50 per share, representing the market value at the end of trading on the date of the agreement. The total value of the investment, including $883,005 of debt assumption, was $4,066,000.

 

Additional Acquisition

 

On February 27, 2012, the Company acquired an additional 883,765 shares of common stock of GROUP from GAVF LLC for an average purchase price of $.070 per share, or approximately $619,000, after 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. By acquiring the new shares, 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.

 

  

 

Note 2 INTERIM REPORTING

  

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) 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 GAAP 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 unaudited interim consolidated financial statements follow the same accounting policies and methods of their application as the Company’s audited consolidated financial statements. All adjustments are of a normal recurring nature.

 

Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that can be expected for the fiscal year ending December 31, 2011.

  

Note 3 ACCOUNTING POLICIES

 

The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, the more significant of which are as follows:

 

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.

 

Segment Reporting

 

The Financial Accounting Standards Board (“FASB”) authoritative guidance regarding segment reporting establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has determined that it operates in only one segment – the development and maintenance of computer software programs and support products.

 

Comprehensive Income (Loss)

 

The Company adopted the 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 and small net actuarial losses on pension plans.

 

Net Income per Common Share

 

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 both the 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 and other receivable, financial assets, notes payable, liabilities to banks, accounts payable, accrued liabilities and other liabilities, due to related parties and retirement benefit obligations. 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, the British Pound, the Indian Rupee, and the Bulgarian Lev. Accordingly, some assets and liabilities are incurred in those currencies and we are subject to foreign currency risks.

 

Fair Value Measurements

 

The Company follows 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 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.

 

Goodwill and other Intangible Assets

 

Intangible assets predominately comprise goodwill, acquired software and capitalized software development services. Intangible assets acquired in exchange for payment are reflected at 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.

 

The Company 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 created software.

 

 

Intangible assets obtained as part of an acquisition which do not meet the criteria for a separate entry are identified as goodwill. Goodwill is reviewed once a year during an impairment test, whereby the appraised fair value of the invested capital of the reporting unit, is compared with the carrying (book) value of its invested capital amount (including goodwill.) Use value is generally applied in order to determine the recoverability of goodwill and intangible assets with an indefinite useful life. The projected financial plan prepared by the management serves as the basis for this determination of use value and 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 determined based on the expected growth rates of the markets in question.

 

If the carrying amount of the reporting unit exceeds the appraised fair value, the impairment based on use value measures the amount of loss, if any, and an unscheduled amortization expense is recorded. If the appraised value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired. 

 

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 for property, plant and equipment is based on useful lives of 3 to 10 years. Leasehold Improvements are depreciated up to 40 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 ASC 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 or appraised value In this instance, the asset is considered to be impaired and is written down to fair value.

 

Revenue Recognition

 

Sources of Revenues:

 

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 in most cases 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 the subsidiary companies whose functional currency is other than US dollars were translated into US dollars using the current rate method. Assets and liabilities were translated at the exchange rates at the balance sheet dates, 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, 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 July 2012, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. With the objective of reducing the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-loved asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles – Goodwill and Other – General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having the likelihood of more than 50 percent. The amendments are effective for annual and interim impairment tests performed beginning April 1, 2013. Adoption of this new standard is not expected to have significant impact to the Company’s financial statement.

 

 

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.

 

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 periods presented prior to January 6, 2011. 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 the FASB 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 Group Business Software Enterprises, Inc. on the acquisition date of January 6, 2011, at their fair value and the operations of Group Business Software Enterprises, Inc. 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, 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.

 

Note 4 CHANGE IN ACCOUNTING POLICIES

 

Fiscal reporting

 

Effective September 19, 2012, the Company changed its fiscal year end from March 31 to December 31. Prior to this change, the company’s subsidiaries, with the exception of SD Holdings, had fiscal year ends of December 31 and in reporting its financial statements, the Company, through the use of Regulation S-X Rule 3A-02 (“the 93 day rule”), consolidated those subsidiaries without any adjustments for timing differences in the period ends. This application was in error. With the change in year end, the Company retroactively adjusted previously released financial statements to reflect this change beginning December 31, 2010. Accordingly, the financial statements for the quarter ended September 30, 2011 and 2010, include the accounts of all consolidated companies for the same three month period beginning January 1, 2011 and 2010 respectively. The Balance Sheets as at September 30, 2011 and September 30, 2010 have also been adjusted to include the accounts of all consolidated companies as of those dates.

 

 

In accordance with ASC 250, effects of this restatement to the respective statements are shown below:

 

		Restated Unaudited				Unaudited
For the nine months ended		September 30, 2011				September 30, 2011				Difference
		$				$				$
Assets
Current Assets
Cash and cash equivalents			3,062,890				3,537,517				(474,627	)
Accounts receivable			4,544,023				4,544,023				0
Inventories			264,611				264,611
Prepaid expenses			1,823,547				1,097,370				726,177
Other receivables			798,759				796,454				2,305
Total current assets			10,493,830				10,239,975				253,855
Equity investments in related parties							285,908				(285,908	)
Property, plant and equipment			2,136,401				2,133,969				2,432
other non-current receivables			923,520				2,818,310				(1,894,790	)
Prepaid expenses							725,178
Deferred tax assets			2,936,954				3,385,350				(448,396	)
Goodwill			48,154,456				49,693,027				(1,538,571	)
Software			16,927,292				17,110,114				(182,822	)
Other assets			319,139				319,139				0
Total non-current assets			71,397,762				76,470,995				(5,073,233	)
Total assets			81,891,592				86,710,970				(4,819,378	)
Liabilities and shareholders' equity
Current liabilities
Notes payable			1,462,560				1,462,560				(0	)
Liabilities to banks			39,040				39,073				(33	)
Accounts payable and accrued liabilities			5,316,468				5,489,528				(173,060	)
Other liabilities			4,092,065				3,507,192				584,873
Deferred income			7,200,058				7,200,058				0
Due to related parties							475,579
Shares payable							298,956
Total current liabilities			18,110,191				18,472,946				(362,755	)
Liabilities to banks			3,606,461				3,606,461				0
Deferred tax liabilities			611,849				611,849				(0	)
Retirement benefit obligation			163,648				163,648				(0	)
Other liabilities			2,786,781				2,786,781				(0	)
Total non-current liabilities			7,168,739				7,168,739				0
Total liabilities			25,278,930				25,641,685				(362,755	)
Shareholders' equity
Capital Stock
Authorized:
75,000,000 common shares and
25,000,000 preferred shares each with a
par value of $.001
Issued and outstanding
			24,674				27,248				(2,574	)
Additional paid in capital			43,167,531				47,325,970				(4,158,439	)
Accumulated deficit			(3,227,566	)			(2,888,488	)			(339,078	)
Other comprehensive income			64,536				73,951				(9,415	)
Total shareholders' equity			40,029,175				44,538,681				(4,509,506	)
Noncontrolling interest in subsidiaries			16,583,487				16,530,604				52,883
Total equity and liabilities			81,891,592				86,710,970				(4,819,378	)

 

 

 

 

 

		Restated Unaudited				Unaudited
For the nine months ended		September 30, 2011				September 30, 2011				Difference
		$				$				$
Net sales			21,320,351				21,320,351				(0	)
Cost of goods sold			11,026,379				10,843,557				182,822
Gross profit			10,293,972				10,476,794				(182,822	)
Operating expenses
Selling expenses			12,277,502				12,277,502				(0	)
Administrative expenses			4,839,237				4,846,513				(7,276	)
General expenses			842,917				861,017				(18,100	)
			17,959,655				17,985,032				(25,377	)
Operating income			(7,665,684	)			(7,508,238	)			(157,446	)
Other Income (expense)
Other Income (expense)			64,916				64,916				(0	)
Interest income			19,254				19,449				(195	)
Interest expense			(261,753	)			(251,955	)			(9,798	)
			(177,584	)			(167,590	)			(9,994	)
Income (loss) before income taxes			(7,843,268	)			(7,675,828	)			(167,440	)
Income tax (income) expense			(2,105,739	)			(2,554,134	)			448,395
Net income (loss)			(5,737,529	)			(5,121,694	)			(615,835	)
Net income (loss) attributable to non-controlling interest			(2,492,331	)			(2,555,725	)			63,394
Net income (loss) attributable to shareholders			(3,245,198	)			(2,565,969	)			(679,229	)
Other comprehensive income (loss)			77,203				174,831				(97,628	)
Net income (loss) and comprehensive income (loss) attributed to shareholders			(3,206,519	)			(2,478,378	)			(728,141	)
Basic and diluted income (loss) per share			(0.149	)			(0.100	)			(0.049	)
Weighted average number of shares outstanding			21,550,753				24,632,896				(3,082,143	)

 

 

 

		Restated				Unaudited
For the nine months ended		September 30, 2011				September 30, 2011				Difference
		$				$				$
Cash flow from operating activities
Net loss / net income			(3,245,198	)			(2,565,969	)			(679,229	)
Adjustments
Deferred income taxes			(2,067,246	)			(2,515,815	)			448,569
Depreciation and amortization			3,433,734				3,462,047				(28,313	)
Loss from equity investment			5,065				5,065				0
Consulting Expense			34,000								34,000
Minority interest losses			(2,492,331	)			(2,555,725	)			63,394
Stock based compensation							34,000				(34,000	)
Foreign exchange							140,831				(140,831	)
Changes in operating assets and liabilities											0
Accounts receivable and other assets			2,301,204				2,181,463				119,741
Retirement benefit obligation			9,583				(95,510	)			105,093
Inventories			(264,611	)			(264,611	)			0
Accounts payable and other liabilities			(575,082	)			2,227,834				(2,802,916	)
Net cash provided by operating activities			(2,860,882	)			53,610				(2,914,492	)
Cash flow from investing activities
Sale (Purchase) of intangible assets			(1,857,435	)			(3,035,533	)			1,178,098
Sale (Purchase) of property, plant and equipment			(3,982,098	)			(2,186,029	)			(1,796,069	)
Sale (Purchase) of subsidiaries			(1,385,000	)							(1,385,000	)
Currency differences											0
Increase (Decrease) of financial assets			17,150,194				(1,980,066	)			19,130,260
Net cash used in investing activities			9,925,661				(7,201,628	)			17,127,289
Cash flow from financing activties
Net borrowings - banks			2,814,342				2,815,184				(842	)
other borrowings			21,297				(3,330,906	)			3,352,203
Net proceeds from exercise of warrants							3,024,970				(3,024,970	)
Loans from related party							(354,577	)			354,577
Net cash used in financing activities			2,835,639				2,154,671				680,968
Effect of exchange rate changes on cash			(8,709,597	)							(8,709,597	)
Net increase in cash			1,190,821				(4,993,347	)			6,184,168
Cash and cash equivalents - Beginning of the period			1,872,068				8,530,864				(6,658,796	)
Cash and cash equivalents - End of period			3,062,889				3,537,517				(474,628	)

  

 

Note 5 SUBSIDIARY COMPANIES

 

As of September 30, 2011, GBS Enterprises Incorporated had the following subsidiaries. Such subsidiaries were included in the basis of consolidation (KUSD = 1,000’s of US Dollars):

 

 

				Stockholders' Equity									Profit						Date
				as of									of the						of the
		Headquarters		Restated 09/30/11			Percentage of Subscribed Capital						consolidated quarter			Ownership			First Consolidation
				KUSD			KUSD			in %			KUSD
ebVokus Software GmbH		Dresden (GER)		438			54			50.1	%		43			I			1/11/2005
GROUP Business Software (UK) Ltd.		Manchester (UK)		(1,233	)		23			50.1	%		(210	)		I			12/31/2005
GROUP Business Software Corp.		Woodstock, GA (USA)		(4,636	)		1			50.1	%		(2,806	)		I			12/31/2005
Permessa Corporation		Waltham, MA (USA)		(554	)		0			50.1	%		(186	)		I			9/22/2010
Relavis Corporation		Woodstock, GA (USA)		(599	)		2			50.1	%		(120	)		I			1/8/2007
GROUP LIVE N.V.		Den Haag (NL)		(2,722	)		134			50.1	%		(6	)		I			12/31/2005
Pavone AG		Paderborn (GER)		(1,242	)		47			100	%		24			D			4/1/2011
Pavone Ltd.		North Yorkshire (UK)		(63	)		584			100	%		(6	)		D			4/1/2011
GROUP Business Software AG		Karlsruhe (GER)		37,521			33,788			Reverse 50.1	%		(1,571	)		D			1/6/2011
Groupware Inc.		Woodstock, GA (USA)		(482	)		1			100	%		0			D			6/1/2011
IDC Global Inc.		Chicago, IL (USA)		2,424			0			100	%		62			D			7/25/2011

 

 

D - Direct Subsidiary

 

I - Indirect Subsidiary
Indirect Subsidiaries are owned 50.1%
through GROUP Business Software AG

 

 

 

Note 6 ASSOCIATED COMPANY

  

Due to the absence of domination/control, B.E.R.S. AD, Varna, Bulgaria is treated an associated company in the consolidated financial statements. GROUP Business Software AG's interest in B.E.R.S AD, is 50%. It was first consolidated on December 31, 2006 for an acquisition cost of 265,000.00 Euros.

  

Assets Restated

Sales

Annual

9.30.11

Debts

Revenues

Profit/Loss

Associated Companies

Headquarters

KUSD

KUSD

KUSD

KUSD

B.E.R.S. AD

Varna (BUL)

271

103

382

37

 

 

Note 7 CASH AND CASH EQUIVALENTS

 

As of the financial statement date, the Company’s cash and cash equivalents totaled 3,063 KUSD restated (December 31, 2010 year end restated: 1,872 KUSD).

   

Note 8 ACCOUNTS RECEIVABLE

 

As of the financial statement date, Accounts Receivable was 4,544 KUSD (December 31, 2010 year end restated: 5,712 KUSD). Receivables are generally measured at their nominal value and taking into account all foreseeable risks. Probable default risks are handled with specific allowances for bad debts. With regard to the trade receivables which are neither impaired nor delinquent, there are no indications as of the financial statement date that the debtors will not meet their payment obligations.

  

Note 9 PREPAID EXPENSES

 

Prepaid expenses in the amount of 1,824 KUSD were primarily recorded for prepaid rent, insurance and advance on technological collaboration events (December 31, 2010 year end restated: 1,421 KUSD).

  

Note 10 OTHER RECEIVABLES - CURRENT

 

Other Receivables as of the financial statement date were 799 KUSD (December 31, 2010 year end restated: 1,983 KUSD).

 

 

Note 11 PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are measured at cost less scheduled straight-line depreciation. 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. Leasehold Improvements are depreciated up to 40 years. 

 

Property, Plant and Equipment kUSD		Development of the cost			Development of accumulated depreciation			Balance
Restated 12/31/2010		5,114.1			4,817.1			297.0
Additions		436.7			333.9			102.7
Disposals		5.9			5.9			0
Currency differences		0			0			0
Reclassifications		3,062.1			1,325.5			1,736.6
Restated 09/30/2011		8,607.0			6,470.6			2,136.4

 

 

 

Note 12 OTHER RECEIVABLES NON-CURRENT

 

Non-current Receivables as of the financial statement date were 924 KUSD (December 31, 2010 restated 1,370 KUSD) include the following:

 

·

The value of the 50% interest in the associated company B.E.R.S. AD with a book value of 291 KUSD.

  

·

The amount still outstanding against the purchaser of GEDYS IntraWare GmbH of 984 KUSD, being repaid in monthly installments of 20 KUSD.

 

 

Note 13 GOODWILL

 

Goodwill derives from the following business acquisitions:

 

Affiliated Company		Date of the First Consolidation		Restated Goodwill as of 09/30/2011 in kUSD
Global words AG		10/01/2002		5,095.3
GROUP Technologies AG		09/01/2005		4,479.7
GROUP Business Software Inc.		12/31/2005		2,177.5
GROUP LIVE N.V.		12/31/2005		1,324.2
zurückbehaltener GoF CRM		12/31/2005		3,108.4
GROUP Business Software Ltd		12/31/2005		2,765.1
ebVOKUS Software GmbH		10/01/2005		443.6
GAP AG für GSM Applikationen und Produkte		12/31/2007		1,913.9
Relavis Corporation		08/01/2007		7,308.1
Permessa		09/22/2010		2,387.4
GROUP Business Software AG		01/06/2001		8,705.5
Pavone AG		04/01/2011		4,956.7
Groupware Inc.		06/01/2011		992.8
IDC Global Inc.		07/01/2011		2,496.2
		TOTAL		48,154.4

 

 

Note 14 SOFTWARE

 

Development costs

 

The costs of developing new software products and updating products already marketed by the Company 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 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 Company according to those used by the parent company. Scheduled amortization is performed over a period from three to ten years.

 

The useful life of the domain “gbs.com”, was estimated as unlimited. This is because no other legal, contractual or other factors exist which would limit its useful life. It is not systematically amortized, but rather annually. Should there exist signs indicating towards impairment it is tested for recoverability and, if necessary, written down to the amount which could be obtained for it if sold.

 

Amortization of concessions, industrial property and similar rights and assets, as well as licenses to such rights and assets are presented in the profit and loss statement under "Depreciation and Amortization."

 

Concessions and licenses		Development of the cost				Development of accumulated depreciation				Balance
kUSD
Restated 12/31/2010			29,497.4				13,136.6				16,360.8
Additions			2,561.3				2,312.5				248.8
Disposals			335.5				324.7				10.8
Currency differences			0				0				0
Reclassifications			328.5				0				328.5
Restated 09/30/2011			32,051.7				15,124.4				16,927.3

  

 

Note 15 OTHER ASSETS

 

The balance of this account of 319 KUSD primarily includes rent and other security deposits (December 31, 2010 year end restated: 224 KUSD).

  

 

Note 16 NOTES PAYABLE

  

Notes Payable had a balance of $1,463 KUSD at September 30, 2011 (December 31, 2010 year end restated: $1,441 KUSD).

  

 

Note 17 LIABILITIES TO BANKS – CURRENT

 

Included in this account is an operating line of credit of 39 KUSD (December 31, 2010 year end restated: 50 KUSD) with interest at a 3.25% daily periodic rate with a credit limit of 100 KUSD.

  

 

Note 18 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Trade payables

 

As of the financial statement date, trade accounts payable amounted to 2,345 KUSD (December 31, 2010 year end restated: 1,130 KUSD). Trade payables are carried at their repayment amount and all have a residual term of up to one year.

 

 

Other Accrual

 

Other provisions are created as of the financial statement date in an amount necessary according to a reasonable commercial appraisal, to cover future payment obligations, perceivable risks and uncertain liabilities of the Company. Amounts deemed to be most likely to occur, in careful assessment, are accrued.

 

USD		Restated
		9/30/2011
Tax provision			0
Salary			1,241
Vacation			307
Workers Compensation Insurance Association			17
Compensation Levy for Non-Employment of Severely Handicapped Persons			13
Outstanding Invoices			575
Annual Financial Statement Costs			343
Other Provisions			397
Warranties			63
Gesture of Goodwill			0
Provision for Legal Costs			15
Severance			0
Total			2,971

  

Provisions for salaries of 1,241 KUSD include the provisions created for the variable salaries of the sales staff for the sales objectives reached in this business period.

 

Vacation provisions of 307 KUSD include the obligations of GROUP’s companies to their employees for remaining vacation claims from the reporting period. The amount of the provision is calculated on the gross salary of the individual employee plus the employer contribution to social security/Medicare and based on the unused vacation days as of the financial statement date.

 

For liabilities not yet settled, a provision totaling 575 KUSD was created.

 

Other Provisions of 397 KUSD include miscellaneous provisions.

 

Expenses for the audit of the Company and preparation of the annual consolidated financial statements were recognized at 343 KUSD.

 

A provision for anticipated legal consulting of 15 KUSD was recorded.

 

For warranty claims, a provision of 63 KUSD was created determined by service income.

  

Note 19 DEFERRED INCOME

 

Accruals for future periods leading to realization of sales after the financial statement date are reported under deferred income. The deferred income items listed as of the financial statement date in the amount of 7,200 KUSD (December 31, 2010 year end restated 6,213 KUSD) primarily include maintenance income collected in advance for the period after the end of the financial statement date. They are amortized on a straight-line basis over their respective contract terms.

   

Note 20 OTHER SHORT TERM LIABILITIES

 

Other short-term liabilities of 4,092 KUSD (December 31, 2010 year end restated: 2,822 KUSD) are comprised of obligations and payments currently due for the purchase of assets from Lotus 911, Permessa and Salesplace.

 

 

 

Note 21 DUE TO RELATED PARTIES

 

Related parties basically refer to the Board of Directors, Supervisory Board, stockholders and associated companies.

 

Business transactions between the companies and its subsidiaries which are also considered to be related companies were eliminated through the consolidation and are not reflected within these footnotes to the consolidated statements.

 

Remuneration of the management occupying key positions in the Corporation subject to disclosure includes the remuneration of the Board of Directors and that of the Supervisory Board.

   

Note 22 LIABILITIES TO BANK – NON CURRENT

 

Liabilities to banks as of the financial statement date was 3,606 KUSD (December 31, 2010 year end restated: 781 KUSD) represent bank obligations of GROUP AG with Baden-Württembergische Bank.

   

Note 23 COMMON STOCK

 

Common stock belongs to the legally purchasing company according to the principles of a Reverse Acquisition and therefore, the common stock is that of GBS Enterprises Incorporated. The Company has authorized capital of 75,000,000 common shares and 25,000,000 preferred shares each with a par value of $0.001. No preferred shares have been issued. As at September 30, 2011, there were 24,673,790 shares of common stock issued. At the time of the Reverse Acquisition, there were 16,500,000 shares of common stock outstanding and, as the Reverse Acquisition was accounted for as a recapitalization applied retroactively, this balance is recorded as the balance outstanding since inception.

 

Unless otherwise noted, in each instance where the Company issued its securities to a U.S. Person, the Company relied on the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) afforded the Company under Section 4(2) promulgated under the Securities Act due to the fact that it was an isolated issuance and did not involve a public offering of securities. In the instances where the Company issued its securities to a non-U.S. Person, the Company relied on the exemption from the registration requirements of the Securities Act afforded the Company under Regulation S promulgated under the Securities Act:

 

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

 

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

 

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

 

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

 

Warrants and Options

 

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, 2011 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 September 30, 2011, the number of shares the warrants outstanding could purchase if exercised was as follows:

 

Warrants		Common Shares				Weighted Average 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

  

Other changes in common stock are disclosed in Note 26, Supplemental Cash Flow Disclosures.

 

 

Note 24 REVENUE ALLOCATION

 

Gross revenue may be broken down by the following products for the nine months ended September 30, 2011 are as follows:

 

Sales Revenues		Restated 09/30/2011
		KUSD
Licenses			3,170
Maintenance			8,516
Partner Contribution			0
Service			5,824
Third-Party Products			1,264
LND Third-Party Products			2,397
Others			149
Discontinued Operations			-0-
			21,320

  

Revenues by geographical area for the nine months ended September 30, 2011 are as follows:

 

Sales Revenues		Restated 09/30/2011
by geographic area		KUSD
US			6,442
Germany			14,035
United Kingdom			843
Others			0
Discontinued Operations			0
			21,320

  

Long-lived assets by geographical area, which primarily include property plant and equipment, are as follows:

 

Long-lived assets		Restated 09/30/2011
by geographic area		KUSD
US			1,803
Germany			329
United Kingdom			4
Others			0
Discontinued Operations			0
			2,136.4

  

Note 25 OTHER INCOME/EXPENSE

 

At the financial statement date, Other expense was 178 KUSD (December 31, 2010 year end restated: Other Income 578 KUSD).

  

Note 26 SUPPLEMENTAL CASH FLOW DISCLOSURES

 

The significant non-cash transactions through September 30, 2011 were as follows. In each instance where the Company issued its securities to a U.S. Person, the Company relied on the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) afforded the Company under Section 4(2) promulgated under the Securities Act due to the fact that it was an isolated issuance and did not involve a public offering of securities. In the instances where the Company issued its securities to a non-U.S. Person, the Company relied on the exemption from the registration requirements of the Securities Act afforded the Company under Regulation S promulgated under the Securities Act:

 

·

On April 1, 2011, the Company acquired Pavone AG, for $350,000, assumption of $583,991 debt and 1,000,000 shares of common stock.

 

·

On June 1, 2011, the Company acquired GroupWare, Inc., for $250,000, assumption of $694,617 debt and 250,000 shares of common stock.

 

·

On July 25, 2011, the Company acquired IDC Global, Inc. for $750,000, $883,005 assumption of debt, $25,000 reimbursement for accounting and legal fees, $35,000 signing bonuses and 880,000 shares of common stock.

 

·

On September 27, 2011, the Company acquired SD Holdings, Ltd. for $525,529 and 612,874 shares of common stock.

 

 

Note 27 SUBSEQUENT EVENTS

  

Key Acquisitions in 2011

 

In 2011, we made the following key strategic acquisitions:

 

SD Holdings, Ltd. On November 1, 2011, we acquired 100% of the outstanding common stock of SD Holdings Ltd., a Mauritius corporation (“SYN”), for $525,529 and 612,874 shares of GBS common stock. The fair value of the GBS common stock was determined to be $2.05 per share, representing the market value at the end of trading on the date of the agreement. SYN owns 100% of Synaptris, Inc., a California corporation (“Synaptris”), and Synaptris Decisions Private Limited, an India company.

 

2012 Highlights

 

Subsidiary Restructurings in 2012

In 2012, in order to reduce overhead and administrative costs, we decided to restructure the Company’s multilevel subsidiary-structure. During the year ended December 31, 2012, we restructured the following subsidiaries:

 

SD Holdings, Ltd./GBS India Private Limited. On April 1, 2012, we sold SYN and its wholly-owned subsidiaries, Synaptris and Synaptris India, to Lotus for $1,877,232. On July 1, 2012, the Company entered into a purchase agreement with SYN for $1,877,232, which transferred all SYN’s assets, including intellectual property rights, and liabilities of the IntelliPRINT and FewClix product lines, customer contracts and certain employees for operations in a new subsidiary, GBS India Private Limited, an Indian company (“GBS India”). A royalty fee in the amount of approximately $350,000 has been agreed upon for the benefit the Company. Additionally a profit based fee of up to $700,000 may be earned based on license and revenue recognized from the sold IntelliVIEW and IntelliVIEW NXT products. On August 1, 2012, the Company acquired 100% of the outstanding capital stock of GBS India. We anticipate GBS India’s presence in India to accelerate our plan to expand our product development team particularly for our strategic offerings in India.

 

Pavone AG/Groupware AG. On July 6, 2012 and August 9, 2012, wholly-owned subsidiaries Pavone AG and Groupware AG, respectively, were merged and consolidated into one wholly-owned subsidiary, Pavone GmbH. The mergers were consummated solely for administrative purposes.

 

 

Pavone, Ltd. On July 8, 2012, Pavone, Ltd., a subsidiary of Pavone AG and a shell company, was dissolved. The Company serves the United Kingdom market through GROUP’s subsidiary GBS, Ltd.

 

EbVokus, GmbH. On October 1, 2012, GROUP sold all of the software and operational assets (constituting substantially all of the assets) of its wholly-owned subsidiary, ebVokus GmbH, along with the associated maintenance and project agreements to a non-affiliated third party for a purchase price of approximately $459,000, approximately $258,000 (200,000 Euros: 1 EUR = $1.29 USD on October 1, 2012) was paid at closing and the remaining $201,000 was paid on February 15, 2013 (150,000 Euro: 1EUR = $1.35 USD on February 15, 2013).

 

B.E.R.S. AD. On November 23, 2012, GBS AG sold its entire participation (50%) in B.E.R.S AD for a total of 25,000 BGN.

 

Group Life N.V, operating under the laws of the Netherlands and a 100% subsidiary of Group Business Software AG, declared its end of business May 31, 2012, registered in the commercial register June 22, 2012. Following the local procedures the Company has been dissolved from the register as per April 5, 2013, registered April 16, 2013. Each of the directors of the Company, including all five disinterested directors with respect to the transaction, has approved each of the transaction agreements discussed above and the transactions contemplated thereby.

 

Changes in Corporate Governance in 2012

 

n

On February 24, 2012, Markus R. Ernst was appointed as the Company’s Chief Financial Officer.

n

On March 1, 2012, the size of the Board was increased to seven members and the Board appointed David M. Darsch, John A. Moore, Jr., Mohammad Shihadah, Stephen D. Baksa and Woody A. Allen (each, a “New Director” or “Independent Director” and collectively, the “New Directors” or “Independent Directors”) as members of the Board until the next annual meeting of stockholders of the Company or until his respective successor is elected and qualified. On March 1, 2012, the Board formed the following committees and appointed the following directors to serve on such committees:

  

o

Audit Committee: John A. Moore, Jr. (Chairman), Woody A, Allen and Gary D. MacDonald

  

o

Compensation Committee: Woody A. Allen (Chairman), David M. Darsch, John A. Moore, Jr., Mohammad Shihadah and Stephen D. Baksa

 

o

Corporate Governance, Regulatory and Nominating Committee: Woody A. Allen (Chairman), David M. Darsch, John A. Moore, Jr., Mohammad Shihadah and Stephen D. Baksa

 

On July 11, 2012, Joerg Ott resigned as the Chief Executive Officer of the Company. His resignation was not due to a dispute or any disagreements with the Company. He retained his membership on the Company’s Board of Directors (the “Board”), and since July 11, 2012, Mr. Ott has been serving as the Board’s Chairman. Mr. Ott also serves as the Chief Executive Officer of GROUP.

 

n

On July 11, 2012, the Board appointed Gary D. MacDonald as the Company’s Interim Chief Executive Officer and Managing Director of Worldwide Operations.

 

Related Party Transactions

 

On April 26, 2013, the Company entered into a note purchase and security agreement (the “Loan Agreement”) with Stephen D. Baksa (the “Lender’), a member of the Board. Pursuant to the Loan Agreement, the Company issued a secured promissory note, dated April 26, 2013 (the “Note”), to Mr. Baksa for the principal amount of $200,000, bearing interest at a rate of 2% per month and maturing on June 30, 2013 or such other time as described in more detail in the Note, without any penalty for prepayment. This Note is secured by fifty percent (50%) of certain financial holdbacks to the Company pursuant to the Stock Purchase Agreement, dated February 1, 2013, by and among the Company, IDC Global, Inc. and Global Telecom & Technology Americas, Inc.

 

 

§

In connection with the execution of the Loan Agreement, on April 29, 2013, the Company issued the Lender a common stock purchase warrant (the “Warrant”), pursuant to which the Lender is entitled to purchase 100,000 shares of common stock at an exercise price of $0.25 from May 1, 2013 until April 30, 2016. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) thereof.

 

§

In connection with the execution of the Loan Agreement, on April 29, 2013, the Company issued the Lender a conditional common stock purchase warrant (the “Conditional Warrant”) which is exercisable in the event that Note is not paid in full by June 30, 2013, pursuant to which the Lender is entitled to purchase 100,000 shares of common stock at an exercise price of $0.25 from July 1, 2013 until June 30, 2016 as described more fully in the Note. The Conditional Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities Act, pursuant to Section 4(2) thereof.

 

·

On April 26, 2013, the Company entered into a note purchase and security agreement (the “Loan Agreement”) with Vitamin B Venture GmbH (the “Lender”), an entity of which Joerg Ott, the Company’s Chairman, has voting and dispositive control. Pursuant to the Loan Agreement, the Company issued to the Lender a secured promissory note, dated October 26, 2012 (the “Note”), for the principal amount of $200,000, bearing interest at a rate of 2% per month and maturing on June 30, 2013 or such other time as described in more detail in the Note, without any penalty for prepayment. This Note is secured by fifty percent (50%) of certain financial holdbacks to be paid to the Company pursuant to the Stock Purchase Agreement, dated February 1, 2013, by and among the Company, IDC Global, Inc. and Global Telecom & Technology Americas, Inc.

 

·

In connection with the execution of the Loan Agreement, on April 29, 2013, the Company issued the Lender a common stock purchase warrant (the “Warrant”), pursuant to which the Lender is entitled to purchase 100,000 shares of common stock at an exercise price of $0.25 from May 1, 2013 until April 30, 2016. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities Act pursuant to Section 4(2) thereof.

 

·

In connection with the execution of the Loan Agreement, on April 29, 2013, the Company issued the Lender a conditional common stock purchase warrant (the “Conditional Warrant”) which is exercisable in the event that Note is not paid in full by June 30, 2013, pursuant to which the Lender is entitled to purchase 100,000 shares of common stock at an exercise price of $0.25 from July 1, 2013 until June 30, 2016 as described more fully in the Note. The Conditional Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities Act, pursuant to Section 4(2) thereof.

 

Other Information

 

On May 29, 2013, the Company’s Common Stock was moved from the OTC Bulletin Board to the Pink Sheets due to the Company’s Common Stock not being quoted by a broker/dealer for more than four consecutive days and not meeting the requirements of 15c2-11 under the Exchange Act. The Company’s common stock is currently quoted on the OTC Markets’ OTCQB under the symbol, “: GBSX.”

 

 

Note 28 COMPARATIVE STATEMENTS

 

In certain circumstances, the classification of accounts previously presented in 2011 has been changed to conform to the presentation used in 2013.

 

 

  

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

 

Note Regarding Forward-Looking Statements

 

The following discussion and analysis should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in the Quarterly Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the “Risk Factors,” “Cautionary Notice Regarding Forward-Looking Statements” and “Description of Business” sections in the Company’s latest Annual Report on Form 10-K and subsequent filings. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “predict,” and similar expressions to identify forward-looking statements. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business, our actual results could differ materially from those discussed in these statements. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

 

 

OVERVIEW 

 

GBS Enterprises Incorporated, a Nevada corporation (the “Company,” “GBS,” “GBSX,” “we,” “us,” “our” or similar expressions), conducts its primary business through its 50.1% owned subsidiary, GROUP Business Software AG (“GROUP”), a German-based public-company whose stock trades on the Frankfurt Exchange under the stock symbol INW. GROUP’s software and consulting business is focused on serving IBM’s Lotus Notes and Domino market. GROUP caters primarily to mid-market and enterprise-size organizations with over 3,500 customers in 38 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 also provides IBM Lotus Notes/Domino Application and Transformation technology. Headquartered in Eisenach, Germany, GROUP has offices throughout Europe and North America. The Company 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. 

  

Products and Services

 

GBS has consolidated the fragmented Lotus Software market through the acquisition of companies with complementary product, technology or services offerings. GBS has continuously developed its software and service business to service and support GBS’s expanding Lotus customer base.

 

Historically, GROUP has achieved growth by acquiring companies with complimentary operations and leveraging GROUP’s expertise to turnaround and integrate these companies. Key success factors for this strategy are: enhanced portfolio, positioning GROUP as the ‘one-stop-shop’ for Lotus applications and services, expanded customer support, fast code migration, and cloud enablement/XPages conversion of acquired applications.

 

Going forward, the Company may focus on potential acquisition targets in the following areas of software and services: Applications and Application Modernizations, 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.

 

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 a 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

 

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.

 

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 Software Integrators (SI) and channel partners, are able to rely on the company’s strategic and tactical advisory services for evaluating, planning, staffing and execution of related customer projects. GBS Consulting Services’ global teams of consultants use modern project management techniques, proprietary methodologies and GBS accelerator technologies to complete client projects on time and with reduced risk.

 

We believe that our focus on recruiting and retaining top Lotus expertise positions our team to offer leading-edge Lotus Notes / Domino subject matter knowledge to our customers. 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 (Connect), 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.

 

Market Trends

 

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 Modernizing/Migrating technology, which will assist client companies as they move to scale and adapt while remaining cost conscious.

 

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 modernized, web enabled (also named “cloud” or “cloud computing”) and migrated Lotus applications; and thus ultimately to take the Lotus applications from legacy to the future. The foundation of the Modernizing/Migrating 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-pended software that underpins Modernizing/Migrating was developed by GBS with assistance and guidance from IBM’s Software Group to ensure alignment with future releases of the IBM Lotus / Domino and XPages technology.

 

Revenue Model

 

GBS generates its revenue from the sale of internally created software, third-party developed software and the delivery of related services, including IT systems planning, administration, support, hosting, implementation and integration.

 

Strategy and Focus Areas

 

Based on current market demands for modern, Cloud-based and mobile-device capable business applications, we have acquired and developed a set of unique technologies that help organizations reduce the time, cost, resources and risks associated with modernizing or migrating their existing applications.

 

We generate revenue from subscription and usage fees and related services, including support and strategic consulting services. The subscription period is typically based on a yearly or multi-year contract with our customers. Another sector of our strategic portfolio is a suite of tools and methodologies we have developed to rapidly convert Lotus Notes applications into web and modern mobile applications. This portfolio includes a set of powerful analysis tools known as Insights that identify all of the Lotus Notes applications within an organization and provide metrics about the uses and users of those applications. Because of the nature of Lotus Notes and Domino, the applications within a customer environment tend to be highly distributed and number in the thousands. For many organizations, this fact alone makes it extremely difficult to plan for projects that involve modernizing these applications for use in a browser and on mobile devices or migrating them to another platform. Our technologies help them to dramatically reduce the cost, risk, time and resources associated with these highly complex projects.

 

 

We generate revenue with our analysis tools by charging a fee for the use of our technology and for the associated cost of the services to produce a report and set of recommendations for the customer. Additional revenues come from consulting services that result from helping our customers implement those recommendations. For use of our conversion tools, referred to as Modernizing/Migrating, we charge a flat fee for the conversion and additional hourly rates to perform additional supporting development or testing as needed.

 

We also believe there is a significant revenue opportunity in licensing these tools to a network of global partners who also have existing presence and expertise in the Lotus Notes and Domino market. We have established partner agreements for the use of the analysis and conversion tools with partners in several countries and directly with IBM.

  

General Corporate History

 

The Company was originally incorporated in the state of Nevada on March 20, 2007 as SWAV Enterprises Ltd. (“SWAV”). SWAV was in a different industry and had a different management team and Board of Directors.

 

On April 26, 2010, SWAV purchased certain technology assets of Lotus Holdings Ltd. (“Lotus”) in consideration for 2,265,240 shares of SWAV common stock. Also on April 26, 2010, Lotus (on behalf of the SPPEF Members as discussed below) purchased an aggregate of 11,984,770 of the outstanding shares of SWAV common stock from certain selling shareholders of SWAV for an aggregate purchase price of $370,000. As a result of these two sets of transactions, Lotus acquired an aggregate of 14,250,010 shares of SWAV common stock which constituted approximately 95.0% of the 15,000,000 outstanding shares of SWAV common stock on April 26, 2010.

 

Upon the consummation of the April 26, 2010 acquisition, the then executive officers and directors of SWAV resigned and Mr. Joerg Ott, the Chief Executive Officer of GROUP and a GROUP Major Shareholder, was appointed the Chief Executive Officer of SWAV and sole member of SWAV’s Board of Directors. Mr. Ott currently serves as the Chairman of the Board of Directors of GBSX and the Chief Executive Officer of GROUP.

 

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. The Company’s common stock is currently quoted on the OTC Markets’ OTCQB under the symbol GBSX.

 

About Lotus Holdings, Ltd.

 

Lotus is a holding company which was formed under the laws of Gibraltar for the purpose of financing merger and acquisition projects, specifically in the niche market of small or microcap companies listed on the Frankfurt Stock Exchange with complex shareholder structures and whose stock is trading below one Euro (€1.00) per share. 

 

SPPEFs

 

Lotus typically finances its merger and acquisition projects through the use of Special Purpose Private Equity Funds (“SPPEFs”). Typically, SPPEFs are funded by a company’s major shareholders (the “Major Shareholders”) seeking to raise capital for projects and who fund at least 50% of the SPPEF, with the remaining portion being provided through the investment community and network of investors in Lotus. Each SPPEF is co-managed by a representative of the Major Shareholders (the “Representative Secretary”) and an attorney appointed by Lotus (the “Lotus Representative”).

 

On February 25, 2010, a group of shareholders (the “GROUP Major Shareholders”) of GROUP Software AG, a German public company trading on the Frankfurt Stock Exchange under the symbol “INW” (“GROUP”), engaged Lotus to provide financial consulting and advisory services, on a non-exclusive basis, for the primary task of establishing a SPPEF. On March 12, 2010, the GROUP Major Shareholders and Lotus established and funded a SPPEF with $1,400,000, consisting of $1,000,000 from the GROUP Major Shareholders and $400,000 from a Lotus investor (collectively, the “SPPEF Members”).

 

In early April 2010, the SPPEF Members decided to acquire SWAV. As disclosed above, on April 26, 2010, Lotus, on behalf of the SPPEF Members, acquired an aggregate of 11,984,770 shares of SWAV common stock from the selling shareholders of SWAV for an aggregate purchase price of $370,000. The 11,984,770 shares of SWAV common stock shares represented approximately 79.9% of the 15,000,000 outstanding shares of SWAV common stock on April 26, 2010.

 

Transactions following the April 26, 2010 Transaction

 

On November 1, 2010, the Company repurchased an aggregate of 3,043,985 of the 11,984,770 shares of the Company’s common stock originally purchased by Lotus on April 26, 2010. In consideration for these 3,043,985 shares, the Company issued to Lotus a Secured Demand Note, dated November 1, 2010 (the “First Demand Note”), for the principal amount of $300,000, bearing interest at the rate of 5% per annum. The First Demand Note was repaid in September 2011.

 

 

Effective December 30, 2010, pursuant to securities purchase agreements between the Company and six GROUP Major Shareholders, the Company purchased an aggregate of 7,115,500 shares of GROUP common stock from the six GROUP Major Shareholders in consideration for the 3,043,985 shares of GBS common stock (the “December 2010 Transaction”). As a result, the Company owned approximately 28.2% of the outstanding common stock of GROUP.

 

Reverse Merger

 

After the December 2010 Transaction was completed, the additional GROUP Major Shareholders decided to accept the share swap offer from the Company and to effectuate a reverse merger of GROUP and the Company. To effectuate the reverse merger, on January 5, 2011, the Company repurchased from Lotus an aggregate of 2,361,426 of the 11,984,770 shares of the Company’s common stock originally purchased by Lotus on April 26, 2010. In consideration for these 2,361,426 shares, the Company issued to Lotus a Secured Demand Note, dated January 5, 2011 (the “Second Demand Note”), for the principal amount of $200,000, bearing interest at the rate of 5% per annum. The Second Demand Note was repaid in November 2011.

 

Effective January 6, 2011, pursuant to securities purchase agreements between the Company and the remaining GROUP Major Shareholders, the Company purchased an aggregate of 5,525,735 shares of GROUP common stock from the remaining GROUP Major Shareholders in consideration for the 2,361,426 shares of GBS common stock (the “January 2011 Transaction”). These 5,525,735 GROUP shares represented approximately 21.9% of the outstanding shares of common stock of GROUP. As a result of the December 2010 Transaction and January 2011 Transaction, the Company had acquired an aggregate of 12,641,235 shares of GROUP common stock from the GROUP Major Shareholders in consideration for an aggregate of 5,405,411 shares of GBS common stock, resulting in GBS owning approximately 50.1% of the outstanding GROUP common stock and effectuating a reverse merger of the Company and GROUP whereby GROUP became the accounting acquirer.

 

Additional GROUP Acquisition

 

On February 27, 2012, we acquired an additional 883,765 shares of GROUP common stock for $619,000 in order to maintain our 50.1% majority ownership of GROUP due to an increase in the outstanding common stock of GROUP.

 

Key Acquisitions in 2011

 

In 2011, we made the following key strategic acquisitions:

 

Pavone AG. On April 1, 2011, we acquired 100% of the outstanding common stock of Pavone AG, a German corporation (“Pavone”), for $350,000 in cash and 1,000,000 shares of GBS common stock. The fair value of the GBS common stock was determined to be $4.90 per share, representing the market value at the end of trading on the date of the acquisition. The total value of the investment, including the assumption of $583,991 in debt, was $5,843,991.

 

GroupWare, Inc. On June 1, 2011, we acquired 100% of the outstanding common stock of GroupWare, Inc., a Florida corporation (“GroupWare”), for $250,000 and 250,000 shares of GBS common stock. The fair value of the GBS common stock was determined to be $4.34 per share, representing the market value at the end of trading on the date of the acquisition. The total value of the investment, including the assumption of $694,617 in debt was $2,029,617.

 

IDC Global, Inc. On July 25, 2011, we acquired 100% of the outstanding common stock of IDC Global, Inc., a Delaware corporation (“IDC”), for 880,000 shares of GBS common stock and $785,000. The fair value of the GBS common stock was determined to be $3.50 per share, representing the market value at the end of trading on the date of the agreement. The total value of the investment, including $883,005 of debt assumption, was $4,066,000.

 

Executive Offices

 

Our principal executive office is located at 585 Molly Lane, Woodstock, Georgia 30189 and our telephone number is (404) 891-1711. GROUP’s executive offices are located at Hospitalstrasse 6, 99817 Eisenach, Germany. We maintain 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. 

  

Financial Condition:

 

Assets:

 

Total Assets increased from $60,502,276 at December 31, 2010 to $81,891,592 at September 30, 2011.  Total Assets consists of Total Current Assets and Total Non-Current Assets.

 

 

 

Total Current Assets

 

At September 30, 2011, Total Current Assets were $10,493,830 as compared to $10,988,106 at December 31, 2010 Total Current Assets consist of: Cash and Cash Equivalents, Accounts Receivable, Prepaid Expenses, and Other Current Receivables.

 

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Cash and Cash Equivalents increased from $1,872,068 at December 31, 2010 to $3,062,890 at September 30, 2011, as a result of our investments in strategic technology areas such as application migration and modernization, and cloud technology.

 

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Accounts Receivable decreased from $5,712.157 at December 31, 2010 to $4,533,023 at September 30, 2011, due to increased collections during the reporting period.

 

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Inventories increased from $nil at December 31, 2010 to $264,611 at September 30, 2011.

 

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Prepaid Expenses increased from $1,420,662 at December 31, 2010 to $1,823,547 at September 30, 2011, from prepaid rent, insurance and advances on technological events.

 

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Other Receivables-current decreased from $1,983,219 at December 31, 2010 to $798,759 at September 30, 2011.

 

 Total Non-Current Assets

 

At September 30, 2011, Total Non-Current Assets were $71,397,762 as compared to $49,514,170 at December 31, 2010.  Total Non-Current Assets consist of: Property Plant and Equipment, Other Receivables non-current, Deferred Tax Assets, Goodwill, Software, and Other Assets.

 

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Net Property (plant and equipment) increased from $297,011 at December 31, 2010 to $2,136,401 at September 30, 2011, primarily due to the acquisition of IDC Global and their fixed assets.

 

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Other Receivables non-current decreased from $1,370,314 at December 31, 2010 to $923,520 at September 30, 2011 and consists of amounts due from the purchaser of GEDYS IntraWare GmbH, and the value of the 50% interest in the associated company B.E.R.S. AD.

 

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Deferred Tax Assets increased from $257,859 at December 31, 2010 to $2,936,954 at September 30, 2011, and consisted of Deferred Tax Assets derived from financial assets and losses carried forward.

 

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Goodwill increased from $31,004.262 at December 31, 2010 to $48,154,456 at September 30, 2011 primarily as a result of the purchase of IDC, Pavone and Groupware.

 

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Software increased from $16,360,884 at December 31, 2010 to $16,927,292 at September 30, 2011, as a result of the quarterly re-calculation of capitalized development costs, product rights and license for our expert business software, legacy business software and strategic business software all in the developmental or improvement stage.

 

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Other Assets increased from $223,780 at December 31, 2010 to $319,139 at September 30, 2011. This category includes rent and other security deposits.

  

Liabilities

 

Total Liabilities increased from $22,396,941 at December 31, 2010 to $25,278,930 at September 30, 2011.  Total Liabilities consists of Total Current Liabilities and Total Non-Current Liabilities.

 

Total Current Liabilities

 

At September 30, 2011, Total Current Liabilities were $18,110,191, compared to $15,330,583 at December 31, 2010.  Total Current Liabilities consist of Notes Payable, Liabilities to Banks, Accounts Payable and Accrued Liabilities, Deferred Income, and Other Liabilities.

 

 

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Notes Payable increased from $1,441,263 at December 31, 2010 to $1,462,560 at September 30, 2011 due to currency conversion.

 

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Liabilities to Banks decreased from $50,358 at December 31, 2010 to $39,040 at September 30, 2011, and included a line of credit and cash in transit.

 

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Accounts Payable and Accrued Liabilities increased from $4,804,434 at December 31, 2010 to $5,316,468 at September 30, 2011, from increases in trade payables and other accruals during the reporting period.

 

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Deferred Income increased from $6,212,360 at December 31, 2010 to $7,200,058 at September 30, 2011 and consists mainly of maintenance income collected in advance of the contractual maintenance period.

 

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Other Liabilities increased from $2,821,898 at December 31, 2010 to $4,092,065 at September 30, 2011, and comprised of obligations and payments currently due for the purchase of assets from Lotus 911, Permessa and Salesplace.

  

Total Non-Current Liabilities

 

At September 30, 2011, our Total Non-Current Liabilities were $7,168,739, compared to $7,066,358 at December 31, 2010.  Total Non-Current Liabilities consist of Liabilities to Banks, Deferred Tax Liabilities, Retirement Benefit Obligation, and Other Liabilities.

 

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Liabilities to Banks increased from $780,801 at December 31, 2010 to $3,606,461 at September 30, 2011, as a result of a long-term business loan/line of credit due to the Baden-Württembergische Bank, Stuttgart, Germany.

 

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Retirement Benefit Obligation increased from $154,065 at December 31, 2010 to $163,648 at September 30, 2011 and consisted of additional accrued retirement benefit obligations.

 

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Deferred Tax Liabilities increased from $nil at December 31, 2010 to $611,849 at September 30, 2011 and consists of the Deferred Tax Liabilities from the capitalization of software expenses.

 

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Other Liabilities decreased from $6,131,492 at December 31, 2010 to $2,786,781 at September 30, 2011 and consisted of a reduction of liabilities related to the purchase of assets in a prior period.

  

Results of Operations:

 

Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010

 

Revenues

 

For the nine months ended September 30, 2011, total revenue increased by $3,360,712, or 18.71%, to $21,320,351 from $17,959,639 for the nine months ended September 30, 2010. The increase was primarily due to additional revenues from the three acquired companies during the the nine month period ended September 30, 2011: Pavone AG on April 1, 2011; GroupWare, Inc. on June 1, 2011; and IDC Global, Inc. on July 25, 2011.

 

The Company generates revenue from two divisions. The Product division of revenues includes revenue generated from the sale of Licenses, Maintenance, Third-Party Products, and Other revenues. The Service division of revenues includes revenue generated from services rendered.

 

Within the Product division, revenue increased by $1,376,511, or 9.75%, from $14,120,203 for the nine months ended September 30, 2010, to $15,496,714 for the nine months ended September 30, 2011. The increase was primarily due to additional revenues from the three acquired companies during the reporting period: Pavone AG, GroupWare, Inc. and IDC Global, Inc.

 

Within the Service division, revenue increased by $1,984,201, or 51.68%, from $3,839,436 for the nine months ended September 30, 2010, to $5,823,637 for the nine months ended September 30, 2011, as a result of the aforementioned acquisitions consummated by the Company during the reporting period.

  

Cost of Goods Sold

 

For the nine months ended September 30, 2011, total Cost of Goods Sold increased by $2,338,463, or 26.92%, to $11,026,379 from $8,687,916 for the nine months ended September 30, 2010. The increase was primarily due to additional cost of goods relating to additional sales generated by acquired companies during the period.

 

 

The Company’s Cost of Goods Sold is segmented into two divisions. The first are costs related to the Product division of revenue which includes the total cost of materials and third party product material costs. The second are the costs related to the Service division of revenue which includes; other operating expenses, personnel expenses, depreciation and amortization expense.

 

Within the Costs of Goods Sold related to the Product division, the Company was able to achieve a reduction in total cost of materials from $4,286,847 for the nine months ended September 30, 2010, to $3,976,750 for to the nine months ended September 30, 2011. The primary factor contributing to the Company’s reduction in Costs of Goods Sold related to the Product division of revenues was a $310,097, or 7.23%, reduction in third party product material costs, due to lower third party product sales for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

 

Within the Costs of Goods Sold related to the Service division, the Company saw a $2,648,560, or 60.18%, increase in the total costs of services, from $4,401,070 for the nine months ended September 30, 2010 to $7,049,630 for the nine months ended September 30, 2011. The Company experienced elevated Service costs due to the increase in salaries and related expenses to fulfill our business objectives in our GROUP Live, our cloud application platform, and our Transformer portfolio.

 

Operating Expenses

 

The Company’s total Operating Expense consist of three segments; Selling, Administrative and General Expenses. For the nine months ended September 30, 2011 total Operating Expenses increased by $6,951,881, or 63.15%, to $17,959,655 from $11,007,774 for the nine months ended September 30, 2010.  

 

For the nine months ended September 30, 2011, Selling Expenses increased by $4,740,441, or 62.90%, to $12,277,502 from $7,537,061 for the nine months ended September 30, 2010. The increase was due to additional recruiting of sales personnel and additional selling expenses relating to the aforementioned acquisitions.

 

For the nine months ended September 30, 2011, administrative expense increased by $2,114,932, or 77.63%, to $4,839,237, from $2,724,305 for the nine months ended September 30, 2010. This was primarily due to increases in personnel expense and other Administrative Expenses related to the Company’s acquisition of subsidiary companies and the increased compliance costs associated with restructuring.

 

For the nine months ended September 30, 2011, General Expenses increased by $96,508, or 12.93%, to $842,917 from $746,409 for the nine months ended September 30, 2010, due to additional expenses resulting from the acquisitions made by the company during the nine month reporting period.

  

Other Income (Expense)

 

For the nine months ended September 30, 2011, Other Expense of $177,574 decreased from Other Income of $577,591 for the nine months ended September 30, 2010. This change is primarily due to decreases in Other Income of $800,461, or 92.50%, due to the previous period’s higher earnings in relation to the sale of the assets of GEDYS IntraWare GmbH  coupled with a net decrease in Interest Expense of $45,286, or 15.74%, from $287,786 for the nine months ended September 30, 2010 to $242,500 for the nine months ended September 30, 2011.

  

Liquidity & Capital Resources

 

As September 30, 2011, the Company had $3,062,890 in cash and cash equivalents, compared to $6,014,411 at December 31, 2010.

 

In March 2011 we consummated a private placement of Units for $1.25 per Unit for total gross proceeds of $7,555,000 (the “Private Placement”). The net proceeds of this offering were $6,839,327.25. Each Unit consisted of one share of common stock and one warrant exercisable to purchase one share of common stock from the date of grant until the third anniversary of the date of grant for $1.50 per share (the “Private Placement Warrants”).

 

 

The Company's cash flow depends on the timely and successful market entry of its strategic offerings. The dependency accounts for revenue generated from direct customers engagements, as well as for revenue generated through the partner channel network.

 

Especially for strategic offerings for paradigm shifting technologies, management's budget plan is based on a series of assumptions regarding market acceptance, readiness and pricing. While management's assumptions are based on market research and customer surveys, assumptions bear the risk of being incorrect and may result in a delay in customer projects and consequently a delay or a reduction in related invoicing. In case these delays have an impact on the Company's liquidity and therefore its ability to support its operations with the necessary cash flow, the Company depends on its ability to generate cash flow from other resources, such as debt financing from related or independent resources or as equity financing from existing shareholders or through the stock market.

 

In the future, the Company may supplement its liquidity to fund its operations or implement its business strategy through the sale of equity or debt securities or through short or long term loans. However, there can be no assurances that the Company will be successful in consummating any such financings on favorable terms, if at all.

 

 Cash Flows

  

		Nine Months Ended September 30,
		2011				2010
Net cash provided (used in) Operating Activities		$	(2,860,882	)		$	3,734,827
Net cash provided (used in) Investing Activities		$	9,925,662			$	(1,156,569	)
Net cash provided (used in) Financing Activities		$	2,835,639			$	420,421
Effect of exchange rate changes on cash		$	(8,709,597	)		$	(3,331,165	)
Net increase (decrease) in cash and cash equivalents during the period		$	1,190,822			$	(332,486	)
Cash and cash equivalents, beginning of period		$	1,872,068			$	1,708,771
Cash and cash equivalents, end of period		$	3,062,890			$	1,376,285

 

Net Cash used in Operating Activities for the nine month period ended September 30, 2011 was $2,860,882 compared to net cash provided in Operating Activities of $3,734,827 for the nine month period ended September 30, 2010 decreasing by $6,595,709. This change is primarily due to increases in Accounts Payable, Depreciation, Income from Equity Investment, Other Liabilities, Consulting Expense and Retirement Benefit Obligation totaling $2,390,116. Being offset by decreases in Net Income/Loss, Deferred Tax Assets, Inventories, Minority Interest Losses, Accounts Receivable and Other Assets totaling $8,985,825.

  

 

Net cash provided in investing activities during the nine month period ended September 30, 2011 was $9,925,662, compared to cash used by investing activities in the comparative period ended September 30, 2010 of $1,156,569. The additional $11,082,231 provided by Investing Activities for the nine month period ended September 30, 2011 was primarily due to decreases from the Purchase of Intangible Assets, Property Plant and Equipment totaling $7,603,328 being offset by increases in Financial Assets and Purchase of Subsidiaries totaling $18,685,558.

 

Net cash used in financing activities during the nine month period ended September 30, 2011 was $2,835,639, compared to net cash provided in financing activities in the comparative period ended September 30, 2010 of $420,421. The increase of $2,415,218 was primarily due to a $2,393,921 increase in borrowings from banks, coupled with a $21,297 increase in other borrowings for the nine month period ended September 30, 2011.

  

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Critical Accounting Policies and Estimates

 

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

 

i. Allowance for doubtful accounts. The company provides for potential bad debts on an account-by-account basis. Bad debts have not been significant and our allowance has been accurate. Non-trade receivables are also scrutinized and allowed for based on expected recovery.

 

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

 

iii. Impairment testing on intangibles and goodwill.  As noted in more detail below, these areas involve numerous estimates as to expected cash flows, expected rates of return and other factors that are difficult to determine and are often out of the Company’s direct control.  

 

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

 

Comprehensive Income (Loss)

 

The Company adopted FASB Codification topic (“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 and small net actuarial losses on pension plans.

 

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, the British pound, and the Indian rupee.  Accordingly, some assets and liabilities are incurred in those currencies and we are subject to foreign currency risks.

 

Fair Value Measurements

 

The Company follows FASB Codification topic (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 (“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.

 

 

Goodwill and other Intangible Assets

 

Intangible assets predominately include goodwill, acquired software and capitalized software development. Intangible assets acquired in exchange for payment are reflected at 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.

 

The Company 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. Goodwill is reviewed once a year during an impairment test, whereby the appraised fair value of the invested capital of the reporting unit, is compared with the carrying (book) value of its invested capital amount (including goodwill.) Use value is generally applied in order to determine the recoverability of goodwill and intangible assets with an indefinite useful life. The projected financial plan prepared by the management serves as the basis for this determination of use value and 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 determined based on the expected growth rates of the markets in question.

 

 

If the carrying amount of the reporting unit exceeds the appraised fair value, the impairment based on use value measures the amount of loss, if any, and an unscheduled amortization expense is recorded. If the appraised value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired.

 

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. Leasehold improvements are depreciated up to 40 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 ASC 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 or appraised value In this instance, the asset is considered to be impaired and is written down to fair value.

  

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 in most cases 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 July 2012, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. With the objective of reducing the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-loved asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles – Goodwill and Other – General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having the likelihood of more than 50 percent. The amendments are effective for annual and interim impairment tests performed beginning April 1, 2013. Adoption of this new standard is not expected to have significant impact to the Company’s financial statement.

 

Principles of Consolidation and Reverse Acquisition

 

As previously disclosed, the Company originally exchanged a total of 5,405,411 shares of common stock in exchange for 50.1% of the outstanding common shares of GROUP (and retained its 50.1% shareholding by acquiring an additional 883,765 shares of GROUP on February 27, 2012). 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 became the accounting acquirer and was 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.

 .

 

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.

 

N/A

 

Item 4.  Controls and Procedures.

  

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer), evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2011, our disclosure controls and procedures were not effective in ensuring that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

During the quarter ended September 30, 2011, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

PART II-OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None

 

Item 1A. Risk Factors.

 

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

 

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

   

On July 25, 2011, the Company issued 880,000 shares of common stock as a partial payment for 100% of the issued and outstanding shares of IDC Global, Inc. The fair value of the shares issued was determined to be $3,080,000. The Company relied on the registration exemption provided under Section 4(2) of the Securities Act of 1933, as amended, due to the fact that it was an isolated issuance and did not involve a public offering of securities.

 

Item 3. Defaults Upon Senior Securities.

 

None 

 

Item 5. Other Information.

 

None 

  

 

Item 6. Exhibits.

 

Exhibit
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)	To be filed by Amendment.

 

 

 

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: July 17,  2013	By: /s/ Joerg Ott
	Joerg Ott
	Chief Executive Officer
	(Principal Executive Officer)
Date: July 17, 2013	By: /s/ Markus R. Ernst
	Markus R. Ernst
	Chief Financial Officer
	(Principal Financial and Accounting Officer)