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EX-31.1 - EXHIBIT 31.1 - GBS Enterprises Incv353178_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - GBS Enterprises Incv353178_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - GBS Enterprises Incv353178_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - GBS Enterprises Incv353178_ex32-2.htm

 

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: June 30, 2013

 

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 x No ¨

  

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

 

Yes ¨ 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 August 19, 2013, there were 30,837,624 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 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
     
  PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 23
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 26
Item 5. Other Information 26
Item 6. Exhibits 26
Signatures   27

 

2
 

 

PART I - FINANCIAL INFORMATION

 

Item 1.          Financial Statements 

 

GBS Enterprises Incorporated

 

Interim Consolidated Financial Statements

 

June 30, 2013

 

(Unaudited)

 

3
 

 

GBS Enterprises Incorporated
Interim Consolidated Balance Sheets
June 30, 2013 (Unaudited) and December 31, 2012 (Audited and Restated)    

 

 

       Restated 
   June 30,   December 31, 
   2013   2012 
   $   $ 
Assets          
Current Assets          
Cash and cash equivalents - Note 6   509,034    1,154,602 
Accounts Receivable - Note 7   3,666,291    4,143,448 
Inventories - Note 3   -    - 
Prepaid expenses - Note 8   220,435    84,304 
Other current receivables - Note 9   474,290    676,976 
Deferred Tax Assets-current - Note 10   809,310    - 
Assets held for sale   -    384,862 
Total current assets   5,679,360    6,444,192 
           
Non-Current Assets          
Assets held for sale   -    1,846,645 
Property, plant and equipment - Note  11   325,666    332,839 
Other non-current receivables - Note 12   1,169    428,422 
Deferred tax assets - Note 10   1,023,952    1,132,103 
Goodwill - Note 13   31,260,500    34,254,881 
Software - Note 14   10,572,956    12,207,031 
Other assets - Note 15   172,721    156,379 
Total non-current assets   43,356,965    50,358,300 
           
           
Total assets   49,036,325    56,802,492 
           
           
Liabilities and stockholders' equity          
Current liabilities          
Notes payable   -    2,313,572 
Liabilities to banks - Note 16   3,482,086    6,774 
Accounts payables and accrued liabilities - Note 17   5,413,042    6,241,733 
Deferred income - Note 18   7,352,780    6,099,570 
Other short term liabilities - Note 19   1,132,411    860,032 
Deferred Tax Liabilities-current - Note 20   127,000    - 
Due to related parties   -    2,115,869 
Liabilities held for sale   -    589,634 
Total current liabilities   17,507,319    18,227,184 
           
Non-Current liabilities          
Liabilities to banks   -    3,716,102 
Retirement benefit obligation   165,874    165,876 
Liabilities held for sale   -    159,898 
Deferred Tax Liabilities non-current - Note 20   (9,882)   - 
Total non-current liabilities   155,992    4,041,876 
           
Total liabilities   17,663,310    22,269,060 
           
Stockholders' equity          
Capital stock - Note 21          
Authorized:          
  75,000,000 common shares of $.001 par value each          
  25,000,000 peferred shares of $.001 par value each          
Issued and outstanding:          
 30,812,624   shares of common stock          
  (29,461,664  shares of common stock at December 31, 2012)   30,813    29,462 
Additional paid in capital   50,005,132    49,691,195 
Subscription Receivable   50,000    - 
Accumulated deficit   (20,508,551)   (18,974,582)
Other comprehensive income   (115,924)   442,841 
           
    29,461,470    31,188,916 
Noncontrolling interest in subsidiaries   1,911,544    3,344,516 
           
Total stockholders' equity   31,373,014    34,533,432 
           
Total stockholders' equity and liabilities   49,036,325    56,802,492 
           
           
           
Subsequent events - Note 25          

  

4
 

 

GBS Enterprises Incorporated

Interim Consolidated Statements of Operations and Comprehensive Income/(Loss)

For the three and six month periods ended June 30, 2013 and June 30, 2012 (Restated)

(Unaudited)                  

 

 

   For the three months ended   For the six months ended 
       Restated       Restated 
   June 30,   June 30,   June 30,   June 30, 
   2013   2012   2013   2012 
   $   $   $   $ 
                 
Revenues - Note 22                    
     Products   4,663,539    4,935,073    9,036,549    10,528,438 
     Services   659,474    1,167,728    1,510,843    2,526,412 
    5,323,013    6,102,801    10,547,392    13,054,850 
Cost of goods sold                    
     Products   1,317,324    994,087    2,174,599    2,910,711 
     Services   998,289    2,070,498    3,242,712    4,327,048 
    2,315,613    3,064,584    5,417,311    7,237,758 
Gross profit   3,007,400    3,038,216    5,130,081    5,817,091 
                     
Operating expenses                    
     Selling expenses   2,222,538    3,186,212    4,594,068    7,364,397 
     Administrative expenses   1,277,094    1,237,164    2,777,136    2,710,811 
     General expenses   42,818    165,505    271,965    392,877 
    3,542,451    4,588,882    7,643,170    10,468,086 
                     
Operating income (loss)   (535,051)   (1,550,665)   (2,513,089)   (4,650,994)
                     
Other Income (expense) - Note 23                    
     Other Income (expense)   348,224    (854,660)   521,703    (840,159)
     Interest income   79    1,358    420    2,657 
     Interest expense   (229,084)   (58,255)   (406,120)   (107,664)
    119,219    (911,556)   116,003    (945,165)
                     
Income (loss) before income taxes   (415,832)   (2,462,222)   (2,397,086)   (5,596,160)
                     
Income tax (income) expense   86,280    (462,700)   13,320    (1,122,041)
                     
     Income (loss) before extraordinary items,                    
     discontinued operations   (502,112)   (1,999,522)   (2,410,406)   (4,474,119)
                     
     Discontinued operations - Note 4   -    (81,286)   -    96,371 
                     
                     
Net income (loss) before extraordinary items   (502,112)   (2,080,808)   (2,410,406)   (4,377,748)
                     
Extraordinary items (value adjustment on goodwill)   -    -    -    - 
                     
Net income (loss)   (502,112)   (2,080,808)   (2,410,406)   (4,377,748)
                     
Net Loss Attributable to noncontrolling Interest   (302,268)   (708,198)   (876,437)   (1,427,976)
Net income (loss) attributable to stockholders   (199,844)   (1,372,610)   (1,533,969)   (2,949,772)
                     
Net earnings (loss) per share, basic and diluted  $(0.0065)  $(0.0472)  $(0.0506)  $(0.1046)
                     
Weighted average number of common stock                    
outstanding, basic and diluted   30,812,624    29,061,335    30,317,454    28,197,214 
                     
Statement of Comprehensive Income (Loss)                    
                     
Net Income (Loss)   (502,112)   (2,080,808)   (2,410,406)   (4,377,748)
Foreign currency Translation Adjustment   (455,436)   2,643,180    (1,115,300)   2,387,362 
                     
Comprehensive income (loss)   (957,548)   562,372    (3,525,706)   (1,990,386)
                     
Less: Net Income (Loss) attributable to noncontrolling interest   (302,268)   (708,198)   (876,437)   (1,427,976)
Less: Other Comprehensive Income (Loss) attributable to noncontrolling interest   (227,263)   1,318,947   (556,535 ) 1,191,294
                     
Total Comprehensive income (loss) attributed to stockholders   (428,017)   (48,377)   (2,092,734)   (1,753,704)

  

5
 

 

GBS Enterprises Incorporated

Interim Consolidated Statements of Operations

For the six months ended June 30, 2013 and June 30, 2012 (Restated)          

(Unaudited)

 

       Restated 
   June 30, 2013   June 30, 2012 
   $   $ 
         
Cash flow from operating activities          
Net loss / net income   (2,410,406)   (4,377,748)
Adjustments          
Deferred income taxes   98,269    (124,377)
Depreciation and amortization   2,075,195    1,689,001 
Consulting expense   70,000    - 
Interest Expense   195,288    - 
Gains (Losses) from equity investment   -    72,613 
Gain (Loss) on Sale of Assets   -    - 
Minority interest losses   (876,437)   (1,123,002)
Changes in operating assets and liabilities:          
Accounts receivable and other assets   2,376,819    (55,000)
Retirement benefit obligation   (2)   1,083,555 
Inventories   -    31,125 
Accounts payable and other liabilities   74,365    (3,864,002)
           
Net cash provided (used) by operating activities   1,603,091    (6,667,835)
Net cash provided (used) by discontinued   -    - 
           
Cash flow from investing activities          
Sale (Purchase) of intangible assets   2,622,659    (2,983,544)
Sale (Purchase) of property, plant and equipment   (62,225)   (660,419)
Increase in Financial assets   -    6,565,341 
           
Net cash provided (used) in investing activities   2,560,434    2,921,378 
           
Cash flow from financing activities          
Net borrowings - banks   (240,788)   451,800 
Other borrowings   (2,313,572)   (1,381,821)
Forgiveness of Debt   10,659    - 
Capital paid-in   100,000    2,020,177 
Loans from related party   (2,115,869)   - 
           
Net cash provided (used) in financing activities   (4,559,570)   1,090,156 
           
Effect of exchange rate changes on cash   (249,522)   (34,414)
           
Net increase (decrease) in cash   (645,568)   (2,690,714)
Cash and cash equivalents - Beginning of the year   1,154,602    3,250,821 
           
           
Cash and cash equivalents - End of Quarter   509,034    560,107 

   

6
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

Note 1COMPANY AND BACKGROUND

 

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“)

 

1
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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.

 

2
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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.

 

3
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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.

 

4
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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.

 

Acquisition/Dissolution of Subsidiary Companies

 

Pavone AG

 

Effective April 1, 2011, the Company acquired 100% of the outstanding common shares of Pavone AG, a German corporation, for $350,000 in cash and 1,000,000 shares of its common stock. The fair value of the common stock was determined to be $4.90 per share, representing the market value at the end of trading on the date of the acquisition. The total value of the investment, including the assumption of $ 583,991 in debt was $5,843,991. Pavone’s extensive workflow software for Lotus Notes and Domino along with their large customer base is well suited to GBS Enterprises portfolio strategy. The acquisition of Pavone complements GBS's majority ownership in GROUP and the Company believes that it further strengthens their leading industry position on the IBM Lotus Platforms and expands their cloud computing technology offerings beyond the IBM Lotus market. Pavone currently has offices in Germany and the UK. They have over 2,500 customers and over 150,000 users worldwide.

 

GroupWare, Inc.

 

Effective June 1, 2011, the Company acquired 100% of the outstanding common shares of GroupWare, Inc., a Florida corporation (“GroupWare”). As consideration the Company paid $250,000 and issued 250,000 shares of its common stock. The fair value of the common stock was determined to be $4.34 per share, representing the market value at the end of trading on the date of the acquisition. The total value of the investment, including the assumption of $ 694,617 in debt was $ 2,029,617. Upon the consummation of the acquisition, the management and board of GroupWare resigned and Joerg Ott, the Company’s Chief Executive Officer and sole director, was appointed as the Chief Executive Officer and sole director of GroupWare. GroupWare is based in Lubeck, Germany with offices in St. Petersburg, Florida. GroupWare's ePDF server delivers centralized, network-wide PDF solutions for messaging, workflow, document, content and data management. The Company believes that the acquisition strengthens the GBS Modernizing/Migrating offering, which helps bring IBM Lotus Notes client applications to the web, by substituting traditional printing methods provided by the Notes client with simple-to-use print-to-PDF capabilities in the browser.

 

5
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

IDC Global, Inc.

 

On July 25, 2011, the Company acquired 100% of the issued and outstanding shares of common stock of IDC Global, Inc., a Delaware corporation (“IDC”). Pursuant to the acquisition agreement, dated July 15, 2011, the Company agreed to issue the shareholders an aggregate of 800,000 shares of common stock and made a cash payment of $750,000. The agreement required an additional payment to the management shareholders of 80,000 shares of common stock and signing bonuses to personnel of $35,000. The Company also agreed to reimburse IDC up to $25,000 for incurred accounting and legal fees related to the transaction. The fair value of the common stock was determined to be $3.70 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. IDC was a privately held company that provides nationwide network and data center services. IDC delivers customized, high availability technology solutions for WAN, Wireless Services, Co-location & Hosting, Managed Services, and Network Security. IDC includes two Data Center facilities located in the downtown Chicago area and Colocation facilities in three other Data Centers in New York, London, England and Frankfurt, Germany. IDC provides internet infrastructure Services (IaaS) to the business community helping customers make the transition from large, static and expensive on-premise computing to dynamic, flexible and cost-effective off-premise computing. IDC is helping customers make the transition from large, static and expensive on-premise computing to dynamic, flexible and cost-effective off-premise computing.

 

Due to the Company’s perceived increase in the demand for Modernization, Mobility and Optimization offerings, the Company made a strategic decision in 2012 to focus on its core offerings in the IBM Notes and Domino market and to divest its non-core businesses, including IDC.

 

On February 1, 2013, GBS entered into a Stock Purchase Agreement, dated February 1, 2013 (the “Agreement”), with IDC and Global Telecom & Technology Americas, Inc., a Virginia corporation (“GTT). Pursuant to the Stock Purchase Agreement, we sold 100% of the issued and outstanding capital stock of IDC to GTT for an aggregate purchase price of $4,600,000 (the “Purchase Price”), subject to certain holdback provisions amounting to $1.093 million as described more fully in the Stock Purchase Agreement. The Purchase Price is also subject to adjustment on a dollar-for-dollar basis for adjustments the Net Working Capital (defined as Current Assets minus Current Liabilities) of IDC by GTT within 90 days of closing.

 

 

6
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

SD Holdings, Ltd.

 

On September 27, 2011, the Company entered into an acquisition agreement with SD Holdings, Ltd. (“SYN”), a Mauritius corporation, and the shareholders of SYN owning 100% of issued and outstanding shares of SYN. SYN owns 100% of all issued and outstanding shares of Synaptris, Inc., a California corporation (“Synaptris”), and 100% of all issued and outstanding shares of Synaptris Decisions Private Limited, a company formed in India (“Synaptris India”). Pursuant to the acquisition agreement, the Company purchased one hundred percent (100%) of the issued and outstanding shares of SYN (“SYN Shares”) effective November 1, 2011 in consideration for $525,529 and agreed to issue 700,000 shares of common stock, subject to adjustment. Actual shares issued were 612,874. The fair value of the common stock was determined to be $2.05 per share, representing the market value at the end of trading on the date of the agreement.

 

On April 1, 2012, the Company sold SYN, Synaptris and Synaptris India for $1,877,232 to Lotus Holding, Ltd. in an effort to restructure the Company’s multilevel subsidiary - structure derived from the historical mergers and acquisitions, and to reduce overhead and administrative costs.

 

GBS India Private Limited

 

Pursuant to an existing transfer agreement, effective July, 1, 2012, the Company entered into a purchase agreement with SYN for $1,877,232, which transferred all 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 incorporated entity formed under the Indian Companies Act 1956 (“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.

 

7
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

On August 1, 2012, the Company acquired 100% of the outstanding shares of 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 into Pavone GmbH. The mergers were consummated solely for administrative purposes. Pavone GmbH is a wholly-owned subsidiary of the Company.

 

Pavone, Ltd.

 

The Company serves the UK market with GROUP’s subsidiary GBS, Ltd. Therefore, subsidiary Pavone, Ltd, as being a shell company, was dissolved on July 8, 2012.

 

EbVokus, GmbH.

 

On October 1, 2012, GROUP Business Software AG 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 GROUP Business Software AG sold its entire participation (50%) in B.E.R.S AD for a total of 25,000 BGN.

 

Group Live, N.V.

 

Group Live N.V. operating under the laws of the Netherlands and a 100% subsidiary of GROUP 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.

  

Note 2INTERIM REPORTING

 

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

 

8
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results that can be expected for the year ending December 31, 2013.

 

Note 3ACCOUNTING 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.

 

9
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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.

 

10
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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.

 

11
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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.

 

12
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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.

 

13
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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.

 

14
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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.

 

15
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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 4DISCONTINUED OPERATIONS

 

Due to the Company's perceived increase in the demand for Modernization, Mobility and Optimization offerings, the Company made a strategic decision in 2012 to focus on its core offerings in the IBM Notes and Domino market and to divest its non-core businesses. As a result,on February 1, 2013, GBS entered into a Stock Purchase Agreement, dated February 1, 2013 (the "Agreement"), with IDC Global, Inc., a Delaware corporation and a wholly-owned subsidiary of GBS ("IDC"), and Global Telecom & Technology Americas, Inc., a Virginia corporation ("GTT). Pursuant to the Stock Purchase Agreement, we sold 100% of the issued and outstanding capital stock of IDC to GTT for an aggregate purchase price of $4,600,000 (the "Purchase Price"), Discontinued Operations and their results of operations, financial positions and cash flows are shown separately for the six months ended on June 30, 2012 for comparative purposes. Summarized financial information for discontinued operations is set forth as follows:

 

Revenues     
Services   (2,648,976)
Cost of goods sold     
Products   (1,278,740)
Services   (589,808)
      
Operating expenses     
Selling expenses   (554,448)
Administrative expenses   (109,845)
General expenses   (33,250)
      
Operating income   (82,885)
      
Other Income (expense)     
Other Income (expense)   (13,486)
      
Income (loss) before income taxes   (96,371)

   

Note 5SUBSIDIARY COMPANIES

 

The subsidiaries listed below were included in the basis of consolidation (KUSD = 1,000’s of US Dollars):

 

   Headquarters  Stockholders' Equity   Percentage of   Ownership  Profit   Date
      as of   Subscribed Capital      of the   of the
      06.30.13          consolidated quarter   First Consolidation
      KUSD   KUSD   in %      KUSD    
                          
GROUP Business Software (UK) Ltd.  Manchester   -1,296    23    50,1%  I   -40   12/31/2005
GROUP Business Software Corp.  Woodstock   -14,353    1    50,1%  I   1,473   12/31/2005
GROUP LIVE N.V.  Den Haag   1,263    134    50,1%  I   -2   12/31/2005
Permessa Corporation  Waltham   10    0    50,1%  I   0   9/22/2010
Relavis Corporation  Woodstock   -804    2    50,1%  I   15   1/8/2007
GROUP Business Software AG  Eisenach   9,435    36,107    50,1%  I   -237   6/1/2011
Pavone GmbH  Boeblingen   -1,119    47    100.0%  D   42   1/4/2011
Groupware Inc.  Woodstock   -482    1    100.0%  D   0   1/6/2011
GBS India  Chennai   157    13    100.0%  D   34   9/30/2012

 

D - Direct Subsidiary

I -   Indirect Subsidiary

Indirect Subsidiaries are owned 50.1% through GROUP Business Software AG

                       

16
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

Note 6CASH AND CASH EQUIVALENTS

 

As of the financial statement date, the Company’s cash and cash equivalents totaled 509 KUSD (December 31, 2012 restated year end: 1,155 KUSD). Included in that amount are cash equivalents of 3 KUSD (December 31, 2012 restated year end: 3 KUSD).

 

Note 7ACCOUNTS RECEIVABLE

 

As of the financial statement date, Accounts Receivable was 3,666 KUSD (December 31, 2012 restated year end: 4,143 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 8PREPAID EXPENSES

 

Prepaid expenses in the amount of 220 KUSD were primarily recorded for prepaid rent, insurance and advance on technological collaboration events (December 31, 2012 restated year end: 84 KUSD).

 

17
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

Note 9OTHER RECEIVABLES - CURRENT

 

Other Receivables as of the financial statement date were 474 KUSD (December 31, 2012 restated year end: 677 KUSD). The largest individual item under other receivables represents receivables from a recoverable receivable from a previous insolvency (446 KUSD) and deposits (28 KUSD).

 

Note 10DEFERRED TAX ASSETS

 

Deferred tax assets as of the financial statement date were 1,833 KUSD (December 31, 2012 restated year end: 1,132 KUSD). Below is a breakdown of deferred taxes into current and non-current assets:

 

Deferred Tax Assets  KUSD   KUSD 
   6/30/2013   12/31/2012 
         
Deferred Tax Assets – Current   809    0 
           
Deferred Tax Assets – Non-current   1,023    1,132 
           
Balance   1,833    1,132 

 

 

Note 11PROPERTY, 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 
             
Updated 03.31.2013   7,202.5    6,884.7    317.8 
Additions   42    12      
Disposals   33    6      
Currency differences   8    3      
Reclassifications   0    0      
Updated 06.30.2013   7,219.4    6,893.7    325.7 

 

Note 12OTHER RECEIVABLES NON-CURRENT

 

The major components of the Non-current Receivables include the following:

 

   KUSD   KUSD 
   6/30/2013   3/31/2013 
         
Cooperative shares   1    1 
Intercompany Loan Values during the quarter   0    0 
Other long term receivables   0    0 
Balance   1    1 

 

 

18
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

 

Note 13GOODWILL

 

Goodwill derives from the following business acquisitions:

 

   Date of   1/1/2013   Additions   Adjustments   Written off   6/30/2013 
June 30, 2013  first               as impaired     
   Consolidation                     
GROUP Business Software AG   01/06/11    18,425.6    -    -    -    18,425.6 
GROUP Business Software (UK) Ltd.   12/31/05    2,765.1    -    -    -    2,765.1 
Permessa Corporation   09/22/11    2,387.4    -    -    -    2,387.4 
Pavone GmbH   01/04/11    5,950.5    -    -    -    5,950.5 
GBS India   8/1/2012    1,731.9    -    -    -    1,731.9 
         31,260.5    -    -    -    31,260.5 

  

  

   Date of   Adjustments   Written off   12/31/2012 
December 31, 2012  first       as impaired     
   Consolidation             
GROUP Business Software AG   1/6/2011    (2,387.4)   -    18,425.6 
GROUP Business Software Corp   12/31/2005    -    2,177.5    - 
GROUP Business Software (UK) Ltd.   12/31/2005    -    -    2,765.1 
evVokus Software GmbH   10/1/2005    (443.60)   -    - 
Permessa Corporation   20110-09-22    -    -    2,387.4 
Pavone GmbH   1/4/2011    -    -    5,950.5 
IDC Global Inc.   7/25/2010    -    -    2,994.4 
SD Holdings   2011-09.27    (2,213.1)   -    - 
GBS India   8/1/2012    -    -    1,731.9 
         (5,044.1)   2,177.5    34,254.9 

 

19
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

  

Note 14SOFTWARE

 

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.

 

20
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

Amortization of concessions, industrial property and similar rights and assets, as well as licenses to such rights and assets are presented in the Statement of Operations and Comprehensive Income/Loss within Cost of Goods Sold. 

  

Concessions and licenses
kUSD
  Development of the cost   Development of accumulated depreciation   Balance 
             
03/31/2013  31,881.7   21,177.7   12,207.0 
Additions   907    159      
Disposals   1,018    122      
Currency differences   143    126      
Reclassifications   0    0      
06/30/2013   31,913.9    21,341.0    10,572.9 

 

Note 15OTHER ASSETS

 

The balance of this account of 173 KUSD primarily includes rent and other security deposits (December 31, 2012 restated year end: 156 KUSD).

  

Note 16LIABILITIES TO BANKS – CURRENT

 

Included in this account is an operating line of credit of 3,482 KUSD (December 31, 2012 restated year end: 5 KUSD) bearing interest at a 3.25%. Also included are checks in transit as of the financial statement date (4 KUSD).

 

21
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

Note 17ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Trade payables

 

As of the financial statement date, trade accounts payable amounted to 2,671 KUSD (December 31, 2012 restated year end: 3,274 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.

 

KUSD  Status               Currency   Status 
   12/31/2012   Utilization   Dissolution   Increase   Differences   6/30/2013 
                         
Tax provision   57    57    0    56    0    56 
Salary   861    861    24    594    16    554 
Vacation   315    303    30    328    12    299 
Workers Compensation Insurance Association   25    21    0    11    1    14 
Compensation Levy for Non-Employment of Severely Handicapped Persons   19    16    0    5    0    8 
Outstanding Invoices   1,059    1,056    60    560    22    482 
Annual Financial Statement Costs   128    88    0    59    4    94 
Other Provisions   446    360    0    342    6    423 
Warranties   96    32    0    0    0    64 
Gesture of Goodwill   0    0    0    0    0    0 
Provision for Legal Costs   73    6    0    0    2    65 
Severance   70    70    0    60    0    61 
Total   3,149    2,870    114    2,015    63    2,119 

 

Provisions for salaries of 554 KUSD (December 31, 2012 restated year end: 861 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 299 KUSD (December 31, 2012 restated year end: 315 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 482 KUSD (December 31, 2012 restated year end: 1059 KUSD) was created.

 

22
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

Other Provisions of 423 KUSD (December 31, 2012 restated year end: 446 KUSD) include miscellaneous provisions.

 

Expenses for the audit of the Company and preparation of the annual consolidated financial statements were recognized at 94 KUSD (December 31, 2012 restated year end: 128 KUSD).

 

A provision for anticipated legal consulting of 65 KUSD was recorded (December 31, 2012 restated year end: 73 KUSD).

 

For warranty claims, a provision of 64 KUSD (December 31, 2012 restated year end: 96 KUSD) was created determined by service income.

 

Note 18DEFERRED 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 7,353 KUSD (December 31, 2012 restated year end: 6,100 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 19OTHER SHORT TERM LIABILITIES

 

Other short-term liabilities of 1,132 KUSD (December 31, 2012 restated year end: 860 KUSD) includes the following obligations and payments currently due:

  

Other Short-Term Liabilities  6/30/2013 
   KUSD 
Purchase Assets L911   0 
Purchase Assets Fastworks   0 
Purchase Assets Permessa   554 
Purchase Assets Salesplace   0 
Purchase Archiving Software   325 
Other Liabilities   253 
    1,132 

 

23
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

Note 20DEFERRED TAX LIABILITIES

 

Deferred tax liabilities as of the financial statement date were 117 KUSD (December 31, 2012 restated year end: Nil KUSD). Below is a breakdown of deferred taxes into current and non-current liabilities:

 

Deferred Tax Liabilities  KUSD   KUSD 
   6/30/2013   12/31/2012 
         
Deferred Tax Liabilities – Current   127    0 
           
Deferred Tax Liabilities– Non-current   (9)   0 
           
Balance   117    0 

  

Note 21COMMON STOCK

 

The Company has authorized capital of 75,000,000 shares of common stock and 25,000,000 shares of “blank check” preferred stock, each with a par value of $0.001. No class of preferred stock has been designated or issued. As of June 30, 2013, there were shares 30,812,624 of common stock outstanding. At the time of the Reverse Merger of the Company by GROUP on January 6, 2011, there were 16,500,000 shares of common stock of the Company outstanding and, as the Reverse Merger was accounted for as a recapitalization and applied retroactively, this balance is recorded as the balance outstanding since inception.

 

Transactions occurring in 2012

 

·In March, 2012 another investor exercised their private purchase warrant and bought 5,000 shares of common stock for net proceeds of $7,500.

 

·Also in March, 2012, as a result of purchasing warrants at nominal value, wherein each warrant allowed the holder to purchase one common share at $0.50 for a period of three years, certain investors exercised those warrants and bought 900,000 shares of common stock for net proceeds of $450,000.

 

·On April 16, 2012, the Company sold 120,000 Units to Joerg Ott, the then Chief Executive Officer and Chairman of the Board of Directors of the Company, for a price of $1.50 per Unit, for a total purchase price of $180,000. Each Unit consisted of one share of Common Stock of the Company and one warrant to purchase one share of Common Stock of the Company from the date of issuance until the third anniversary date of the date of issuance for $1.50 per share. The Company sold the Units and underlying securities to Mr. Ott in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

 

24
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

·On April 28, 2012, $632,500 in notes payable were converted at $1.15 per unit into 550,000 units with each unit consisting of one common share of common stock and one warrant. Each warrant allows the holder to purchase one common share at $1.75 for a period of three years. The Company issued the Note pursuant to Section 4(a)(2) (formerly Section 4(2)) under the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

·On April 30, 2012, $460,000 in notes payable to Lotus Holdings Ltd. (“Lotus Holdings”) were converted at $1.15 per unit into 400,000 units, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to purchase one common share at $1.75 for a period of three years. The Company issued the Lotus Note pursuant to Section 4(a)(2) (formerly Section 4(2)) under the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

·Also on April 30, 2012, $172,500 in debt to a company owned by Joerg Ott, the then Chief Executive Officer and Chairman of the Board of Directors of the Company, were converted at $1.15 per unit into 150,000 units, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to purchase one common share at $1.75 for a period of three years. The Company issued the debt pursuant to Section 4(a)(2) (formerly Section 4(2)) under the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

·On May 10, 2012, the Company sold 30,000 Units to Markus R. Ernst, the Chief Financial Officer of the Company, for a purchase price of $1.50 per unit, for a total purchase price of $45,000. Each unit consists of one share of common stock of the Company and one warrant, allowing the holder to purchase one share of common stock of the Company from the date of issuance until the third anniversary date of the date of issuance for $1.50 per share. The Company sold the units and underlying securities to Mr. Ernst in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

 

25
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

·On May 15, 2012, the Company issued 150,000 unregistered shares of common stock to Kjell Jahn, the former selling stockholder of GroupWare, AG, a Florida corporation purchased by the Company in June 2011. The Company issued the shares in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

·On July 5, 2012, the Company entered into a convertible promissory note agreement (the “Loan Agreement”) with Mohammad A. Shihadah, a member of the Board. Pursuant to the Loan Agreement, the Company issued a convertible promissory note, dated July 5, 2012 (the “Note”), to Mr. Shihadah for the principal amount of $50,000, bearing interest at a rate of 8% per year and maturing on the earlier of the first anniversary date of the date of issuance or such other time as described in more detail in the Note.

 

The Note was convertible in full at $0.50 per share into common stock of the Company if this conversion was exercised on or before September 30, 2012. If not exercised, Mr. Shihadah would receive a 3-year warrant to purchase shares at 50,000 shares of common stock at $1.00 per share.

 

The conversion was not exercised by September 30, 2012, therefore, as per the terms of the Loan Agreement Mr. Shihadah was issued a 3-year warrant to purchase shares at 50,000 shares of common stock at $1.00 per share.

 

·On July 5, 2012, the Company entered into a convertible promissory note agreement (the “Loan Agreement”) with K Group Ltd. Pursuant to the Loan Agreement, the Company issued a convertible promissory note, dated July 5, 2012 (the “Note”), to K Group Ltd. for the principal amount of $250,000, bearing interest at a rate of 8.5% per year and maturing on the earlier of the first anniversary date of the date of issuance or such other time as described in more detail in the Note.

 

26
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

The Note was convertible in full at $0.50 per share into common stock of the Company if this conversion was exercised on or before September 30, 2012. If not exercised, K Group Ltd. would receive a 3-year warrant to purchase shares at 250,000 shares of common stock at $1.00 per share.

 

The conversion was not exercised by September 30, 2012, therefore, as per the terms of the Loan Agreement K Group was issued a 3-year warrant to purchase shares at 250,000 shares of common stock at $1.00 per share.

 

·On July 5, 2012, the Company entered into a convertible promissory note agreement (the “Loan Agreement”) with Vitamin B Venture GmbH. Pursuant to the Loan Agreement, the Company issued a convertible promissory note, dated July 5, 2012 (the “Note”), to Vitamin B Venture GmbH for the principal amount of $252,500, bearing interest at a rate of 8.5% per year and maturing on the earlier of the first anniversary date of the date of issuance or such other time as described in more detail in the Note.

 

The Note was convertible in full at $0.50 per share into common stock of the Company if this conversion was exercised on or before September 30, 2012. If not exercised Vitamin B Venture GmbH would receive a 3-year warrant to purchase shares at 250,000 shares of common stock at $1.00 per share.

 

The conversion was not exercised by September 30, 2012, therefore, as per the terms of the Loan Agreement Vitamin B Venture GmbH was issued a 3-year warrant to purchase shares at 250,000 shares of common stock at $1.00 per share.

 

·On August 13, 2012, the Company entered into a note purchase and security agreement (the “Loan Agreement”) with John A. Moore, a member of the Board. Pursuant to the Loan Agreement, the Company issued a secured promissory note, dated October 26, 2012 (the “Note”), to Mr. Moore for the principal amount of $1,000,000, bearing interest at a rate of 20% per year and maturing on the earlier of the first anniversary date of the date of issuance or such other time as described in more detail in the Note, without any penalty for prepayment. To secure the obligations of the Company under the Note, the Company granted Mr. Moore a secured priority security interest in the Company’s Accounts Receivable and its subsidiaries located in the United States of America, as more fully described in the full text of the document.

 

27
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

In connection with the execution of the Loan Agreement, on October 26, 2012, 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 $0.35 until the third anniversary date of the date of issuance. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities and Exchange Act of 1933, as amended, pursuant to Section 4(a)(2) (formerly Section 4(2)) thereof.

 

In connection with the Loan Agreement, on February 22, 2013, the Company and Mr. Moore amended the Note pursuant to which Mr. Moore agreed to convert the interest due under the Note into shares of GBSX common stock at a rate of $0.30 per share. Pursuant to the amendment, the Company issued 450,960 shares of Common Stock to Mr. Moore. The Company issued the shares in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

·On October 26, 2012, the Company entered into a note purchase and security agreement (the “Loan Agreement”) with Stephen D. Baksa, a member of the Board. Pursuant to the Loan Agreement, the Company issued a secured promissory note, dated October 26, 2012 (the “Note”), to Mr. Baksa for the principal amount of $1,000,000, bearing interest at a rate of 20% per year and maturing on the earlier of the first anniversary date of the date of issuance or such other time as described in more detail in the Note, without any penalty for prepayment. To secure the obligations of the Company under the Note, the Company granted the Baksa a first priority security interest in all of the Company’s right, title and interest in and to the shares of IDC Global, Inc. then owned by the Company. The Note contains customary provisions upon an Event of Default, as more fully described in the full text of the document.

 

In connection with the execution of the Loan Agreement, on October 26, 2012, the Company issued the Lender a common stock purchase warrant (the “Warrant”), pursuant to which the Lender is entitled to purchase 500,000 shares of common stock at an exercise price of $0.20 until the third anniversary date of the date of issuance. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities and Exchange Act of 1933, as amended, pursuant to Section 4(a)(2) (formerly Section 4(2)) thereof. On February 12, 2013, Mr. Baksa exercised the right to purchase 500,000 shares of common stock at the exercise price of $0.20.

 

28
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

In connection with the Loan Agreement, on February 22, 2013, the Company and Mr. Baksa amended the Note pursuant to which Mr. Baksa agreed to convert the interest due under the Note into shares of GBSX common stock at a rate of $0.30 per share. Pursuant to the amendment, the Company issued 200,000 shares of Common Stock to Mr. Baksa. The Company issued the shares in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities

  

Transactions occurring in 2013

 

·As stated above, on February 12, 2013, and in connection with the above October 26, 2012 Loan Agreement the Company issued an aggregate of 500,000 restricted shares of Common Stock to Board Member, Stephen Baksa pursuant to exercise of a common stock purchase warrant issued on October 26, 2012 and exercisable for $0.20 per share. The Company issued the securities in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

·On February 12, 2013, the Company sold an aggregate of 250,000 restricted shares of Common Stock to an Accredited Investor (as that term is defined the Securities Act) pursuant to exercise of a common stock purchase warrant issued on November 30, 2012 and exercisable for $0.20 per share. The Company issues the securities in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

As of March 31, 2013, these shares had not yet been issued and remain as Subscriptions Receivable.

 

29
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

·As stated above, on February 22, 2013 and in connection with the above August 13, 2012 Loan Agreement, the Company and Board Member, John Moore amended the Note pursuant to which Mr. Moore agreed to convert the interest due under the Note into shares of GBSX common stock at a rate of $0.30 per share. Pursuant to the amendment, the Company issued 450,960 shares of Common Stock to Mr. Moore. The Company issued the shares in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

·As stated above, on February 22, 2013, and in connection with the above October 26, 2012 Loan Agreement, the Company and Board Member Stephen Baksa amended the Note pursuant to which Mr. Baksa agreed to convert the interest due under the Note into shares of GBSX common stock at a rate of $0.30 per share. Pursuant to the amendment, the Company issued 200,000 shares of Common Stock to Mr. Baksa. The Company issued the shares in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

·On March 20, 2013, the Company issued an aggregate of 450,950 restricted shares of Common Stock to Board Member, John Moore pursuant to a February 22, 2013 amendment to a Secured Promissory Note Agreement entered into on August 13, 2012 between the Company and the Board Member. The Company issued the securities in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

·On March 27, 2013, the Company issued an aggregate of 200,000 restricted shares of Common Stock to Board Member, Stephen Baksa pursuant to a February 22, 2013 amendment to a Secured Promissory Note Agreement entered into on October 26, 2012 between the Company and the Board Member. The Company issued the securities in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

·On March 27, 2013, the Company issued 200,000 restricted shares of Common Stock to a third party non-affiliated consultant in consideration for consulting services rendered by the consultant to the Company. The Company issued the securities in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities

 

30
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

nOn 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. The Company issued the Note upon reliance on Section 4(a)(2) (formerly 4(2)) of the Securities Act in light of the fact it was a private transaction and did not involve a public offering of securities.

 

§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 pursuant to Section 4(a)(2) (formerly 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(a)(2) (formerly Section 4(2)) thereof.

 

31
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

nOn 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 and Chief Executive Officer, 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. The Company issued the Note upon reliance on Section 4(a)(2) (formerly 4(2)) of the Securities Act in light of the fact it was a private transaction and did not involve a public offering of securities.

 

§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(a)(2) (formerly 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(a)(2) (formerly Section 4(2)) thereof.

 

32
 

 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

Other changes in common stock are disclosed in Note 25, Supplementary Cash Flow Disclosures.

 

Options

 

The Company has not issued any options, so that none are outstanding as of June 30, 2013.

 

Warrants

 

The Company has issued warrants in four different manners. In each instance, the warrant allows the holder to purchase a common share within a three year period from issuance at a specific price per share. In the first instance, warrants have been issued as part of a private placement offering wherein the investor purchases a common share, and a warrant. The fair value of those warrants has been determined (and is shown below) by utilizing the residual method, whereby the current market value of the stock is deducted from the unit price and the remainder is allocated to the warrant. The valuation of the warrants issued is for disclosure purposes only and has no impact to the financial statements. A description of those warrants has been described above under common shares.

 

The second manner in which warrants are issues is in respect to financing by way of the issuance of notes payable or the conversion of debt into shares. In these instances, the fair value of the warrant has been determined using the effective interest rate method whereby the note is discounted when the interest rate is less than other similar notes and discount is allocated to the warrant and credited to additional paid in capital. The corresponding charge to discount is then amortized over the life of the note. Where there is no difference in interest terms, no value is attributable to the warrant.

 

The Company has also sold warrants at nominal value to certain investors. In this instance the fair value of the warrants has been determined using a Black-Scholes option pricing model with volatility, equity value and interest rate inputs noted below. The valuation of the warrants issued is for disclosure purposes only and has no impact to the financial statements.

 

33
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

Lastly, the Company has issued warrants to outside consultants in payments for services. The warrants are issued as “cashless” warrants and have been valued using a Black-Scholes option pricing model with volatility, equity value and interest rate inputs noted below.. The fair value of warrants issued for financing are determined for disclosure purposes as there is no impact to the financial statements. The fair value for other services, namely legal, and consulting have been recorded in the financial statements with a charge to the corresponding expense account and a credit to additional paid in capital.

 

Black Scholes assumptions for warrants issued were as follows:

 

   For the Period Ending
December 31,
 
   2012   2011 
Volatility   120.6 – 134.3%    77.1%  
Risk Free  Interest Rate   0.34% - 0.51%    1.19%  
Expected Life   3 years    

3 years  

 
Dividend Rate   Nil    Nil 

 

The following share purchase warrant transactions have not been disclosed elsewhere.

 

On April 1, 2011, the former CFO was issued 100,000 share purchase warrants, which gave him the option of purchasing 100,000 shares of common stock for a period of 3 years at a price of $1.50 per common share. The value of this issuance, using the Black Scholes pricing model was determined to $34,000 and this amount was recorded as a consulting expense.

 

In March 2012, the Company issued an aggregate of 2,020,000 warrants to five “accredited investors” pursuant to Section 4(a)(2) (formerly Section 4(2)) of the Securities Act. Each investor warrant is exercisable for the three-year period commencing from the date of issuance for $0.50 per share of Common Stock and has the same terms as the Private Placement Warrants. As noted above investors immediately exercised warrants and purchased 900,000 shares of common stock for $450,000.On March 27, 2012, the Company issued an aggregate of 250,000 warrants to 3 outside consultants pursuant to Section 4(a)(2) (formerly Section 4(2)) of the Securities Act. Each warrant is exercisable for the three-year period commencing from the date of issuance for $1.10 per share of Common Stock and has the same terms as the Private Placement Warrants. The value of this issuance, using the Black Scholes pricing model was determined to $270,208 and this amount was recorded as a professional expense.

 

 

34
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

In December 2012, The Company issued 16,875 warrants to an outside consultant pursuant to Section 4(a)(2) (formerly Section 4(2)) of the Securities Act. Each warrant is exercisable for the three-year period commencing from the date of issuance for $0.21 per share of Common Stock and has the same terms as the Private Placement Warrants. The value of this issuance, using the Black Scholes pricing model was determined to $2,624 and this amount was recorded as a consulting expense.

 

   # of shares   Issue  Expiry  Strike   Fair value   Issued   Exercised   Balance 
   allowed to   Date  Date  Price   at           End of 
   purchase             Issuance           Period 
   #         $   $   #   #   # 
Opening - Jan 1, 2011   2,000,000   10/1/2010  6/1/2013   4.00    -    -    -    2,000,000 
Issued for financing services       3/11/2011  3/11/2014   1.50    -    707,280    -    707,280 
Issued for financing services       3/28/2011  3/28/2014   1.50    -    15,000    -    15,000 
sold with share units       3/31/2011  3/31/2014   1.50    -    6,044,000    2,020,000    4,024,000 
Issued for consulting services       4/1/2011  4/1/2014   1.50    34,000(1)   100,000    -    100,000 
Closing - Dec 31, 2011                        6,866,280    2,020,000    6,846,280 
                                     
Opening - Jan 1, 2012   6,846,280                         5,000    6,841,280 
Amended   (2,000,000)  10/1/2010  6/1/2013   4.00    -    -    -    - 
Reissued   2,000,000   6/1/2012  6/1/2015   1.00    556,785    -    -    - 
Issued for legal services       3/31/2012  3/31/2012   1.10    270,208(2)   250,000    -    250,000 
Issued for nominal value       3/28/2012  3/28/2015   0.50    2,457,662    2,020,000    900,000    1,120,000 
Sold with share units       4/16/2012  4/16/2015   1.50    90,000    120,000    -    120,000 
Issued with debt conversion       4/28/2012  4/28/2015   1.75    -    550,000    -    550,000 
Issued with debt conversion       4/30/2012  4/30/2015   1.75    -    500,000    -    500,000 
Sold with share units       5/10/2012  5/10/2015   1.50    25,800    30,000    -    30,000 
Issued with debt       7/5/2012  7/5/2012   0.50    26,500    550,000    -    550,000 
Issued with debt       8/13/2012  8/13/2015   0.35    -    100,000    -    100,000 
Issued with debt       10/26/2012  10/29/2015   0.20    -    500,000    500,000    - 
Issued with debt       11/30/2012  11/30/2015   0.20    -    500,000    250,000    250,000 
Issued for consulting services       12/21/2012  12/21/2015   0.21    2,624(1)   16,875    -    16,875 
Closing - Dec 31, 2012                        5,136,875    1,655,000    10,328,155 
                                     
Opening - Jan 1, 2013   10,328,155                              10,328,155 
Transfer (3/11/2011)   739,000   2/6/2013  3/11/2014   1.50    -    -    -    739,000 
Closing - Mar 31, 2013                        5,136,875    1,655,000    11,067,155 
                                     
Issued with debt       4/26/2013  4/26/2016   0.25    -    400,000    -    400,000 
Closing - Jun 30, 2013                        5,536,875    1,655,000    11,467,155 

 

(1) recorded as consulting expense

(2) recorded as legal expense

 

35
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

Note 22REVENUE ALLOCATION

 

Gross revenue may be broken down by the following products for the six months ended June 30, 2013 are as follows:

 

Sales Revenues  06.30.2013 
   KUSD 
Licenses   1,777 
Maintenance   4,860 
Partner Contribution   0 
Service   1,511 
Third-Party Products   1,284 
LND Third-Party Products   1,116 
Others   0 
    10,547 

 

Revenues by geographical area for the six months ended June 30, 2013 are as follows:

 

Sales Revenues  06.30.2013 
by geographic area  KUSD 
      
US   1,516 
Germany   8,581 
United Kingdom   449 
Others   0 
    10,547 

 

36
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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

 

Long-lived assets  06.30.2013 
by geographic area  KUSD 
US   98 
Germany   203 
United Kingdom   4 
Others   21 
    326 

  

Note 23OTHER INCOME/EXPENSE

 

At the financial statement date, Other expense was 522 KUSD (December 31, 2012 year end: Other Expense 33 KUSD).

 

Note 24SUPPLEMENTAL CASH FLOW DISCLOSURES

 

The significant non-cash transactions through June 30, 2013 were as follows:

 

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

 

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

 

37
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

 

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

 

·On September 27, 2011, the Company acquired SD Holdings Ltd for $525,529 and issued 612,874 shares of Common Stock.

 

·On February 27, 2012, an outstanding debt of GROUP was converted into an aggregate of 1,750,000 shares of GROUP common stock, increasing GROUP’s total outstanding common stock to 26,982,000 shares. As a result of the foregoing increase in the number of total outstanding shares of GROUP common stock, the Company increased its ownership of GROUP common stock to an aggregate of 13,525,000 shares, representing approximately 50.1% of the outstanding common stock of GROUP, by purchasing the 883,765 shares of GROUP common stock from GAVF LLC for an average purchase price of $0.70 per share.

 

·On March 31, 2012, warrants were issued in lieu of consulting services and the fair value, based on the Black Scholes pricing model, was determined to be $ 270,208 and recorded as Additional Paid-In Capital.

  

·On April 28, 2012, $ 632,500 in notes payable to RealRisk Ventures, LL were converted into 550,000 shares of common stock and into 550,000 warrants with each warrant allowing the holder to purchase one common share at $1.75 for a period of 3 years. On April 30, 2012, $ 460,000 in notes payable to Lotus Holdings Ltd. were converted into 400,000 shares of common stock and 400,000 warrants, with each warrant allowing the holder to purchase one common share at $1.75 for a period of 3 years.

 

·On April 30, 2012 $ 172,500 of accounts payable due to Vitamin B Venture, GmbH was converted into 150,000 shares of common stock in satisfaction of a converted note to Kjell Jahn.

 

·On July 5, 2012, promissory notes for $552,500 were issued at 8.5% and had a conversion feature. Similar notes without the conversion were issued at 20%. Therefore, it was determined that the conversion feature had a value which was calculated by discounting the note as if the cost of capital was 20% and based on the due date set forth of 6 months. The calculated value was classified as discounted debt and amortized over the life of the promissory notes resulting in additional Interest expense and a credit to Additional Paid-In Capital for $26,700.

 

·On December 21, 2012, warrants were issued in lieu of consulting services and the fair value, based on the Black Scholes pricing model, was determined to be $ 2,624 and recorded as Additional Paid-In Capital.

  

·On March 1, 2013, $700,000 of Notes Payable and Accounts Payable due to Vitamin VbV GmbH was dissolved as payment against a Loan Payable from Group AG.

 

·On March 20, 2013, 450,960 shares were issued at a rate of .30/share on conversion of accrued interest due on a Note Payable to John Moore.

 

·On March 27, 2013, 200,000 shares were issued at a rate of .30/share on conversion of accrued interest due on a Note Payable to Stephen Baksa. Also on

 

·March 27, 2013, 200,000 shares were issued in lieu of services and the fair value based on the Black Scholes pricing model, was determined to be $ 70,000 and recorded as Additional Paid-In Capital.

 

38
 

 

Notes to the Interim Financial Statements

June 30, 2013

GBS Enterprises Incorporated

Unaudited

  

 

·

On March 27, 2013, 200,000 shares were issued in lieu of services and the fair value based on the Black Scholes method was determined to be $ 70,000 and recorded as Additional Paid-In Capital.

 

Note 25SUBSEQUENT EVENTS

 

On July 10, 2013, the Board of Directors of the Company reappointed Joerg Ott as the Chief Executive Officer (Principal Executive Officer) of the Company, effective immediately. Mr. Ott replaced Mr. Gary D. MacDonald who had been serving as the Company’s Interim Chief Executive Officer since July 11, 2012.

 

On August 2, 2013, Gary D. MacDonald resigned as member of the Board of Directors of the Company and as, Managing Director of GBS-UK. From March 1, 2012 to the date of his resignation, Mr. MacDonald also served as member of the Board’ Audit Committee. Mr. MacDonald’s resignation was not due to any disagreement with the Company or the Board.

 

39
 

 

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 thirty-eight countries spanning four continents, representing more than 5,000,000 active users of its products. GROUP’s customers include Abbot, Ernst & Young, Deutsche Bank, Bayer, HBSC, Merck and Toyota. GROUP provides IBM Lotus Notes/Domino Application and Transformation technology. 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 had 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.

 

7
 

 

In 2012, in order to reduce overhead and administrative costs, we decided to restructure the Company’s multilevel subsidiary-structure. As of the fiscal quarter ended June 30, 2013, we restructured the following subsidiaries:

 

  n SD Holdings, Ltd./GBS India Private Limited

 

  n Pavone AG

 

  n GroupWare AG

 

  n Pavone, Ltd.

 

  n ebVokus, GmbH

 

  n B.E.R.S. AD (Investment)
  n IDC Global, Inc.
  n Group Live, NV.

 

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.

 

IDC Global, Inc. On February 1, 2013, GBS entered into a Stock Purchase Agreement, dated February 1, 2013 (the “Agreement”), with IDC Global, Inc., a Delaware corporation and a wholly-owned subsidiary of GBS (“IDC”), and Global Telecom & Technology Americas, Inc., a Virginia corporation (“GTT). Pursuant to the Agreement, we sold 100% of the issued and outstanding capital stock of IDC to GTT for a purchase price of $4,600,000 (the “Purchase Price”), subject to certain holdback provisions, including a holdback of approximately $217,000 for accounts receivable and which is to be paid by GTT to GBS within one business day of IDC receiving such payment, $334,000 for GroupLive liabilities and liens on IDC which is to be paid by GTT to GBS within three business days that GTT is reasonably satisfied that such liabilities and liens have been removed, less any amounts up to $12,500 which GTT or IDC is required to pay to either satisfy the obligations or purchase replacement equipment; and approximately $528,000 for an outstanding dispute which is to be paid by GTT to GBS within three days that GTT is reasonably satisfied has been resolved, subject however to a term of 18 months from the closing date or, if after 18 months, the holdback will be used to offset any indemnifications by GBS under the Agreement. The Purchase Price was also subject to adjustment on a dollar-for-dollar basis for adjustments to the Net Working Capital (defined as Current Assets minus Current Liabilities) of IDC by GTT.

 

Group Live N.V. operating under the laws of the Netherlands and a 100% subsidiary of GROUP 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.

 

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.

 

8
 

 

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.

 

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.

 

9
 

 

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 Market OTCQB under the ticker 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.

 

10
 

 

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.

 

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. 

 

Changes in Financial Condition

 

Assets:

 

Total Assets decreased from $56,802,492 at December 31, 2012 to $ 49,036,324 at June 30, 2013.  Total Assets consists of Total Current Assets and Total Non-Current Assets.

 

Total Current Assets

 

At June 30, 2013, Total Current Assets were $5,679,360 as compared to $6,444,192 at December 31, 2012. Total Current Assets consist of: Cash and Cash Equivalents, Accounts Receivable, Prepaid Expenses, Other Receivables-current, Deferred Tax Assets-current and Assets Held for Sale.

 

nCash and Cash Equivalents decreased from $1,154,602 at December 31, 2012 to $509,034 at June 30, 2013 as a result of our investments in strategic technology areas such as application migration and modernization, cloud technology, the associated costs necessary to build and implement the go- to- market strategy and losses in operations.

 

nAccounts Receivable decreased from $4,143,448 at December 31, 2012 to $3,666,291 at June 30, 2013 due to increased collections during the reporting period and less revenue.

 

nPrepaid Expenses increased from $84,304 at December 31, 2012 to $220,435 at June 30, 2013 from prepaid rent, insurance and advances on technological events.

 

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nOther Receivables-current decreased from $676,976 at December 31, 2012 to $474,290 at June 30, 2013 and consisted of a receivable from a previous insolvency of approximately $446,000 and deposits of approximately $28,000.

 

nDeferred Tax Assets-current increased from $Nil at December 31, 2012 to $809,310 at June 30, 2013 and consisted of Deferred Tax Assets derived from financial assets and losses carried forward.
   
nAssets Held for Sale decreased from $384,862 at December 31, 2012 to $Nil at June 30, 2013 as a result of the sale of IDC Global, Inc. on February 1, 2013.

  

Total Non-Current Assets

 

At June 30, 2013, Total Non-Current Assets were $43,356,964 as compared to $50,358,300 at December 31, 2012.  Total Non-Current Assets consist of: Property Plant and Equipment, Other Receivables noncurrent, Deferred Tax Assets non-current, Goodwill, Software, Other Assets and Assets Held for Sale.

 

nNet Property (plant and equipment) decreased from $332,839 at December 31, 2012 to $325,666 at June 30, 2013.

 

nOther Receivables non-current decreased from $428,422 at December 31, 2012 to $1,169 at June 30, 2013 and consisted of cooperative shares.

 

nDeferred Tax Assets non-current decreased from $1,132,103 at December 31, 2012 to $1,023,952 at June 30, 2013 and consisted of Deferred Tax Assets derived from financial assets and losses carried forward.

 

nGoodwill decreased from $34,254,881 at December 31, 2012 to $31,260,500 at June 30, 2013. The decreased in goodwill of $2,994,381 resulted from the sale of the subsidiary IDC Global, Inc. on February 1, 2013..

 

nSoftware decreased from $12,207,031 at December 31, 2012 to $10,572,956 at June 30, 2013, 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.

 

nOther Assets increased from $156,379 at December 31, 2012 to $172,721 at June 30, 2013. This category includes rent and other security deposits.

 

nAssets Held for Sale decreased from $1,846,645 at December 31, 2012 to $Nil at June 30, 2013 as a result of the sale of IDC Global, Inc. on February 1, 2013.

 

Liabilities

 

Total Liabilities decreased from $22,269,060 at December 31, 2012 to $17,663,310 at June 30, 2013.  Total Liabilities consists of Total Current Liabilities and Total Non-Current Liabilities.

 

Total Current Liabilities

 

At June 30, 2013, Total Current Liabilities were $17,507,319, compared to $18,227,184 at December 31, 2012.  Total Current Liabilities consist of Notes Payable, Liabilities to Banks, Accounts Payable and Accrued Liabilities, Deferred Income, Other Liabilities, Deferred Tax Liabilities-current, Amounts Due to Related Parties and Liabilities Held for Sale.

 

nNotes Payable decreased from $2,313,572 at December 31, 2012 to $Nil at June 30, 2013 based on repayments of short terms loans during the quarter.

 

nLiabilities to Banks increased from $6,774 at December 31, 2012 to $3,482,086 at June 30, 2013 and included a line of credit and cash in transit. The increase was mainly as a result from reclassification from non-current liabilities to current liabilities.

 

nAccounts Payable and Accrued Liabilities decreased from $6,241,733 at December 31, 2012 to $5,413,042 at June 30, 2013. The decrease was due to the reduction of trade payables by approximately $630,000 and a decrease in accrued liabilities of approximately $1,030,000 by repayment and as a result of the sale of subsidiary IDC Global. The remaining amounts were reclassified into other short term notes and due to related parties.

 

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nDeferred Income increased from $6,099,570 at December 31, 2012 to $7,352,780 at June 30, 2013, and consists mainly of maintenance income collected in advance of the contractual maintenance period.

 

nOther Liabilities of $860,032 at December 31, 2012 increased to $1,132,411 at June 30, 2013 and includes $325,000 due for purchased software, $554,000 for purchased companies and other short term liabilities of $253,000.

 

nDeferred Tax Liabilities-current increased from $Nil at December 31, 2012 to $127,000 at June 30, 2013.

 

nAmounts Due to Related Parties decreased from $2,115,869 at December 31, 2012 to $Nil at June 30, 2013 as a result of payments to related parties during the reporting period.

 

nLiabilities Held for Sale decreased from $589,634 at December 31, 2012 to $Nil at June 30, 2013 as a result of the sale of IDC Global, Inc.

  

Total Non-Current Liabilities

 

At June 30, 2013, our Total Non-Current Liabilities were $155,992, compared to $4,041,876 at December 31, 2012.  Total Non-Current Liabilities consist of Liabilities to Banks, Retirement Benefit Obligation, Liabilities Held for Sale, and Deferred Tax Liabilities non-current.

 

nLiabilities to Banks decreased from $3,716,102 at December 31, 2012 to $Nil at June 30, 2013 as a result from reclassification from non-current liabilities to current liabilities.

nRetirement Benefit Obligation decreased from $165,876 at December 31, 2012 to $165,874 at June 30, 2013.

 

nLiabilities Held for Sale decreased from $159,898 at December 31, 2012 to $Nil at June 30, 2013 as a result of the sale of IDC Global, Inc. on February 1, 2013.

 

nDeferred Tax Liabilities non-current decreased from $Nil at December 31, 2012 to (-$9,882) at June 30, 2013.

 

Results of Operations

  

Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012

 

Revenues

 

For the three months ended June 30, 2013, our total revenue decreased to $5,323,013 from $6,102,801 for the three months ended June 30, 2012, a decline of $779,788 or 12.78%. 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 includes revenue generated from services rendered.

  

The Product division decreased to $4,663,539 for the three months ended June 30, 2013 from $4,935,073 for the three months ended June 30, 2012, a decrease of $271,534 or 5.50%. The primary contributing factors were increases in License revenues of approximately $17,776, Third Party Product revenues of $368,816, offset by decreases in Maintenance revenues of approximately $637,069 and Other revenues of approximately $21,057 for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. This is mainly as a result of economic conditions causing an increase in the sales cycles, whereby strategic customers are giving greater consideration towards the modernization/migration of their current application platform.

 

The Service division of revenue decreased $508,254 or 43.53% from $1,167,728 for the three months ended June 30, 2012 to $659,474 for the three months ended June 30, 2013. Primarily as a result of the sale of subsidiary companies that were major contributors to the Service division of revenue.

 

Cost of Goods Sold

 

For the three months ended June 30, 2013, total Cost of Goods Sold decreased to $2,315,613 from $3,064,584 for the three months ended June 30, 2012, a cost reduction of $748,971 or 24.44%.  

 

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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. The second are the costs related to the Service division of revenue which includes; other operating expenses, depreciation & amortization expense, and personnel expenses.

 

Within the Costs of Goods Sold related to the Product division the Company saw a $323,237 or 32.52% increase from $994,087 for the three months ended June 30, 2012 to $1,317,324 for the three months ended June 30, 2013. The primary factors contributing to the Company’s higher Costs of Goods Sold related to the Product division of revenues was a reduction of $37,299 in product material costs, being offset by an increase of $360,536 in third party product material costs for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

 

Within the Costs of Goods Sold related to the Service division, the Company had a reduction of $1,072,209 or 51.79%, in the total costs of services from $2,070,498 for the three months ended June 30, 2012 to $998,289 for the three months ended June 30, 2013. The primary factor contributing to the Company’s reduction in the costs of services was a decrease in the volume of services rendered and a reduction in personnel costs, depreciation and amortization costs associated with the sale of subsidiary companies. Additional personnel costs relating to Services are included in Selling Expenses and these were also reduced from the quarter ending June 30, 2012 as indicated below.

 

Operating Expenses

 

The Company’s total operating expense consists of three segments; selling, administrative and general expenses. For the three months ended June 30, 2013, total operating expenses decreased $1,046,431 or 22.80% to $3,542,451 from $4,588,882 for the three months ended June 30, 2012.  

 

For the three months ended June 30, 2013, Selling Expenses decreased $963,674 or 30.25% to $2,222,538 from $3,186,212 for the three months ended June 30, 2012.  This was primarily due to decreases in cost of materials of $39,350, personnel expense of $915,278 and in other selling expense of $81,658, coupled with a reduction in other operating income of $70,246 and a slight increase in depreciation expense of $2,367.

 

For the three months ended June 30, 2013, Administrative Expense increased by $39,930 or 3.23% to $1,277,094 from $1,237,164 for the three months ended June 30, 2012. This was primarily due to a reduction in personnel costs of $10,486 coupled with an increase in other operating income of $14,340, being offset by increases in other administrative expense of $58,794 and depreciation expense of $5,962.

 

For the three months ended June 30, 2013, General Expense decreased $122,687 to $42,818 from $165,505 for the three months ended June 30, 2012. This was primarily due to an increase of $110,424 in other operating income and decreases in personnel expense of $42,768, and other operating expense of $29,556, being offset by an increase in depreciation expense of $60,061.

 

Other Income (Expense)

 

For the three months ended June 30, 2013, Other Income of $119,219 increased from Other Expense of $911,556 for the three months ended June 30, 2012. This change is primarily due to an increase in Other Income of $1,202,885 and an increase in net Interest Expense of $172,109 for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

 

Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

 

Revenues

 

For the six months ended June 30, 2013, our total revenue decreased $2,507,458 or 19.21% to $10,547,392 from $13,054,850 for the six months ended June 30, 2012. 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 includes revenue generated from services rendered.

 

The Product division decreased $1,491,889 or 14.17% to $9,036,549 from $10,528,438 for the six months ended June 30, 2012 The primary factors contributing to the decline were decreases in License revenues of $300,100, Maintenance revenues of $603,198, Third Party Product revenues of $545,380 and Other revenues of approximately $43,211 for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. This is mainly as a result of economic conditions causing an increase in the sales cycles, whereby strategic customers are giving greater consideration towards the modernization/migration of their current application platform.

 

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The Service division of revenue decreased $1,015,569 or 40.20%, from $2,526,412 for the six months ended June 30, 2012 to $1,510,843 for the six months ended June 30, 2013, primarily as a result of a reduction in service staff.

  

Cost of Goods Sold

 

For the six months ended June 30, 2013, total Cost of Goods Sold decreased $1,820,447 or 25.15% to $5,417,311 from $7,237,758 for the six months ended June 30, 2012.

 

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. The second are the costs related to the Service division of revenue which includes; other operating expenses, depreciation & amortization expense, and personnel expenses.

 

Within the Costs of Goods Sold related to the Product division the Company shows a $736,112 or 25.29% reduction from $2,910,711 for the six months ended June 30, 2012 to $2,174,599 for the six months ended June 30, 2013. The primary factors contributing to the Company’s lower Costs of Goods Sold related to the Product division of revenues was a reduction of $155,671 in product material costs and a reduction of $580,441 in third party product material costs, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

 

Within the Costs of Goods Sold related to the Service division, the Company had a reduction of $1,084,336 or 25.06% in the total costs of services from $4,327,048 for the six months ended June 30, 2012 to $3,242,712 for the six months ended June 30, 2013. The primary factor contributing to the Company’s reduction in the costs of services was a decrease in the volume of services rendered and a reduction in personnel costs, depreciation and amortization costs associated with the sale of subsidiary companies.

 

Operating Expenses

 

The Company’s total operating expense consist of three segments; selling, administrative and general expenses. For the six months ended June 30, 2013, total operating expenses decreased $2,824,916 or 26.99% to $7,643,170 from $10,468,086 for the six months ended June 30, 2012.  

 

For the six months ended June 30, 2013, Selling Expenses decreased $2,770,329 or 37.62% to $4,594,068 from $7,364,397 for the six months ended June 30, 2012.  This was primarily due to decreases in, cost of materials of $248,005, personnel expense of $1,977,586 and in other selling expense of $581,963, coupled with a reduction in other operating income of $32,382 and a slight increase in depreciation expense of $4,843.

 

For the six months ended June 30, 2013, Administrative Expense increased by $66,325 or 2.45% to $2,777,136 from $2,710,811 for the six months ended June 30, 2012. This was primarily due to an increase in other operating income of $75,477 and a reduction in other administrative expense of $26,659, being offset by increases in personnel costs of $156,003 and depreciation expense of $12,458.

 

For the six months ended June 30, 2013, General Expense decreased $120,912 or 30.78% to $271,956 from $392,877 for the six months ended June 30, 2012. This was primarily due to an increase in other operating income of $209,491 and a decrease in personnel expense of $51,226, being offset by increases in other operating costs of $19,977 and depreciation expense of $119,828.

 

Other Income (Expense)

 

For the six months ended June 30, 2013, Other Income of $116,003 increased from Other Expense of $945,165 for the six months ended June 30, 2012. This change is primarily due to an increase in Other Income of $1,361,863 and a net increase in Interest Expense of $300,694 for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

 

Liquidity & Capital Resources

 

As June 30, 2013, the Company had $509,034 in cash and cash equivalents, compared to $1,154,602 at December 31, 2012.

 

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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.

 

Since 2012, the Company has been exploring internal and external sources for financing. To date, these sources have provided necessary funds to support the working capital needs of the Company; mainly to finance the Company’s strategic offerings.  There can be no assurances, however, that the Company will be able to obtain additional funds from these or any other sources or that such funds will be sufficient to permit the Company to implement its intended business strategy. In the event the Company is not able to secure additional funds, management will postpone any strategic investment until the financing will be sufficient. However, management believes as a result of the assets purchased and sold to date, in accordance with the above-mentioned statement, the Company will be able to provide sufficient cash flow to support its standard operations for the next 9 months.

 

From time to time, the Company has issued promissory notes to fund its operations. As of June 30, 2013, the Company had an aggregate of $260,421 of indebtedness, including principal and accrued interest, outstanding resulting from a promissory note issued to K Group, Ltd. on July 5, 2012, bearing interest at the rate of 8.5% and maturing on the earlier of the first anniversary date of the date of issuance or such other time as described in more detail in the Notes.

 

During the period ended June 30, 2013, we raised capital by consummating the following transactions:

 

 

nOn February 1, 2013, we sold 100% of our ownership in IDC Global, Inc. for net proceeds of $3,577,195.

 

nOn February 12, 2013, we issued an aggregate of 500,000 restricted shares of Common Stock to a Board Member Stephen Baksa, pursuant to exercise of a common stock purchase warrant issued on October 26, 2012 and exercisable for $0.20 per share, for total proceeds of $100,000.

 

nOn February 12, 2013, the Company issued an aggregate of 250,000 restricted shares of Common Stock to an Accredited Investor (as that term is defined the Securities Act) pursuant to exercise of a common stock purchase warrant issued on November 30, 2012 and exercisable for $0.20 per share, for total proceeds of $50,000...

 

nOn 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(a)(2) (formerly 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(a)(2) (formerly Section 4(2)) thereof.

 

§The Company has aggressively re-negotiated the terms of the Loan Agreement with the Lender and has swapped the outstanding loan against receivables.

 

 

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·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 and Chief Executive Officer, 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(a)(2) (formerly 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(a)(2) (formerly Section 4(2)) thereof.

 

§The Company has aggressively re-negotiated the terms of the Loan Agreement with the Lender and has swapped the outstanding loan against receivables.

 

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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

 

   Six Months Ended June 30, 2013   Six Months Ended June 30, 2012 
         
Net cash provided (used in) Operating Activities  $(1,631,345)  $(2,983,111)
Net cash provided (used) by Discontinued  $-   $- 
Net cash provided (used in) Investing Activities  $4,170,908   $3,393,213 
Net cash provided (used in) Financing Activities  $(3,138,858)  $(521,180)
Effect of exchange rate changes on cash  $(84,689)  $(34,414)
Net increase (decrease) in cash and cash equivalents during the period  $(683,984)  $(145,492)
Cash and cash equivalents, beginning of period  $1,154,602   $1,502,977 
Cash and cash equivalents, end of period  $470,618   $1,357,485 

 

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Net cash provided by operating activities for the six month period ended June 30, 2013 was $1,603,091 compared to net cash used in operating activities of $6,667,835 for the six month period ended June 30, 2012, an increase of approximately $8,270,925. This change is primarily due to an increase of cash provided by Accounts Receivable and Other Assets of approximately $2,431,819, Depreciation and Amortization of approximately $386,194, Deferred Tax Assets of approximately $222,646 and an increase of Accounts Payable and Other Liabilities of approximately $3,938,367. Reductions in Net Income/Loss provided approximately $1,967,342, reduced Minority Interest Losses provided approximately $246,565,shares issued in lieu of Interest and Consulting expenses provided approximately $265,288 and Gains/Losses on Sale of Assets of approximately $72,613.

 

Net cash provided by investing activities during the six month period ended June 30, 2013 was $2,560,434, compared to cash provided by investing activities in the comparative period ended June 30, 2012 of $2,921,378, decreasing by approximately $360,944. The decrease was primarily due to cash provided by the Purchase of Intangible Assets of approximately $5,606,203 and cash provided by the Sale/Purchase of property plant and equipment of approximately $598,194 being offset by a decrease of $6,565,341 in Financials assets.

 

Net cash used in financing activities during the six month period ended June 30, 2013 was $4,559,570, compared to net cash provided by financing activities in the comparative period ended June 30, 2012 of $1,090,156, decreasing by approximately $5,649,726 for the six month period ended June 30, 2013. This change was primarily due to a $1,920,177 reduction in capital paid-in, coupled with cash used by net borrowings from banks of approximately $692,588, a reduction of related party loans of $2,115,869, and other borrowings and debt forgiveness of approximately $921,092.

   

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.

 

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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.

 

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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.

 

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Foreign Currency Translation

 

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

 

Other Provisions

 

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

 

Deferred Taxes

 

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

 

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

 

Recent Accounting Pronouncements

 

In 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.

 

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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

 

As of June 30, 2013, 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 Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2013, 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 June 30, 2013, 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 February 12, 2013, the Company issued an aggregate of 500,000 restricted shares of Common Stock to Board Member Stephen Baksa, pursuant to exercise of a common stock purchase warrant issued on October 26, 2012 and exercisable for $0.20 per share. The Company issued the securities in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

On February 12, 2013, the Company issued an aggregate of 250,000 restricted shares of Common Stock to an Accredited Investor (as that term is defined the Securities Act) pursuant to exercise of a common stock purchase warrant issued on November 30, 2012 and exercisable for $0.20 per share. The Company issued the securities in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

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On March 20, 2013, the Company issued an aggregate of 450,950 restricted shares of Common Stock to Board Member John Moore pursuant to a February 22, 2013 amendment to a Secured Promissory Note Agreement entered into on August 13, 2012 between the Company and the Board Member. The Company issued the securities in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

On March 27, 2013, the Company issued an aggregate of 200,000 restricted shares of Common Stock to a Board Member Stephen Baksa pursuant to a February 26, 2013 amendment to a Secured Promissory Note Agreement entered into on October 26, 2012 between the Company and the Board Member. The Company issued the securities in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

On March 27, 2013, the Company issued 200,000 restricted shares of Common Stock to a third party non-affiliated consultant in consideration for consulting services rendered by the consultant to the Company. The Company issued the securities in reliance on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities.

 

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. The Company issued the Note upon reliance on Section 4(a)(2) (formerly 4(2)) of the Securities Act in light of the fact it was a private transaction and did not involve a public offering of securities.


§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 pursuant to Section 4(a)(2) (formerly 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(a)(2) (formerly Section 4(2)) thereof.

 

§The Company has aggressively re-negotiated the terms of the Loan Agreement with the Lender and has swapped the outstanding loan against receivables.

 

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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 and Chief Executive Officer, 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. The Company issued the Note upon reliance on Section 4(a)(2) (formerly 4(2)) of the Securities Act in light of the fact it was a private transaction and did not involve a public offering of securities.

§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(a)(2) (formerly 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(a)(2) (formerly Section 4(2)) thereof.

 

§The Company has aggressively re-negotiatde the terms of the Loan Agreement with the Lender and has swapped the outstanding loan against receivables.

 

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Item 3. Defaults Upon Senior Securities.

 

None

 

Item 5. Other Information.

 

Subsequent Events

 

As previously reported by the Company on a Form 8-K filed with the Commission on July 10, 2013, on July 10, 2013, the Board of Directors of the Company reappointed Joerg Ott as the Chief Executive Officer (Principal Executive Officer) of the Company, effective immediately. Mr. Ott replaced Mr. Gary D. MacDonald who had been serving as the Company’s Interim Chief Executive Officer since July 11, 2012.

 

As previously reported by the Company on a Form 8-K filed with the Commission on August 2, 2013, on August 2, 2013, Gary D. MacDonald resigned as member of the Board of Directors of the Company and as, Managing Director of GBS-UK. From March 1, 2012 to the date of his resignation, Mr. MacDonald also served as member of the Board’ Audit Committee. Mr. MacDonald’s resignation was not due to any disagreement with the Company or the Board.

 

Item 6. Exhibits.

  

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

 

*Filed herewith.

 

(1) Furnished herewith. Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Exchange Act of 1934 and otherwise are not subject to liability.

 

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SIGNATURES

 

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

 

  GBS ENTERPRISES INCORPORATED
   
Date: August 19, 2013 By: /s/ Joerg Ott
  Joerg Ott
  Chief Executive Officer
  (Principal Executive Officer)
   
Date: August 19, 2013 By: /s/ Markus R. Ernst
  Markus R. Ernst
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

 

 

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